Any negative impact of currency movements on the currency contracts that we have entered into to hedge foreign currency commitments to purchase or sell goods and services would be offset by an equal and opposite favorable exchange impact on the commitments being hedged. For a discussion of accounting policies and other information relating to currency contracts, seeNote 1-1 — Business and Summary of Significant Accounting Policies and Note 17 — Financial Instruments and Commodity Contracts to our accompanying consolidated and combined financial statements.
Report of Independent Registered Public Accounting Firm
To the Board of Directors of Novelis Inc.:
In our opinion, the accompanying combined statements of operations, invested equity and cash flows present fairly, in all material respects, the invested equity of the Novelis Group as described in Note 1, as of December 31, 2004, and the results of their operations and their cash flows for the year ended December 31, 2004 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Novelis Group’s management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Atlanta, Georgia
August 24, 2006
91
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Novelis Inc.:
In our opinion, the accompanying combined balance sheet and related combined statements of income, invested equity and cash flows present fairly, in all material respects, the financial position of the Novelis Group as described in Note 1, at December 31, 2004, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2004 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Novelis Group’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLPChartered Accountants
Montreal, Quebec, Canada
March 24, 2005, except as to Note 2322 and Note 25 which are as of August 3, 2005
92
Novelis Inc.
| | | | | | | | | | | | |
| | Year Ended December 31, | |
| | 2005 | | | 2004 | | | 2003 | |
| | (In millions, except per share amounts) | |
|
Net sales | | $ | 8,363 | | | $ | 7,755 | | | $ | 6,221 | |
| | | | | | | | | | | | |
Cost of goods sold (exclusive of depreciation and amortization shown below) | | | 7,570 | | | | 6,856 | | | | 5,482 | |
Selling, general and administrative expenses | | | 352 | | | | 289 | | | | 255 | |
Litigation settlement — net of insurance recoveries | | | 40 | | | | — | | | | — | |
Provision for depreciation and amortization | | | 230 | | | | 246 | | | | 222 | |
Research and development expenses | | | 41 | | | | 58 | | | | 62 | |
Restructuring charges | | | 10 | | | | 20 | | | | 8 | |
Impairment charges on long-lived assets | | | 7 | | | | 75 | | | | 4 | |
Interest expense and amortization of debt issuance costs — net | | | 194 | | | | 48 | | | | 33 | |
Equity in net income of non-consolidated affiliates | | | (6 | ) | | | (6 | ) | | | (6 | ) |
Other income — net | | | (299 | ) | | | (62 | ) | | | (49 | ) |
| | | | | | | | | | | | |
| | | 8,139 | | | | 7,524 | | | | 6,011 | |
| | | | | | | | | | | | |
Income before provision for taxes on income, minority interests’ share and cumulative effect of accounting change | | | 224 | | | | 231 | | | | 210 | |
Provision for taxes on income | | | 107 | | | | 166 | | | | 50 | |
| | | | | | | | | | | | |
Income before minority interests’ share and cumulative effect of accounting change | | | 117 | | | | 65 | | | | 160 | |
Minority interests’ share | | | (21 | ) | | | (10 | ) | | | (3 | ) |
| | | | | | | | | | | | |
Net income before cumulative effect of accounting change | | | 96 | | | | 55 | | | | 157 | |
Cumulative effect of accounting change — net of tax | | | (6 | ) | | | — | | | | — | |
| | | | | | | | | | | | |
Net income | | | 90 | | | | 55 | | | | 157 | |
| | | | | | | | | | | | |
Other comprehensive income (loss) — net of tax | | | | | | | | | | | | |
Currency translation adjustment | | | (155 | ) | | | 30 | | | | 102 | |
Change in minimum pension liability | | | (17 | ) | | | (26 | ) | | | 1 | |
| | | | | | | | | | | | |
Other comprehensive income (loss) — net of tax | | | (172 | ) | | | 4 | | | | 103 | |
| | | | | | | | | | | | |
Comprehensive income (loss) | | $ | (82 | ) | | $ | 59 | | | $ | 260 | |
| | | | | | | | | | | | |
Earnings per share: | | | | | | | | | | | | |
— Basic: | | | | | | | | | | | | |
Net income before cumulative effect of accounting change | | $ | 1.29 | | | $ | 0.74 | | | $ | 2.12 | |
Cumulative effect of accounting change — net of tax | | | (0.08 | ) | | | — | | | | — | |
| | | | | | | | | | | | |
Net income per share — basic | | $ | 1.21 | | | $ | 0.74 | | | $ | 2.12 | |
| | | | | | | | | | | | |
— Diluted: | | | | | | | | | | | | |
Net income before cumulative effect of accounting change | | $ | 1.29 | | | $ | 0.74 | | | $ | 2.11 | |
Cumulative effect of accounting change — net of tax | | | (0.08 | ) | | | — | | | | — | |
| | | | | | | | | | | | |
Net income per share — diluted | | $ | 1.21 | | | $ | 0.74 | | | $ | 2.11 | |
| | | | | | | | | | | | |
Dividends per common share | | $ | 0.36 | | | $ | — | | | $ | — | |
| | | | | | | | | | | | |
Supplemental information for 2005 only: | | | | | | | | | | | | |
Net income attributable to the consolidated and combined results of Novelis from January 6 to December 31, 2005 — increase to Retained earnings | | $ | 119 | | | | | | | | | |
Net loss attributable to the combined results of Novelis from January 1 to January 5, 2005 — decrease to Owner’s net investment | | | (29 | ) | | | | | | | | |
| | | | | | | | | | | | |
Net income | | $ | 90 | | | | | | | | | |
| | | | | | | | | | | | |
The accompanying notes to the consolidated and combined financial statements
are an integral part of these statements.
93
Novelis Inc.
| | | | | | | | |
| | As of December 31, | |
| | 2005 | | | 2004 | |
| | (In millions, except number of shares) | |
|
ASSETS |
Current assets | | | | | | | | |
Cash and cash equivalents | | $ | 100 | | | $ | 31 | |
Accounts receivable (net of allowances of $26 in 2005 and $33 in 2004) | | | | | | | | |
— third parties | | | 1,098 | | | | 770 | |
— related parties | | | 33 | | | | 798 | |
Inventories | | | 1,128 | | | | 1,226 | |
Prepaid expenses and other current assets | | | 66 | | | | 36 | |
Current portion of fair value of derivative contracts | | | | | | | | |
— third parties | | | 194 | | | | 22 | |
— related parties | | | — | | | | 134 | |
Deferred income tax assets | | | 8 | | | | — | |
| | | | | | | | |
Total current assets | | | 2,627 | | | | 3,017 | |
Property and equipment — net | | | 2,160 | | | | 2,347 | |
Goodwill | | | 211 | | | | 256 | |
Intangible assets — net | | | 21 | | | | 27 | |
Investment in and advances to non-consolidated affiliates | | | 144 | | | | 122 | |
Fair value of derivative contracts — net of current portion | | | 90 | | | | 3 | |
Deferred income tax assets | | | 21 | | | | 12 | |
Other long-term assets | | | | | | | | |
— third parties | | | 131 | | | | 66 | |
— related parties | | | 71 | | | | 104 | |
| | | | | | | | |
Total assets | | $ | 5,476 | | | $ | 5,954 | |
| | | | | | | | |
|
LIABILITIES AND SHAREHOLDERS’/INVESTED EQUITY |
Current liabilities | | | | | | | | |
Current portion of long-term debt | | | | | | | | |
— third parties | | $ | 3 | | | $ | 1 | |
— related parties | | | — | | | | 290 | |
Short-term borrowings | | | | | | | | |
— third parties | | | 27 | | | | 229 | |
— related parties | | | — | | | | 312 | |
Accounts payable | | | | | | | | |
— third parties | | | 866 | | | | 492 | |
— related parties | | | 38 | | | | 342 | |
Accrued expenses and other current liabilities | | | 641 | | | | 425 | |
Deferred income tax liabilities | | | 26 | | | | 1 | |
| | | | | | | | |
Total current liabilities | | | 1,601 | | | | 2,092 | |
Long-term debt — net of current portion | | | | | | | | |
— third parties | | | 2,600 | | | | 139 | |
— related parties | | | — | | | | 2,307 | |
Deferred income tax liabilities | | | 186 | | | | 249 | |
Accrued post-retirement benefits | | | 305 | | | | 284 | |
Other long-term liabilities | | | 192 | | | | 188 | |
| | | | | | | | |
| | | 4,884 | | | | 5,259 | |
| | | | | | | | |
Commitments and contingencies | | | | | | | | |
Minority interests in equity of consolidated affiliates | | | 159 | | | | 140 | |
| | | | | | | | |
Shareholders’/invested equity | | | | | | | | |
Preferred stock, no par value; unlimited number of first preferred and second preferred shares authorized; none issued and outstanding | | | — | | | | — | |
Common stock, no par value; unlimited number of shares authorized; 74,005,649 shares issued and outstanding as of December 31, 2005 | | | — | | | | — | |
Additional paid-in capital | | | 425 | | | | — | |
Retained earnings | | | 92 | | | | — | |
Accumulated other comprehensive income (loss) | | | (84 | ) | | | 88 | |
Owner’s net investment | | | — | | | | 467 | |
| | | | | | | | |
Total shareholders’/invested equity | | | 433 | | | | 555 | |
| | | | | | | | |
Total liabilities and shareholders’/invested equity | | $ | 5,476 | | | $ | 5,954 | |
| | | | | | | | |
The accompanying notes to the consolidated and combined financial statements
are an integral part of these balance sheets.
94
Novelis Inc.
| | | | | | | | | | | | |
| | Year Ended December 31, | |
| | 2005 | | | 2004 | | | 2003 | |
| | (In millions) | |
|
OPERATING ACTIVITIES | | | | | | | | | | | | |
Net income | | $ | 90 | | | $ | 55 | | | $ | 157 | |
Adjustments to determine net cash provided by operating activities: | | | | | | | | | | | | |
Cumulative effect of accounting change — net of tax | | | 6 | | | | — | | | | — | |
Depreciation and amortization | | | 230 | | | | 246 | | | | 222 | |
Net (gains) losses on change in fair market value of derivatives | | | (269 | ) | | | (69 | ) | | | (20 | ) |
Litigation settlement — net of insurance recoveries | | | 40 | | | | — | | | | — | |
Deferred income taxes | | | 30 | | | | 97 | | | | (20 | ) |
Amortization of debt issuance costs | | | 17 | | | | — | | | | — | |
Provision for uncollectible accounts | | | 3 | | | | 6 | | | | 4 | |
Equity in net income of non-consolidated affiliates | | | (6 | ) | | | (6 | ) | | | (6 | ) |
Minority interests’ share of net income | | | 21 | | | | 10 | | | | 3 | |
Impairment charges on long-lived assets | | | 7 | | | | 75 | | | | 4 | |
Stock-based compensation | | | 3 | | | | 2 | | | | 2 | |
Gain on sales of businesses and investments and assets — net | | | (17 | ) | | | (5 | ) | | | (28 | ) |
Changes in assets and liabilities (net of effects from acquisitions) | | | | | | | | | | | | |
Accounts receivable | | | | | | | | | | | | |
— third parties | | | (91 | ) | | | (94 | ) | | | 4 | |
— related parties | | | (1 | ) | | | 72 | | | | 190 | |
Inventories | | | 52 | | | | (144 | ) | | | (18 | ) |
Prepaid expenses and other current assets | | | 18 | | | | (4 | ) | | | (3 | ) |
Other long-term assets | | | (13 | ) | | | (7 | ) | | | (28 | ) |
Accounts payable | | | | | | | | | | | | |
— third parties | | | 144 | | | | (7 | ) | | | 34 | |
— related parties | | | 2 | | | | 40 | | | | (46 | ) |
Accrued expenses and other current liabilities | | | 167 | | | | (14 | ) | | | (63 | ) |
Accrued post-retirement benefits | | | 13 | | | | (42 | ) | | | 43 | |
Other long-term liabilities | | | (1 | ) | | | 29 | | | | 5 | |
Other — net | | | 4 | | | | (32 | ) | | | 8 | |
| | | | | | | | | | | | |
Net cash provided by operating activities | | | 449 | | | | 208 | | | | 444 | |
| | | | | | | | | | | | |
INVESTING ACTIVITIES | | | | | | | | | | | | |
Capital expenditures | | | (178 | ) | | | (165 | ) | | | (189 | ) |
Proceeds from sales of assets | | | 19 | | | | 17 | | | | 33 | |
Investment in and advances to non-consolidated affiliates | | | — | | | | — | | | | (11 | ) |
Proceeds from (advances on) loans receivable — net | | | | | | | | | | | | |
— third parties | | | 19 | | | | — | | | | — | |
— related parties | | | 374 | | | | 874 | | | | (1,210 | ) |
Premiums paid to purchase derivative instruments | | | (57 | ) | | | — | | | | — | |
Net proceeds from settlement of derivative instruments | | | 148 | | | | — | | | | — | |
| | | | | | | | | | | | |
Net cash provided by (used in) investing activities | | | 325 | | | | 726 | | | | (1,377 | ) |
| | | | | | | | | | | | |
|
(continued) |
95
Novelis Inc.
Consolidated and Combined Statements of Cash Flows — (Continued)
| | | | | | | | | | | | |
| | Year Ended December 31, | |
| | 2005 | | | 2004 | | | 2003 | |
| | (In millions) | |
|
FINANCING ACTIVITIES | | | | | | | | | | | | |
Proceeds from issuance of new debt | | | | | | | | | | | | |
— third parties | | | 2,779 | | | | 575 | | | | 500 | |
— related parties | | | — | | | | 1,561 | | | | 471 | |
Principal repayments | | | | | | | | | | | | |
— third parties | | | (1,822 | ) | | | (993 | ) | | | — | |
— related parties | | | (1,180 | ) | | | (5 | ) | | | — | |
Short-term borrowings — net | | | | | | | | | | | | |
— third parties | | | (145 | ) | | | (774 | ) | | | 577 | |
— related parties | | | (302 | ) | | | 221 | | | | (29 | ) |
Dividends — common shareholders | | | (27 | ) | | | — | | | | — | |
Dividends — minority interests | | | (7 | ) | | | (4 | ) | | | — | |
Net receipts from (payments to) Alcan | | | 72 | | | | (1,512 | ) | | | (592 | ) |
Debt issuance costs | | | (71 | ) | | | — | | | | — | |
| | | | | | | | | | | | |
Net cash provided by (used in) financing activities | | | (703 | ) | | | (931 | ) | | | 927 | |
| | | | | | | | | | | | |
Net increase (decrease) in cash and cash equivalents | | | 71 | | | | 3 | | | | (6 | ) |
Effect of exchange rate changes on cash balances held in foreign currencies | | | (2 | ) | | | 1 | | | | 2 | |
Cash and cash equivalents — beginning of year | | | 31 | | | | 27 | | | | 31 | |
| | | | | | | | | | | | |
Cash and cash equivalents — end of year | | $ | 100 | | | $ | 31 | | | $ | 27 | |
| | | | | | | | | | | | |
Supplemental disclosures of cash flow information: | | | | | | | | | | | | |
Interest paid | | $ | 153 | | | $ | 76 | | | $ | 41 | |
Income taxes paid | | | 39 | | | | 70 | | | | 19 | |
Principal payments on capital lease obligations (included in principal repayments — third parties) | | | 3 | | | | — | | | | — | |
Supplemental schedule of non-cash investing and financing activities relating to the spin-off transaction and post-closing adjustments (2005 only): | | | | | | | | | | | | |
Other receivables | | $ | 433 | | | | | | | | | |
Short-term borrowings — related parties | | | (57 | ) | | | | | | | | |
Long-term debt — related parties | | | 32 | | | | | | | | | |
Capital lease obligation | | | 52 | | | | | | | | | |
Additional paid-in capital | | | (109 | ) | | | | | | | | |
Supplemental schedule of non-cash transaction (Pechiney acquisition): | | | | | | | | | | | | |
Assets | | $ | 8 | | | $ | (197 | ) | | $ | (298 | ) |
Liabilities | | | — | | | | 28 | | | | 170 | |
| | | | | | | | | | | | |
Net assets allocated to us from Alcan | | $ | 8 | | | $ | (169 | ) | | $ | (128 | ) |
| | | | | | | | | | | | |
The accompanying notes to the consolidated and combined financial statements
are an integral part of these statements.
96
Novelis Inc.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | Accumulated
| | | | | | | |
| | | | | | | | Additional
| | | | | | Other
| | | | | | | |
| | Common Stock | | | Paid-In
| | | Retained
| | | Comprehensive
| | | Owner’s Net
| | | | |
| | Shares | | | Amount | | | Capital | | | Earnings | | | Income (Loss) | | | Investment | | | Total | |
| | (In millions, except number of common shares, which is in thousands) | |
|
Balance as of December 31, 2002 | | | — | | | $ | — | | | $ | — | | | $ | — | | | $ | (19 | ) | | $ | 2,200 | | | $ | 2,181 | |
2003 Activity: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income | | | | | | | | | | | | | | | | | | | | | | | 157 | | | | 157 | |
Transfers (to) / from Alcan — net | | | | | | | | | | | | | | | | | | | | | | | (467 | ) | | | (467 | ) |
Currency translation adjustment | | | | | | | | | | | | | | | | | | | 102 | | | | | | | | 102 | |
Change in minimum pension liability | | | | | | | | | | | | | | | | | | | 1 | | | | | | | | 1 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance as of December 31, 2003 | | | — | | | | — | | | | — | | | | — | | | | 84 | | | | 1,890 | | | | 1,974 | |
2004 Activity: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income | | | | | | | | | | | | | | | | | | | | | | | 55 | | | | 55 | |
Transfers (to) / from Alcan — net | | | | | | | | | | | | | | | | | | | | | | | (1,478 | ) | | | (1,478 | ) |
Currency translation adjustment | | | | | | | | | | | | | | | | | | | 30 | | | | | | | | 30 | |
Change in minimum pension liability | | | | | | | | | | | | | | | | | | | (26 | ) | | | | | | | (26 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance as of December 31, 2004 | | | — | | | | — | | | | — | | | | — | | | | 88 | | | | 467 | | | | 555 | |
2005 Activity: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
January 1 to January 5, 2005 — Net loss | | | | | | | | | | | | | | | | | | | | | | | (29 | ) | | | (29 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Adjusted Invested equity at spin-off date — January 6, 2005 | | | — | | | | — | | | | — | | | | — | | | | 88 | | | | 438 | | | | 526 | |
Issuance of common stock in connection with the spin-off | | | 73,989 | | | | — | | | | 438 | | | | | | | | | | | | (438 | ) | | | — | |
Spin-off settlement and post-closing adjustments | | | | | | | | | | | (6 | ) | | | | | | | | | | | | | | | (6 | ) |
Issuance of common stock in connection with stock plans | | | 17 | | | | — | | | | | | | | | | | | | | | | | | | | — | |
January 6 to December 31, 2005 — Net income | | | | | | | | | | | | | | | 119 | | | | | | | | | | | | 119 | |
Currency translation adjustment | | | | | | | | | | | | | | | | | | | (155 | ) | | | | | | | (155 | ) |
Change in minimum pension liability | | | | | | | | | | | | | | | | | | | (17 | ) | | | | | | | (17 | ) |
Dividends on common shares ($0.36 per share) | | | | | | | | | | | | | | | (27 | ) | | | | | | | | | | | (27 | ) |
Dividends on preferred shares of consolidated affiliates | | | | | | | | | | | (7 | ) | | | | | | | | | | | | | | | (7 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance as of December 31, 2005 | | | 74,006 | | | $ | — | | | $ | 425 | | | $ | 92 | | | $ | (84 | ) | | $ | — | | | $ | 433 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
��
The accompanying notes to the consolidated and combined financial statements
are an integral part of these statements.
97
Novelis Inc.
COMPREHENSIVE INCOME (LOSS)
(In millions, except per share amounts)
| | | | | | | | | | | | |
| | Year Ended December 31, | |
| | 2006 | | | 2005 | | | 2004 | |
|
Net sales | | $ | 9,849 | | | $ | 8,363 | | | $ | 7,755 | |
| | | | | | | | | | | | |
Cost of goods sold (exclusive of depreciation and amortization shown below) | | | 9,317 | | | | 7,570 | | | | 6,856 | |
Selling, general and administrative expenses | | | 410 | | | | 352 | | | | 289 | |
Litigation settlement — net of insurance recoveries | | | — | | | | 40 | | | | — | |
Depreciation and amortization | | | 233 | | | | 230 | | | | 246 | |
Research and development expenses | | | 40 | | | | 41 | | | | 58 | |
Restructuring charges — net | | | 19 | | | | 10 | | | | 20 | |
Impairment charges on long-lived assets | | | — | | | | 7 | | | | 75 | |
Interest expense and amortization of debt issuance costs — net | | | 206 | | | | 194 | | | | 48 | |
Equity in net income of non-consolidated affiliates | | | (16 | ) | | | (6 | ) | | | (6 | ) |
Other income — net | | | (82 | ) | | | (299 | ) | | | (62 | ) |
| | | | | | | | | | | | |
| | | 10,127 | | | | 8,139 | | | | 7,524 | |
| | | | | | | | | | | | |
Income (loss) before provision (benefit) for taxes on income (loss), minority interests’ share and cumulative effect of accounting change | | | (278 | ) | | | 224 | | | | 231 | |
Provision (benefit) for taxes on income (loss) | | | (4 | ) | | | 107 | | | | 166 | |
| | | | | | | | | | | | |
Income (loss) before minority interests’ share and cumulative effect of accounting change | | | (274 | ) | | | 117 | | | | 65 | |
Minority interests’ share | | | (1 | ) | | | (21 | ) | | | (10 | ) |
| | | | | | | | | | | | |
Net income (loss) before cumulative effect of accounting change | | | (275 | ) | | | 96 | | | | 55 | |
Cumulative effect of accounting change — net of tax | | | — | | | | (6 | ) | | | — | |
| | | | | | | | | | | | |
Net income (loss) | | | (275 | ) | | | 90 | | | | 55 | |
| | | | | | | | | | | | |
Other comprehensive income (loss) — net of tax | | | | | | | | | | | | |
Currency translation adjustment | | | 168 | | | | (155 | ) | | | 30 | |
Change in fair value of effective portion of hedges — net | | | (46 | ) | | | — | | | | — | |
Change in minimum pension liability | | | 12 | | | | (17 | ) | | | (26 | ) |
| | | | | | | | | | | | |
Other comprehensive income (loss) — net of tax | | | 134 | | | | (172 | ) | | | 4 | |
| | | | | | | | | | | | |
Comprehensive income (loss) | | $ | (141 | ) | | $ | (82 | ) | | $ | 59 | |
| | | | | | | | | | | | |
Earnings (loss) per share: | | | | | | | | | | | | |
— Basic: | | | | | | | | | | | | |
Net income (loss) before cumulative effect of accounting change | | $ | (3.71 | ) | | $ | 1.29 | | | $ | 0.74 | |
Cumulative effect of accounting change — net of tax | | | — | | | | (0.08 | ) | | | — | |
| | | | | | | | | | | | |
Net income (loss) per share — basic | | $ | (3.71 | ) | | $ | 1.21 | | | $ | 0.74 | |
| | | | | | | | | | | | |
— Diluted: | | | | | | | | | | | | |
Net income (loss) before cumulative effect of accounting change | | $ | (3.71 | ) | | $ | 1.29 | | | $ | 0.74 | |
Cumulative effect of accounting change — net of tax | | | — | | | | (0.08 | ) | | | — | |
| | | | | | | | | | | | |
Net income (loss) per share — diluted | | $ | (3.71 | ) | | $ | 1.21 | | | $ | 0.74 | |
| | | | | | | | | | | | |
Dividends per common share | | $ | 0.20 | | | $ | 0.36 | | | $ | — | |
| | | | | | | | | | | | |
Supplemental information for 2005 only: | | | | | | | | | | | | |
Net income attributable to the consolidated and combined results of Novelis from January 6 to December 31, 2005 — increase to Retained earnings | | | | | | $ | 119 | | | | | |
Net loss attributable to the combined results of Novelis from January 1 to January 5, 2005 — decrease to Owner’s net investment | | | | | | | (29 | ) | | | | |
| | | | | | | | | | | | |
Net income | | | | | | $ | 90 | | | | | |
| | | | | | | | | | | | |
The accompanying notes to the Consolidatedconsolidated and Combined Financial Statementscombined financial statements
are an integral part of these statements.
98
Novelis Inc.
(In millions, except number of shares)
| | | | | | | | |
| | As of December 31, | |
| | 2006 | | | 2005 | |
|
ASSETS |
Current assets | | | | | | | | |
Cash and cash equivalents | | $ | 73 | | | $ | 100 | |
Accounts receivable (net of allowances of $29 in 2006 and $26 in 2005) | | | | | | | | |
— third parties | | | 1,321 | | | | 1,098 | |
— related parties | | | 21 | | | | 33 | |
Inventories | | | 1,391 | | | | 1,128 | |
Prepaid expenses and other current assets | | | 42 | | | | 66 | |
Current portion of fair value of derivative instruments | | | 106 | | | | 194 | |
Deferred income tax assets | | | 9 | | | | 8 | |
| | | | | | | | |
Total current assets | | | 2,963 | | | | 2,627 | |
Property, plant and equipment — net | | | 2,143 | | | | 2,160 | |
Goodwill | | | 236 | | | | 211 | |
Intangible assets — net | | | 20 | | | | 21 | |
Investment in and advances to non-consolidated affiliates | | | 150 | | | | 144 | |
Fair value of derivative instruments — net of current portion | | | 44 | | | | 90 | |
Deferred income tax assets | | | 76 | | | | 45 | |
Other long-term assets | | | | | | | | |
— third parties | | | 101 | | | | 107 | |
— related parties | | | 59 | | | | 71 | |
| | | | | | | | |
Total assets | | $ | 5,792 | | | $ | 5,476 | |
| | | | | | | | |
|
LIABILITIES AND SHAREHOLDERS’ EQUITY |
Current liabilities | | | | | | | | |
Current portion of long-term debt | | $ | 144 | | | $ | 3 | |
Short-term borrowings | | | 133 | | | | 27 | |
Accounts payable | | | | | | | | |
— third parties | | | 1,542 | | | | 964 | |
— related parties | | | 44 | | | | 38 | |
Accrued expenses and other current liabilities | | | 508 | | | | 543 | |
Deferred income tax liabilities | | | 61 | | | | 26 | |
| | | | | | | | |
Total current liabilities | | | 2,432 | | | | 1,601 | |
Long-term debt — net of current portion | | | 2,158 | | | | 2,600 | |
Deferred income tax liabilities | | | 81 | | | | 186 | |
Accrued postretirement benefits | | | 425 | | | | 305 | |
Other long-term liabilities | | | 343 | | | | 192 | |
| | | | | | | | |
| | | 5,439 | | | | 4,884 | |
| | | | | | | | |
| | | | | | | | |
Commitments and contingencies | | | | | | | | |
| | | | | | | | |
Minority interests in equity of consolidated affiliates | | | 158 | | | | 159 | |
| | | | | | | | |
Shareholders’ equity | | | | | | | | |
Preferred stock, no par value; unlimited number of first preferred and second preferred shares authorized; none issued and outstanding | | | — | | | | — | |
Common stock, no par value; unlimited number of shares authorized; 74,140,335 and 74,005,649 shares issued and outstanding as of December 31, 2006 and 2005, respectively | | | — | | | | — | |
Additional paid-in capital | | | 398 | | | | 425 | |
Retained earnings (Accumulated deficit) | | | (198 | ) | | | 92 | |
Accumulated other comprehensive loss | | | (5 | ) | | | (84 | ) |
| | | | | | | | |
Total shareholders’ equity | | | 195 | | | | 433 | |
| | | | | | | | |
Total liabilities and shareholders’ equity | | $ | 5,792 | | | $ | 5,476 | |
| | | | | | | | |
The accompanying notes to the consolidated and combined financial statements
are an integral part of these balance sheets.
99
Novelis Inc.
(In millions)
| | | | | | | | | | | | |
| | Year Ended December 31, | |
| | 2006 | | | 2005 | | | 2004 | |
|
OPERATING ACTIVITIES | | | | | | | | | | | | |
Net income (loss) | | $ | (275 | ) | | $ | 90 | | | $ | 55 | |
Adjustments to determine net cash provided by operating activities: | | | | | | | | | | | | |
Cumulative effect of accounting change — net of tax | | | — | | | | 6 | | | | — | |
Depreciation and amortization | | | 233 | | | | 230 | | | | 246 | |
Net gain on change in fair value of derivative instruments | | | (63 | ) | | | (269 | ) | | | (69 | ) |
Litigation settlement — net of insurance reserves | | | — | | | | 40 | | | | — | |
Deferred income taxes | | | (77 | ) | | | 30 | | | | 97 | |
Amortization of debt issuance costs | | | 13 | | | | 17 | | | | — | |
Provision for uncollectible accounts receivable | | | 4 | | | | 3 | | | | 6 | |
Equity in net income of non-consolidated affiliates | | | (16 | ) | | | (6 | ) | | | (6 | ) |
Dividends from non-consolidated affiliates | | | 5 | | | | — | | | | — | |
Minority interests’ share | | | 1 | | | | 21 | | | | 10 | |
Impairment charges on long-lived assets | | | — | | | | 7 | | | | 75 | |
Share-based compensation | | | 9 | | | | 3 | | | | 2 | |
Gain on sales of businesses, investments and assets — net | | | (6 | ) | | | (17 | ) | | | (5 | ) |
Changes in assets and liabilities (net of effects from acquisitions and divestitures): | | | | | | | | | | | | |
Accounts receivable | | | | | | | | | | | | |
— third parties | | | (142 | ) | | | (91 | ) | | | (94 | ) |
— related parties | | | 1 | | | | (1 | ) | | | 72 | |
Inventories | | | (206 | ) | | | 52 | | | | (144 | ) |
Prepaid expenses and other current assets | | | 25 | | | | 18 | | | | (4 | ) |
Other long-term assets | | | 6 | | | | (13 | ) | | | (7 | ) |
Accounts payable | | | | | | | | | | | | |
— third parties | | | 519 | | | | 181 | | | | 10 | |
— related parties | | | 4 | | | | 2 | | | | 40 | |
Accrued expenses and other current liabilities | | | (64 | ) | | | 130 | | | | (31 | ) |
Accrued postretirement benefits | | | (24 | ) | | | 13 | | | | (42 | ) |
Other long-term liabilities | | | 69 | | | | (1 | ) | | | 29 | |
Other — net | | | — | | | | 4 | | | | (32 | ) |
| | | | | | | | | | | | |
Net cash provided by operating activities | | | 16 | | | | 449 | | | | 208 | |
| | | | | | | | | | | | |
INVESTING ACTIVITIES | | | | | | | | | | | | |
Capital expenditures | | | (116 | ) | | | (178 | ) | | | (165 | ) |
Disposal of business — net | | | (7 | ) | | | — | | | | — | |
Proceeds from sales of assets | | | 38 | | | | 19 | | | | 17 | |
Changes to investment in and advances to non-consolidated affiliates | | | 3 | | | | — | | | | — | |
Proceeds from loans receivable — net | | | | | | | | | | | | |
— third parties | | | — | | | | 19 | | | | — | |
— related parties | | | 37 | | | | 374 | | | | 874 | |
Premiums paid to purchase derivative instruments | | | (4 | ) | | | (57 | ) | | | — | |
Net proceeds from settlement of derivative instruments | | | 242 | | | | 148 | | | | — | |
| | | | | | | | | | | | |
Net cash provided by investing activities | | | 193 | | | | 325 | | | | 726 | |
| | | | | | | | | | | | |
(Continued)
100
Novelis Inc.
CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS — (Continued)
(In millions)
| | | | | | | | | | | | |
| | Year Ended December 31, | |
| | 2006 | | | 2005 | | | 2004 | |
|
FINANCING ACTIVITIES | | | | | | | | | | | | |
Proceeds from issuance of debt | | | | | | | | | | | | |
— third parties | | | 41 | | | | 2,779 | | | | 575 | |
— related parties | | | — | | | | — | | | | 1,561 | |
Principal repayments | | | | | | | | | | | | |
— third parties | | | (353 | ) | | | (1,822 | ) | | | (993 | ) |
— related parties | | | — | | | | (1,180 | ) | | | (5 | ) |
Short-term borrowings — net | | | | | | | | | | | | |
— third parties | | | 103 | | | | (145 | ) | | | (774 | ) |
— related parties | | | — | | | | (302 | ) | | | 221 | |
Dividends | | | | | | | | | | | | |
— common shareholders | | | (15 | ) | | | (27 | ) | | | — | |
— minority interests | | | (15 | ) | | | (7 | ) | | | (4 | ) |
Net receipts from (payments to) Alcan | | | 5 | | | | 72 | | | | (1,512 | ) |
Debt issuance costs | | | (11 | ) | | | (71 | ) | | | — | |
Proceeds from issuance of common stock in connection with stock plans | | | 2 | | | | — | | | | — | |
| | | | | | | | | | | | |
Net cash used in financing activities | | | (243 | ) | | | (703 | ) | | | (931 | ) |
| | | | | | | | | | | | |
Net increase (decrease) in cash and cash equivalents | | | (34 | ) | | | 71 | | | | 3 | |
Effect of exchange rate changes on cash balances held in foreign currencies | | | 7 | | | | (2 | ) | | | 1 | |
Cash and cash equivalents — beginning of year | | | 100 | | | | 31 | | | | 27 | |
| | | | | | | | | | | | |
Cash and cash equivalents — end of year | | $ | 73 | | | $ | 100 | | | $ | 31 | |
| | | | | | | | | | | | |
Supplemental disclosures of cash flow information: | | | | | | | | | | | | |
Interest paid | | $ | 201 | | | $ | 153 | | | $ | 76 | |
Income taxes paid | | | 68 | | | | 39 | | | | 70 | |
Principal payments on capital lease obligations (included in principal repayments — third parties) | | | 3 | | | | 3 | | | | — | |
| | | | | | | | | | | | |
Supplemental schedule of non-cash investing and financing activities relating to the spin-off transaction and post-closing adjustments: | | | | | | | | | | | | |
Other receivables | | | | | | $ | 433 | | | | | |
Short-term borrowings — related parties | | | | | | | (57 | ) | | | | |
Long-term debt — related parties | | | | | | | 32 | | | | | |
Capital lease obligation | | | | | | | 52 | | | | | |
Additional paid-in capital | | $ | (43 | ) | | | (109 | ) | | | | |
| | | | | | | | | | | | |
Supplemental schedule of non-cash transaction — Pechiney acquisition (2005 and 2004 only): | | | | | | | | | | | | |
Assets | | | | | | $ | 8 | | | $ | (197 | ) |
Liabilities | | | | | | | — | | | | 28 | |
| | | | | | | | | | | | |
Net assets allocated to us from Alcan | | | | | | $ | 8 | | | $ | (169 | ) |
| | | | | | | | | | | | |
The accompanying notes to the consolidated and combined financial statements
are an integral part of these statements.
101
Novelis Inc.
(In millions, except number of common shares, which is in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | Retained
| | | Accumulated
| | | | | | | |
| | | | | | | | Additional
| | | Earnings
| | | Other
| | | Owner’s
| | | | |
| | Common Stock | | | Paid-in
| | | (Accumulated
| | | Comprehensive
| | | Net
| | | | |
| | Shares | | | Amount | | | Capital | | | Deficit) | | | Income (Loss) | | | Investment | | | Total | |
|
Balance as of December 31, 2003 | | | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 84 | | | $ | 1,890 | | | $ | 1,974 | |
2004 Activity: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income | | | — | | | | — | | | | — | | | | — | | | | — | | | | 55 | | | | 55 | |
Transfers (to) / from Alcan — net | | | — | | | | — | | | | — | | | | — | | | | — | | | | (1,478 | ) | | | (1,478 | ) |
Currency translation adjustment — net of tax | | | — | | | | — | | | | — | | | | — | | | | 30 | | | | — | | | | 30 | |
Change in minimum pension liability | | | — | | | | — | | | | — | | | | — | | | | (26 | ) | | | — | | | | (26 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance as of December 31, 2004 | | | — | | | | — | | | | — | | | | — | | | | 88 | | | | 467 | | | | 555 | |
2005 Activity: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
January 1 to January 5, 2005 — Net loss | | | — | | | | — | | | | — | | | | — | | | | — | | | | (29 | ) | | | (29 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Adjusted Invested equity at spin-off date — January 6, 2005 | | | — | | | | — | | | | — | | | | — | | | | 88 | | | | 438 | | | | 526 | |
Issuance of common stock in connection with the spin-off | | | 73,989 | | | | — | | | | 438 | | | | — | | | | — | | | | (438 | ) | | | — | |
Spin-off settlement and post-closing adjustments | | | — | | | | — | | | | (6 | ) | | | — | | | | — | | | | — | | | | (6 | ) |
Issuance of common stock in connection with stock plans | | | 17 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
January 6 to December 31, 2005 — Net income | | | — | | | | — | | | | — | | | | 119 | | | | — | | | | — | | | | 119 | |
Currency translation adjustment — net of tax | | | — | | | | — | | | | — | | | | — | | | | (155 | ) | | | — | | | | (155 | ) |
Change in minimum pension liability | | | — | | | | — | | | | — | | | | — | | | | (17 | ) | | | — | | | | (17 | ) |
Dividends on common shares ($0.36 per share) | | | — | | | | — | | | | — | | | | (27 | ) | | | — | | | | — | | | | (27 | ) |
Dividends on preferred shares of consolidated affiliates | | | — | | | | — | | | | (7 | ) | | | — | | | | — | | | | — | | | | (7 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance as of December 31, 2005 | | | 74,006 | | | | — | | | | 425 | | | | 92 | | | | (84 | ) | | | — | | | | 433 | |
2006 Activity: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net loss | | | — | | | | — | | | | — | | | | (275 | ) | | | — | | | | — | | | | (275 | ) |
Issuance of common stock in connection with stock plans | | | 134 | | | | — | | | | 2 | | | | — | | | | — | | | | — | | | | 2 | |
Spin-off settlement and post-closing adjustments | | | — | | | | — | | | | (38 | ) | | | — | | | | — | | | | — | | | | (38 | ) |
Share-based compensation | | | — | | | | — | | | | 9 | | | | — | | | | — | | | | — | | | | 9 | |
Currency translation adjustment — net of tax | | | — | | | | — | | | | — | | | | — | | | | 168 | | | | — | | | | 168 | |
Change in fair value of effective portion of hedges — net | | | — | | | | — | | | | — | | | | — | | | | (46 | ) | | | — | | | | (46 | ) |
Change in minimum pension liability | | | — | | | | — | | | | — | | | | — | | | | 12 | | | | — | | | | 12 | |
Initial impact of adopting Financial Accounting Standards Board Statement No. 158 | | | — | | | | — | | | | — | | | | — | | | | (55 | ) | | | — | | | | (55 | ) |
Dividends on common shares ($0.20 per share) | | | — | | | | — | | | | — | | | | (15 | ) | | | — | | | | — | | | | (15 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance as of December 31, 2006 | | | 74,140 | | | $ | — | | | $ | 398 | | | $ | (198 | ) | | $ | (5 | ) | | $ | — | | | $ | 195 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
The accompanying notes to the consolidated and combined financial statements
are an integral part of these statements.
102
Novelis Inc.
| |
1. | Business and Summary of Significant Accounting PoliciesBUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Organization and Description of Business
Novelis Inc., formed in Canada on September 21, 2004, and its subsidiaries, is the world’s leading aluminum rolled products producer based on shipment volume. We produce aluminum sheet and light gauge products where the end-use destination of the products includes the construction and industrial, beverage and food cans, foil products and transportation markets. As of December 31, 2005,2006, we had operations on four continents: North America; South America; Asia; and Europe, through 3633 operating plants and three research facilities in 11 countries. In addition to aluminum rolled products plants, our South American businesses include bauxite mining, alumina refining, primary aluminum smelting and power generation facilities that are integrated with our rolling plants in Brazil.
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 “Alcan” refer to Alcan, Inc.
On May 18, 2004, Alcan Inc. (Alcan) announced its intention to transfer its rolled products businesses into a separate company and to pursue a spin-off of that company to its shareholders. The rolled products businesses were managed under two separate operating segments within Alcan — Rolled Products Americas and Asia, and Rolled Products Europe. On January 6, 2005, Alcan and its subsidiaries contributed and transferred to Novelis substantially all of the aluminum rolled products businesses operated by Alcan, together with some of Alcan’s alumina and primary metal-related businesses in Brazil, which are fully integrated with the rolled products operations there, as well as four rolling facilities in Europe whose end-use markets and customers were similar.
The spin-off occurred on January 6, 2005 following approval by Alcan’s board of directors and shareholders, and legal and regulatory approvals. Alcan shareholders received one Novelis common share for every five Alcan common shares held. Our common shares began trading on a “when issued” basis on the Toronto (TSX) and New York (NYSE) stock exchanges on January 6, 2005, with a distribution record date of January 11, 2005. “Regular Way” trading began on the TSX on January 7, 2005, and on the NYSE on January 19, 2005.
We have determined that, under the rules and regulations promulgated by the United States Securities and Exchange Commission (SEC), asAs of February 27, 2006, a majority of our outstanding shares were directly or indirectly held by U.S. residents and accordingly, we ceased to qualify as a foreign private issuer.issuer under the rules and regulations promulgated by the United States Securities and Exchange Commission (SEC). We are now a domestic issuer for purposes of the Securities Exchange Act of 1934, as amended.
In 2004 and prior,Prior to January 6, 2005, Alcan was considered a related party due to its parent-subsidiary relationship with the Novelis entities. Following the spin-off, Alcan is no longer a related party as defined in Financial Accounting Standards Board (FASB) Statement No. 57,Related Party Disclosures(Refer to Note 208 — Investment in and Advances to Non-consolidated Affiliates and Related Party Transactions).
Post-Transaction Adjustments
The agreements giving effect to the spin-off provide for various post-transaction adjustments and the resolution of outstanding matters, which are expectedmatters. On November 8, 2006, we executed a settlement agreement with Alcan resolving the working capital and cash balance adjustments to be carried out by the parties byopening balance sheet and issues relating to the endtransfer of 2006. These adjustments, for the most part, have been and will be recognized as changes toShareholders’/invested equityand include items such as working capital,U.S. pension assets and liabilities from Alcan to Novelis. Excluding pension assets and liabilities transfers, the net impact of the settlement was a payment to Novelis of $5 million. The pension asset and liability transfer resulted in Novelis assuming approximately $50 million in accrued pension costs. We also contributed $7 million to an Alcan sponsored plan in the U.K. from which we exited. Additionally, we recorded non-cash adjustments related to our opening balance sheet accounts.of $5 million. The net impact of recording
103
Novelis Inc.
NOTES TO THE CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS — (Continued)
all of the transactions was a $57 million ($38 million net of tax) reduction toAdditional paid-in capitalduring the fourth quarter of 2006.
We have yet to transition the pension plan assets and liabilities from Alcan with respect to two pension plans for those employees who elected to transfer their past service from Alcan to Novelis (one in Canada and one in the U.K.). We expect this transfer will take place during the first quarter of 2007, and we expect that the plan assets transferred will approximate the liabilities assumed. To the extent that they are different, we will record an adjustment toAdditional paid-in capitalas a post-transaction adjustment.
Agreements between Novelis and Alcan
We haveAt the spin-off, we entered into various agreements with Alcan including the use of transitional and technical services, the supply from Alcan of Alcan’s metal and alumina, the licensing of certain of Alcan’s patents, trademarks and
98
Novelis Inc.
Notes to the Consolidated and Combined Financial Statements — (Continued)
other intellectual property rights, and the use of certain buildings, machinery and equipment, technology and employees at certain facilities retained by Alcan, but required in our business. The terms and conditions of the agreements were determined primarily by Alcan and may not reflect what two unaffiliated parties might have agreed to. Had these agreements been negotiated with unaffiliated third parties, their terms may have been more favorable, or less favorable to us.
Basis of Presentation and Combination: Pre-Spin-off
The combined balance sheet as of December 31, 2004 and the combined financial statements for the yearsyear ended December 31, 2004 and 2003 (historical combined financial statements) have been derived from the accounting records of Alcan using the historical results of operations and historical basis of assets and liabilities of the businesses subsequently transferred to us, and were prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) on a carve-out accounting basis. Management believes the assumptions underlying the historical combined financial statements, including the allocations described below, are reasonable. However, the historical combined financial statements included herein may not necessarily reflect our financial position, results of operations and cash flows or what our past financial position, results of operations and cash flows would have been had we been a stand-alone company during the periods presented. Alcan’s investment in the Novelis businesses, presented asOwner’s net investmentin the historical combined financial statements, includes the accumulated earnings of the businesses as well as net cash transfers related to cash management functions performed by Alcan.
The financial results for the period from January 1 to January 5, 2005 represent our combined results of operations and cash flows on a carve-out accounting basis, prior to our spin-off from Alcan, and are included in our consolidated and combined financial statements for the year ended December 31, 2005. The consolidated balance sheet as of December 31, 2005 and the results for the period from January 6 (the date of the spin-off) to December 31, 2005 present our financial position, results of operations, and cash flows as a stand-alone entity.
As we operated as a part of Alcan and were not a stand-alone company prior to 2005, our historical combined financial statements include allocations of certain Alcan expenses, assets and liabilities, including the items described below.
General Corporate Expenses
The general corporate expense allocations are primarily for human resources, legal, treasury, insurance, finance, internal audit, strategy and public affairs, and amounted to $34 million and $24 million for the yearsyear ended December 31, 2004 and 2003, respectively.2004. Total corporate office costs, including the amounts allocated, amounted to $49 million and $36 million for the yearsyear ended December 31, 2004 and 2003, respectively.2004.
104
Novelis Inc.
NOTES TO THE CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS — (Continued)
Alcan allocated these general corporate expenses to us based on average head count and capital employed. Capital employed representsTotal assetslessTotal current liabilities(excluding current portion of long-term debt and short-term borrowings),Accrued post-retirementpostretirement benefitsandOther long-term liabilities. These allocations are reported inSelling, general and administrative expensesin the historical combined financial statements for the yearsyear ended December 31, 2004 and 2003.2004. The costsexpenses allocated are not necessarily indicative of the costs that would have been incurred had we performed these functions as a stand-alone company, nor are they indicative of costs that will be incurred in the future.
Following the spin-off, we performed the majority of these functions with our own resources or through purchased services, with some services provided by Alcan on an interim basis. As of June 30, 2006, thebasis under transitional service agreements. The majority of these agreements terminated on or prior to December 31, 2005. However, we have continuing agreements with Alcan through 2007 to use certain information technology services to support our metal management and through 2008 to use certain information technology hosting services to support our financial accounting systems for the approximately 130 transitional service agreements between AlcanNachterstedt and Novelis have ended.Goettingen plants.
Interest Expense and Amortization of Debt Issuance Costs — net
Historically, Alcan provided intercompany financing to us and incurred third party debt at the parent level. This financing is recognized in the combined balance sheet as of December 31, 2004 as amounts due to Alcan withinShort-term borrowings — related partiesandLong-term debt — related parties(including the
99
Novelis Inc.
Notes to the Consolidated and Combined Financial Statements — (Continued)
current portion thereof) and iswas interest-bearing as described in Note 208 — Investment in and Advances to Non-consolidated Affiliates and Related Party Transactions. As a result of this arrangement, the historical combined financial statements for the yearsyear ended December 31, 2004 and 2003 do not include interest expense (or interest payable) at third party rates.
Prior to and following the spin-off from Alcan, we obtained short and long-term financing from third parties. Interest charged on all short-term borrowings and long-term debt is included inInterest expense and amortization of debt issuance costs — netin the accompanying consolidated and combined statements of income.operations.
Basis of Presentation and Consolidation: Post Spin-off
Beginning January 6, 2005, the accompanyingour consolidated and combined financial statements of Novelis and its subsidiaries include the assets, liabilities, revenues, and expenses of all wholly-owned subsidiaries, majority-owned subsidiaries over which the Company exerciseswe exercise control and, when applicable, entities in which the Company haswe have a controlling financial interest.
As of December 31, 2005,2006, we had investments in sixfive partially-owned subsidiaries,affiliates, which include two corporations, one limited liability corporation, one general partnership, one public limited company and one unincorporated joint venture, in which Novelis Inc. or one of our subsidiaries is a shareholder, general or limited partner, managing member, or venturer, as applicable.
To determine if partially ownedpartially-owned affiliates should be consolidated, we evaluate them in accordance with the provisions of American Institute of Certified Public Accountants (AICPA) Statement of Position (SOP)78-9,Accounting for Investments in Real Estate Ventures, and Emerging Issues Task Force (EITF) IssueNo. 98-6, “Investor’sInvestor’s Accounting for an Investment in a Limited Partnership When the Investor Is the Sole General Partner and the Limited Partners Have Certain Approval or Veto Rights”Rights, to determine whether the rights held by other investors constitute “important rights” as defined therein.
For general partners of all new limited partnerships formed and for existing limited partnerships for which the partnership agreements were modified on or subsequent to June 29, 2005, we evaluate partially owned subsidiaries and joint ventures held in partnership form using the guidance in EITF IssueNo. 04-5, “Investor’sInvestor’s Accounting for an Investment in a Limited Partnership When the Investor Is the Sole General Partner and the
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COMBINED FINANCIAL STATEMENTS — (Continued)
Limited Partners Have Certain Rights”Rights, which includes a framework for evaluating whether a general partner or a group of general partners controls a limited partnership and therefore should include it in consolidation.
In January 2003, FASB Interpretation No. 46,Consolidation of Variable Interest Entities,, was issued. It was revised in December 2003 by FASB Interpretation No. 46 (Revised), which addresses the consolidation of business enterprises to which the usual condition (ownership of a majority voting interest) of consolidation does not apply. In 2004, we determined we were the primary beneficiary of Logan Aluminum Inc. (Logan), a variable interest entity. As a result, theour consolidated and combined balance sheets as of December 31, 2005 and 2004financial statements include the assets and liabilities and results of operations of Logan. Logan is a joint venture that manages a tolling arrangement for Novelis and a third party. At the date of adoption of FASB Interpretation No. 46 (Revised), January 1, 2004, we recorded assets of $38 million and liabilities of $38 million related to Logan that were previously not recorded on our balance sheet. Prior periods were not restated.
For partially-owned subsidiariesaffiliates or joint ventures held in corporate form, we utilize the guidance of FASB Statement No. 94,Consolidation of All Majority-Owned Subsidiaries, and EITF IssueNo. 96-16, “Investor’sInvestor’s Accounting for an Investee When the Investor Has a Majority of the Voting Interest but the Minority Shareholder or Shareholders Have Certain Approval or Veto Rights”.Rights. To the extent that any minority investor has important rights in a partnership or participating rights in a corporation that inhibit our ability to control the corporation, including substantive veto rights, we will not include the entity in consolidation.
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We use the equity method to account for our investments in entities that we do not control, but where we have the ability to exercise significant influence over operating and financial policies. Consolidated net income (loss) includes our share of the net earnings 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 consolidated and combined financial statements for consolidated entities, compared to a two-line presentation of equity method investments and earnings.
We use the cost method to account for our investments in entities that we do not control and for which we do not have the ability to exercise significant influence over operating and financial policies. These investments are recorded at the lower of their cost or fair value.
We eliminate all significant intercompany accounts and transactions from our financial statements.
Certain reclassifications of prior years’ amounts have been made to conform to the presentation adopted for the current year.
2005Out-of-Period Adjustments — Net of Tax
During the preparation of our financial statements for the year ended December 31, 2005, we identified errors in our combined financial statements for the year ended December 31, 2004 and for prior periods. These errors, net of tax, primarily related to: (1) the overstatement of tax expense of approximately $9.3 million because we did not properly exclude the impact of inflation indexing of certain long-lived assets in South America; (2) the improper deferral of approximately $6.5 million of gains from the settlement of certain derivative instruments primarily in Europe and South America; (3) the understatement of approximately $5.7 million of option premium expense in North America; (4) the understatement of approximately $4.1 million of various working capital and employee-related accruals primarily in North America and Europe, (5) the improper calculation and understatement of approximately $1.8 million of income tax expense related to various tax matters primarily in Europe and South America, (6) understated accruals of approximately $3.5 million related to certain labor claims in South America and (7) certain other miscellaneous items approximating a net amount of $0.7 million in overstated expenses. In total, the net impact of these corrections increased 2005 Net income by $1.4 million for the year ended December 31, 2005. We do not believe these adjustments are material, individually or in the aggregate, to our financial position, results of operations or cash flows for the year ended December 31, 2005 or to any prior periods’ annual or quarterly financial statements. As a result, we have not restated any prior period amounts.
These adjustments are summarized as follows:
Effect on 2005 Net income — increase/(decrease)
| | | | | | | | |
| | | | | $ in millions | |
|
| (1 | ) | | Overstatement of tax expense related to improper asset indexation in South America | | $ | 9.3 | |
| (2 | ) | | Improper deferral of gains from the settlement of certain derivative instruments primarily in Europe and South America | | | 6.5 | |
| (3 | ) | | Understatement of option premium expense in North America | | | (5.7 | ) |
| (4 | ) | | Understatement of various accruals primarily in North America and Europe | | | (4.1 | ) |
| (5 | ) | | Improper calculation of certain tax expenses primarily in Europe and South America | | | (1.8 | ) |
| (6 | ) | | Understatement of accruals for labor claims in South America | | | (3.5 | ) |
| (7 | ) | | Other miscellaneous items | | | 0.7 | |
| | | | | | | | |
| | | | Net increase to 2005 Net income | | $ | 1.4 | |
| | | | | | | | |
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Cumulative Effect of Accounting Change
On December 31, 2005, we adopted FASB Interpretation No. 47,Accounting for Conditional Asset Retirement Obligations. As a result of our adoption ofadopting FASB Interpretation No. 47, we identified conditional retirement obligations primarily related to environmental contamination of equipment and buildings at certain of our plantplants and administrative sites in North America, South America, Asia and Europe. See Note 6 — Property, Plant and Equipment.
Use of Estimates and Assumptions
The preparation of our consolidated and combined financial statements in conformity with 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. Significant estimates and assumptions are used for, but are not limited to: (1) allowances for sales discounts; (2) allowances for doubtful accounts; (3) inventory valuation allowances; (4) fair value of derivative financial instruments; (5)(2) asset impairments, including goodwill; (6)(3) depreciable lives of assets; (7)(4) useful lives of intangible assets; (8)(5) economic lives and fair value of leased assets; (9)(6) income tax reserves and valuation allowances; (10)(7) fair value of stock options; (11)(8) actuarial assumptions related to pension and other post-retirementpostretirement benefit plans; (12)
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COMBINED FINANCIAL STATEMENTS — (Continued)
(9) environmental cost reserves; and (13)(10) litigation reserves. Future events and their effects cannot be predicted with certainty, and accordingly, our accounting estimates require the exercise of judgment. The accounting estimates used in the preparation of our consolidated and combined financial statements will 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.
Risks and Uncertainties
We are exposed to a number of risks in the normal course of our operations that could potentially affect our financial position, results of operations, and cash flows.
Laws and regulations
We operate in an industry that is subject to a broad range of environmental, health and safety laws and regulations in the jurisdictions in which we operate. These laws and regulations impose increasingly stringent environmental, health and safety protection standards and permitting requirements regarding, among other things, air emissions, wastewater storage, treatment and discharges, the use and handling of hazardous or toxic materials, waste disposal practices, and the remediation of environmental contamination and working conditions for our employees. Some environmental laws, such as the U.S. Comprehensive Environmental Response, Compensation, and Liability Act, also known as CERCLA or Superfund, and comparable state laws, impose joint and several liability for the cost of environmental remediation, natural resource damages, third-partythird party claims, and other expenses, without regard to the fault or the legality of the original conduct, on those persons who contributed to the release of a hazardous substance into the environment.
The costs of complying with these laws and regulations, including participation in assessments and remediation of contaminated sites and installation of pollution control facilities, have been, and in the future could be, significant. In addition, these laws and regulations may also result in substantial environmental liabilities associated with divested assets, third-partythird party locations and past activities. In certain instances, these costs and liabilities, as well as related action to be taken by us, could be accelerated or increased if we were to close, divest of or change the principal use of certain facilities with respect to which we may have environmental liabilities or remediation obligations. Currently, we are involved in a number of compliance
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Notes to the Consolidated and Combined Financial Statements — (Continued)
efforts, remediation activities and legal proceedings concerning environmental matters, including certain activities and proceedings arising under U.S. Superfund and comparable state laws.laws in other jurisdictions where we have operations.
We have established reserves for environmental remediation activities and liabilities where appropriate. However, the cost of addressing environmental matters (including the timing of any charges related thereto) cannot be predicted with certainty, and these reserves may not ultimately be adequate, especially in light of potential changes in environmental conditions, changing interpretations of laws and regulations by regulators and courts, the discovery of previously unknown environmental conditions, the risk of governmental orders to carry out additional compliance on certain sites not initially included in remediation in progress, our potential liability to remediate sites for which provisions have not been previously established and the adoption of more stringent environmental laws. Such future developments could result in increased environmental costs and liabilities and could require significant capital expenditures, any of which could have a material adverse effect on our financial position or results.results of operations or cash flows. Furthermore, the failure to comply with our obligations under the environmental laws and regulations could subject us to administrative, civil or criminal penalties, obligations to pay damages or other costs, and injunctions or other orders, including orders to cease
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COMBINED FINANCIAL STATEMENTS — (Continued)
operations. In addition, the presence of environmental contamination at our properties could adversely affect our ability to sell a property, receive full value for a property or use a property as collateral for a loan.
Some of our current and potential operations are located or could be located in or near communities that may regard such operations as having a detrimental effect on their social and economic circumstances. Environmental laws typically provide for participation in permitting decisions, site remediation decisions and other matters. Concern about environmental justice issues may affect our operations. Should such community objections be presented to government officials, the consequences of such a development may have a material adverse impact upon the profitability or, in extreme cases, the viability of an operation. In addition, such developments may adversely affect our ability to expand or enter into new operations in such location or elsewhere and may also have an effect on the cost of our environmental remediation projects.
We use a variety of hazardous materials and chemicals in our rolling processes, as well as in our smelting operations in Brazil and in connection with maintenance work on our manufacturing facilities. Because of the nature of these substances or related residues, we may be liable for certain costs, including, among others, costs for health-related claims or removal or re-treatment of such substances. Certain of our current and former facilities incorporate asbestos-containing materials, a hazardous substance that has been the subject of health-related claims for occupation exposure. In addition, although we have developed environmental, health and safety programs for our employees, including measures to reduce employee exposure to hazardous substances, and conduct regular assessments at our facilities, we are currently, and in the future may be, involved in claims and litigation filed on behalf of persons alleging injury predominantly as a result of occupational exposure to substances at our current or former facilities. It is not possible to predict the ultimate outcome of these claims and lawsuits due to the unpredictable nature of personal injury litigation. If these claims and lawsuits, individually or in the aggregate, were finally resolved against us, our financial position, results of operations and cash flows could be adversely affected.
Materials and labor
In the aluminum rolled products industry, our raw materials are subject to continuous price volatility. We may not be able to pass on the entire cost of the increases to our customers or offset fully the effects of higher raw material costs, other than metal, through productivity improvements, which may cause our profitability to decline. In addition, there is a potential time lag between changes in prices under our purchase contracts and the point when we can implement a corresponding change under our sales contracts with our customers. As a result, we could be exposed to fluctuations in raw materials prices, including metal, since, during the time lag period, we may have to temporarily bear the additional cost of the change under our purchase contracts, which could have a material adverse effect on our financial position, results of operations, and cash flows. Significant
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price increases may result in our customers’ substituting other materials, such as plastic or glass, for aluminum or switch to another aluminum rolled products producer, which could have a material adverse effect on our financial position, results of operations, and cash flows.
We consume substantial amounts of energy in our rolling operations, our cast house operations and our Brazilian smelting operations. The factors that affect our energy costs and supply reliability tend to be specific to each of our facilities. A number of factors could materially adversely affect our energy position including, but not limited to (a) increases in the cost of natural gas; (b) increases in the cost of supplied electricity or fuel oil related to transportation, (c) interruptions in energy supply due to equipment failure or other causes; and (d) the inability to extend energy supply contracts upon expiration on economical terms. A significant increase in energy costs or disruption of energy supplies or supply arrangements could have a material impact on our financial position, results of operations, and cash flows.
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COMBINED FINANCIAL STATEMENTS — (Continued)
Approximately 75 percent of our employees are represented by labor unions under a large number of collective bargaining agreements with varying durations and expiration dates. Approximately 28 percent of our labor force is covered by collective bargaining agreements that will expire during the year ended December 31, 2006.2007. We may not be able to satisfactorily renegotiate our collective bargaining agreements when they expire. In addition, existing collective bargaining agreements may not prevent a strike or work stoppage at our facilities in the future, and any such work stoppage could have a material adverse effect on our financial position, results of operations, and cash flows.
Geographic markets
We are, and will continue to be, subject to financial, political, economic and business risks in connection with our global operations. We have made investments and carry on production activities in various emerging markets, including Brazil, Korea and Malaysia, and we market our products in these countries, as well as China and certain other countries in Asia. While we anticipate higher growth or attractive production opportunities from these emerging markets, they also present a higher degree of risk than more developed markets. In addition to the business risks inherent in developing and servicing new markets, economic conditions may be more volatile, legal and regulatory systems less developed and predictable, and the possibility of various types of adverse governmental action more pronounced. In addition, inflation, fluctuations in currency and interest rates, competitive factors, civil unrest and labor problems could affect our revenues, expenses and results of operations. Our operations could also be adversely affected by acts of war, terrorism or the threat of any of these events as well as government actions such as controls on imports, exports and prices, tariffs, new forms of taxation, or changes in fiscal regimes and increased government regulation in the countries in which we operate or service customers. Unexpected or uncontrollable events or circumstances in any of these markets could have a material adverse effect on our financial position, results of operations, and cash flows.
In addition, refer to Note 13 — Fair Value of Financial Instruments and Note 2120 — Commitments and Contingencies to our consolidated and combined financial statements for a discussion of financial instruments and commodity contracts and commitments and contingencies.
Revenue Recognition
We recognize net sales when the revenue is realized or realizable, and has been earned, in accordance with the SEC’s Staff Accounting Bulletin (SAB) No. 104,Revenue Recognition in Financial Statements.Recognition. We record sales when a firm sales agreement is in place, delivery has occurred and collectibility of the fixed or determinable sales price is reasonably assured.
We recognize product revenue, net of trade discounts and allowances, in the reporting period in which the products are shipped and the title and risk of ownership pass to the customer. We generally ship our product to
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Notes to the Consolidated and Combined Financial Statements — (Continued)
our customers FOB (free on board) destination point. Our standard terms of delivery are included in our contracts of sale, order confirmation documents and invoices. We sell most of our products under contracts with pricing based on “margin over metal” pricing, which is subject to periodic adjustments based on market factors. As a result, the aluminum price risk is largely absorbed by the customer. In situations where we offer customers fixed prices for future delivery of our products, we may enter into derivative instruments for all or a portion of the cost of metal inputs to protect our profit on the conversion of the product. In addition, sales contracts currently representing approximately 20%certain of our total annual net sales contracts provide for a ceiling over which metal prices cannot contractually be passed through to our customers, unless adjusted. We partially mitigate the risk of this metal price exposure through the purchase of metal options.derivative instruments.
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COMBINED FINANCIAL STATEMENTS — (Continued)
We record tolling revenue when the revenue is realized or realizable, and has been earned. Tolling refers to the process by which certain customers provide metal to us for conversion to rolled product. We do not take title to the metal and, after the conversion and return shipment of the rolled product to the customer, we charge them for the value-added conversion cost and record these amounts inNet sales.
Shipping and handling amounts we bill to our customers are included inNet salesand the related shipping and handling costs we incur are included inCost of sales.
Cash and Cash Equivalents
Cash and cash equivalentsincludes investments that are highly liquid and have maturities of three months or less when purchased. The carrying values of cash and cash equivalents approximate their fair value due to the short-term nature of these instruments.
We maintain amounts on deposit with various financial institutions, which may, at times, exceed federally insured limits. However, management periodically evaluates the credit-worthiness of those institutions, and we have not experienced any losses on such deposits.
Alcan performed cash management functions on behalf of certain of our businesses in North America, the U.K. and other parts of Europe. Cash deposits from these businesses were transferred to Alcan on a regular basis. As a result, none of Alcan’s cash and cash equivalents for these businesses was allocated to Novelis in the historical combined financial statements. Transfers to and from Alcan were included inOwner’s net investment. Subsequent to the spin-off, we perform our own cash management functions.
Cash and cash equivalentsin the combined balance sheet as of December 31, 2004 include amounts only for businesses that had performed their own cash management functions prior to the spin-off, which are primarily located in South America, Asia and parts of Europe.
Accounts Receivable
Our accounts receivable are geographically dispersed. We do not obtain collateral or other forms of security relating to our accounts receivable. We do not believe there are any significant concentrations of revenues from any particular customer or group of customers that would subject us to any significant credit risks in the collection of our accounts receivable. We report accounts receivable at the estimated net realizable amount we expect to collect from our customers.
Additions to the allowance for doubtful accounts are made by means of the provision for doubtful accounts. We write offwrite-off uncollectible receivablesaccounts receivable against the allowance for doubtful accounts after exhausting collection efforts.
For each of the three years in the period ended December 31, 2005,2006, we performed an analysis of our historical cash collection patterns and considered the impact of any known material events in determining the allowance for doubtful accounts. In performing the analysis, the impact of any adverse changes in general economic conditions was considered, and for certain customers we reviewed a variety of factors including:
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Notes to the Consolidated and Combined Financial Statements — (Continued)
past due receivables; macro-economic conditions; significant one-time events and historical experience. Specific reserves for individual accounts may be established due to a customer’s inability to meet their financial obligations, such as in the case of bankruptcy filings or the deterioration in a customer’s operating results or financial position. As circumstances related to customers change, we adjust our estimates of the recoverability of receivables.the accounts receivable.
Derivative Instruments
We utilize derivative instruments to manage our exposure to changes in foreign currency exchange rates, commodity prices and interest rates. The fair values of all derivative instruments are recognized as assets or liabilities at the balance sheet date. Changes in the fair value of these instruments are recognized in income or included inAccumulated other comprehensive income (loss) (AOCI), depending on the nature or use of the derivative and whether it qualifies for hedge accounting treatment under the provisions of FASB Statement No. 133,Accounting for Derivative Instruments and Hedging Activities,, as amended.
Gains and losses on derivative instruments qualifying as cash flow hedges are included, to the extent the hedges are effective, in AOCI, until the underlying transactions are recognized in income. Gains and losses on derivative instruments used as hedges of our net investment in foreign operations are included, net of taxes, to
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NOTES TO THE CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS — (Continued)
the extent the hedges are effective, in AOCI as part of the cumulative translation adjustment. The ineffective portions of cash flow hedges and hedges of net investments in foreign operations, if any, are recognized inOther income — netin the current period.
During 2004, and 2003, we entered into derivative contracts, primarily with Alcan, to manage some of our foreign currency and commodity price risk. These contracts are reported at their fair value on our combined balance sheet as of December 31, 2004. Changes in the fair value of these derivativesderivative instruments were recorded as net gains on changes in fair market value of derivative instruments in the accompanying consolidated and combined statements of incomeoperations inOther income — net. For the yearsyear ended December 31, 2004, and 2003, the cash flows from these hedges were included inNet cash provided by operating activitiesin our combined statements of cash flows. For the yearyears ended December 31, 2006 and 2005, we included the proceeds and disbursementdisbursements from transactions which did not qualify for hedge accounting inNet cash provided by (used in) investing activities.
Inventories
We carry our inventories at the lower of their cost or market value, reduced by allowancesreserves for excess and obsolete items. We use both the “average cost” and“first-in/first-in / first-out” methods to determine cost.
Property, Plant and Equipment
We report land, buildings, leasehold improvements and machinery and equipment at cost, net of asset impairments, and we report assets under capital lease obligations at the lower of their fair value or the present value of the aggregate future minimum lease payments as of the beginning of the lease term. We depreciate our assets using the straight-line method over the shorter of the estimated useful life of the assets or the lease term, excluding any lease renewals, unless the lease renewals are reasonably assured. The ranges of estimated useful lives are as follows:
| | | | |
| | Years | |
|
Buildings | | | 30 to 40 | |
Leasehold improvements | | | 7 to 20 | |
Machinery and equipment | | | 5 to 25 | |
Furniture, fixtures and equipment | | | 3 to 7 | |
Equipment under capital lease obligations | | | 6 to 15 | |
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Notes to the Consolidated and Combined Financial Statements — (Continued)
Maintenance and repairs of property and equipment are expensed as incurred. We capitalize replacements and improvements that increase the estimated useful life of an asset and we capitalize interest on major construction and development projects while in progress.
We retain fully depreciated assets in property and accumulated depreciation accounts until we remove them from service. In the case of sale, retirement or disposal, the asset cost and related accumulated depreciation balances are removed from the respective accounts, and the resulting net amount, less any proceeds, is included as a gain or loss inOther income — netin our statements of income.operations.
We account for operating leases under the provisions of FASB Statement No. 13,Accounting for Leases,and FASB TechnicalBulletin No. 85-3,Accounting for Operating Leases with Scheduled Rent Increases. These pronouncements require us to recognize escalating rents, including any rent holidays, on a straight-line basis over the term of the lease for those lease agreements where we receive the right to control the use of the entire leased property at the beginning of the lease term.
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COMBINED FINANCIAL STATEMENTS — (Continued)
Goodwill and Other Intangible Assets
We account for goodwill and other intangible assets under the guidance in FASB Statement No. 141,Business Combinations, FASB Statement No. 142,Goodwill and Other Intangible Assets, and FASB Statement No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets.
We test goodwill for impairment using a fair value approach at thereporting unitlevel. We use our operating segments as our reporting units. We test for impairment at least annually as of October 31st each year, unless some triggering event occurs that would require an impairment assessment.
We use the present value of estimated future cash flows to establish the estimated fair value of our reporting units as of the testing dates. This approach includes many assumptions related to future growth rates, discount factors and tax rates, among other considerations. Changes in economic and operating conditions impacting these assumptions could result in goodwill impairment in future periods. When available and as appropriate, we use comparative market multiples to corroborate the estimated fair value. If the carrying amount of a reporting unit’s goodwill were to exceed its impliedestimated fair value, we would recognize an impairment charge inImpairment charges on long-lived assets,, in our statements of income.operations.
When a business within a reporting unit is disposed of, goodwill is allocated to the gain or loss on disposition using the relative fair value methodology of FASB Statement No. 142.
In accordance with FASB Statement No. 142, we amortize the cost of intangible assets with finite useful lives over their respective estimated useful lives to their estimated residual value.
Impairment of Long-Lived Assets and Other Intangible Assets
Under the guidance in FASB Statement No. 144, we assess the recoverability of long-lived assets (excluding goodwill) and identifiable acquired intangible assets with finite useful lives, whenever events or changes in circumstances indicate that we may not be able to recover the asset’s carrying amount. We measure the recoverability of assets to be held and used by a comparison of the carrying amount of the asset (groups) to the expected, undiscounted future net cash flows to be generated by that asset (groups), or, for identifiable intangible assets with finite useful lives, by determining whether the amortization of the intangible asset balance over its remaining life can be recovered through undiscounted future cash flows. The amount of impairment of identifiable intangible assets with finite useful lives is based on the present value of estimated future cash flows. We measure the amount of impairment of other long-lived assets (excluding goodwill) as the amount by which the carrying value of the asset exceeds the fair market value of the asset, which is generally determined as the present value of estimated future cash flows or as the appraised value. If the
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carrying amount of an intangible asset were to exceed its fair market value, we would recognize an impairment charge inImpairment charges on long-lived assetsin our statements of income.operations.
We continue to amortize long-lived assets to be disposed of other than by sale. We carry long-lived assets to be disposed of by sale in our balance sheets at the lower of net book value or the fair value less cost to sell, and we cease depreciation.
Investment in and Advances to Non-consolidated Affiliates
Investments in entities in which we have the ability to exercise significant influence over the operating and financial policies of the investee and are not the primary beneficiary are accounted for under the equity method. Equity method investments are recorded at original cost and adjusted periodically to recognize our proportionate share of the investees’ net income or losses after the date of investment; additional contributions made and dividends or distributions received; and impairment losses resulting from adjustments to net
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COMBINED FINANCIAL STATEMENTS — (Continued)
realizable value. We record equity method losses in excess of the carrying amount of an investment when we guarantee obligations or we are otherwise committed to provide further financial support to the affiliate.
We use the cost method to account for equity investments for which the equity securities do not have readily determinable fair values and for which we do not have the ability to exercise significant influence and for which we are not the primary beneficiary. Under the cost method of accounting, private equity investments are carried at cost and are adjusted only forother-than-temporary declines in fair value and additional investments.
Management assesses the potential impairment of our equity method and cost method investments. We consider all available information, including the recoverability of the investment, the earnings and near-term prospects of the affiliate, factors related to the industry, conditions of the affiliate, and our ability, if any, to influence the management of the affiliate. We assess fair value based on valuation methodologies, as appropriate, including the present value of estimated future cash flows, estimates of sales proceeds, and external appraisals. If an investment is considered to be impaired and the decline in value is other than temporary, we record an appropriate write-down.
Guarantees
We account for certain guarantees in accordance with FASB Interpretation No. 45,Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. FASB Interpretation No. 45 requires that a guarantor recognize a liability for the fair value of obligations undertaken at the inception of a guarantee.
Financing Costs and Interest Income
We amortize financing costs and premiums, and accrete discounts, over the remaining life of the related debt using the “effective interest amortization” and straight-line methods. The related income or expense is included inInterest expense and amortization of debt issuance costs — netin our consolidated and combined statements of income.operations. We record discounts or premiums as a direct deduction from, or addition to, the face amount of the financing.
We net interest income earned against interest expense and include both inInterest expense and amortization of debt issuance costs — netin our consolidated and combined statements of income.operations.
Fair Value of Financial Instruments
FASB Statement No. 107,Disclosures about Fair Value of Financial Instruments,, requires disclosures of the fair value of financial instruments. Our financial instruments include cash and cash equivalents, certificates
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of deposit, accounts receivable, accounts payable, foreign currency, energy and interest rate derivative instruments, cross-currency swaps, metal option and forward contracts, related party notes receivable and payable, letters of credit, short-term borrowings and long-term debt.
The carrying amounts of cash and cash equivalents, certificates of deposit, accounts receivable, current related party notes receivable and payable, and accounts payable approximate their fair value because of the short-term maturity and highly liquid nature of these instruments. The fair value of our letters of credit is deemed to be the amount of payment guaranteed on our behalf by third party financial institutions. We determine the fair value of our short-term borrowings and long-term debt based on various factors including maturity schedules, call features and current market rates. We also use quoted market prices, when available, or the present value of estimated future cash flows to determine fair value of short-term borrowings and long-term debt. When quoted market prices are not available for various types of financial instruments (such as
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NOTES TO THE CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS — (Continued)
currency and interest rate derivatives,derivative instruments, swaps, options and forward contracts), we use standard pricing models with market-based inputs, which take into account the present value of estimated future cash flows.
Pensions and Post-RetirementPostretirement Benefits
We account for our pensions and other postretirement benefits in accordance with FASB Statements No. 158,Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans,No. 87,Employers’ Accounting for Pensions, and No. 106,Employers’ Accounting for Postretirement Benefits Other than Pensions. We adopted FASB Statement No. 158 for the year ended December 31, 2006. FASB Statement No. 158 requires us to recognize the funded status of our benefit plans as a net asset or liability, with an offsetting adjustment to accumulated other comprehensive income in shareholders’ equity. The funded status is calculated as the difference between the fair value of plan assets and the benefit obligation. In accordance with FASB Statement No. 158, we use a December 31st measurement date for our pension and postretirement plans.
We use standard actuarial methods and assumptions to account for our defined benefit pension plans in accordance with FASB Statement No. 87,Employers’ Accounting for Pensions. Other post-retirement benefits are accounted for in accordance with FASB Statement No. 106,Employers’ Accounting for Post-Retirement Benefits Other than Pensions.and other postretirement benefits. Pension and post-retirementpostretirement benefit obligations are actuarially calculated using management’s best estimates of expected service periods, salary increases and retirement ages of employees. Pension and post-retirementpostretirement benefit expense includes the actuarially computed cost of benefits earned during the current service period, the interest cost on accrued obligations, the expected return on plan assets based on fair market value and the straight-line amortization of net actuarial gains and losses and adjustments due to plan amendments. All net actuarial gains and losses are amortized over the expected average remaining service lives of the employees.
Prior to the spin-off, certainCertain of our entities hadhave pension obligations primarily comprised of defined benefit plans in the U.S. and the U.K., unfunded pension benefits in Germany and lump sum indemnities payable upon retirement to employees of businesses in France, Italy, Korea and Malaysia. These pension benefits are managed regionally and the related assets, liabilitiesplans’ funded status and costs are included in theour combined and consolidated and combined balance sheets as of December 31, 2005 and 2004.financial statements.
Prior to the spin-off, Alcan managed defined benefit plans in Canada, the U.S., the U.K. and Switzerland that include certain of our entities. Our share of these plans’ assets and liabilities is not included in the accompanying combined balance sheet as of December 31, 2004 as they were retained by Alcan. The combined statementsstatement of incomeoperations for the yearsyear ended December 31, 2004 and 2003, however, includeincludes an allocation of the costs of the plans. The costs vary depending on whether the entity was a subsidiary or a division of Alcan at that time. Pension costs of divisions of Alcan that were transferred to us were allocated based on the following methods: service costs were allocated based on a percentage of payroll costs; interest costs, the expected return on assets, and amortization of actuarial gains and losses were allocated based on a percentage of the projected benefit obligation (PBO); and prior service costs were allocated based on headcount. The total allocation of such pension costs amounted to $13 million and $15 million for the yearsyear ended December 31, 2004 and 2003, respectively.2004. Pension costs of subsidiaries of Alcan that were transferred to us were accounted for on the same basis as a multi-employer pension plan whereby the subsidiaries’ contributions for the period were recognized as net periodic pension cost. There were no contributions by the subsidiaries for the yearsyear ended December 31, 2004 and 2003.2004.
Prior to the spin-off, Alcan provided unfunded healthcare and life insurance benefits to retired employees of some of our businesses in Canada and the U.S. Our share of these plans’ liabilities is included in the
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Notes to the Consolidated and Combined Financial Statements — (Continued)
combined balance sheet as of December 31, 2004 and our share of these plans’ costs is included in the combined statementsstatement of incomeoperations for the years ended December 31, 2004 and 2003.2004.
Minority Interests in Consolidated Affiliates
Our consolidated and combined financial statements include all assets, liabilities, revenues and expenses of less-than-100%-owned affiliates that we control or for which we are the primary beneficiary. We record a
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Novelis Inc.
NOTES TO THE CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS — (Continued)
minority interest for the allocable portion of income or loss to which the minority interest holders are entitled based upon their ownership share of the affiliate. Distributions made to the holders of minority interests are charged to the respective minority interest balance.
We suspend allocation of losses to minority interest holders when the minority interest balance for an affiliate is reduced to zero and the minority interest holder does not have an obligation to fund such losses. As of December 31, 2006 we have no such losses. Any excess loss above the minority interest balance is recognized by us in our statements of incomeoperations until the affiliate begins earning income again, at which time the minority interest holder’s share of the income is offset against the previously unrecorded losses, and only cumulative income in excess of the previously unrecorded losses will be creditedand/or distributed to the minority interest holder.
Environmental Liabilities
We record accruals for environmental matters when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated, based on current law and existing technologies. We adjust these accruals periodically as assessment and remediation efforts progress or as additional technical or legal information becomes available. Accruals for environmental liabilities are stated at undiscounted amounts and included in the consolidated and combined balance sheets in bothAccrued expenses and other current liabilitiesandOther long-term liabilities, depending on their short-orshort- or long-term nature. Any receivables for related insurance or other third-partythird party recoveries for environmental liabilities are recorded when it is probable that a recovery will be realized and are included in the consolidated and combined balance sheets inPrepaid expenses and other current assets.
Costs related to environmental contamination treatment andclean-up are charged to expense. Estimated future incremental operations, maintenance and management costs directly related to remediation are accrued in the period in which such costs are determined to be probable and estimable.
Litigation Reserves
FASB Statement No. 5,Accounting for Contingencies,, requires that we accrue for loss contingencies associated with outstanding litigation, claims and assessments for which management has determined it is probable that a loss contingency exists and the amount of loss can be reasonably estimated. We expense legal costsprofessional fees associated with litigation claims and assessments as incurred, including those legal costs expected to be incurred in connection with a loss contingency.
Advertising Costs
We expense advertising costs as incurred. Advertising expenses are included inSelling, general and administrative expensesin the accompanying consolidated and combined statements of income and were $1 million in 2005, and negligible in 2004 and 2003.
Income Taxes
We provide for income taxes using the asset and liability method as required by FASB Statement No. 109,Accounting for Income Taxes. This approach recognizes the amount of federal, state and localincome taxes payable or refundable for the current year, as well as deferred tax assets and liabilities for the future tax consequence of events recognized in the consolidated and combined financial statements and income tax returns. Deferred
110
Novelis Inc.
Notes to the Consolidated and Combined Financial Statements — (Continued)
income tax assets and liabilities are adjusted to recognize the effects of changes in tax laws or enacted tax rates. Under FASB Statement No. 109, a valuation allowance is required when it is more likely than not that some portion of the deferred tax assets will not be realized. Realization is dependent on generating sufficient future taxable income.
In connection with our spin-off from Alcan we entered into a tax sharing and disaffiliation agreement that provides indemnification if certain factual representations are breached or if certain transactions are undertaken or certain actions are taken that have the effect of negatively affecting the tax treatment of the spin-off. It further governs the disaffiliation of the tax matters of Alcan and its subsidiaries or affiliates other than us, on the one hand, and us and our subsidiaries or affiliates, on the other hand. In this respect it allocates taxes
115
Novelis Inc.
NOTES TO THE CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS — (Continued)
accrued prior to the spin-off and after the spin-off as well as transfer taxes resulting therefrom. It also allocates obligations for filing tax returns and the management of certain pending or future tax contests and creates mutual collaboration obligations with respect to tax matters.
We are subject to income taxes in Canada and numerous foreign jurisdictions.
We calculated our income taxes for the yearsyear ended December 31, 2004 and 2003 as if all of our businesses had been separate tax paying legal entities, each filing a separate tax return in its local tax jurisdiction. For jurisdictions where there was no tax sharing agreement, amounts currently payable were included inOwner’s net investment.
Comprehensive Income (Loss)
Comprehensive income (loss)is comprised of net income foreign(loss), currency translation adjustmentsadjustment, change in fair value of effective portion of hedges — net and changeschange in the minimum pension liability.liability, all net of tax.Accumulated other comprehensive income (loss)is included as a component of shareholders’/investedShareholders’ equity and is further described in Note 12 — Other Comprehensive Income (Loss).
Dividends
We record dividends as payable on their declaration date with a corresponding charge against ourto retained earnings.
Stock-Based Compensation
On January 1, 2004, we adopted the fair value recognition provisions of FASB Statement No. 123,Accounting for Stock-Based Compensation, using the retroactive restatement method described in FASB Statement No. 148,Accounting for Stock-Based Compensation — Transition and Disclosure. Under the fair value recognition provisions of FASB Statement No. 123, stock-based compensation cost is measured at the grant date based on the value of the award and is recognized as expense over the vesting period. In connection with the use of the retroactive restatement method, income statement amounts were restated for fiscal year 2003 to recognize results as if the fair value method of FASB Statement No. 123 had been applied from its original effective date.
For the yearsyear ended December 31, 2004, and 2003, stock options expense and other stock-based compensation expense in the combined statementsstatement of incomeoperations included the Alcan expenses related to the fair value of awards held by certain employees of Alcan’s rolled products businesses during the periods presented as well as an allocation, calculated based on the average of headcount and capital employed, for Alcan’s corporate office employees. These expenses are not necessarily indicative of what the expenses would have been had we been a separate stand-alone company during the yearsyear ended December 31, 20042004.
On January 1, 2006, we adopted FASB Statement No. 123 (Revised),Share-Based Payment, which is a revision to FASB Statement No. 123. FASB Statement No. 123 (Revised) requires the recognition of compensation expense for a share-based award over an employee’s requisite service period based on the award’s grant date fair value, subject to adjustment.
We adopted FASB Statement No. 123 (Revised) using the modified prospective method, which requires companies to record compensation cost beginning with the effective date based on the requirements of FASB Statement No. 123 (Revised) for all share-based payments granted after the effective date. All awards granted to employees prior to the effective date of FASB Statement No. 123 (Revised) that remain unvested at the adoption date will continue to be expensed over the remaining service period.
Prior to the adoption of FASB Statement No. 123 (Revised), we presented all tax benefits of deductions resulting from the exercise of stock options within operating cash flows in the consolidated and 2003.combined statements of cash flows. Beginning on January 1, 2006, we changed our cash flow presentation in accordance
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Novelis Inc.
Notes to the Consolidated and Combined Financial StatementsNOTES TO THE CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS — (Continued)
with FASB Statement No. 123 (Revised), which requires that the cash flows resulting from tax benefits for deductions in excess of compensation cost recognized be classified within financing cash flows.
Additionally, upon adoption of FASB Statement No. 123 (Revised), we determined that all of our compensation plans settled in cash are considered liability based awards. As such, liabilities for awards under these plans are required to be measured at each reporting date until the date of settlement. Various valuation methods were used to determine the fair value of these awards.
Prior to January 1, 2006, we applied the intrinsic value based method of accounting prescribed by Accounting Principles Board (APB) Opinion No. 25,Accounting for Stock Issued to Employees, and related interpretations in accounting for stock-based compensation plans settled in cash. We incurred a liability when the vesting of the award became probable under the guidance provided by FASB Interpretation No. 28,Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans. When variable plan awards were granted, we measured compensation expense as the amount by which the quoted market value of the shares of our stock covered by the grant exceeded the option price or value specified, by reference to a market price or otherwise, subject to any appreciation limitations under the plan. Changes, either increases or decreases, in the quoted market value of those shares between the date of grant and the measurement date resulted in a prospective change in the measurement of compensation expense for the right or award.
Foreign Currency Translation
In accordance with FASB Statement No. 52,Foreign Currency Translation, the asset and liabilities of foreign operations, whose functional currency is other than the U.S. dollar (located principally in Europe and Asia), are translated to U.S. dollars at the year end exchange rates and revenues and expenses are translated at average exchange rates for the year. Differences arising from exchange rate changes are included in the Currency translation adjustments (CTA) component ofAccumulated other comprehensive income (loss). If there is a reduction in our ownership in a foreign operation, the relevant portion of the CTA is recognized inOther income — net. All other operations, including most of those in Canada and Brazil, have the U.S. dollar as the functional currency. For these operations, monetary items denominated in currencies other than the U.S. dollar are translated at year-end exchange rates and translation gains and losses are included in income. Non-monetary items are translated at historical rates.
Research and Development
We incur costs in connection with research and development programs that are expected to contribute to future earnings, and charge such costs against income as incurred. Research and development costs consist primarily of salaries and administrative costs.
Restructuring Activities
We assess the need to record restructuring charges in accordance with FASB Statement No. 146,Accounting for Costs Associated with Exit or Disposal Activities,, which addresses the financial accounting and reporting for costs associated with exit or disposal activities and requires a company to recognize costs associated with exit or disposal activities when they are incurred. Examples of costs covered by the statement include lease termination costs and certain employee severance costs that are associated with restructuring activities, discontinued operations, facility closings or other exit or disposal activities.
We recognize liabilities that primarily include one-time termination benefits, or severance, and contract termination costs, primarily related to equipment and facility lease obligations. These amounts are based on the remaining amounts due under various contractual agreements, and are periodically adjusted for any
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NOTES TO THE CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS — (Continued)
anticipated or unanticipated events or changes in circumstances that would reduce or increase these obligations. The settlement of these liabilities could differ materially from recorded amounts.
Earnings (Loss) Per Share
The calculation of earnings (loss) per common share for the yearyears ended December 31, 2006 and 2005 is based on the weighted-average number of our common shares outstanding during the year. The calculation for diluted earnings per common share for the yearyears ended December 31, 2006 and 2005 recognizes the effect of all potentially dilutive potential common shares that were outstanding during the year.year, unless their impact would be considered anti-dilutive.
Prior to the spin-off, we were not a separate legal entity with common shares outstanding. We calculated our earnings per common share for the yearsyear ended December 31, 2004 and 2003 using our common shares outstanding immediately after the completion of the spin-off. The calculations for diluted earnings per common share for the yearsyear ended December 31, 2004 and 2003 recognized the effect of all potentially dilutive potential common shares that were outstanding immediately after the completion of the spin-off on January 6, 2005.
Recently Issued Accounting Standards
In November 2004,February 2007, the FASB issued FASB Statement No. 151,159,Inventory CostsThe Fair Value Option for Financial Assets and Financial Liabilities,, which amendsprovides companies with an option to report selected financial assets and liabilities at fair value. The new standard also establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. It also requires companies to provide additional information that will help investors and other users of financial statements to more easily understand the guidance in ARB No. 43, Chapter 4, “Inventory Pricing,”effect of a company’s choice to clarifyuse fair value on its earnings. The new Statement also requires entities to display the accountingfair value of those assets and liabilities for abnormal amountswhich the company has chosen to use fair value on the face of idle facility expense, freight, handling costs and wasted materials by requiring those items to be recognized as current period charges. Additionally,the balance sheet. FASB Statement No. 151 requires159 does not eliminate disclosure requirements included in other accounting standards, including requirements for disclosures about fair value measurements included in FASB Statements No. 157,Fair Value Measurements,and No. 107,Disclosures about Fair Value of Financial Instruments. FASB Statement No. 159 is effective as of the beginning of an entity’s first fiscal year beginning after November 15, 2007. Early adoption is permitted as of the beginning of the previous fiscal year provided that fixed production overheads be allocatedthe entity makes that choice in the first 120 days of that fiscal year and also elects to conversion costs basedapply the provisions of FASB Statement No. 157. We have not yet commenced evaluating the potential impact, if any, of the adoption of FASB Statement No. 159 on our consolidated financial position, results of operations and cash flows.
In September 2006, the Staff of the SEC issued SAB No. 108,Considering the Effects of Prior-Year Misstatements when Quantifying Misstatements in Current Year Financial Statements. SAB No. 108 provides guidance on the normal capacityconsideration of the production facilities.effects of prior year misstatements in quantifying current year misstatements. SAB No. 108 is effective for fiscal years ending after November 15, 2006. We adopted SAB No. 108 as of December 31, 2006. The new standardadoption of SAB No. 108 did not have a material impact on our consolidated financial position, results of operations and cash flows.
In September 2006, the FASB issued FASB Statement No. 158, which requires a company that sponsors one or more single-employer defined benefit pension and other postretirement benefit plans (benefit plans) to recognize in its balance sheet the funded status of a benefit plan, which is the difference between the fair value of plan assets and the benefit obligation, as a net asset or liability, with an offsetting adjustment to accumulated other comprehensive income in shareholders’ equity. FASB Statement No. 158 required additional financial statement disclosure regarding certain effects on net periodic benefit cost. FASB Statement No. 158 required prospective application and the recognition and disclosure requirements are effective for fiscal years
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Novelis Inc.
Notes to the Consolidated and Combined Financial StatementsNOTES TO THE CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS — (Continued)
prospectively for inventory costs incurred in fiscal years beginningending after JuneDecember 15, 2005.2006. We will adopt theadopted FASB Statement No. 151 on January 1,158 as of December 31, 2006 and we do not expect its adoption to have a material effect on our financial position,the results of operations, or cash flows.our adoption of FASB Statement No. 158 are presented in Note 15 — Postretirement Benefit Plans.
In December 2004,addition, FASB Statement No. 158 requires that a company measure defined benefit plan assets and obligations at its year-end balance sheet date. We currently use our year-end balance sheet date as our measurement date, and as a result, that new requirement did not affect us.
In September 2006, the FASB issued FASB Statement No. 123(R),157,Share-Based PaymentFair Value Measurements, which isdefines fair value, establishes a revision toframework for measuring fair value under GAAP, and expands disclosures about fair value measurements. FASB Statement No. 123,Accounting157 applies to other accounting pronouncements that require or permit fair value measurements. The new guidance is effective for Stock-Based Compensation(FASB 123). FASB Statement No. 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values.issued for fiscal years beginning after November 15, 2007, and for interim periods within those fiscal years. We adoptedare currently evaluating the fair value based methodpotential impact, if any, of accounting for share-based payments effective January 1, 2004 using the retroactive restatement method described in FASB Statement No. 148,Accounting for Stock-Based Compensation — Transition and Disclosure. Currently, we use the Black-Scholes valuation model to estimate the value of stock options granted to employees. We expect to adopt FASB Statement No. 123(R) on January 1, 2006 and expect to apply the modified prospective method upon adoption. The modified prospective method requires companies to record compensation cost beginning with the effective date based on the requirementsadoption of FASB Statement No. 123(R) for all share-based payments granted after the effective date. All awards granted to employees prior to the effective date of FASB Statement No. 123(R) that remain unvested at the adoption date will continue to be expensed over the remaining service period in accordance with FASB 123. We are still in the process of determining the impact that the adoption of Statement No. 123(R) will have157 on our consolidated financial position, results of operations or cash flows.
In June 2005, the FASB ratified the consensus reached in EITF IssueNo. 05-5, “Accounting for Early Retirement or Postemployment Programs with Specific Features (Such As Terms Specified in Altersteilzeit Early Retirement Arrangements)”. EITF IssueNo. 05-5 addresses the timing of recognition of salaries, bonuses and additional pension contributions associated with certain early retirement arrangements typical in Germany (as well as similar programs). The Task Force also specifies the accounting for government subsidies related to these arrangements. EITF IssueNo. 05-5 is effective in fiscal years beginning after December 15, 2005. The adoption of EITF IssueNo. 05-5 is not expected to have a material impact on our financial position, results of operations or cash flows.
In June 2006, the FASB issued FASB Interpretation No. 48,Accounting for Uncertainty in Income Taxes,, which is effective for fiscal years beginning after December 15, 2006. Earlier adoption is permitted as of the beginning of the fiscal year, provided an enterprise has not yet issued financial statements, including financial statements for any interim period, for that fiscal year. FASB Interpretation No. 48 clarifies the accounting for uncertainty in income taxes recognized in the financial statements by prescribing a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The newFASB Interpretation No. 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transitiontransition. We will adopt the provisions of FASB Interpretation No. 48 effective January 1, 2007 however, we are currentlystill evaluating the Interpretation potential impact, if any, of the adoption on our consolidated financial position, results of operations and cash flows.
We have determined that all other recently issued accounting pronouncements will not have a material impact on our consolidated financial position, results of operations or cash flows, or do not apply to our operations.
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2. | Business CombinationsDISPOSALS OF BUSINESSES AND INVESTMENTS |
In December 2003, Alcan completedNovember 2006, we sold the acquisitioncommon and preferred shares of 100%our 25% interest in Petrocoque S.A. Industria e Comercio (Petrocoque) to the other shareholders of Petrocoque for approximately $20 million. We recognized a pre-tax gain of approximately $15 million, which is included inOther income — netin the accompanying consolidated statement of operations.
In March 2006, we disposed of our aluminum rolling mill in Annecy, France (Annecy) for consideration in the amount of one euro. We recorded a pre-tax charge of $15 million in connection with the sale, which is included inOther income — netin the accompanying consolidated statement of operations. The charge was comprised primarily of $8 million representing our investment in and advances to Annecy, cash payments of $5 million we made in connection with the disposal of the common stockbusiness, and other cash fees and expense we paid of Pechiney in a public offer for a cost of approximately $5,458 million, net of cashan additional $2 million.
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3. | RESTRUCTURING PROGRAMS |
All restructuring provisions and cash equivalents acquired. A portion of the acquisition cost, relating to four Pechiney plants in three countries, was allocated to us and accounted for as additional invested equity. As this transaction represented a transfer of these plants to us rather than an acquisition, we incurred no cash outflows. The four plants produce rolled products in foil, painted sheet and circles. Alcan used the purchase method to account for the business combination. The net assets of the Pechiney plantsrecoveries are included in our balance sheets from December 31, 2003 forwardRestructuring charges — netin the accompanying consolidated and the resultscombined statements of operations unless otherwise stated below. The following table
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Novelis Inc.
Notes to the Consolidated and Combined Financial StatementsNOTES TO THE CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS — (Continued)
operations and cash flows ofsummarizes our restructuring liabilities for the Pechiney plants are includedthree years in our results of operations and cash flows from January 1, 2004 forward.the period ended December 31, 2006 (in millions).
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | Other Exit
| | | | |
| | Severance Reserves | | | Related
| | | Total
| |
| | | | | North
| | | Corporate
| | | Total
| | | Reserves | | | Restructuring
| |
| | Europe | | | America | | | and Other | | | Severance | | | Europe | | | Reserves | |
|
Balance as of December 31, 2004 | | $ | 35 | | | $ | 2 | | | $ | — | | | $ | 37 | | | $ | 20 | | | $ | 57 | |
Provisions (recoveries) — net | | | — | | | | — | | | | — | | | | — | | | | 10 | | | | 10 | |
Cash payments | | | (18 | ) | | | (1 | ) | | | — | | | | (19 | ) | | | (8 | ) | | | (27 | ) |
Adjustments to goodwill | | | (5 | ) | | | — | | | | — | | | | (5 | ) | | | — | | | | (5 | ) |
Adjustments — other | | | (3 | ) | | | — | | | | — | | | | (3 | ) | | | (3 | ) | | | (6 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Balance as of December 31, 2005 | | | 9 | | | | 1 | | | | — | | | | 10 | | | | 19 | | | | 29 | |
Provisions (recoveries) — net | | | 16 | | | | — | | | | 1 | | | | 17 | | | | 2 | | | | 19 | |
Cash payments | | | (8 | ) | | | (1 | ) | | | — | | | | (9 | ) | | | (8 | ) | | | (17 | ) |
Adjustments — other | | | (3 | ) | | | — | | | | — | | | | (3 | ) | | | 6 | | | | 3 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Balance as of December 31, 2006 | | $ | 14 | | | $ | — | | | $ | 1 | | | $ | 15 | | | $ | 19 | | | $ | 34 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Allocation2006 Restructuring Activities
In December 2006, we announced several restructuring actions at our facilities in the U.K., Germany, France and Italy. These actions are intended to streamline the management of the purchase price involved estimatesthese operations. We incurred $2 million in severance-related costs through December 2006 in connection with these programs. We do not anticipate future costs related to these programs to be significant and information gathered during months following the date of the acquisition. Given the magnitude of the Pechiney acquisition and duewe expect all actions to the fact that the transaction wasbe completed atby the end of 2003, a preliminary valuation2007.
In December 2006, we announced the closing of the net assets acquired and a preliminary purchase price allocation was performed asour Montreal planning office. We incurred approximately $1 million of severance-related costs through December 31, 2003. This resulted in a preliminary estimated purchase price2006. We expect to incur total costs of $128less than $2 million (netrelated to this action and expect all the closure to be completed by the end of cash and cash equivalents acquired) for the businesses of Pechiney that were allocated to us. When the Pechiney valuation and purchase price allocation was completed in 2004 by Alcan, the purchase price of the businesses allocated to us was revised to $297 million (net of cash and cash equivalents acquired), an increase of $169 million. These revisions resulted in an increase to goodwill of $183 million in 2004.2007.
DuringIn August 2006, we announced a restructuring of our European central management and administration activities in Zurich, Switzerland to reduce overhead costs and streamline support functions. In addition, we are exiting our Neuhausen research and development center in Switzerland. These programs have begun and through December 31, 2006, we have incurred costs of approximately $4 million. We expect all actions to be completed by the first quarterend of 2005, we recorded a final downward adjustment to the purchase price of $8 million, making the final allocated purchase price $289 million. The preliminary and final purchase price allocations for the plants allocated to us are shown below (in millions). The most significant change was a net increase in allocated goodwill of $175 million.
| | | | | | | | |
| | Final
| | | Preliminary
| |
| | Purchase Price
| | | Purchase Price
| |
| | Allocation | | | Allocation | |
|
Accounts receivable | | $ | 82 | | | $ | 82 | |
Inventories | | | 101 | | | | 101 | |
Property, plant and equipment | | | 80 | | | | 70 | |
Goodwill(A) | | | 220 | | | | 45 | |
Intangible assets(A) | | | 4 | | | | — | |
| | | | | | | | |
Total assets | | | 487 | | | | 298 | |
| | | | | | | | |
Accounts payable and accrued liabilities(B) | | | 158 | | | | 139 | |
Long-term debt | | | 4 | | | | 4 | |
Other long-term liabilities | | | 18 | | | | 14 | |
Deferred income taxes — non-current | | | 18 | | | | 13 | |
| | | | | | | | |
Total liabilities | | | 198 | | | | 170 | |
| | | | | | | | |
Fair value of net assets acquired — at date of acquisition (net of cash and cash equivalents acquired of $5 million) | | $ | 289 | | | $ | 128 | |
| | | | | | | | |
2007.
In July 2006, we announced restructuring actions at our Goettingen facility in Germany to reduce overhead administrative costs and streamline functions. We incurred approximately $5 million related primarily to severance costs through December 31, 2006. We do not anticipate future costs related to these programs to be significant and expect the restructuring to be completed by the end of 2007.
| | |
(A) | | See Note 7 — Goodwill and Intangible Assets. |
|
(B) | | Includes $23 million of accrued restructuring costs as described in Note 3 — Restructuring Programs. |
In March 2006, we announced the restructuring of our European operations, with the reorganization of our plants in Ohle and Ludenscheid, Germany, including the closing of two non-core business lines located within those facilities. In connection with the reorganization of our Ohle and Ludenscheid plants, we incurred costs of approximately $5 million during the year ended December 31, 2006. We do not anticipate future costs related to these programs to be significant and expect the closures to be completed by the end of 2007.
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Notes to the Consolidated and Combined Financial StatementsNOTES TO THE CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS — (Continued)
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3. | Restructuring Programs |
All restructuring provisions and recoveries are included inRestructuring chargesin the accompanying consolidated and combined statements of income unless otherwise stated below. The following table summarizes our restructuring liabilities for the three years in the period ended December 31, 2005 (in millions).
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Novelis
| | | Novelis
| | | | |
| | Europe | | | North America | | | Total | |
| | | | | Other Exit
| | | | | | Other Exit
| | | | | | Other Exit
| |
| | Severance | | | Related | | | Severance | | | Related | | | Severance | | | Related | |
|
Balance as of December 31, 2003 | | $ | 16 | | | $ | 15 | | | $ | 3 | | | $ | — | | | $ | 19 | | | $ | 15 | |
Provisions (recoveries) — net | | | 12 | | | | 8 | | | | — | | | | — | | | | 12 | | | | 8 | |
Cash payments | | | (12 | ) | | | (5 | ) | | | (1 | ) | | | — | | | | (13 | ) | | | (5 | ) |
Adjustments to Goodwill | | | 19 | | | | 4 | | | | — | | | | — | | | | 19 | | | | 4 | |
Adjustments — other | | | — | | | | (2 | ) | | | — | | | | — | | | | — | | | | (2 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Balance as of December 31, 2004 | | | 35 | | | | 20 | | | | 2 | | | | — | | | | 37 | | | | 20 | |
Provisions (recoveries) — net | | | — | | | | 10 | | | | — | | | | — | | | | — | | | | 10 | |
Cash payments | | | (18 | ) | | | (8 | ) | | | (1 | ) | | | — | | | | (19 | ) | | | (8 | ) |
Adjustments to Goodwill | | | (5 | ) | | | — | | | | — | | | | — | | | | (5 | ) | | | — | |
Adjustments — other | | | (3 | ) | | | (3 | ) | | | — | | | | — | | | | (3 | ) | | | (3 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Balance as of December 31, 2005 | | $ | 9 | | | $ | 19 | | | $ | 1 | | | $ | — | | | $ | 10 | | | $ | 19 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
2005 Restructuring Activities
Borgofranco Italy
AsIn November 2005, we announced in November 2005,our intent to close our casting alloy facility in Borgofranco, Italy was closed in March 2006. In 2005, we recognized charges of $5 million for asset impairments and $9 million for other exit related costs, including $6 million for environmental remediation expenses relating to this plant closing. We have incurred additional costs of less than $1approximately $2 million through June 30, 2006 and expect all activities (including environmental remediation) to be complete in 2009.December 31, 2006.
2004 Restructuring Activities
Pechiney
In the fourth quarter of 2004, we recorded liabilities of $23 million for restructuring costs in connection with the exit of certain operations of Pechiney and these costs were recorded in the allocation of the purchase price of Pechiney as of December 31, 2004. These costs relate to a plant closure in Flemalle, Belgium and are comprised of $19 million in severance costs and $4 million of other exit related charges. No further charges are expected to be incurred in relation to this plant closure.
In 2005, we recorded recoveries of $5 million in connection with the operations of Pechiney. These recoveries were used to reduce the goodwill associated with the Pechiney acquisition.
Other 2004 Restructuring Activities
In the third quarter of 2004, we incurred restructuring charges of $11 million relating to the consolidation of our U.K. aluminum sheet-rolling activities in Rogerstone, Wales. Production ceased at the rolling mill in Falkirk, Scotland in December 2004 and the facility was closed in the first quarter of 2005. The charges of $11 million include $5 million of severance costs and $6 million of other exit related costs.
115
Novelis Inc.
Notes to the Consolidated and Combined Financial Statements — (Continued)
In 2004, we incurred restructuring charges of $6 million relating to the closure and restructuring of corporate offices and our Nachterstedt plant in Germany, comprised of $5 million for severance costs and $1 million related to costs to consolidate facilities. No further charges are expected to be incurred in relation to these restructuring activities.
In 2005, we recorded recoveries of $1 million in connection with 2004 restructuring program activities for the plant in Nachterstedt, Germany. In addition, we received $7 million in proceeds from the sale of land at the closed rolling mill in Falkirk, Scotland in October 2005 resulting in a gain of $7 million, which is included inOther income — netin the accompanying consolidated statementsstatement of income.operations.
2001 Restructuring Activities
In 2001, Alcan implemented a restructuring program, resulting in a series of plant sales, closures and divestitures throughout the organization. A detailed business portfolio review was undertaken in 2001 to identify high cost operations, excess capacity and non-core products. Impairment charges were recognized as a result of negative projected cash flows and recurring losses. These charges related principally to buildings, machinery and equipment. This program was essentially completed in 2003.
In 2004, we recorded recoveries related to the 2001 restructuring program comprised of $7 million relating to a gain on the sale of assets related to the closure of facilities in Glasgow, U.K.Scotland and a recovery of $1 million relating to a provision in the U.S.United States.
In 2005, we recorded recoveries of $2 million in connection with 2001 restructuring program activities in Rogerstone, Wales.
Subsequent Events
In March 2006, we announced additional actions in the restructuring of our European operations, with the sale of our aluminum rolling mill in Annecy, France to private equity firm American Industrial Acquisition Corporation and the reorganization of our plants in Ohle and Ludenscheid, Germany, including the closure of two non-core business lines located within those facilities. In the first quarter of 2006, we disposed of Annecy for consideration in the amount of one Euro, and recorded pre-tax charges of $20 million in connection with the sale. In connection with the reorganization of our Ohle and Ludenscheid plants, we have incurred costs of $6 million (including an asset impairment charge of $1 million) through the end of June 2006, and expect to incur additional costs of $5 million (primarily severance) by the end of 2007.
116
Novelis Inc.
Notes to the Consolidated and Combined Financial Statements — (Continued)
| |
4. | Accounts ReceivableACCOUNTS RECEIVABLE |
Accounts receivable consists of the following (in millions):.
| | | | | | | | |
| | As of December 31, | |
| | 2005 | | | 2004 | |
|
Customer accounts receivable | | | | | | | | |
Third parties | | $ | 993 | | | $ | 736 | |
Related parties | | | — | | | | 87 | |
| | | | | | | | |
| | | 993 | | | | 823 | |
| | | | | | | | |
Other accounts receivable | | | | | | | | |
Third parties | | | 131 | | | | 67 | |
Related parties | | | 33 | | | | 711 | |
| | | | | | | | |
| | | 164 | | | | 778 | |
| | | | | | | | |
Total accounts receivable — gross | | | 1,157 | | | | 1,601 | |
Less: allowance for doubtful accounts — all third parties | | | (26 | ) | | | (33 | ) |
| | | | | | | | |
| | $ | 1,131 | | | $ | 1,568 | |
| | | | | | | | |
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Novelis Inc.
NOTES TO THE CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS — (Continued)
| | | | | | | | |
| | As of December 31, | |
| | 2006 | | | 2005 | |
|
Customer accounts receivable — all with third parties | | $ | 1,249 | | | $ | 993 | |
Other accounts receivable: | | | | | | | | |
Third parties | | | 101 | | | | 131 | |
Related parties | | | 21 | | | | 33 | |
| | | | | | | | |
| | | 122 | | | | 164 | |
| | | | | | | | |
Total accounts receivable — gross | | | 1,371 | | | | 1,157 | |
Allowance for doubtful accounts — all with third parties | | | (29 | ) | | | (26 | ) |
| | | | | | | | |
Accounts receivable — net of allowances | | $ | 1,342 | | | $ | 1,131 | |
| | | | | | | | |
Allowance for Doubtful Accounts
The allowance for doubtful accounts is management’s best estimate of probable losses inherent in the receivablesaccounts receivable balance. Management determines the allowance based on known uncollectible accounts, historical experience and other currently available evidence. As of December 31, 20052006 and 2004,2005, our allowance for doubtful accounts represented approximately 2.2%2.1% and 2.1%2.2%, respectively, of gross accounts receivable before allowances. Activity in the allowance for doubtful accounts is as follows (in millions).
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Balance at
| | Additions
| | Accounts
| | | | | | | Balance at
| | Additions
| | Accounts
| | | | | |
| | Beginning
| | Charged to
| | Recovered /
| | Foreign Exchange
| | Balance at
| | | Beginning
| | Charged to
| | Recovered/
| | Foreign Exchange
| | Balance at
| |
Year Ended December 31, | | of Year | | Expense | | Written-Off | | and Other | | End of Year | | | of Year | | Expense | | Written-Off | | and Other | | End of Year | |
|
2006 | | | $ | 26 | | | $ | 4 | | | $ | (4 | ) | | $ | 3 | | | $ | 29 | |
2005 | | $ | 33 | | | $ | 3 | | | $ | (8 | ) | | $ | (2 | ) | | $ | 26 | | | | 33 | | | | 3 | | | | (8 | ) | | | (2 | ) | | | 26 | |
2004 | | | 30 | | | | 6 | | | | (3 | ) | | | — | | | | 33 | | | | 30 | | | | 6 | | | | (3 | ) | | | — | | | | 33 | |
2003 | | | 25 | | | | 4 | | | | (1 | ) | | | 2 | | | | 30 | | |
Sales, Forfaiting and Factoring of Trade Receivables
Sales of Trade Receivables
Prior to the spin-off, we transferred third party trade receivables to Alcan, a related party, which were then subsequently sold to a financial institution under Alcan’s accounts receivable securitization program. Subsequent to the spin-off, we have not securitized any of our third party trade receivables.
Forfaiting of Trade Receivables
Novelis Korea Limited forfaits trade receivables in the ordinary course of business. These trade receivables are typically outstanding for 60 to 120 days. Forfaiting is a non-recourse method to manage credit and interest rate risks. Under this method, customers contract to pay a financial institution. The institution assumes the risk of non-payment and remits the invoice value (net of a fee) to us after presentation of a proof of delivery of goods to the customer. We do not retain a financial or legal interest in these receivables, and they are not included in the accompanying consolidated and combined balance sheets. We incurred forfaiting expenses of $4.7 million, $2.4 million $1.8 million and $1.5$1.8 million for the years ended December 31, 2006, 2005 2004 and
117
Novelis Inc.
Notes to the Consolidated and Combined Financial Statements — (Continued)
2003,2004, respectively. These amounts are included inSelling, general and administrative expensesin our consolidated and combined statements of income.operations.
122
Novelis Inc.
NOTES TO THE CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS — (Continued)
Factoring of Trade Receivables
Our Brazilian operations factor, without recourse, certain trade receivables that are unencumbered by pledge restrictions. Under this method, customers are directed to make payments on invoices to a financial institution, but are not contractually required to do so. The financial institution pays us any invoices it has approved for payment (net of a fee). We do not retain financial or legal interest in these receivables, and they are not included in the accompanying consolidated and combined balance sheets. We incurred factoring expenses of $0.8 million, $1.3 million $0.4 million and $0.3$0.4 million for the years ended December 31, 2006, 2005 2004 and 2003,2004, respectively. These amounts are included inSelling, general and administrative expensesin our consolidated and combined statements of income.operations.
Summary Disclosures of Financial Amounts
The following tables summarize our forfaiting and factoring amounts for the periodsyears presented (in millions).
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | | Year Ended December 31, | |
| | 2005 | | 2004 | | 2003 | | | 2006 | | 2005 | | 2004 | |
|
Receivables forfaited | | $ | 285 | | | $ | 190 | | | $ | 162 | | | $ | 424 | | | $ | 285 | | | $ | 190 | |
| | | | | | | | | | | | | | |
Receivables factored | | $ | 94 | | | $ | 27 | | | $ | 8 | | | $ | 71 | | | $ | 94 | | | $ | 27 | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | As of December 31, | | | As of December 31, | |
| | 2005 | | 2004 | | | 2006 | | 2005 | |
|
Forfaited receivables outstanding | | $ | 59 | | | $ | 50 | | | $ | 80 | | | $ | 59 | |
| | | | | | | | | | |
Factored receivables outstanding | | $ | 12 | | | $ | — | | | $ | 3 | | | $ | 12 | |
| | | | | | | | | | |
| |
5. | InventoriesINVENTORIES |
Inventories consist of the following (in millions).
| | | | | | | | | |
| | | | | | | | | | As of
| |
| | As of December 31, | | | December 31, | |
| | 2005 | | 2004 | | | 2006 | | 2005 | |
|
Finished goods | | $ | 326 | | | $ | 309 | | | $ | 404 | | | $ | 313 | |
Work in process | | | 240 | | | | 196 | | | | 283 | | | | 234 | |
Raw materials | | | 509 | | | | 658 | | | | 626 | | | | 498 | |
Supplies | | | 122 | | | | 124 | | | | 126 | | | | 123 | |
| | | | | | | | | | |
| | | 1,197 | | | | 1,287 | | | | 1,439 | | | | 1,168 | |
Allowances | | | (69 | ) | | | (61 | ) | |
Reserves | | | | (48 | ) | | | (40 | ) |
| | | | | | | | | | |
Inventories | | | $ | 1,391 | | | $ | 1,128 | |
| | $ | 1,128 | | | $ | 1,226 | | | | | | |
| | | | | | |
In November 2004, the FASB issued FASB Statement No. 151,Inventory Cost, which amends the guidance in Accounting Research Bulletin (ARB) No. 43, Chapter 4, “Inventory Pricing”, to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted materials by requiring those items to be recognized as current period charges. Additionally, FASB Statement No. 151 requires that fixed production overheads be allocated to conversion costs based on the normal capacity of the production facilities. FASB Statement No. 151 is effective prospectively for inventory costs incurred in fiscal years beginning after June 15, 2005. We adopted FASB Statement No. 151 on January 1, 2006, and its
118123
Novelis Inc.
Notes to the Consolidated and Combined Financial StatementsNOTES TO THE CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS — (Continued)
adoption did not have a material effect on our consolidated financial position, results of operations or cash flows.
| |
6. | Property, Plant and EquipmentPROPERTY, PLANT AND EQUIPMENT |
Property, plant and equipment — net, consists of the following (in millions).
| | | | | | | | | |
| | | | | | | | | | As of
| |
| | As of December 31, | | | December 31, | |
| | 2005 | | 2004 | | | 2006 | | 2005 | |
|
Land and property rights | | $ | 90 | | | $ | 93 | | | $ | 97 | | | $ | 90 | |
Buildings | | | 845 | | | | 935 | | | | 894 | | | | 845 | |
Machinery and equipment | | | 4,407 | | | | 4,478 | | | | 4,673 | | | | 4,407 | |
| | | | | | | | | | |
| | | 5,342 | | | | 5,506 | | | | 5,664 | | | | 5,342 | |
Accumulated depreciation and amortization | | | (3,319 | ) | | | (3,271 | ) | | | (3,608 | ) | | | (3,319 | ) |
| | | | | | | | | | |
| | | 2,023 | | | | 2,235 | | | | 2,056 | | | | 2,023 | |
Construction in progress | | | 137 | | | | 112 | | | | 87 | | | | 137 | |
| | | | | | | | | | |
Property, plant and equipment — net | | | $ | 2,143 | | | $ | 2,160 | |
| | $ | 2,160 | | | $ | 2,347 | | | | | | |
| | | | | | |
The amounts of fully depreciated assets included in our consolidated balance sheets were $1.226 billion and assets and related accumulated amortization under capital lease obligations$1.250 billion as of December 31, 2006 and 2005, and 2004 are as follows (in millions):
| | | | | | | | |
| | As of December 31, | |
| | 2005 | | | 2004 | |
|
Fully depreciated assets | | $ | 1,250 | | | $ | 1,150 | |
| | | | | | | | |
Assets under capital lease obligations | | | | | | | | |
Land | | $ | 1 | | | $ | — | |
Buildings | | | 9 | | | | — | |
Machinery and equipment | | | 41 | | | | 3 | |
| | | | | | | | |
| | | 51 | | | | 3 | |
Accumulated amortization | | | (7 | ) | | | (3 | ) |
| | | | | | | | |
| | $ | 44 | | | $ | — | |
| | | | | | | | |
respectively.
The total amounts of depreciation expense, amortization expense and interest capitalized on construction projects for each of the three years in the period ended December 31, 20052006 are as follows (in millions).
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | | Year Ended December 31, | |
| | 2005 | | 2004 | | 2003 | | | 2006 | | 2005 | | 2004 | |
|
Depreciation expense | | $ | 228 | | | $ | 244 | | | $ | 220 | | | $ | 231 | | | $ | 228 | | | $ | 244 | |
| | | | | | | | | | | | | | |
Amortization expense | | $ | 2 | | | $ | 2 | | | $ | 2 | | |
Amortization expense (related to intangible assets) | | | $ | 2 | | | $ | 2 | | | $ | 2 | |
| | | | | | | | | | | | | | |
Interest capitalized on construction projects | | $ | — | | | $ | 1 | | | $ | 1 | | | $ | — | | | $ | — | | | $ | 1 | |
| | | | | | | | | | | | | | |
Asset impairments
In 2003,2005, in connection with the decision to close and sell our plant in Borgofranco, Italy, we recognized an impairment charge of $5 million to reduce the net book value of allthe plant’s fixed assets in our Annecy plant to zero. We based our estimate on third party offers and negotiations to sell the business.
In 2005 and 2004, capital expenditures required to keep the businessour Annecy plant operating were fully impaired as incurred and included inImpairment charges on long-lived assets in our consolidated and combined statements of income.operations. These amounted to $2 million in each of the years ended December 31, 2005 and $2 million,2004, respectively.
119
Novelis Inc.
Notes to the Consolidated and Combined Financial Statements — (Continued)
In 2004, we recorded an impairment charge of $65 million to reduce the carrying value of the production equipment at two facilities in Italy to their fair value of $56 million. We determined the fair value of the impaired assets based on the discounted future cash flows of these facilities using a 7% discount rate.
In 2004, we announced that we would cease operations in Falkirk, Scotland. We designated certain production equipment with a nominal carrying value for transfer to our Rogerstone facility. We reduced the carrying value of the remaining fixed assets to zero, which resulted in an $8 million impairment charge.
124
In 2005, in connection with the decision to close and sell our plant in Borgofranco, Italy, we recognized an impairment charge of $5 million to reduce the net book value of the plant’s fixed assets to zero. We based our estimate on third-party offers and negotiations to sell the business.Novelis Inc.
In March 2006, we announced that we would end production of plastic containers and manufactured sealing machines in our Ludenscheid and Ohle plants in Germany. In March 2006 we recognized a $1 million impairment charge to reduce the carrying value of the related production equipment to $0.4 million, which we estimate to be its net sales value.NOTES TO THE CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS — (Continued)
Leases
We lease certain land, buildings and equipment under non-cancelable operating leases expiring at various dates through 2015, and we lease assets in Sierre, Switzerland from Alcan under a15-year capital lease through 2020. Operating leases generally have five to ten-year terms, with one or more renewal options, with terms to be negotiated at the time of renewal. Various facility leases include provisions for rent escalation to recognize increased operating costs or require us to pay certain maintenance and utility costs. We incurred rent expense of $14$22 million, $17$21 million and $16$22 million for the years ended December 31, 2006, 2005 2004 and 2003,2004, respectively.
Future minimum lease payments as of December 31, 20052006 for our operating and capital leases having an initial or remaining non-cancelable lease term in excess of one year are as follows (in millions):.
| | | | | | | | | | | | | | | | |
| | Operating
| | Capital Lease
| | | Operating
| | Capital Lease
| |
Year Ending December 31, | | Leases | | Obligations | | | Leases | | Obligations | |
|
2006 | | $ | 14 | | | $ | 6 | | |
2007 | | | 11 | | | | 6 | | | $ | 19 | | | $ | 6 | |
2008 | | | 9 | | | | 6 | | | | 15 | | | | 7 | |
2009 | | | 6 | | | | 6 | | | | 12 | | | | 6 | |
2010 | | | 5 | | | | 6 | | | | 11 | | | | 7 | |
2011 | | | | 10 | | | | 6 | |
Thereafter | | | 12 | | | | 48 | | | | 29 | | | | 45 | |
| | | | | | | | | | |
Total payments | | $ | 57 | | | | 78 | | | $ | 96 | | | | 77 | |
| | | | | | |
Less: interest portion on capital leases | | | | | | | (29 | ) | | | | | | | (26 | ) |
| | | | | | |
Principal obligation on capital leases | | | | | | $ | 49 | | | | | | | $ | 51 | |
| | | | | | |
Assets and related accumulated amortization under capital lease obligations as of December 31, 2006 and 2005 are as follows (in millions).
| | | | | | | | |
| | As of December 31, | |
| | 2006 | | | 2005 | |
|
Assets under capital lease obligations | | | | | | | | |
Land | | $ | 1 | | | $ | 1 | |
Buildings | | | 10 | | | | 9 | |
Machinery and equipment | | | 44 | | | | 41 | |
| | | | | | | | |
| | | 55 | | | | 51 | |
Accumulated amortization | | | (13 | ) | | | (7 | ) |
| | | | | | | | |
| | $ | 42 | | | $ | 44 | |
| | | | | | | | |
Sale of assets
During the fourth quarter of 2006, we sold our rights to develop and operate two hydroelectric power plants in South America and recorded a pre-tax gain of approximately $11 million, included inOther income — net.
In 2005, we sold land and a building in Malaysia and recorded a pre-tax gain of $11 million, included inOther income — net.
In December 2003, we sold the extrusions operations of Aluminium Company of Malaysia (Novelis Asia), for net proceeds of $2 million. A pre-tax amount of $6 million, which is included inRestructuring charges, consists of a favorable adjustment to a previously recorded impairment provision.
120125
Novelis Inc.
Notes to the Consolidated and Combined Financial StatementsNOTES TO THE CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS — (Continued)
In 2003, we sold our Borgofranco power facilities in Italy and recorded a gain of $19 million inOther income — net.
Asset Retirement Obligations
On December 31, 2005, we adopted FASB Interpretation No. 47,Accounting for Conditional Asset Retirement Obligations. The interpretation clarifies that the term conditional asset retirement obligation, as used in FASB Statement No. 143,Accounting for Asset Retirement Obligations,, refers to a legal obligation to perform an asset retirement activity in which the timingand/or method of settlement are conditional on a future event that may or may not be within an entity’s control. FASB Interpretation No. 47 also clarifies that an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation when incurred, if fair value can be reasonably estimated. The interpretation was effective no later than the end of fiscal years ending after December 15, 2005. FASB Interpretation No. 47 uses the same methodology as FASB Statement No. 143, which requires an entity to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred and a corresponding increase in the related long-lived asset. The liability is adjusted to its present value each period and the asset is depreciated over its useful life. A gain or loss may be incurred upon settlement of the liability.
As a result of our adoption of FASB Interpretation No. 47, we identified conditional retirement obligations primarily related to environmental contamination of equipment and buildings at certain of our plants and administrative sites. Upon adoption, we recognized assets of $6 million with offsetting accumulated depreciation of $4 million, and an asset retirement obligation of $11 million. We also recognized a charge of $9 million ($6 million after tax), which is classified as aCumulative effect of accounting change — net of taxin our accompanying consolidated and combined statement of operations for the accompanying statements of income.year ended December 31, 2005.
If the conditional asset retirement obligation measurement and recognition provisions of FASB Interpretation No. 47 had been in effect on January 1, 2004, the aggregate carrying amount of those obligations on that date would have been $10 million. The aggregate amount of those obligations would have been $11 million on December 31, 2004 and the impact on net income each year would have been immaterial. Further, the impact on earnings per common share (both basic and diluted) would have been less than $0.01 per share each year.
The following is an analysis of the activity in our asset retirement obligation for the yearyears ended December 31, 2005 and 2006, the year end balancebalances of which isare included inOther long-term liabilitiesin the accompanying consolidated balance sheetsheets as of December 31, 2005 and 2006 (in millions).
| | | | | | | | |
| | Amount | | | Amount | |
|
Asset retirement obligation as of January 1, 2005 | | $ | — | | | $ | — | |
Liability accrued upon adoption | | | 11 | | | | 11 | |
Liability settled | | | — | | | | — | |
Accretion | | | — | | | | — | |
| | | | | | |
Asset retirement obligation as of December 31, 2005 | | $ | 11 | | | $ | 11 | |
Liability settled | | | | — | |
Accretion | | | | 2 | |
| | | | | | |
Asset retirement obligation as of December 31, 2006 | | | $ | 13 | |
| | | | |
121126
Novelis Inc.
Notes to the Consolidated and Combined Financial StatementsNOTES TO THE CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS — (Continued)
| |
7. | Goodwill and Intangible AssetsGOODWILL AND INTANGIBLE ASSETS |
Goodwill
We haveGoodwill goodwill in our Novelis EuropeEuropean operating segment. The following is a summary of the activity inGoodwill(in millions).
| | | | | | | | |
| | Total | | | Total | |
|
Balance as of December 31, 2003 | | $ | 69 | | |
Additions | | | — | | |
Balance as of December 31, 2004 | | | $ | 256 | |
Cumulative translation adjustment | | | 4 | | | | (32 | ) |
Adjustments | | | 183 | | | | (13 | ) |
Impairment charges | | | — | | |
| | | | |
Balance as of December 31, 2004 | | | 256 | | |
Additions | | | — | | |
Cumulative translation adjustment | | | (32 | ) | |
Adjustments | | | (13 | ) | |
Impairment charges | | | — | | |
| | | | | | |
Balance as of December 31, 2005 | | $ | 211 | | | | 211 | |
Cumulative translation adjustment | | | | 25 | |
| | | | | | |
Balance as of December 31, 2006 | | | $ | 236 | |
| | | | |
In 2004, the $183 million adjustment was due to changes to the preliminary purchase price allocation related to the Pechiney acquisition. In 2005, we received a further and final purchase price allocation adjustment for the Pechiney acquisition from Alcan, which reduced goodwill by $8 million. Also in 2005, we reduced goodwill by $5 million for the recovery of restructuring liabilities that had been established in connection with the Pechiney acquisition for our Flemalle, Belgium operations, and had been included in the purchase price and initially allocated to goodwill. See Note 2 — Business Combinations and Note 3 — Restructuring Programs.
We performed annual impairment tests in 2006, 2005 2004 and 20032004 and determined that there was no impairment of goodwill.
Intangible Assets with Finite Lives
The following is a summary of the components of intangible assets with finite lives as of December 31, 2006 and 2005 (in millions).
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Gross
| | | | Net
| | | Gross
| | | | Net
| |
| | Carrying
| | Accumulated
| | Carrying
| | | Carrying
| | Accumulated
| | Carrying
| |
| | Amount | | Amortization | | Amount | | | Amount | | Amortization | | Amount | |
|
Trademarks | | | | | | | | | | | | | | | | | | | | | | | | |
2006 | | | $ | 14 | | | $ | 6 | | | $ | 8 | |
2005 | | $ | 12 | | | $ | 4 | | | $ | 8 | | | | 12 | | | | 4 | | | | 8 | |
2004 | | | 14 | | | | 4 | | | | 10 | | |
2003 | | | 11 | | | | 2 | | | | 9 | | |
Patented and non-patented technology | | | | | | | | | | | | | | | | | | | | | | | | |
2006 | | | $ | 20 | | | $ | 8 | | | $ | 12 | |
2005 | | $ | 19 | | | $ | 6 | | | $ | 13 | | | | 19 | | | | 6 | | | | 13 | |
2004 | | | 22 | | | | 5 | | | | 17 | | |
2003 | | | 17 | | | | 4 | | | | 13 | | |
Total intangible assets | | | | | | | | | | | | | | | | | | | | | | | | |
2006 | | | $ | 34 | | | $ | 14 | | | $ | 20 | |
2005 | | $ | 31 | | | $ | 10 | | | $ | 21 | | | | 31 | | | | 10 | | | | 21 | |
2004 | | | 36 | | | | 9 | | | | 27 | | |
2003 | | | 28 | | | | 6 | | | | 22 | | |
122
Novelis Inc.
Notes to the Consolidated and Combined Financial Statements — (Continued)
As of December 31, 2005,2006, all of our finite life intangible assets have useful lives of 15 years, no estimated residual value and are amortized using the straight-line method. We have no intangible assets with indefinite lives.
Amortization expense for intangible assets was $2 million in each of the years ended December 31, 2006, 2005 2004 and 2003,2004, and we expect amortization expense for the next five succeeding fiscal years to be approximately $2 million per year.
127
Novelis Inc.
NOTES TO THE CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS — (Continued)
| |
8. | Investment in and Advances to Non-consolidated AffiliatesINVESTMENT IN AND ADVANCES TO NON-CONSOLIDATED AFFILIATES AND RELATED PARTY TRANSACTIONS |
The following table summarizes the ownership structure and our ownership percentage ownership of the non-consolidated affiliates in which we have an investment as of December 31, 2006, and which we account for using the equity method. We have no material investments in entities that we account for underusing the cost method.
| | | | | | |
| | | | PercentageOwnership
| |
Affiliate Name | | Ownership Structure | | OwnershipPercentage | |
|
Aluminium Norf GmbH | | Corporation | | | 50 | % |
Consorcio Candonga | | Unincorporated Joint Venture | | | 50 | % |
Petrocoque S.A. — Industria e Comercio | | Limited Liability Corporation | | | 25 | % |
EuroNorca Partners | | General Partnership | | | 50 | % |
Deutsche Aluminium Verpackung Recycling GmbH | | Corporation | | | 30 | % |
France Aluminum Recyclage SA | | Public Limited Company | | | 20 | % |
In November 2006, we sold the common and preferred shares of our 25% interest in Petrocoque S.A. Industria e Comercio (Petrocoque) to the other shareholders of Petrocoque for approximately $20 million. We recognized a pre-tax gain of approximately $15 million, which is included inOther income — netin the accompanying consolidated statement of operations. Prior to the sale, we accounted for Petrocoque using the equity method of accounting. Petrocoque’s combined assets, liabilities and equity as of December 31, 2005 and combined results of operations for the years ended December 31, 2006 (through the date of sale only), 2005 and 2004 are included in the tables below.
As of December 31, 2006, EuroNorca Partners was inactive and is in the process of being dissolved. In 2007, we expect to receive approximately $2 million once the liquidation proceedings have been finalized.
We do not control theseour non-consolidated affiliates, but have the ability to exercise significant influence over their operating and financial policies. The following tables summarizetable summarizes the combined assets, liabilities and equity andof our equity method affiliates (on a 100% basis, in millions).
| | | | | | | | |
| | As of December 31, | |
| | 2006 | | | 2005 | |
|
Assets | | | | | | | | |
Current | | $ | 243 | | | $ | 228 | |
Non-current | | | 646 | | | | 605 | |
| | | | | | | | |
Total assets | | $ | 889 | | | $ | 833 | |
| | | | | | | | |
Liabilities and equity | | | | | | | | |
Current liabilities | | $ | 335 | | | $ | 349 | |
Non-current liabilities | | | 254 | | | | 188 | |
| | | | | | | | |
Total liabilities | | | 589 | | | | 537 | |
Partners’ capital and shareholders’ equity | | | | | | | | |
Novelis | | | 150 | | | | 144 | |
Third parties | | | 150 | | | | 152 | |
| | | | | | | | |
Total liabilities and equity | | $ | 889 | | | $ | 833 | |
| | | | | | | | |
128
Novelis Inc.
NOTES TO THE CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS — (Continued)
The following table summarizes the combined results of operations of our equity method affiliates (on a 100% basis, in millions).
| | | | | | | | |
| | As of December 31, | |
| | 2005 | | | 2004 | |
|
Assets | | | | | | | | |
Current | | $ | 228 | | | $ | 253 | |
Non-current | | | 605 | | | | 609 | |
| | | | | | | | |
Total assets | | $ | 833 | | | $ | 862 | |
| | | | | | | | |
| | | | | | | | |
Liabilities and equity | | | | | | | | |
Current liabilities | | $ | 349 | | | $ | 457 | |
Non-current liabilities | | | 188 | | | | 153 | |
| | | | | | | | |
Total liabilities | | | 537 | | | | 610 | |
Partners’ capital and shareholders’/invested equity | | | | | | | | |
Novelis | | | 144 | | | | 122 | |
Third parties | | | 152 | | | | 130 | |
| | | | | | | | |
Total liabilities and equity | | $ | 833 | | | $ | 862 | |
| | | | | | | | |
| | | | | | | | | | | | |
| | Year Ended December 31, | |
| | 2006 | | | 2005 | | | 2004 | |
|
Net sales | | $ | 558 | | | $ | 497 | | | $ | 451 | |
Costs, expenses and provision for taxes on income | | | 521 | | | | 479 | | | | 434 | |
| | | | | | | | | | | | |
Net income | | $ | 37 | | | $ | 18 | | | $ | 17 | |
| | | | | | | | | | | | |
Included in the accompanying consolidated and combined financial statements are transactions and balances arising from business we conduct with these non-consolidated affiliates, which we classify as related party transactions and balances. The following table describes the nature and amounts of transactions that we had with related parties during the years ended December 31, 2006, 2005 and 2004 (in millions). For years prior to 2005, Alcan was considered a related party to Novelis. However, subsequent to the spin-off, Alcan is no longer a related party as defined in FASB Statement No. 57, and accordingly, all transactions between Novelis and Alcan subsequent to the spin-off are third party transactions.
| | | | | | | | | | | | |
| | Year Ended December 31, | |
| | 2006 | | | 2005 | | | 2004 | |
|
Net sales | | | | | | | | | | | | |
Alcan(A) | | $ | — | | | $ | — | | | $ | 450 | |
| | | | | | | | | | | | |
Cost of sales | | | | | | | | | | | | |
Alcan(A) | | $ | — | | | $ | — | | | $ | 403 | |
| | | | | | | | | | | | |
Research and development expenses | | | | | | | | | | | | |
Alcan(B) | | $ | — | | | $ | — | | | $ | 38 | |
| | | | | | | | | | | | |
Interest expense and amortization of debt issuance costs — net | | | | | | | | | | | | |
Alcan(C) | | $ | — | | | $ | — | | | $ | 33 | |
| | | | | | | | | | | | |
Other (income) expenses — net | | | | | | | | | | | | |
Alcan: | | | | | | | | | | | | |
Service fee income(D) | | $ | — | | | $ | — | | | $ | (42 | ) |
Service fee expense(E) | | | — | | | | — | | | | 25 | |
Interest income(F) | | | — | | | | — | | | | (22 | ) |
Gain on change in fair value of derivative instruments — net(G) | | | — | | | | — | | | | (23 | ) |
Other | | | — | | | | — | | | | 8 | |
| | | | | | | | | | | | |
Total Other income — net, with Alcan | | | — | | | | — | | | | (54 | ) |
Aluminium Norf GmbH: | | | | | | | | | | | | |
Interest expense (income) | | | (1 | ) | | | 1 | | | | (2 | ) |
| | | | | | | | | | | | |
Total Other income — net, with all related parties | | $ | (1 | ) | | $ | 1 | | | $ | (56 | ) |
| | | | | | | | | | | | |
Purchases of tolling services, electricity and inventories | | | | | | | | | | | | |
Aluminium Norf GmbH(H) | | $ | 227 | | | $ | 205 | | | $ | 203 | |
Alcan(I) | | | — | | | | — | | | | 1,739 | |
Consorcio Candonga(J) | | | 14 | | | | 8 | | | | 2 | |
Petrocoque S.A. Industria e Comercio(K) | | | 2 | | | | 2 | | | | 2 | |
| | | | | | | | | | | | |
Total purchases from related parties | | $ | 243 | | | $ | 215 | | | $ | 1,946 | |
| | | | | | | | | | | | |
123129
Novelis Inc.
Notes to the Consolidated and Combined Financial StatementsNOTES TO THE CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS — (Continued)
| | | | | | | | | | | | |
| | Year Ended December 31, | |
| | 2005 | | | 2004 | | | 2003 | |
|
Net sales | | $ | 497 | | | $ | 451 | | | $ | 411 | |
Costs, expenses and provision for taxes on income | | | 479 | | | | 434 | | | | 396 | |
| | | | | | | | | | | | |
Net income | | $ | 18 | | | $ | 17 | | | $ | 15 | |
| | | | | | | | | | | | |
| | |
(A) | | We purchase from and sell materials to Alcan in the ordinary course of business. |
|
(B) | | These expenses represent an allocation of research and development expenses incurred by Alcan on behalf of Novelis. |
|
(C) | | During 2004, we had various short-term borrowings and long-term debt payable to Alcan where interest was charged on both a fixed and floating rate basis. |
|
(D) | | Service fee income arose from sales of research and development and other corporate services to Alcan. |
|
(E) | | Service fee expense arose from the purchase of corporate services from Alcan. |
|
(F) | | Represents interest income earned on outstanding advances and loans to Alcan. |
|
(G) | | Alcan was the counterparty to most of our metal and currency derivative instruments. |
|
(H) | | We purchase tolling services (the conversion of customer-owned metal) from Aluminium Norf GmbH. |
|
(I) | | Alcan is our primary third party supplier of prime and sheet ingot. Refer to Note 20 — Commitments and Contingencies. |
|
(J) | | We purchase electricity from Consorcio Candonga for our operations in South America. |
|
(K) | | We purchase calcined-coke from Petrocoque S.A. Industria e Comercio for use in our smelting operations in South America. |
The table below describes the year-end balances that we have with related parties (in millions).
| | | | | | | | |
| | As of December 31, | |
| | 2006 | | | 2005 | |
|
Accounts receivable(A) | | $ | 21 | | | $ | 33 | |
Other long-term receivables(A) | | | 59 | | | | 71 | |
Accounts payable(B) | | | 44 | | | | 38 | |
As described in Note 1 — Business and Summary of Significant Accounting Policies, beginning in 2004, we consolidated the financial statements of Logan under the provisions of FASB Interpretation No. 46 (Revised). Prior to 2004, we accounted for Logan using the equity method of accounting. The results of Logan’s operations for the year ended December 31, 2003 are included in the table above.
| | |
(A) | | The balances represent current and non-current portions of a loan due from Aluminium Norf GmbH. |
|
(B) | | We purchase tolling services from Aluminium Norf GmbH and electricity from Consorcio Candonga. |
| |
9. | Accrued Expenses and Other Current LiabilitiesACCRUED EXPENSES AND OTHER CURRENT LIABILITIES |
Accrued expenses and other current liabilities are comprised of the following (in millions):.
| | | | | | | | | | | | | | | | |
| | As of December 31, | | | As of December 31, | |
| | 2005 | | 2004 | | | 2006 | | 2005 | |
|
Accrued payroll | | $ | 152 | | | $ | 150 | | |
Accrued litigation settlement | | | 71 | | | | — | | |
Accrued compensation and benefits | | | $ | 130 | | | $ | 121 | |
Accrued settlement of legal claim | | | | 39 | | | | 71 | |
Accrued interest payable | | | 51 | | | | 2 | | | | 56 | | | | 51 | |
Accrued income taxes | | | 55 | | | | 1 | | | | 17 | | | | 55 | |
Current portion of fair value of derivative contracts | | | 22 | | | | 91 | | |
Current portion of fair value of derivative instruments | | | | 42 | | | | 22 | |
Other current liabilities | | | 290 | | | | 181 | | | | 224 | | | | 223 | |
| | | | | | | | | | |
Accrued expenses and other current liabilities | | | $ | 508 | | | $ | 543 | |
| | $ | 641 | | | $ | 425 | | | | | | |
| | | | | | |
130
Novelis Inc.
NOTES TO THE CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS — (Continued)
| |
10. | Long-Term DebtLONG-TERM DEBT |
Long-term debt is comprisedconsists of the following (in millions):.
| | | | | | | | | | | | |
| | Interest
| | | As of December 31, | |
| | Rates(A) | | | 2005 | | | 2004 | |
|
Due to related parties | | | | | | | | | | | | |
Total related party debt | | | | | | $ | — | | | $ | 2,597 | |
Less: current portion | | | | | | | — | | | | (290 | ) |
| | | | | | | | | | | | |
Long-term related party debt — net of current portion | | | | | | $ | — | | | $ | 2,307 | |
| | | | | | | | | | | | |
Due to third parties | | | | | | | | | | | | |
Novelis Inc. | | | | | | | | | | | | |
Floating rate Term Loan B, due 2012 | | | 6.01 | % | | $ | 342 | | | $ | — | |
7.25% Senior Notes, due 2015 | | | 7.25 | %(B) | | | 1,400 | | | | — | |
Novelis Corporation | | | | | | | | | | | | |
Floating rate Term Loan B, due 2012 | | | 6.01 | % | | | 593 | | | | — | |
Novelis Switzerland S.A. | | | | | | | | | | | | |
Capital lease obligation, due 2020 (Swiss francs (CHF) 60 million) | | | 7.50 | % | | | 45 | | | | — | |
Capital lease obligation, due 2011 (CHF 5 million) | | | 2.49 | % | | | 4 | | | | — | |
124
Novelis Inc.
Notes to the Consolidated and Combined Financial Statements — (Continued)
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Interest
| | As of December 31, | | | Interest
| | As of December 31, | |
| | Rates(A) | | 2005 | | 2004 | | | Rates(A) | | 2006 | | 2005 | |
|
Novelis Inc. | | | | | | | | | | | | | |
Floating rate Term Loan B, due 2012 | | | | 7.62 | %(B) | | $ | 259 | | | $ | 342 | |
7.25% Senior Notes, due 2015 | | | | 7.25 | %(C) | | | 1,400 | | | | 1,400 | |
Novelis Corporation | | | | | | | | | | | | | |
Floating rate Term Loan B, due 2012 | | | | 7.62 | %(B) | | | 449 | | | | 593 | |
Novelis Switzerland S.A. | | | | | | | | | | | | | |
Capital lease obligation, due 2020 (Swiss francs (CHF) 57 million) | | | | 7.50 | % | | | 47 | | | | 45 | |
Capital lease obligation, due 2011 (CHF 4 million) | | | | 2.49 | % | | | 4 | | | | 4 | |
Novelis Korea Limited | | | | | | | | | | | | | | | | | | | | | | | | |
Bank loan, due 2008 | | | 5.30 | % | | | 50 | | | | — | | | | | | | | — | | | | 50 | |
Bank loan, due 2008 (Korean won (KRW) 30 billion) | | | 5.75 | % | | | 30 | | | | — | | | | | | | | — | | | | 30 | |
Bank loan, due 2007 | | | 4.55 | % | | | 70 | | | | 70 | | | | 4.55 | % | | | 70 | | | | 70 | |
Bank loan, due 2007 (KRW 40 billion) | | | 4.80 | % | | | 40 | | | | 39 | | | | 4.80 | % | | | 43 | | | | 40 | |
Bank loan, due 2007 (KRW 25 billion) | | | 4.45 | % | | | 25 | | | | 24 | | | | 4.45 | % | | | 27 | | | | 25 | |
Bank loans, due 2008 through 2011 (KRW 1 billion) | | | 4.09 | %(C) | | | 1 | | | | 2 | | | | 4.04 | %(D) | | | 1 | | | | 1 | |
Other | | | | | | | | | | | | | | | | | | | | | | | | |
Other debt, due 2006 through 2012 | | | 2.70 | %(C) | | | 3 | | | | 5 | | |
Other debt, due 2007 through 2012 | | | | 2.50 | %(D) | | | 2 | | | | 3 | |
| | | | | | | | | | |
Total third party debt | | | | | | | 2,603 | | | | 140 | | |
Total debt | | | | | | | | 2,302 | | | | 2,603 | |
Less: current portion | | | | | | | (3 | ) | | | (1 | ) | | | | | | | (144 | ) | | | (3 | ) |
| | | | | | | | | | |
Long-term third party debt — net of current portion | | | | | | $ | 2,600 | | | $ | 139 | | |
Long-term debt — net of current portion | | | | | | | $ | 2,158 | | | $ | 2,600 | |
| | | | | | | | | | |
| | |
(A) | | Interest rates are as of December 31, 20052006 and exclude the effects of any related interest swaps or amortization of debt issuance and other costs. |
|
(B) | | The interest rate for the Floating rate Term Loan B includes an increased applicable margin in effect through March 31, 2008 and excludes the effect of any related interest rate swaps, as discussed below. |
|
(C) | | The interest rate for the Senior Notes does not include additional “special interest”special interest discussed below. |
|
(C)(D) | | Weighted average interest rate. |
131
Based on rates of exchange as of December 31, 2005, principalNovelis Inc.
NOTES TO THE CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS — (Continued)
Principal repayment requirements for our debt over the next five years and thereafter (using rates of exchange as of December 31, 2006 for our debt denominated in foreign currencies) are as follows (in millions):.
| | | | | | | | |
Year Ending December 31, | | Amount | | | Amount | |
|
2006 | | $ | 3 | | |
2007 | | | 139 | | | $ | 144 | |
2008 | | | 84 | | | | 4 | |
2009 | | | 4 | | | | 4 | |
2010 | | | 3 | | | | 4 | |
2011 | | | | 535 | |
Thereafter | | | 2,370 | | | | 1,611 | |
| | | | | | |
Total | | $ | 2,603 | | | $ | 2,302 | |
| | | | | | |
Significant Changes in DebtSenior Secured Credit Facilities
In order to facilitate the separation of Novelis andconnection with our spin-off from Alcan, as described in Note 1 — Business and Summary of Significant Accounting Policies, we executed debt restructuring and financing transactions in early January and February of 2005, which effectively replaced all of our financing obligations to Alcan and certain other third parties with new third party debt aggregating $2,951 million. On January 10, 2005, we entered into senior secured credit facilities providing for aggregate borrowings of up to $1,800 million. These facilities consist of a $1,300 million seven-year senior secured Term Loan B facility, all of which was borrowed on January 10, 2005, and a $500 million five-year multi-currency revolving credit and letters of credit facility. Additionally, on February 3, 2005, Alcan was repaid with the net proceeds from issuance of $1,400 million of ten-year 7.25% Senior Notes.
125
Novelis Inc.
Notes to the Consolidated and Combined Financial Statements — (Continued)
The Alcan debt as of December 31, 2004, plus additional Alcan debt of $170 million issued in January 2005, provided $1,375 million of bridge financing for the spin-off transaction. Alcan was a related party as of December 31, 2004, and was repaid in the first quarter of 2005.
Debt Due to Third Parties
Floating Rate Term Loan B
In connection with the spin-off transaction, we entered into senior secured credit facilities providing for aggregate borrowings of up to $1,800 million.$1.8 billion. These facilities consist of: (1) a $1,300 million$1.3 billion seven-year senior secured Term Loan B facility, bearing interest at LIBORLondon Interbank Offered Rate (LIBOR) plus 1.75% (subject to change based on certain leverage ratios), all of which was borrowed on January 10, 2005; and (2) a $500 million five-year multi-currency revolving credit and letters of credit facility. The $1,300
Through December 31, 2006, we satisfied the 1% per annum principal amortization requirement through fiscal year 2010, as well as $514 million facility consistsof the principal amortization requirement for 2011. No further minimum principal payments are due until 2011. As of December 31, 2006, we had $708 million outstanding under this facility.
Our senior secured credit facilities include customary affirmative and negative covenants, as well as financial covenants relating to our maximum total leverage ratio, minimum interest coverage ratio, and minimum fixed charges coverage ratio. Substantially all of our assets are pledged as collateral under our senior secured credit facilities.
On October 16, 2006, we amended the financial covenants to our senior secured credit facilities. In particular, we amended our maximum total leverage, minimum interest coverage, and minimum fixed charges coverage ratios through the quarter ending March 31, 2008. We also amended and modified other provisions of the senior secured credit facilities to permit more efficient ordinary-course operations, including increasing the amounts of certain permitted investments and receivables securitizations, permitting nominal quarterly dividends, and the transfer of an $825intercompany loan to another subsidiary. In return for these amendments and modifications, we paid aggregate fees of approximately $3 million to lenders who consented to the amendments and modifications, and agreed to continue paying the higher applicable margins on our senior secured credit facilities, and the higher unused commitment fees on our revolving credit facilities that were instated with a prior waiver and consent agreement in May 2006. Specifically, we agreed to a 1.25% applicable margin for Term Loan B in the U.S.Loans maintained as Base Rate Loans, a 2.25% applicable margin for Term Loans maintained as Eurocurrency Rate Loans, a 1.50% applicable margin for Revolver Loans maintained as Base Rate Loans, a 2.50% applicable margin for Revolver Loans maintained as Eurocurrency Rate Loans and a $475 million Term Loan B in Canada. The proceeds62.5 basis point commitment fee on the unused portion of the Term Loan Brevolving credit facility, until such time as the compliance certificate for the fiscal quarter ending March 31, 2008 has been delivered.
The amended maximum total leverage, minimum interest coverage, and minimum fixed charges coverage ratios for the year ended December 31, 2006 were used7.00 to refinance1; 1.70 to 1; and 0.80 to 1, respectively. We were in
132
Novelis Inc.
NOTES TO THE CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS — (Continued)
compliance with these covenants for the year ended December 31, 2006. In addition, as described below, we previously obtained waivers from our lenders related party debt with Alcan and to pay related fees and expenses. our inability to timely file our SEC reports.
Debt issuance costs, totalling $32including amendment fees, totaling $34 million have been recorded inOther long-term assetsand are being amortized over the life of the related borrowing inInterest expense and amortization of debt issuance costs — netusing the “effective interest amortization” method for the Term Loans and the straight-line method for the revolving credit and letters of credit facility. The unamortized amount of these costs was $23 million and $26 million as of December 31, 2005.
Under the terms of the Term Loan B debt, we are required to pay a 1% per annum minimum principal amortization requirement through fiscal year 2010 of $78 million, as well as $917 million principal amortization required for 2011. During2006 and 2005, we made principal payments of $85 million, $90 million, $110 million and $80 million in the first, second, third and fourth quarters of 2005, respectively, and as a result, satisfied the 1% per annum principal amortization requirement through fiscal year 2010, as well as $287 million of the principal amortization requirement for 2011. No further minimum principal payments are due until 2011. As of December 31, 2005, we had $935 million outstanding under this facility. Additionally, in March, May and June of 2006, we made additional principal repayments of $80 million, $40 million and $15 million, respectively and as of June 30, 2006, we had $800 million outstanding under this facility.
The credit agreement relating to the senior secured credit facilities includes customary affirmative and negative covenants, as well as financial covenants. As of December 31, 2005 the maximum total leverage, minimum interest coverage, and minimum fixed charge coverage ratios were 5.00 to 1; 2.75 to 1; and 1.20 to 1, respectively. As of December 31, 2005, we were in compliance with these covenants.
7.25% Senior Notes
On February 3, 2005, we issued $1,400 million$1.4 billion aggregate principal amount of senior unsecured debt securities (Senior Notes). The Senior Notes were priced at par, bear interest at 7.25% and mature on February 15, 2015. The net proceeds of the Senior Notes were used to repay the Alcan debt. Debt issuance costs totallingtotaling $28 million have been recorded inOther long-term assetsand are being amortized over the life of the related borrowing inInterest expense and amortization of debt issuance costs — netusing the “effective interest amortization” method. The unamortized amount of these costs was $24 million and $26 million as of December 31, 2005.2006 and 2005, respectively.
Under the indenture that governs the Senior Notes, we are subject to certain restrictive covenants applicable to incurring additional debt and providing additional guarantees, (see Note 25 — Supplemental Guarantor Information), paying dividends beyond certain amounts and making other restricted payments, sales and transfers of assets, certain consolidations or mergers, and certain transactions with affiliates. We were in compliance with these covenants as offor the year ended December 31, 2005.
126
Novelis Inc.
Notes to the Consolidated and Combined Financial Statements — (Continued)
We believe that we are currently in compliance with the covenants in our senior secured credit facility. However, as described below, we obtained waivers from our lenders related to our inability to timely file our SEC reports. In addition, future operating results substantially below our business plan or other adverse factors, including a significant increase in interest rates, could result in our being unable to comply with our financial covenants. If we do not comply with these covenants and are unable to obtain waivers from our lenders, we would be unable to make additional borrowings under these facilities, our indebtedness under these agreements would be in default and could be accelerated by our lenders and could cause a cross-default under our other indebtedness. In particular, we expect it will be necessary to amend the financial covenant related to our interest coverage and leverage ratios in order to align them with our current business outlook for the remainder of the 2006 fiscal year. In addition, if we incur additional debt in the future, we may be subject to additional covenants, which may be more restrictive than those that we are subject to now.2006.
The indenture governing the Senior Notes and the related registration rights agreement required us to file a registration statement for the notes and exchange the original, privately placed notes for registered notes. The registration statement was declared effective by the SEC on September 27, 2005. Under the indenture and the related registration rights agreement, we were required to complete the exchange offer for the Senior Notes by November 11, 2005. We did not complete the exchange offer by that date. As a result, we began to accrue additional special interest at a rate of 0.25% from November 11, 2005. The indenture and the registration rights agreement provide that the rate of additional special interest increases by 0.25% during each subsequent90-day period until the exchange offer closes, with the maximum amount of additional special interest being 1.00% per year. On August 8, 2006, the rate of additional special interest increased to 1.00%. On August 14,October 17, 2006, we extended the offer to exchange the Senior Notes to October 20, 2006.December 15, 2006 and on December 14, 2006, we re-extended the offer to exchange to January 4, 2007. We expect to filefiled a post-effective amendment to the registration statement and completeon December 1, 2006 which was declared effective by the exchange as soon as practicable following the date we are currentSEC on our reporting requirements.December 22, 2006. We will ceaseceased paying additional special interest once the exchange offer is completed.effective January 5, 2007.
Korean Bank Loans
In November 2004, Novelis Korea Limited (Novelis Korea), formerly Alcan Taihan Aluminium Limited, entered into a Korean won (KRW) 40 billion ($40 million) floating rate long-term loan due November 2007. We immediately entered into an interest rate swap to fix the interest rate at 4.80%.
In December 2004, we entered into a $70 million floating rate long-term loan which was subsequently swappeddue December 2007. We immediately entered into an interest rate and cross currency swap for this loan through a 4.55% fixed rate KRW 73 billion loan and two long-termloan.
Additionally, in December 2004 we entered into a KRW 25 billion ($25 million) floating rate loans of $40 million (KRW 40 billion) and $25 million (KRW 25 billion) which were then swappedloan due December 2007. We immediately entered into fixedan interest rate loans of 4.80% andswap to fix the interest rate at 4.45%, respectively. .
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Novelis Inc.
NOTES TO THE CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS — (Continued)
In February 2005, Novelis Korea entered into a $50 million floating rate long-term loan which was subsequently swappeddue in February 2008. We immediately entered into an interest rate and cross-currency swap for this loan through a 5.30% fixed rate KRW 51 billion loan. In October 2005, Novelis Korea entered into a $29 million (KRWKRW 30 billion)billion ($29 million) long-term loan at a fixed rate of 5.75%. due in October 2008.
In the first quarter of 2006, we repaid our KRW 30 billion ($30 million) 5.75% fixed rate loan originally due October 2008. In May 2006, a portion of our $50 million (KRW 51 billion) 5.30% fixed rate loan was refinanced into a KRW 19 billion ($20 million) short-term floating rate loan which was repaid in June 2006. In October 2006, the balance of this loan was refinanced by two short-term floating rate loans: (1) a KRW 10 billion ($11 million) loan, which was repaid in October 2006 and (2) a KRW 20 billion ($21 million) loan, which was repaid in November 2006.
In 2006 and 2005, interest rates on other Korean bank loans for $1 million (KRW 1 billion) ranged from 3.25% to 5.50% (2004: 3.00% to 5.50%)5.5%. We were in compliance with all debt covenants related to the Korean bank loans as of December 31, 2005.
In May 2006, $19 million (KRW 19 billion) of the 5.30% fixed rate loan was refinanced into a short-term floating rate loan with an interest rate of 4.21% due June 30, 2006.
Other Agreements
In 2004, we entered into a loan and a correspondingdeposit-and-guarantee agreement for up to $90 million. As of December 31, 2006 and 2005, this arrangement had a balance of $80 million. We do not include the loan or deposit amounts in our consolidated balance sheetsheets as the agreements include a legal right of setoff and we have the intent and ability to setoff.
Interest Rate Swaps
AsIn addition to interest rate swaps on certain Korean bank loans noted above, as of December 31, 2005,2006, we had entered into interest rate swaps to fix the3-month LIBOR interest rate on a total of $310$200 million of the floating rate Term Loan B debt at effective weighted average interest rates and amounts expiring as follows: 3.7% on $310 million through February 3, 2006; 3.8% on $200$100 million
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Novelis Inc.
Notes to the Consolidated and Combined Financial Statements — (Continued)
through February 3, 2007; and 3.9% on $100 million through February 3, 2008. We are still obligated to pay any applicable margin, as defined in theour senior secured credit agreement,facilities, as amended, in addition to these interest rates. See Note 17 — Financial Instruments and Commodity Contracts for additional disclosure about our interest rate swaps and the effectiveness of these transactions. As of December 31, 2005,2006, 74% of ourfixed-to-variable debt was fixed rate debt ratioand 26% was 76:24.variable rate.
Capital Lease Obligations
In December 2004, in connection with the spin-off, we entered into a fifteen-year capital lease obligation with Alcan for assets in Sierre, Switzerland, which has an interest rate of 7.5% and calls for fixed quarterly payments of 1.7 million CHF, which is equivalent to $1.3$1.4 million at the exchange rate as of December 31, 2005.2006.
In September 2005, we entered into a six-year capital lease obligation for equipment in Switzerland which has an interest rate of 2.49% and calls for fixed monthly payments of 0.1 million CHF, which is equivalent to $0.1 million at the exchange rate as of December 31, 2005.2006.
Impact of Late SEC Filings on our Debt Agreements
As a result of theThe restatement of our unaudited condensed consolidated and combined financial statements for the quarters ended March 31, 2005 and June 30, 2005 we delayed(filed on May 16, 2006) resulted in delays in the filing of our quarterly reportQuarterly Report onForm 10-Q for the quarter ended September 30, 2005 this(filed on May 16, 2006), our Annual Report onForm 10-K for the year ended December 31, 2005 (filed on August 25, 2006 and amended on October 20, 2006), our quarterly reportsQuarterly Reports onForm 10-Q for the first two quarters of 2006.period ended March 31, 2006 (filed on
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Novelis Inc.
NOTES TO THE CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS — (Continued)
September 15, 2006) and our Quarterly Report onForm 10-Q for the period ended June 30, 2006 (filed on October 20, 2006).
The terms of our senior secured credit facility require that we deliver unaudited quarterly and audited annual financial statements to our lenders within specified periods of time. Due to the restatement,delays, we obtained a series of five waiver and consent agreements from the lenders under the facility to extend the various filing deadlines. The fourthFees related to the five waiver and consent agreement, dated May 10, 2006, extendedagreements total $6 million, including $5 million paid during the filing deadline for this Annual Report onForm 10-Kyear ended December 31, 2006. These fees are being amortized over the remaining life of the related borrowing inInterest expense and amortization of debt issuance costs — netusing the “effective interest amortization” method. Unamortized fees related to September 29, 2006, and theForm 10-Q filing deadlines for the first, second and third quarters of 2006 to October 31, 2006, November 30, 2006, and December 29, 2006, respectively. These extended filing deadlines were subject to acceleration to 30 days after the receipt of an effective notice of default under the indenture governing our Senior Notes relating to our inability to timely file such periodic reports with the SEC. We received an effective notice of default with respect to this Annual Report onForm 10-K and ourForm 10-Q for the first quarter of 2006 on July 21, 2006 causing these deadlines to accelerate to August 18, 2006. As a result, we entered into a fifth waiver and consent agreement, dated August 11, 2006, which again extended the filing deadline for this Annual Report onForm 10-K and ourForm 10-Q for the first quarter of 2006 to September 18, 2006. Subsequent to the effective date of the fifth waiver and consent agreement, we also received an effective notice of default with respect to ourForm 10-Q for the second quarter of 2006 on August 24, 2006. The fifth waiver and consent agreement extended the accelerated filing deadline caused as a result of the receipt of the effective notice of default with respect to ourForm 10-Q for the second quarter of 2006 to October 22, 2006 (59 days after the receipt of any notice). The fifth waiver and consent agreement would also extend any accelerated filing deadline caused as a result of the receipt of an effective notice of default under the Senior Notes with respect to ourForm 10-Q for the third quarter of 2006 to the earlier of 30 days after the receipt of any such notice of default and December 29, 2006.
Beginning with the fourth waiver and consent agreement, we agreed to a 50 basis point increase agreements are included inOther long-term assetsin the applicable margin on all currentaccompanying consolidated balance sheets and future borrowings outstanding under our senior secured credit facility,were $5 million and a 12.5 basis point increase in the commitment fee on the unused portion$1 million as of our revolving credit facility. These increases will continue until we inform our lenders that we no longer need the benefit of the extended filing deadlines granted in the fifth waiver and consent agreement, at which time the fifth waiver and consent agreement will expire and obligate us to the filing requirements set forth in the senior secured credit facility and the fourth waiver and consent agreement.
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Novelis Inc.
Notes to the Consolidated and Combined Financial Statements — (Continued)
We believe it is probable that we will file ourForm 10-Q for the first quarter of 2006 by September 18,December 31, 2006 and ourForm 10-Q for the second quarter of 2006 by October 22, 2006; however, there can be no assurance that we will be able to do so. If we are unable to file ourForm 10-Q for the first and second quarters of 2006 by the applicable deadlines, we intend to seek additional waivers from the lenders under our senior secured credit facility to avoid an event of default under the facility. An event of default under the senior secured credit facility would entitle the lenders to terminate the senior secured credit facility and declare all or any portion of the obligations under the facility due and payable. If we were unable to timely file ourForm 10-Qs for the first and second quarters of 2006 or obtain additional waivers, we would seek to refinance our senior secured credit facility using a $2,855 million commitment for financing facilities that we obtained from Citigroup Global Markets Inc. described below (the Commitment Letter).
Under the indenture governing the Senior Notes, we are required to deliver to the trustee a copy of our periodic reports filed with the SEC within the time periods specified by SEC rules. As a result of our receipt of effective notices of default from the trustee on July 21, 2006, with respect to this Annual Report onForm 10-K and ourForm 10-Q for the first quarter of 2006 and on August 24, 2006 with respect to ourForm 10-Q for the second quarter of 2006, we are required to file ourForm 10-Q for the first quarter of 2006 by September 19, 2006, and ourForm 10-Q for the second quarter of 2006 by October 23, 2006 in order to prevent an event of default. From June 22, 2006 to July 19, 2006, we solicited consents from the noteholders to a proposed amendment of certain provisions of the indenture and a waiver of defaults thereunder; however, we did not receive a sufficient number of consents and the consent solicitation lapsed. If we fail to file ourForm 10-Qs for the first and second quarters of 2006 by the applicable deadlines, the trustee or holders of at least 25% in aggregate principal amount of the Senior Notes may elect to accelerate the maturity of the Senior Notes. We believe it is probable that we will file ourForm 10-Qs for the first and second quarters of 2006 by the applicable deadlines; however, there can be no assurance that we will be able to do so. If we are unable to file ourForm 10-Qs for the first and second quarters of 2006 by the applicable deadlines, we intend to amend the facility so we may refinance the Senior Notes utilizing the Commitment Letter, likely through a tender offer for the Senior Notes. We will obtain this refinancing from the lenders under our senior secured credit facility or, if we are unsuccessful in obtaining the necessary approvals from our lenders to refinance the Senior Notes, we intend to rely on the Commitment Letter to refinance the senior secured credit facility and repay the Senior Notes.2005, respectively.
On July 26, 2006, we entered into thea Commitment Letter with Citigroup Global Markets Inc. (Citigroup) for backstop financing facilities totaling approximately $2,855 million. Under the terms of the Commitment Letter, Citigroup has agreed that,in an amount up to $2.855 billion to backstop our financing needs in the event we are unablewere not able to cure the default under the Senior Notes by September 19, 2006, Citigroup will (a) provide loanstimely file certain SEC reports. We paid fees of approximately $4 million in an amount sufficient to repurchase the Senior Notes, (b) use commercially reasonable efforts to obtain the requisite approval from the lenders under our senior secured credit facility for an amendment permitting these additional loans, and (c) in the event that such lender approval is not obtained, provide usconjunction with replacement senior secured credit facilities, in addition to the loans to be used to repay the Senior Notes.
Under any of the refinancing alternatives discussed above, we would incur significant costs and expenses, including professional fees and other transaction costs. We also anticipate that it will be necessary to pay significant waiver and amendment fees in connection with the potential amendments to our senior secured credit facility described above. In addition, if we are successful in refinancing any or all of our outstanding debt under thethis commitment. The Commitment Letter we are likely to experience an increase toexpired on October 31, 2006. Accordingly, during the applicable interest rates over the life of any new debt in excess of our current interest rates, based on prevailing market conditions and our credit risk.
While we expect that funding will be available under the Commitment Letter to refinance our Senior Notesand/or our senior secured credit facility if necessary, if financing is not available under the Commitment
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Novelis Inc.
Notes to the Consolidated and Combined Financial Statements — (Continued)
Letter for any reason, we would not have sufficient liquidity to repay our debt. Accordingly, we would be required to negotiate an alternative restructuring or refinancing of our debt.
Any acceleration of the outstanding debt under the senior secured credit facility would result in a cross-default under our Senior Notes. Similarly, the occurrence of an event of default under our Senior Notes would result in a cross-default under the senior secured credit facility. Further, the acceleration of outstanding debt under our senior secured credit facility or our Senior Notes would result in defaults under other contracts and agreements, including certain interest rate and foreign currency derivative contracts, giving the counterparty to such contracts the right to terminate. As of June 30, 2006, we hadout-of-the-money derivatives valued at approximately $86 million that the counterparties would have the ability to terminate upon the occurrence of an event of default.
We believe it is probable that we will file ourForm 10-Q for the firstfourth quarter of 2006, by September 18, 2006we charged the $4 million in fees toInterest expense and ourForm 10-Q for the second quarteramortization of 2006 by October 22, 2006. Accordingly, we continue to classify the senior secured credit facility anddebt issuance costs — netin our Senior Notes as long-term debt asconsolidated statement of December 31, 2005.operations.
Lines of Credit/Short TermShort-Term Borrowings
As noted above,of December 31, 2006, our short-term borrowings were $133 million, consisting of (1) $129 million in short-term loans in the senior securedU.S. and the U.K. under our $500 million revolving credit facility for $1,800and (2) $4 million includes ain bank overdrafts in Italy. As of December 31, 2006, $20 million of our $500 million five-year multi-currency revolving credit facility was utilized for letters of credit and letterwe had approximately $351 million available under the credit facility.
As of December 31, 2006, we had an additional $63 million under letters of credit in Korea not included in our revolving credit facility. As of December 31, 2005, $2 million2006, the weighted average interest rate on our total short-term borrowings was 7.70% (2.69% as of the $500 million facility was utilized for letters of credit. December 31, 2005).
Commitment fees related to the unused portion of the senior secured$500 million revolving credit facility, prior to the Waiverfourth waiver and Consentconsent agreement dated May 10, 2006, ranged between 0.375% and 0.5% per annum, depending on certain financial ratios we achieve. Afterratios. In connection with the Waiverfourth waiver and Consent dated May 10, 2006,consent agreement, these commitment fees increased to 0.625%, where they. Under the terms of the October 16, 2006 amendment to our senior secured credit facilities, these higher fees will remain in effect until such time as the earlier of December 29, 2006 and such date when we no longer have delayed financial reports, and we request in writing that we no longer needcompliance certificate for the benefit of the extended reporting deadlines. Additionally, we also have an unsecured line of credit facility in Brazil for $25 million, of which $2 million was available as of Decemberfiscal quarter ending March 31, 2005.
As of December 31, 2005, our short-term borrowings were $27 million, consisting of $23 million under an unsecured line of credit in Brazil and $4 million in Italy through local banking relationships not under lines of credit. As of December 31, 2005 the weighted average interest rate on our short-term borrowings was 2.69% (2.50% in 2004).2008 has been delivered.
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11. | Preferred and Common SharesPREFERRED AND COMMON SHARES |
Authorization of Shares
Upon approval by our board of directors, and our shareholders in accordance with NYSE rules, we may issue an unlimited number of common and preferred shares from time to time for such consideration as the board of directors determines is appropriate. The terms of any preferred shares, including dividend rates, conversion and voting rights, if any, redemption prices and similar matters will be established by the board of directors prior to issuance.
Preferred Shares
Our board of directors may, from time to time, fix the number of shares in, and determine the designation, rights, privileges, restrictions and conditions attaching to, each series of preferred shares subject to the limitations in our articles of incorporation. Holders of preferred shares are not entitled to receive notice of, or
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Novelis Inc.
NOTES TO THE CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS — (Continued)
to attend, any meeting of shareholders and are not entitled to vote at any such meeting, except to the extent otherwise provided in our articles of incorporation in respect of preferred shares. Holders of our preferred shares are entitled to receive dividends in such amounts and at such intervals as may be determined by theour board of directors. As of December 31, 2005,2006, there were no preferred shares issued and outstanding.
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Novelis Inc.
Notes to the Consolidated and Combined Financial Statements — (Continued)
Common Shares
Our common shares have no nominal or par value and are subordinate to the rights, privileges, restrictions and conditions attaching to any of our preferred shares and shares of any other class ranking senior to the common shares we may issue in the future.
Holders of our common shares are entitled to one vote per common share at all meetings of shareholders, to participate ratably in any dividends which may be declared on our common shares by the board of directors and, in the event of our dissolution, to our remaining property. Our common shares have no pre-emptive, redemption or conversion rights.
The provisions of the Canada Business Corporations Act require that the amendment of certain rights of holders of any class of shares, including the common shares, must be approved by not less than two-thirds of the votes cast by the holders of such shares. A quorum for any meeting of the holders of common shares is 25% of the common shares then outstanding. Therefore, it is possible for the rights of the holders of common shares to be changed other than by the affirmative vote of the holders of the majority of the outstanding common shares. In circumstances where certain rights of holders of common shares may be amended, holders of common shares have the right, under the Canada Business Corporations Act, to dissent from such amendment and we would be required to pay them the then fair value of their common shares.
Shareholders are also entitled to rights and privileges under the shareholder rights plan summarized below.
Shareholder Rights Plan
In 2004, our board of directors approved a plan whereby each of our common shares carries one right to purchase additional common shares. The rights expire in 2014, subject to re-confirmation at the annual meetings of shareholders in 2008 and 2011. The rights under the plan are not currently exercisable. The rights may become exercisable upon the acquisition by a person or group of affiliated or associated persons (Acquiring Person) of beneficial ownership of 20% or more of our outstanding voting shares or upon the commencement of a takeover bid. Under those circumstances, holders of rights, with the exception of an Acquiring Person or bidding party, will be entitled to purchase from us, upon payment of the exercise price (currently $200.00 U.S. per right), the number of common shares that can be purchased for twice the exercise price, based on the market value of our common shares at the time the rights become exercisable.
The plan also has a permitted bid feature which allows a takeover bid to proceed without the rights becoming exercisable, provided that the bid meets specified minimum standards of fairness and disclosure, even if our board of directors does not support the bid. The rights may be redeemed by our board of directors prior to the expiration or re-authorization of the rights agreement, with the prior consent of the holders of rights or common shares, for $0.01 U.S. per right. In addition, under specified conditions, our board of directors may waive the application of the rights.
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12. | Other Comprehensive Income (Loss) |
Accumulated other comprehensive income (loss), net of income tax effects, consistsAs a result of the following (in millions):
| | | | | | | | |
| | As of December 31, | |
| | 2005 | | | 2004 | |
|
Foreign currency translation adjustments | | $ | (35 | ) | | $ | 120 | |
Minimum pension liability | | | (49 | ) | | | (32 | ) |
| | | | | | | | |
| | $ | (84 | ) | | $ | 88 | |
| | | | | | | | |
potential acquisition of our common stock by Hindalco (see Note 23 — Subsequent Event), on February 10, 2007, we amended the Shareholders Rights Agreement by and between us and CIBC Mellon Trust Company, as rights agent, and our board of directors adopted resolutions deferring the Separation Time of the Rights (as such terms are defined in the Shareholders Rights Agreement) to a later date to be
131136
Novelis Inc.
Notes to the Consolidated and Combined Financial StatementsNOTES TO THE CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS — (Continued)
determined by subsequent decision of the board of directors so that the transactions contemplated by the court approved plan of arrangement will not cause the rights to become exercisable.
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12. | OTHER COMPREHENSIVE INCOME (LOSS) |
A summary of the components of other comprehensive income (loss) is as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | | Year Ended December 31, | |
| | 2005 | | 2004 | | 2003 | | | 2006 | | 2005 | | 2004 | |
|
Net change in foreign currency translation adjustments | | $ | (169 | ) | | $ | 30 | | | $ | 102 | | | $ | 172 | | | $ | (169 | ) | | $ | 30 | |
Net change in fair value of effective portion of hedges | | | | (46 | ) | | | — | | | | — | |
Net change in minimum pension liability | | | (14 | ) | | | (41 | ) | | | 4 | | | | 16 | | | | (14 | ) | | | (41 | ) |
| | | | | | | | | | | | | | |
Net other comprehensive income (loss) adjustments, before income tax (expense) benefit | | | (183 | ) | | | (11 | ) | | | 106 | | |
Income tax (expense) benefit | | | 11 | | | | 15 | | | | (3 | ) | |
Net other comprehensive income (loss) adjustments, before income tax effect | | | | 142 | | | | (183 | ) | | | (11 | ) |
Income tax effect | | | | (8 | ) | | | 11 | | | | 15 | |
| | | | | | | | | | | | | | |
Other comprehensive income (loss) | | $ | (172 | ) | | $ | 4 | | | $ | 103 | | | $ | 134 | | | $ | (172 | ) | | $ | 4 | |
| | | | | | | | | | | | | | |
Accumulated other comprehensive loss, net of income tax effects, consists of the following (in millions).
| | | | | | | | |
| | As of December 31, | |
| | 2006 | | | 2005 | |
|
Foreign currency translation adjustments | | $ | 133 | | | $ | (35 | ) |
Fair value of effective portion of hedges — net | | | (46 | ) | | | — | |
Minimum pension liability | | | — | | | | (49 | ) |
Net actuarial loss | | | (83 | ) | | | — | |
Net prior service cost | | | (8 | ) | | | — | |
Net transition obligation | | | (1 | ) | | | — | |
| | | | | | | | |
Accumulated other comprehensive loss | | $ | (5 | ) | | $ | (84 | ) |
| | | | | | | | |
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Novelis Inc.
NOTES TO THE CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS — (Continued)
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13. | Fair Value of Financial InstrumentsFAIR VALUE OF FINANCIAL INSTRUMENTS |
The carrying value approximates fair value for our financial instruments that are classified as current in our consolidated and combined balance sheets. The fair values of financial instruments that are recorded at cost and classified as long-term are summarized in the table below (in millions).
| | | | | | | | | | | | | | | | |
| | As of December 31, | |
| | 2005 | | | 2004 | |
| | Carrying
| | | Estimated
| | | Carrying
| | | Estimated
| |
| | Value | | | Fair Value | | | Value | | | Fair Value | |
|
Assets | | | | | | | | | | | | | | | | |
Long-term receivables from related parties | | $ | 71 | | | $ | 71 | | | $ | 104 | | | $ | 104 | |
| | | | | | | | | | | | | | | | |
Liabilities | | | | | | | | | | | | | | | | |
Long-term debt | | | | | | | | | | | | | | | | |
Long-term related party debt — net of current portion | | | — | | | | — | | | | 2,307 | | | | 2,307 | |
Novelis Inc. | | | | | | | | | | | | | | | | |
Floating rate Term Loan B, due 2012 | | | 342 | | | | 342 | | | | — | | | | — | |
7.25% Senior Notes, due 2015 | | | 1,400 | | | | 1,306 | | | | — | | | | — | |
Novelis Corporation | | | | | | | | | | | | | | | | |
Floating rate Term Loan B, due 2012 | | | 593 | | | | 593 | | | | — | | | | — | |
Novelis Switzerland S.A. | | | | | | | | | | | | | | | | |
Capital lease obligation, due 2020 (CHF 60 million) | | | 45 | | | | 44 | | | | — | | | | — | |
Capital lease obligation, due 2011 (CHF 5 million) | | | 4 | | | | 4 | | | | — | | | | — | |
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Notes to the Consolidated and Combined Financial Statements — (Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, | | | Year Ended December 31, | |
| | 2005 | | 2004 | | | 2006 | | 2005 | |
| | Carrying
| | Estimated
| | Carrying
| | Estimated
| | | Carrying
| | Estimated
| | Carrying
| | Estimated
| |
| | Value | | Fair Value | | Value | | Fair Value | | | Value | | Fair Value | | Value | | Fair Value | |
|
Assets | | | | | | | | | | | | | | | | | |
Long-term receivables from related parties | | | $ | 59 | | | $ | 59 | | | $ | 71 | | | $ | 71 | |
Liabilities | | | | | | | | | | | | | | | | | |
Long-term debt | | | | | | | | | | | | | | | | | |
Novelis Inc. | | | | | | | | | | | | | | | | | |
Floating rate Term Loan B, due 2012 | | | | 259 | | | | 259 | | | | 342 | | | | 342 | |
7.25% Senior Notes, due 2015 | | | | 1,400 | | | | 1,348 | | | | 1,400 | | | | 1,306 | |
Novelis Corporation | | | | | | | | | | | | | | | | | |
Floating rate Term Loan B, due 2012 | | | | 449 | | | | 449 | | | | 593 | | | | 593 | |
Novelis Switzerland S.A. | | | | | | | | | | | | | | | | | |
Capital lease obligation, due 2020 (CHF 57 million) | | | | 47 | | | | 43 | | | | 45 | | | | 44 | |
Capital lease obligation, due 2011 (CHF 4 million) | | | | 4 | | | | 3 | | | | 4 | | | | 4 | |
Novelis Korea Limited | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Bank loan, due 2008 | | | 50 | | | | 45 | | | | — | | | | — | | | | — | | | | — | | | | 50 | | | | 45 | |
Bank loan, due 2008 (KRW 30 billion) | | | 30 | | | | 25 | | | | — | | | | — | | | | — | | | | — | | | | 30 | | | | 25 | |
Bank loan, due 2007 | | | 70 | | | | 64 | | | | 70 | | | | 65 | | | | 70 | | | | 67 | | | | 70 | | | | 64 | |
Bank loan, due 2007 (KRW 40 billion) | | | 40 | | | | 36 | | | | 39 | | | | 37 | | | | 43 | | | | 41 | | | | 40 | | | | 36 | |
Bank loan, due 2007 (KRW 25 billion) | | | 25 | | | | 22 | | | | 24 | | | | 23 | | | | 27 | | | | 26 | | | | 25 | | | | 22 | |
Bank loans, due 2008 through 2011 (KRW 1 billion) | | | 1 | | | | 1 | | | | 2 | | | | 1 | | | | 1 | | | | 1 | | | | 1 | | | | 1 | |
Other | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Other debt, due 2006 through 2012 | | | 3 | | | | 2 | | | | 5 | | | | 4 | | |
Other debt, due 2007 through 2012 | | | | 2 | | | | 2 | | | | 3 | | | | 2 | |
Financial commitments | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Letters of credit | | | — | | | | 2 | | | | — | | | | 1 | | | | — | | | | 83 | | | | — | | | | 2 | |
Other financial instruments are marked to market to adjust to fair value, and are disclosed in Note 17 — Financial Instruments and Commodity Contracts.
| |
14. | Stock-Based CompensationSHARE-BASED COMPENSATION |
On January 1, 2006, we adopted FASB Statement No. 123 (Revised) using the modified prospective method. The modified prospective method requires companies to record compensation cost beginning with the effective date based on the requirements of FASB Statement No. 123 (Revised) for all share-based payments granted after the effective date. All awards granted to employees prior to the effective date of FASB Statement No. 123 (Revised) that remain unvested at the adoption date will continue to be expensed over the remaining service period. The cumulative effect of the accounting change, net of tax, as of January 1, 2006 was
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Novelis Inc.
NOTES TO THE CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS — (Continued)
The fair value of each SPAU was estimated as of December 31, 2006 using the following assumptions:
| | |
Expected volatility | | 36.20 to 40.30% |
Weighted average volatility | | 39.32% |
Dividend yield | | 0.14% |
Risk-free interest rate | | 4.67 to 4.80% |
Expected life | | 2.37 to 4.37 years |
During the year ended December 31, 2006, we had 101,104 SPAUs vest with a total fair value of $1.2 million.
As of December 31, 2005, 14,3152006, there was $0.6 million of unamortized compensation cost related to non-vested SPAUs, were exercisable atwhich is expected to be recognized over a weighted average priceremaining vesting period of $16.59.1.8 years.
Total Shareholder Returns Performance Plan
Some Alcan employees who later transferred to Novelis were entitled to receive cash awards under the Alcan Total Shareholder Returns Performance Plan (TSR). TSR was a cash incentive plan whichthat rewarded eligible employees based on the relative performance of Alcan’s common share price and cumulative dividend yield performance compared to other corporations included in the Standard & Poor’s Industrials Index, measured over three-year periods starting on October 1, 2002 and 2003. These awards had to be held for three years. On January 6, 2005, these employees immediately ceased participating in and accruing benefits under the TSR. The current three-year performance periods, namely 2002 to 2005 and 2003 to 2006, were truncated as of the date of the spin-off. The accrued awards for all of the TSR participants were converted into 452,667 Novelis restricted share units (RSUs). At the end of each performance period, each holder of RSUs will receive net proceeds based on the price of Novelis common shares at that time, including declared dividends. On
In October 15, 2005, an aggregate of $7 million was paid to employees who held RSUs that had
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Novelis Inc.
Notes to the Consolidated and Combined Financial Statements — (Continued)
vested on September 30, 2005. As of December 31, 2005, there were 119,842In October 2006, 120,949 RSUs and related dividends outstanding.outstanding were paid to employees in the aggregate amount of $2.8 million.
The table below shows our RSU activity for the year ended December 31, 2006. RSUs granted represent the unit equivalent of dividends earned during the period (all amounts actual).
| | | | | | | | | | | | |
| | | | | | | | Aggregate
| |
| | Number of
| | | Redemption
| | | Intrinsic
| |
| | RSUs | | | Price | | | Value | |
|
RSUs outstanding as of December 31, 2005 | | | 119,842 | | | $ | 20.89 | | | | | |
Granted/Dividends | | | 1,107 | | | | | | | | | |
Exercised | | | (120,949 | ) | | | | | | | | |
Forfeited/Cancelled | | | — | | | | | | | | | |
| | | | | | | | | | | | |
RSUs outstanding as of December 31, 2006 | | | — | | | $ | — | | | $ | — | |
| | | | | | | | | | | | |
Deferred Share Unit Plan Forfor Non-Executive Directors
On January 5, 2005, Novelis established the Deferred Share Unit Plan for Non-Executive Directors under which non-executive directors receive 50% of their compensation payable in the form of directors’ deferred share units (DDSUs) and the other 50% in the form of either cash, additional DDSUs or a combination of these two (at the individual election of each non-executive director). The number of DDSUs is determined by dividing the quarterly amount payable, as elected, by the average closing prices of a common share on the TSXToronto Stock Exchange (TSX) and NYSENew York Stock Exchange (NYSE) on the last five trading days of each quarter.
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Novelis Inc.
NOTES TO THE CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS — (Continued)
Additional DDSUs representing the equivalent of dividends declared on common shares are credited to each holder of DDSUs. The number of DDSUs outstanding as of December 31, 2006 and 2005 includes DDSUs issued on January 1, 2007 and 2006, respectively, as the required service was provided by each year-end.
The DDSUs are redeemable in cashand/or in shares of our common stock following the participant’s retirement from the board. The redemption amount is calculated by multiplying the accumulated balance of DDSUs by the average closing price of a common share on the TSX and NYSE on the last five trading days prior to the redemption date. For
The table below shows our DDSU activity for the year ended December 31, 2005, 41,862 DDSUs were granted and none were redeemed. On January 1, 2006 15,189 additional DDSUs were granted resulting in 57,051 DDSUs outstanding.(all amounts actual).
| | | | | | | | | | | | |
| | | | | | | | Aggregate
| |
| | Number of
| | | Redemption
| | | Intrinsic
| |
| | DDSUs | | | Price | | | Value | |
|
DDSUs outstanding as of December 31, 2005 | | | 57,051 | | | $ | 20.94 | | | | | |
Granted | | | 54,988 | | | | | | | | | |
Exercised | | | — | | | | | | | | | |
Forfeited | | | — | | | | | | | | | |
Expired/Cancelled | | | — | | | | | | | | | |
| | | | | | | | | | | | |
DDSUs outstanding as of December 31, 2006 | | | 112,039 | | | $ | 27.11 | | | $ | 3,037,707 | |
| | | | | | | | | | | | |
Novelis Founders Performance Awards
In March 2005 (and amended and restated in March 2006), Novelis established a plan to reward certain key executives with Performance Share Units (PSUs) if Novelis common share price improvement targets arewere achieved within specific time periods. For all participants other than the company’s chief executive officer, thereThere are three equal tranches of PSUs, and each has a specific share price improvement target. For the first tranche, the target share price of $23.57 applies for the period from March 24, 2005 to March 23, 2008. For the second tranche, the target share price of $25.31 applies for the period from March 24, 2006 to March 23, 2008. For the third tranche, the target share price of $27.28 applies for the period from March 24, 2007 to March 23, 2008. If awarded, a particular tranche will be paid in cash on the later of six months from the date the specific common share price target is reached or twelve months after the start of the performance period, and will be based on the average of the daily stockcommon share closing prices on the NYSE for the last five trading days prior to the payment date. Upon a participant’s termination due to retirement, death or disability, all PSUs awarded prior to the termination will be paid at the same time as for active participants. For any other termination, all PSUs will be forfeited. Additionally, upon a change in control, all PSUs awarded prior to the change in control event will be paid. However, any PSUs that have not been awarded prior to the change in control will be forfeited. In March 2006, our board of directors amended the PSUs in order to clarify that PSUs would only be awarded under the second and third tranches for performance periods beginning in 2006 and 2007, respectively, if the share price met the applicable threshold for 15 consecutive days during an open trading window.
The share price improvement targets for the first tranche have beenwere achieved and 180,350 PSUs were awarded on June 20, 2005. For the year ended December 31, 2005, 1,650 PSUs were forfeited and 178,700 remained outstanding. In March 2006, 46,850 PSUs were forfeited.forfeited and 131,850 PSUs were ultimately paid out. The liability for this awardthe first tranche was accrued over theits term, of the first tranche, was valued on March 24, 2006, and was settled in cashpaid in April 2006 in the aggregate amount of $2.7 million.
Upon adoption of FASB Statement No. 123 (Revised), we changed our valuation technique to the Monte Carlo valuation model due to the fact that the PSUs contain a market condition for $3 million.vesting of the award. The Monte Carlo model utilizes multiple input variables that determine the probability of satisfying the market
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Novelis Inc.
NOTES TO THE CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS — (Continued)
condition stipulated in the award and calculates the fair market value of each award. We used our own historical stock price volatility to determine expected volatility assumptions. The annual expected dividend yield is based on dividend payments of $0.01 per share per quarter. The risk-free interest rate represents U.S. Treasury Strip yields as of the valuation date. The fair value of the PSUs is amortized over the derived service period of each tranche, which is up to three years, subject to acceleration in the event the vesting condition is met (as defined above).
The fair value of each PSU was estimated as of December 31, 2006 using the following assumptions:
| | |
Expected volatility | | 37.00% |
Weighted average expected volatility | | 37.00% |
Dividend yield | | 0.14% |
Risk-free interest rate | | 4.75% |
Expected life (derived service periods) | | 0.93 to 1.23 years |
As of December 31, 2006, there was approximately $0.6 million of unamortized compensation expense related to the second tranche of 94,450 PSUs, which is expected to be recognized over the next 0.93 years, and approximately $0.6 million of unamortized compensation expense related to the third tranche of 94,450 PSUs, which is expected to be recognized over the next 1.23 years.
In February 2007, as a result of the potential acquisition of our common stock by Hindalco (see Note 23 — Subsequent Event), our board of directors recognized that the applicable share price threshold had been (or would likely be) met with respect to the second tranche and would probably be met for the third tranche, but in light of the insiders’ awareness of the possibility of a change in control transaction, they have been subject to a trading blackout. Moreover, it is unlikely that a 15 day open trading window under the Novelis disclosure and insider trading policies will arise prior to the potential closing of the change in control transaction (estimated to be by the end of the second quarter of 2007). Accordingly, on February 10, 2007, our board of directors further amended the PSUs in order to provide that the applicable threshold for (a) the second tranche will be met as of February 28, 2007, and (b) the third tranche will be met as of March 26, 2007, for purposes of PSUs to be awarded.
Deferred Share Agreements
On January 6, 2005, 33,500 Alcan deferred shares held by one of our executives who was an Alcan employee immediately prior to the spin-off were replaced with the right to receive 66,477 Novelis shares. On July 27, 2005, the deferred share agreement was amended to provide that we will, in lieu of granting the executive 66,477 common shares, pay the executive in cash in an amount equal to the value of the shares based on the closing price of the shares on the NYSE on August 1, 2005. This obligation was paid in cash in lieu of shares on August 3, 2005 for $2 million.
Compensation Cost
For the year ended December 31, 2005, stock-based compensation expense for arrangements that are settled in cash was $4 million (2004: $4 million and 2003: $3 million), and was included inSelling, general and administrative expenses.
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Novelis Inc.
Notes to the Consolidated and Combined Financial StatementsNOTES TO THE CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS — (Continued)
Compensation Cost
Total share-based compensation expense for the years ended December 31, 2006, 2005 and 2004, including amounts related to the cumulative effect of an accounting change (exclusive of income taxes) from adopting FASB Statement No. 123 (Revised) on January 1, 2006, is presented in the table below (in millions). These amounts are included inSelling, general and administrative expensesin our consolidated and combined statements of operations.
| | | | | | | | | | | | |
| | Year Ended December 31, | |
| | 2006 | | | 2005 | | | 2004 | |
|
Compensation Settled in Stock: | | | | | | | | | | | | |
Novelis 2006 Incentive Plan | | $ | 0.7 | | | $ | — | | | $ | — | |
Novelis Conversion Plan of 2005 | | | 7.3 | | | | 3.1 | | | | 1.7 | |
Recognition Awards | | | 0.5 | | | | — | | | | — | |
| | | | | | | | | | | | |
| | | 8.5 | | | | 3.1 | | | | 1.7 | |
| | | | | | | | | | | | |
Compensation Settled in Cash: | | | | | | | | | | | | |
Novelis 2006 Incentive Plan (Stock Appreciation Rights) | | | 0.4 | | | | — | | | | — | |
Stock Price Appreciation Unit Plan | | | 4.5 | | | | — | | | | — | |
Total Shareholder Returns Performance Plan | | | 0.2 | | | | (0.4 | ) | | | 3.4 | |
Deferred Share Unit Plan for Non-Executive Directors | | | 1.8 | | | | 1.8 | | | | — | |
Novelis Founders Performance Awards | | | 2.7 | | | | 1.9 | | | | — | |
Deferred Share Agreements | | | — | | | | 0.5 | | | | 0.8 | |
| | | | | | | | | | | | |
| | | 9.6 | | | | 3.8 | | | | 4.2 | |
| | | | | | | | | | | | |
Total Share-Based Compensation Expense | | $ | 18.1 | | | $ | 6.9 | | | $ | 5.9 | |
| | | | | | | | | | | | |
| |
15. | Post-Retirement Benefit PlansPOSTRETIREMENT BENEFIT PLANS |
Our pension obligations relate to funded defined benefit pension plans in the United States,U.S., Canada and the United Kingdom,U.K., unfunded pension benefits primarilyplans in Germany, and unfunded lump sum indemnities to employees of businesses in France, South Korea, Malaysia and Italy. Our other post-retirementpostretirement obligations (Other Benefits)Benefits, as shown in certain tables below) include unfunded health carehealthcare and life insurance benefits provided to retired employees in Canada, the U.S. and the United States.Brazil.
Some of our employees participateparticipated in defined benefit plans that were previously managed by Alcan in the U.S., the U.K. and Switzerland. These benefits are generally based on the employee’s years of service and either a flat dollar rate or on the highest average eligible compensation before retirement.
In 2005, the following occurred related to existing Alcan pension plans covering our employees:
a) In the U.S., for our employees previously participating in the Alcancorp Pension Plan and the Alcan Supplemental Executive Retirement Plan, Alcan agreed to recognize up to one year of additional service in its plan if the employee worked for us and we paid Alcan the normal cost (in the case of the Alcancorp Pension Plan) and the current service cost (in the case of the Alcan Supplemental Executive Retirement Plan);
b) In the U.K., the sponsorship of the Alusuisse Holdings U.K. Ltd Pension Plan was transferred from Alcan to us, and the plan was renamed the Novelis U.K. Pension Plan. No new plan was established. Approximately 575 of our employees who had participated in the British Alcan RILA Plan remained in
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Novelis Inc.
NOTES TO THE CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS — (Continued)
that plan for 2005. As agreed with the trustees of the plan, we arewere responsible for remitting to Alcan both the employee and employer contributions for the 2005 year; and
c) In Switzerland, we became a participating employer in the Alcan Swiss Pension Plans.Plan. Our employees are participating in these plansthis plan for up to one year (or longer with Alcan approval) provided we make the required pension contributions.
For We made contributions of $3 million for each of the yearyears ended December 31, 2005, we contributed $14 million to2006 and 2005. Upon withdrawal from the Alcan sponsored plans described above.Swiss Pension Plan, we are responsible for the pension liabilities related to our employees and we will receive assets per applicable Swiss law. As of December 31, 2006, the projected benefit obligation related to our employees was approximately $73 million and total plan assets were approximately ninety-nine percent of the plan’s projected benefit obligations.
The following plans were established in 2005 to replace the Alcan pension plans that previously covered both Alcan and Novelis employees:
Novelis Pension Plan (Canada) — The Novelis Pension Plan (Canada) provides for pensions calculated on years of service and eligible earnings. There is no service cap. Eligible earnings are based on the average of an employee’s highest 36 consecutive months of salary and short-term incentive award (up to its target). Pensions are normally paid as a lifetime annuity with either guaranteed payments for 60 months, or a 50% lifetime pension to the surviving spouse.
Pension Plan for Officers — The Pension Plan for Officers (PPO) provides for pensions calculated on service up to 20 years as an officer of Novelis or Alcan and eligible earnings. Eligible earnings are based on the excess of the average of an employee’s highest 60 consecutive months of salary and target short-term incentive award over eligible earnings in the U.S. Plan or U.K. Plan, as applicable. Pensions are normally paid as a lifetime annuity. Payments are not subject to Social Security or other offsets. After we make the final payment to our former Chief Executive Officer, this plan will be terminated.
The board of directors reviewed management’s recommendations with respect to certain modifications of our post-retirementpostretirement benefit plans. On October 28, 2005, our board of directors approved and adopted the following changes related to our post-retirementpostretirement benefit plans:
a) New hires (on or after January 1, 2005 in the U.S. and, on or after January 1, 2006 in Canada and the U.K.) or on or after September 30, 2006 in Germany) will generally participate in Defined Contribution (DC) rather than Defined Benefit (DB) plans. The Novelis board of directors also approved the adoption of the Novelis Savings and Retirement Plan
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Novelis Inc.
Notes to the Consolidated and Combined Financial Statements — (Continued)
effective December 1, 2005. This plan replaced the Alcancorp Employees’ Savings Plan (for non-union U.S. non-union employees) and added a retirement account feature for new hires not eligible for a DB plan;plan. New defined contribution pension plans were established in Canada, the U.K. and Germany during 2006;
b) As a result of the spin-off, account balances in Alcan’s savings plans in the Alcancorp Employees’ Savings Plans (Salaried PlanU.S. and Hourly Plan) and the Alcan Employee Savings Plan (Canada)Canada were transferred to the newly established Novelis Savings and Retirement Plan (for non-union U.S. employees), the Novelis Hourly Savings Plan (for hourly “union”union U.S. employees) and the Novelis Savings Plan (Canada) for all Canadian employees; and
c) Pursuant to the Employee Matters Agreement (EMA) between Alcan and Novelis, active Novelis transferred employees continued to participate in the Alcancorp Pension Plan (ACPP) until December 31, 2005. Effective October 28, 2005, the Novelis board of directors approved the adoption of Novelis DB pension arrangements (to be called the Novelis Pension Plan (NPP) in the U.S.) for employees who participated in a DB plan with Alcan. Under the terms of the EMA and subject to Internal Revenue Service (IRS) requirements, assets and liabilities will bewere transferred from ACPP to the new NPP for all transferred employees.employees who were actively employed on December 31, 2005. Similar transfers will occur in
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Novelis Inc.
NOTES TO THE CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS — (Continued)
Canada and the U.K. for pension plans, but only for employees who elect to have their accrued pensions transferred to Novelis.
In addition2006, the following occurred related to existing defined benefitAlcan pension plans we have electedcovering our employees:
a) Novelis assumed coverage for employees participating in 2005the ACPP and the Alcan Supplemental Executive Retirement Plan effective January 1, 2006 for future service. The assets of $178 million and liabilities of $200 million, as of January 1, 2006, associated with these employees for service prior to assume pension liabilitiesJanuary 1, 2006 were transferred from the U.S., U.K. and CanadianACPP to the Novelis Pension Plan. Effective January 1, 2006 the accrued postretirement pension plans that we currently share with Alcan. The assumption of such liabilities will occur in 2006 together withcosts related to the transfer of assetsemployees from the ACPP and the Alcan Supplemental Executive Retirement Plan were $43 million and $7 million, respectively; and
b) In the U.K., former Alcan employees who subsequently became Novelis employees could elect to exit the British Alcan RILA plan and begin participating in the Novelis U.K. pension plansplan. Of the approximate 575 Novelis employees who had participated in the British Alcan RILA plan, 377 elected to eitherkeep their past service with the newly created U.S. pension plan orBritish Alcan RILA plan. Novelis made a payment of $7 million to the existing U.K. and Canadian pension plans. It is expected thatBritish Alcan RILA plan to pay the assumption of liabilities will exceed the transfer of assets resulting in a corresponding decrease in shareholders’ equity.statutory withdrawal liability.
Results of Adopting FASB Statement No. 158
On September 29, 2006, the FASB issued FASB Statement No. 158, which required us to recognize on our balance sheet the funded status of our defined benefit plans, with an offsetting adjustment toAccumulated other comprehensive lossinShareholders’ equity. We adopted FASB Statement No. 158 as of December 31, 2006, and the table below presents the impact of applying the provisions of FASB Statement No. 158 on our consolidated balance sheet as of December 31, 2006 (in millions).
| | | | | | | | | | | | |
| | Before Application
| | | | | | After Application
| |
| | of FASB Statement
| | | | | | of FASB Statement
| |
| | No. 158 | | | Adjustments | | | No. 158 | |
|
Investment in and advances to non-consolidated affiliates | | $ | 158 | | | $ | (8 | ) | | $ | 150 | |
Total assets | | | 5,800 | | | | (8 | ) | | | 5,792 | |
Accrued postretirement benefits | | | 351 | | | | 74 | | | | 425 | |
Deferred income tax liabilities | | | 169 | | | | (27 | ) | | | 142 | |
Total liabilities | | | 5,392 | | | | 47 | | | | 5,439 | |
Accumulated other comprehensive income (loss) | | | 50 | | | | (55 | ) | | | (5 | ) |
Total shareholders’ equity | | | 250 | | | | (55 | ) | | | 195 | |
Employer Contributions to Pension Plans
OurFor 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. For the year ended December 31, 2005, we contributed $16 million to the funded pension plans and $12 million to the unfunded pension plans. We expect to contribute $26 million to the funded pension plans and $12 million to the unfunded pension plans in 2006.
Our employeesWe also participate in savings plans in Canada and the U.S. as well as defined contribution pension plans in the U.K., Canada, Germany, Malaysia and Brazil.
We made contributions of $9 million, $8 million and $7contributed the following amounts to all plans, including the Alcan plans covering our employees, discussed above (in millions).
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Novelis Inc.
NOTES TO THE CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS — (Continued)
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | |
| | 2006 | | | 2005 | |
| | Novelis
| | | Alcan
| | | | | | Novelis
| | | Alcan
| | | | |
| | Plans | | | Plans | | | Total | | | Plans | | | Plans | | | Total | |
|
Funded pension plans | | $ | 36 | | | $ | 3 | | | $ | 39 | | | $ | 16 | | | $ | 11 | | | $ | 27 | |
Unfunded pension plans | | | 15 | | | | 7 | | | | 22 | | | | 12 | | | | 4 | | | | 16 | |
Savings and defined contribution pension plans | | | 11 | | | | 1 | | | | 12 | | | | 9 | | | | — | | | | 9 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total contributions | | $ | 62 | | | $ | 11 | | | $ | 73 | | | $ | 37 | | | $ | 15 | | | $ | 52 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
We expect to contribute an additional $37 million to theseour funded pension plans; $18 million to our unfunded pension plans in 2005, 2004 and 2003, respectively.$11 million to our savings and defined contribution pension plans during 2007.
Investment Policy and Asset Allocation
Each funded pension plan is governed by an Investment Fiduciary, who establishes an investment policy appropriate for the pension plan. The Investment Fiduciary is responsible for selecting the asset allocation for each plan, monitoring investment managers, monitoring returns versus benchmarks and compliance with the investment policy. Pension assets are diversified across major asset classes and are primarily invested in publicly traded stocks and high quality bonds, with small allocations to real estate and other assets.
The targeted allocation ranges by asset class, and the actual allocation percentages for each class for the years ended December 31, 20052006 and 20042005 are listed in the table below.
| | | | | | | | | | | | | | | | | | | | |
| | | | Allocation in
| | | | | Allocation in
| |
| | Target
| | Aggregate at
| | | Target
| | Aggregate as of
| |
| | Allocation
| | December 31, | | | Allocation
| | December 31, | |
Category of Asset | | Ranges | | 2005 | | 2004 | | | Ranges | | 2006 | | 2005 | |
|
Equity securities | | | 40-75 | % | | | 54 | % | | | 55 | % | | | 50 - 70 | % | | | 57 | % | | | 54 | % |
Debt securities | | | 25-60 | % | | | 41 | % | | | 39 | % | | | 30 - 50 | % | | | 41 | % | | | 41 | % |
Real estate | | | — | | | | 3 | % | | | — | | | | 0 - 3 | % | | | 2 | % | | | 3 | % |
Other | | | 0-25 | % | | | 2 | % | | | 6 | % | | | 0 - 5 | % | | | — | % | | | 2 | % |
137
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Novelis Inc.
Notes to the Consolidated and Combined Financial StatementsNOTES TO THE CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS — (Continued)
Benefit Obligations, MarketFair Value of Plan Assets, Funded Status and Net AmountAmounts Recognized in Balance SheetFinancial Statements
The following table presentstables present the change in benefit obligation, change in fair value of plan assets and the funded status and the liability recognized in the balance sheet for pension and other benefits for the years ended December 31, 20052006 and 20042005 (in millions). Other Benefits in the tabletables below include unfunded health carehealthcare and life insurance benefits provided to retired employees in Canada and the United States.U.S.
| | | | | | | | | | | | | | | | |
| | Pension Benefits | | | Other Benefits | |
| | 2005 | | | 2004 | | | 2005 | | | 2004 | |
|
Change in benefit obligation | | | | | | | | | | | | | | | | |
Benefit obligation measured as of January 1, | | $ | 550 | | | $ | 256 | | | $ | 115 | | | $ | 79 | |
Service cost | | | 23 | | | | 15 | | | | 4 | | | | 4 | |
Interest cost | | | 29 | | | | 29 | | | | 7 | | | | 6 | |
Members’ contributions | | | 2 | | | | 1 | | | | — | | | | — | |
Benefits paid | | | (26 | ) | | | (23 | ) | | | (7 | ) | | | (8 | ) |
Amendments | | | 2 | | | | — | | | | (3 | ) | | | — | |
Acquisitions/reorganization | | | (3 | ) | | | 251 | | | | — | | | | 22 | |
Curtailments/settlements/termination benefits | | | — | | | | (43 | ) | | | — | | | | — | |
Actuarial (gains) losses | | | 40 | | | | 32 | | | | 6 | | | | 12 | |
Currency (gains) losses | | | (42 | ) | | | 32 | | | | — | | | | — | |
| | | | | | | | | | | | | | | | |
Benefit obligation measured as of December 31, | | $ | 575 | | | $ | 550 | | | $ | 122 | | | $ | 115 | |
| | | | | | | | | | | | | | | | |
Benefit obligation of funded plans | | $ | 414 | | | $ | 398 | | | | — | | | | — | |
Benefit obligation of unfunded plans | | | 161 | | | | 152 | | | $ | 122 | | | $ | 115 | |
| | | | | | | | | | | | | | | | |
Benefit obligation measured as of December 31, | | $ | 575 | | | $ | 550 | | | $ | 122 | | | $ | 115 | |
| | | | | | | | | | | | | | | | |
Change in market value of plan assets | | | | | | | | | | | | | | | | |
Assets as of January 1, | | $ | 290 | | | $ | 114 | | | | | | | | | |
Actual return on assets | | | 23 | | | | 17 | | | | | | | | | |
Members’ contributions | | | 2 | | | | 1 | | | | | | | | | |
Benefits paid | | | (26 | ) | | | (23 | ) | | | | | | | | |
Company contributions | | | 28 | | | | 32 | | | | | | | | | |
Acquisitions/reorganization | | | — | | | | 177 | | | | | | | | | |
Curtailments/settlements/termination benefits | | | — | | | | (39 | ) | | | | | | | | |
Currency gains (losses) | | | (16 | ) | | | 11 | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Assets as of December 31, | | $ | 301 | | | $ | 290 | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Assets less than benefit obligation of funded plans | | $ | (113 | ) | | $ | (108 | ) | | | | | | | | |
Benefit obligation of unfunded plans | | | (161 | ) | | | (152 | ) | | $ | (122 | ) | | $ | (115 | ) |
| | | | | | | | | | | | | | | | |
Assets less than benefit obligation | | $ | (274 | ) | | $ | (260 | ) | | $ | (122 | ) | | $ | (115 | ) |
Unamortized | | | | | | | | | | | | | | | | |
— actuarial (gains)/losses | | $ | 92 | | | $ | 84 | | | $ | 23 | | | $ | 26 | |
— prior service cost | | | 15 | | | | 15 | | | | (1 | ) | | | (1 | ) |
Minimum pension liability | | | (62 | ) | | | (54 | ) | | | — | | | | — | |
Intangible assets | | | 11 | | | | 9 | | | | — | | | | — | |
Accumulated other comprehensive income | | | 51 | | | | 45 | | | | — | | | | — | |
| | | | | | | | | | | | | | | | |
Net amount recognized in balance sheet | | $ | (167 | ) | | $ | (161 | ) | | $ | (100 | ) | | $ | (90 | ) |
| | | | | | | | | | | | | | | | |
Amount recognized for funded plans | | $ | (44 | ) | | $ | (44 | ) | | | — | | | | — | |
Amount recognized for unfunded plans | | | (123 | ) | | | (117 | ) | | $ | (100 | ) | | $ | (90 | ) |
| | | | | | | | | | | | | | | | |
Net amount recognized in balance sheet | | $ | (167 | ) | | $ | (161 | ) | | $ | (100 | ) | | $ | (90 | ) |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | Pension Benefits | | | Other Benefits | |
| | 2006 | | | 2005 | | | 2006 | | | 2005 | |
|
Change in benefit obligation | | | | | | | | | | | | | | | | |
Benefit obligation as of January 1, | | $ | 575 | | | $ | 550 | | | $ | 122 | | | $ | 115 | |
Service cost | | | 42 | | | | 23 | | | | 5 | | | | 4 | |
Interest cost | | | 44 | | | | 29 | | | | 7 | | | | 7 | |
Members’ contributions | | | 4 | | | | 2 | | | | — | | | | — | |
Benefits paid | | | (30 | ) | | | (26 | ) | | | (8 | ) | | | (7 | ) |
Amendments | | | 1 | | | | 2 | | | | — | | | | (3 | ) |
Transfers/mergers | | | 209 | | | | (3 | ) | | | 1 | | | | — | |
Curtailments/settlements/termination benefits | | | (5 | ) | | | — | | | | — | | | | — | |
Actuarial (gains) losses | | | (10 | ) | | | 40 | | | | 12 | | | | 6 | |
Currency (gains) losses | | | 47 | | | | (42 | ) | | | — | | | | — | |
| | �� | | | | | | | | | | | | | | |
Benefit obligation as of December 31, | | $ | 877 | | | $ | 575 | | | $ | 139 | | | $ | 122 | |
| | | | | | | | | | | | | | | | |
Benefit obligation of funded plans | | $ | 690 | | | $ | 414 | | | $ | — | | | | — | |
Benefit obligation of unfunded plans | | | 187 | | | | 161 | | | | 139 | | | $ | 122 | |
| | | | | | | | | | | | | | | | |
Benefit obligation as of December 31, | | $ | 877 | | | $ | 575 | | | $ | 139 | | | $ | 122 | |
| | | | | | | | | | | | | | | | |
153
Novelis Inc.
NOTES TO THE CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS — (Continued)
| | | | | | | | | | | | | | | | |
| | Pension Benefits | | | Other Benefits | |
| | 2006 | | | 2005 | | | 2006 | | | 2005 | |
|
Change in fair value of plan assets | | | | | | | | | | | | | | | | |
Fair value of plan assets as of January 1, | | $ | 301 | | | $ | 290 | | | $ | — | | | $ | — | |
Actual return on plan assets | | | 41 | | | | 23 | | | | — | | | | — | |
Members’ contributions | | | 4 | | | | 2 | | | | — | | | | — | |
Benefits paid | | | (30 | ) | | | (26 | ) | | | — | | | | — | |
Company contributions | | | 51 | | | | 28 | | | | — | | | | — | |
Transfers/mergers | | | 178 | | | | — | | | | — | | | | — | |
Currency gains (losses) | | | 23 | | | | (16 | ) | | | — | | | | — | |
| | | | | | | | | | | | | | | | |
Fair value of plan assets as of December 31, | | $ | 568 | | | $ | 301 | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | | | | |
Funded Status | | | | | | | | | | | | | | | | |
Assets less than benefit obligation of funded plans | | $ | (122 | ) | | $ | (113 | ) | | | — | | | | — | |
Benefit obligation of unfunded plans | | | (187 | ) | | | (161 | ) | | $ | (139 | ) | | $ | (122 | ) |
| | | | | | | | | | | | | | | | |
Funded Status as of December 31, | | $ | (309 | ) | | $ | (274 | ) | | $ | (139 | ) | | $ | (122 | ) |
| | | | | | | | | | | | | | | | |
Unamortized | | | | | | | | | | | | | | | | |
-actuarial losses | | | N/A | | | $ | 92 | | | | N/A | | | $ | 23 | |
-prior service cost | | | N/A | | | | 15 | | | | N/A | | | | (1 | ) |
Minimum pension liability | | | N/A | | | | (62 | ) | | | N/A | | | | — | |
Intangible assets | | | N/A | | | | 11 | | | | N/A | | | | — | |
Accumulated other comprehensive income | | | N/A | | | | 51 | | | | N/A | | | | — | |
| | | | | | | | | | | | | | | | |
Net amounts recognized in consolidated balance sheets | | | N/A | | | $ | (167 | ) | | | N/A | | | $ | (100 | ) |
| | | | | | | | | | | | | | | | |
Amount recognized for funded plans | | | N/A | | | $ | (44 | ) | | | N/A | | | $ | — | |
Amount recognized for unfunded plans | | | N/A | | | | (123 | ) | | | N/A | | | | (100 | ) |
| | | | | | | | | | | | | | | | |
Net amounts recognized in consolidated balance sheets | | | N/A | | | $ | (167 | ) | | | N/A | | | $ | (100 | ) |
| | | | | | | | | | | | | | | | |
The postretirement assets and liabilities recognized are included in the following captions in our consolidated balance sheets (in millions).
| | | | | | | | | | | | | | | | |
| | Pension Benefits | | | Other Benefits | |
| | As of December 31, | |
| | 2006 | | | 2005 | | | 2006 | | | 2005 | |
|
Other long-term assets — third parties | | $ | 2 | | | | N/A | | | $ | — | | | | N/A | |
Accrued expenses and other current liabilities | | | (18 | ) | | | N/A | | | | (7 | ) | | | N/A | |
Accrued post retirement benefits | | | (293 | ) | | | N/A | | | | (132 | ) | | | N/A | |
| | | | | | | | | | | | | | | | |
Net amounts recognized in consolidated balance sheets | | $ | (309 | ) | | | N/A | | | $ | (139 | ) | | | N/A | |
| | | | | | | | | | | | | | | | |
138
154
Novelis Inc.
Notes to the Consolidated and Combined Financial StatementsNOTES TO THE CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS — (Continued)
The postretirement amounts recognized inAccumulated other comprehensive loss, before tax effects, are presented in the table below (in millions).
For certain pension plans, the
| | | | | | | | | | | | | | | | |
| | Pension Benefits | | | Other Benefits | |
| | As of December 31, | |
| | 2006 | | | 2005 | | | 2006 | | | 2005 | |
|
Net actuarial loss | | $ | 84 | | | | N/A | | | $ | 34 | | | | N/A | |
Prior service cost (credit) | | | 16 | | | | N/A | | | | (3 | ) | | | N/A | |
Net transition obligation | | | — | | | | N/A | | | | 1 | | | | N/A | |
| | | | | | | | | | | | | | | | |
Total postretirement amounts recognized in Accumulated other comprehensive loss | | $ | 100 | | | | N/A | | | $ | 32 | | | | N/A | |
| | | | | | | | | | | | | | | | |
Accumulated Benefit Obligation in Excess of Plan Assets
The projected benefit obligation, (PBO) exceeds the market value of the plans’ assets. For these plans which include unfunded pensionsaccumulated benefit obligation and lump sum indemnities, the PBO and marketfair value of plan assets for the year ended December 31, 2005 were $547 million and $270 million, respectively. For the year ended December 31, 2004, the PBO and market valuepension plans with an accumulated benefit obligation in excess of plan assets were $523 millionas of December 31, 2006 and $260 million, respectively.2005 are presented in the table below (in millions).
| | | | | | | | |
| | As of December 31, | |
| | 2006 | | | 2005 | |
|
Projected benefit obligation | | $ | 599 | | | $ | 541 | |
| | | | | | | | |
Accumulated benefit obligation | | $ | 531 | | | $ | 479 | |
| | | | | | | | |
Fair value of plan assets | | $ | 323 | | | $ | 265 | |
| | | | | | | | |
The total accumulated benefit obligation (ABO) for all pensions plans for the years ended December 31, 2005 and 2004 were $512 million and $488 million, respectively. For certain pension plans, the ABO exceeds the market value of assets. For those plans which include unfunded pensions and lump sum indemnities, the ABO and market value of plan assets for the year ended December 31, 2005 were $479 million and $265 million, respectively. For the year ended December 31, 2004, the ABO and market value of plan assets were $453 million and $252 million, respectively.
Future Benefit Payments
Expected benefit payments for the next ten years are listed in the table below (in millions).
| | | | | | | | | | | | | | | | |
| | Pension
| | Other
| | | Pension
| | Other
| |
| | Benefits | | Benefits | | | Benefits | | Benefits | |
|
2006 | | $ | 25 | | | $ | 7 | | |
2007 | | | 27 | | | | 7 | | | $ | 35 | | | $ | 8 | |
2008 | | | 27 | | | | 7 | | | | 35 | | | | 8 | |
2009 | | | 29 | | | | 7 | | | | 37 | | | | 8 | |
2010 | | | 31 | | | | 7 | | | | 39 | | | | 8 | |
2011 through 2015 | | | 185 | | | | 44 | | |
2011 | | | | 42 | | | | 8 | |
2012 through 2016 | | | | 265 | | | | 40 | |
| | | | | | | | | | |
Total | | $ | 324 | | | $ | 79 | | | $ | 453 | | | $ | 80 | |
| | | | | | | | | | |
139155
Novelis Inc.
Notes to the Consolidated and Combined Financial StatementsNOTES TO THE CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS — (Continued)
Components of Net Periodic Benefit Cost Actuarial Assumptions and Sensitivity Analysis
The components of net periodic benefit cost for the years ended December 31, 2006, 2005 and 2004 are listed in the table below (in millions).
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Pension Benefits | | | Other Benefits | |
| | 2006 | | | 2005 | | | 2004 | | | 2006 | | | 2005 | | | 2004 | |
|
Net periodic benefit cost | | | | | | | | | | | | | | | | | | | | | | | | |
Service cost | | $ | 42 | | | $ | 23 | | | $ | 27 | | | $ | 5 | | | $ | 4 | | | $ | 4 | |
Interest cost | | | 44 | | | | 29 | | | | 37 | | | | 7 | | | | 7 | | | | 6 | |
Expected return on assets | | | (38 | ) | | | (20 | ) | | | (28 | ) | | | — | | | | — | | | | — | |
Amortization | | | | | | | | | | | | | | | | | | | | | | | | |
— actuarial losses | | | 6 | | | | 5 | | | | 4 | | | | 1 | | | | 1 | | | | 1 | |
— prior service cost | | | 2 | | | | 2 | | | | 4 | | | | — | | | | — | | | | — | |
Curtailment/settlement losses | | | (4 | ) | | | — | | | | (19 | ) | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net periodic benefit cost | | | 52 | | | | 39 | | | | 25 | | | | 13 | | | | 12 | | | | 11 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Proportionate share of non-consolidated affiliate’s deferred pension costs, net of $2 million of tax in 2006 | | | 4 | | | | — | | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total net periodic costs recognized | | $ | 56 | | | $ | 39 | | | $ | 25 | | | $ | 13 | | | $ | 12 | | | $ | 11 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
The estimated net loss and prior service cost for the defined benefit pension plans that will be amortized fromAccumulated other comprehensive loss into net periodic benefit cost during 2007 are $5 million and $3 million, respectively. The estimated net loss for the other postretirement plans that will be amortized fromAccumulated other comprehensive lossinto net periodic benefit cost during 2007 is $2 million.
Actuarial Assumptions and Sensitivity Analysis
The weighted average assumptions used to determine benefit obligations for the years ended December 31, 2006, 2005 2004 and 20032004 are listed in the table below (dollars in millions).below.
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Pension Benefits | | | Other Benefits | |
| | 2005 | | | 2004 | | | 2003 | | | 2005 | | | 2004 | | | 2003 | |
|
Components of net periodic benefit cost | | | | | | | | | | | | | | | | | | | | | | | | |
Service cost | | $ | 23 | | | $ | 27 | | | $ | 21 | | | $ | 4 | | | $ | 4 | | | $ | 2 | |
Interest cost | | | 29 | | | | 37 | | | | 33 | | | | 7 | | | | 6 | | | | 5 | |
Expected return on assets | | | (20 | ) | | | (28 | ) | | | (28 | ) | | | — | | | | — | | | | — | |
Amortization | | | | | | | | | | | | | | | | | | | | | | | | |
— actuarial (gains) losses | | | 5 | | | | 4 | | | | 3 | | | | 1 | | | | 1 | | | | — | |
— prior service cost | | | 2 | | | | 4 | | | | 5 | | | | — | | | | — | | | | — | |
Curtailment/settlement losses | | | — | | | | (19 | ) | | | 7 | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 39 | | | $ | 25 | | | $ | 41 | | | $ | 12 | | | $ | 11 | | | $ | 7 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Weighted average assumptions used to determine benefit obligations as of December 31, | | | | | | | | | | | | | | | | | | | | | | | | |
Discount rate | | | 5.1 | % | | | 5.4 | % | | | 5.8 | % | | | 5.7 | % | | | 5.8 | % | | | 6.2 | % |
Average compensation growth | | | 4.0 | % | | | 3.6 | % | | | 3.3 | % | | | 3.9 | % | | | 4.0 | % | | | 3.7 | % |
Weighted average assumptions used to determine net periodic benefit cost | | | | | | | | | | | | | | | | | | | | | | | | |
Discount rate | | | 5.4 | % | | | 5.8 | % | | | 6.2 | % | | | 5.8 | % | | | 6.2 | % | | | 6.5 | % |
Average compensation growth | | | 4.2 | % | | | 3.3 | % | | | 3.0 | % | | | 4.0 | % | | | 3.7 | % | | | 3.9 | % |
Expected return on plan assets | | | 7.4 | % | | | 8.3 | % | | | 8.0 | % | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Pension Benefits | | | Other Benefits | |
| | 2006 | | | 2005 | | | 2004 | | | 2006 | | | 2005 | | | 2004 | |
|
Weighted average assumptions used to determine benefit obligations as of December 31, | | | | | | | | | | | | | | | | | | | | | | | | |
Discount rate | | | 5.4 | % | | | 5.1 | % | | | 5.4 | % | | | 5.7 | % | | | 5.7 | % | | | 5.8 | % |
Average compensation growth | | | 3.8 | % | | | 4.0 | % | | | 3.6 | % | | | 3.9 | % | | | 3.9 | % | | | 4.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
Weighted average assumptions used to determine net periodic benefit cost for the year ended December 31, | | | | | | | | | | | | | | | | | | | | | | | | |
Discount rate | | | 5.1 | % | | | 5.4 | % | | | 5.8 | % | | | 5.7 | % | | | 5.8 | % | | | 6.2 | % |
Average compensation growth | | | 3.9 | % | | | 4.2 | % | | | 3.3 | % | | | 3.9 | % | | | 4.0 | % | | | 3.7 | % |
Expected return on plan assets | | | 7.3 | % | | | 7.4 | % | | | 8.3 | % | | | — | | | | — | | | | — | |
In selecting the appropriate discount rate for each plan, we generally used a country-specific, high-quality corporate bond index, adjusted to reflect the duration of the particular plan. In the U.S., the discount rate was
156
Novelis Inc.
NOTES TO THE CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS — (Continued)
calculated by matching the plan’s projected cash flows with similar duration high-quality corporate bonds to develop a present value, which was then calibrated to develop a single equivalent discount rate.
In estimating the expected return on assets of a pension plan, consideration is given primarily to its target allocation, the current yield on long-term bonds in the country where the plan is established, and the historical risk premium in each relevant country of equity or real estate over long-term bond yields.yields in each relevant country. The approach is consistent with the principle that assets with higher risk provide a greater return over the long term.long-term.
Novelis providesWe provide unfunded health carehealthcare and life insurance benefits to our retired employees in Canada, the U.S. and the United States,Brazil, for which we paid $8 million in 2006 and $7 million in 2005. The assumed health carehealthcare cost trend used for measurement purposes is 9.0%8.0% for 2006,2007, decreasing gradually to 5.0% in 20102013 and remaining at that level thereafter. A change of one percentage point in the assumed health carehealthcare cost trend rates would have the following effects (in millions).
| | | | | | | | | | | | | | | | |
| | Other Benefits | | | Other Benefits | |
| | 1% Increase | | 1% Decrease | | | 1% Increase | | 1% Decrease | |
|
Sensitivity Analysis | | | | | | | | | | | | | | | | |
Effect on service and interest costs | | $ | 1 | | | $ | (1 | ) | | $ | 2 | | | $ | (1 | ) |
Effect on benefit obligation | | $ | 12 | | | $ | (11 | ) | | $ | 11 | | | $ | (10 | ) |
140
Novelis Inc.
Notes to the Consolidated and Combined Financial Statements — (Continued)
In addition, Novelis provideswe provide post-employment benefits, including workers’ compensation, disability, jubilees, early retirement and continuation of benefits (medical, dental, and life insurance) to our former or inactive employees, which are accounted for on anthe accrual basis in accordance with FASB Statement No. 112,Employers’ Accounting for Postemployment Benefits — an amendment of FASB Statements No. 5 and 43.Benefits.Other long-term liabilities includedon our consolidated balance sheets includes $24 million atand $20 million as of December 31, 2006 and 2005, respectively, for these benefits.
| |
16. | Currency Gains and LossesCURRENCY GAINS (LOSSES) |
The following currency gains (losses) are included inOther income — netin ourthe accompanying consolidated and combined statements of incomeoperations (in millions).
| | | | | | | | | | | | |
| | Year Ended December 31, | |
| | 2005 | | | 2004 | | | 2003 | |
|
Net gains (losses) on change in fair market value of currency derivatives | | $ | 96 | | | $ | (23 | ) | | $ | (37 | ) |
Realized currency gains | | | — | | | | — | | | | 1 | |
Net gains (losses) on translation of monetary assets and liabilities | | | 6 | | | | (4 | ) | | | (7 | ) |
| | | | | | | | | | | | |
| | $ | 102 | | | $ | (27 | ) | | $ | (43 | ) |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | Year Ended December 31, | |
| | 2006 | | | 2005 | | | 2004 | |
|
Net gain (loss) on change in fair value of currency derivative instruments | | $ | (24 | ) | | $ | 96 | | | $ | (23 | ) |
Net gain (loss) on translation of monetary assets and liabilities | | | 8 | | | | 6 | | | | (4 | ) |
| | | | | | | | | | | | |
| | $ | (16 | ) | | $ | 102 | | | $ | (27 | ) |
| | | | | | | | | | | | |
The following currency gains (losses) are recorded inAccumulated other comprehensive income (loss).
| | | | | | | | | | | | |
| | Year Ended December 31, | |
| | 2005 | | | 2004 | | | 2003 | |
|
Cumulative translation adjustment — beginning of year | | $ | 120 | | | $ | 90 | | | $ | (12 | ) |
Effect of changes in exchange rates | | | (155 | ) | | | 30 | | | | 103 | |
Realized translation adjustment gains | | | — | | | | — | | | | (1 | ) |
| | | | | | | | | | | | |
Cumulative translation adjustment — end of year | | $ | (35 | ) | | $ | 120 | | | $ | 90 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | Year Ended December 31, | |
| | 2006 | | | 2005 | | | 2004 | |
|
Cumulative currency translation adjustment — beginning of year | | $ | (35 | ) | | $ | 120 | | | $ | 90 | |
Effect of changes in exchange rates | | | 168 | | | | (155 | ) | | | 30 | |
| | | | | | | | | | | | |
Cumulative currency translation adjustment — end of year | | $ | 133 | | | $ | (35 | ) | | $ | 120 | |
| | | | | | | | | | | | |
| |
17. | Financial Instruments and Commodity ContractsFINANCIAL INSTRUMENTS AND COMMODITY CONTRACTS |
In conducting our business, we use various derivative and non-derivative instruments, including forward contracts, to manage the risks arising from fluctuations in exchange rates, interest rates, aluminum prices and other commodityenergy prices. Such instruments are used for risk management purposes only. We may be exposed to losses in
157
Novelis Inc.
NOTES TO THE CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS — (Continued)
the future if the counterparties to the contracts fail to perform. We are satisfied that the risk of such non-performance is remote, due to our monitoring of credit exposures. Alcan is the principal counterparty to our aluminum forward contracts and somecontracts.
During the first quarter of 2006, we implemented hedge accounting for certain of our aluminum options. In 2004, Alcan was also the principal counterpartycross-currency swaps with respect to ourintercompany loans to several European subsidiaries and forward exchange contracts. As described in Note 20 — Related Party Transactions, in 2004of December 31, 2006, we had $712 million of cross-currency swaps (Euro 475 million, British Pound (GBP) 62 million and prior years, Alcan was considered a related party to us. However, subsequent to the spin-off, Alcan is no longer a related party, as defined in FASB Statement No. 57,Related Party Disclosures.Swiss Franc (CHF) 35 million) and $131 million of forward foreign exchange contracts (304 million Brazilian real (BRL)).
ThereThe Euro and GBP cross-currency swaps have been no material changesdesignated as net investment hedges, while the CHF cross-currency swaps and the BRL forward foreign exchange contracts have been designated as cash flow hedges.
For contracts designated as net investment hedges and cash flow hedges, we recognize the change in fair value of the ineffective portion of the hedge as a gain or loss in our current period results of operations. We include the change in fair value of the effective and interest portions of these hedges inAccumulated other comprehensive losswithinShareholders’ equityin the accompanying consolidated balance sheet. During the year ended December 31, 2006, the change in fair value of the effective and interest portions of our net investment hedges was a loss of $53 million. During the year ended December 31, 2006, the change in fair value of the effective portion of our cash flow hedges was a gain of $7 million. Accordingly, $46 million of cumulative pre-tax net losses are included inAccumulated other comprehensive lossas of December 31, 2006.
As of December 31, 2006, the amount of effective net gains and losses expected to be realized during the next twelve months is $6 million. No cash flow hedges were discontinued during the year ended December 31, 2006. The maximum period over which we have hedged our exposure to cash flow variability is through February 2015.
The fair values of our financial instruments and commodity contracts during 2005, except as noted below.of December 31, 2006 were as follows (in millions).
| | | | | | | | | | | | | | |
| | Maturity
| | | | | | | | Net Fair
| |
As of December 31, 2006 | | Dates | | Assets | | | Liabilities | | | Value | |
|
Foreign exchange forward contracts | | 2007 through 2011 | | $ | 12 | | | $ | (20 | ) | | $ | (8 | ) |
Interest rate swaps | | 2007 through 2008 | | | 2 | | | | — | | | | 2 | |
Cross-currency swaps | | 2007 through 2015 | | | 4 | | | | (95 | ) | | | (91 | ) |
Aluminum forward contracts | | 2007 through 2009 | | | 67 | | | | (12 | ) | | | 55 | |
Aluminum options | | 2007 | | | 2 | | | | — | | | | 2 | |
Electricity swap | | 2016 | | | 47 | | | | — | | | | 47 | |
Embedded derivative instruments | | 2007 | | | 16 | | | | — | | | | 16 | |
Natural gas swaps | | 2007 | | | — | | | | (2 | ) | | | (2 | ) |
| | | | | | | | | | | | | | |
Total fair value | | | | | 150 | | | | (129 | ) | | | 21 | |
Less: current portion(A) | | | | | 106 | | | | (42 | ) | | | 64 | |
| | | | | | | | | | | | | | |
Noncurrent portion(A) | | | | $ | 44 | | | $ | (87 | ) | | $ | (43 | ) |
| | | | | | | | | | | | | | |
| | |
(A) | • | DuringThe amounts of the first quartercurrent and noncurrent portions of 2005, we entered into U.S. dollar interest rate swaps totaling $310 million with respect to the Term Loan Bfair values under assets are each presented in the U.S.accompanying consolidated balance sheets. The amounts of the current and $766 millionnoncurrent portions of cross-currency interest rate swaps (Euro 475 million, GBP 62 million, CHF 35 million) with respect to intercompany loans to several European subsidiaries. |
|
| • | Duringfair values under liabilities are included inAccrued expenses and other current liabilitiesandOther long-term liabilities, respectively, in the second quarter of 2005, we monetized the initial cross-currency interest rate swaps and replaced them with new cross-currency interest rate swaps maturing in 2015, totaling $712 million as of December 31, 2005 (Euro 475 million, GBP 62 million, CHF 35 million). We realized a gain of $45 million related to this transaction.accompanying consolidated balance sheets. |
141158
Novelis Inc.
Notes to the Consolidated and Combined Financial StatementsNOTES TO THE CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS — (Continued)
| | |
| • | During the third quarter of 2005, we entered into cross-currency principal only swaps (Euro 89 million). The U.S. notional amount of these swaps was $108 million as of December 31, 2005. These swaps mature in 2006 and are designated as cash flow hedging instruments. |
The fair values of our financial instruments and commodity contracts as of December 31, 2005 were as follows (in millions):.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | Net Fair
| | | Maturity
| | | | | | Net Fair
| |
As of December 31, 2005 | | Maturity Dates | | Assets | | Liabilities | | Value | | | Dates | | Assets | | Liabilities | | Value | |
|
Forward foreign exchange contracts | | 2006 through 2011 | | $ | 15 | | | $ | (9 | ) | | $ | 6 | | |
Foreign exchange forward contracts | | | 2006 through 2011 | | $ | 15 | | | $ | (9 | ) | | $ | 6 | |
Interest rate swaps | | 2006 through 2008 | | | 5 | | | | — | | | | 5 | | | 2006 through 2008 | | | 5 | | | | — | | | | 5 | |
Cross-currency interest swaps | | 2006 through 2015 | | | — | | | | (24 | ) | | | (24 | ) | |
Cross-currency swaps | | | 2006 through 2015 | | | — | | | | (24 | ) | | | (24 | ) |
Aluminum forward contracts | | 2006 through 2009 | | | 87 | | | | (7 | ) | | | 80 | | | 2006 through 2009 | | | 87 | | | | (7 | ) | | | 80 | |
Aluminum call options | | Matures in 2006 | | | 109 | | | | — | | | | 109 | | |
Fixed price electricity contract | | Matures in 2016 | | | 68 | | | | — | | | | 68 | | |
Aluminum options | | | 2006 | | | 109 | | | | — | | | | 109 | |
Electricity swap | | | 2016 | | | 68 | | | | — | | | | 68 | |
| | | | | | | | | | | | | | |
Total fair value | | | | | | 284 | | | | (40 | ) | | | 244 | |
Less: current portion(A) | | | | | | 194 | | | | (22 | ) | | | 172 | |
| | | | | 284 | | | | (40 | ) | | | 244 | | | | | | | | |
Less: current portion(A) | | | | | 194 | | | | (22 | ) | | | 172 | | |
Noncurrent portion(A) | | | | | $ | 90 | | | $ | (18 | ) | | $ | 72 | |
| | | | | | | | | | | | | | |
| | | | $ | 90 | | | $ | (18 | ) | | $ | 72 | | |
| | | | | | | | |
| | |
(A) | | Current portion as presented on our consolidated balance sheet. Remaining long-termThe amounts of the current and noncurrent portions of fair values under assets are each presented in the accompanying consolidated balance sheets. The amounts of the current and noncurrent portions of fair values under liabilities are included inOther long-term assetsAccrued expenses and other current liabilitiesandOther long-term liabilitieson our, respectively, in the accompanying consolidated balance sheet.sheets. |
The fair values of our financial instruments and commodity contracts as of December 31, 2004 were as follows (in millions):
| | | | | | | | | | | | | | |
| | | | | | | | | | Net Fair
| |
As of December 31, 2004 | | Maturity Dates | | Assets | | | Liabilities | | | Value | |
|
Forward foreign exchange contracts | | 2005 through 2009 | | $ | 3 | | | $ | (60 | ) | | $ | (57 | ) |
Interest rate swaps | | Matures in 2007 | | | — | | | | (1 | ) | | | (1 | ) |
Cross-currency interest swaps | | 2005 through 2007 | | | — | | | | (8 | ) | | | (8 | ) |
Aluminum forward contracts | | 2005 through 2006 | | | 112 | | | | (8 | ) | | | 104 | |
Aluminum call options | | Matures in 2005 | | | 26 | | | | — | | | | 26 | |
Embedded derivatives | | Matures in 2005 | | | — | | | | (13 | ) | | | (13 | ) |
Natural gas futures | | Matures in 2005 | | | — | | | | (1 | ) | | | (1 | ) |
Fixed price electricity contract | | Matures in 2016 | | | 18 | | | | — | | | | 18 | |
| | | | | | | | | | | | | | |
| | | | | 159 | | | | (91 | ) | | | 68 | |
Less: current portion(A) | | | | | 156 | | | | (91 | ) | | | 65 | |
| | | | | | | | | | | | | | |
| | | | $ | 3 | | | $ | — | | | $ | 3 | |
| | | | | | | | | | | | | | |
| | |
(A) | | Current portion as presented on our combined balance sheet. Remaining long-term portions of fair values are included inOther long-term assetsandOther long-term liabilitieson our combined balance sheet. |
142
Novelis Inc.
Notes to the Consolidated and Combined Financial Statements — (Continued)
| |
18. | Income TaxesINCOME TAXES |
We provide for income taxes using the liability method in accordance with FASB Statement No. 109,Accounting for Income Taxes.
We are subject to Canadian and United States federal, state, and local income taxes as well as other foreign income taxes. The domestic (Canada) and foreign components of ourIncome (loss) before provision (benefit) for taxes on income (loss), minority interests’ share and cumulative effect of accounting change(and after removing ourEquity in net income of non-consolidated affiliates) are as follows (in millions).
| | | | | | | | | | | | |
| | Year Ended December 31, | |
| | 2005 | | | 2004 | | | 2003 | |
|
Domestic (Canada) | | $ | 28 | | | $ | (25 | ) | | $ | (24 | ) |
Foreign (all other countries) | | | 190 | | | | 250 | | | | 228 | |
| | | | | | | | | | | | |
| | $ | 218 | | | $ | 225 | | | $ | 204 | |
| | | | | | | | | | | | |
The significant components of theProvision for taxes on incomeare as follows (in millions):
| | | | | | | | | | | | |
| | Year Ended December 31, | |
| | 2005 | | | 2004 | | | 2003 | |
|
Current income taxes | | | | | | | | | | | | |
Canada | | $ | 11 | | | $ | (11 | ) | | $ | (11 | ) |
Foreign (all other countries) | | | 66 | | | | 80 | | | | 81 | |
| | | | | | | | | | | | |
Total current | | | 77 | | | | 69 | | | | 70 | |
| | | | | | | | | | | | |
Deferred income taxes | | | | | | | | | | | | |
Canada | | | (15 | ) | | | 2 | | | | 4 | |
Foreign (all other countries) | | | 45 | | | | 95 | | | | (24 | ) |
| | | | | | | | | | | | |
Total deferred | | | 30 | | | | 97 | | | | (20 | ) |
| | | | | | | | | | | | |
Total provision for taxes on income | | $ | 107 | | | $ | 166 | | | $ | 50 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | Year Ended December 31, | |
| | 2006 | | | 2005 | | | 2004 | |
|
Domestic (Canada) | | $ | (100 | ) | | $ | (40 | ) | | $ | (25 | ) |
Foreign (all other countries) | | | (194 | ) | | | 258 | | | | 250 | |
| | | | | | | | | | | | |
Income (loss) before provision (benefit) for taxes on income (loss), minority interests’ share, cumulative effect of accounting change and equity in net income of non-consolidated affiliates | | $ | (294 | ) | | $ | 218 | | | $ | 225 | |
| | | | | | | | | | | | |
143159
Novelis Inc.
Notes to the Consolidated and Combined Financial StatementsNOTES TO THE CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS — (Continued)
The significant components of theProvision (benefit) for taxes on income (loss)are as follows (in millions).
| | | | | | | | | | | | |
| | Year Ended December 31, | |
| | 2006 | | | 2005 | | | 2004 | |
|
Current income taxes (benefit) | | | | | | | | | | | | |
Canada | | $ | 1 | | | $ | 11 | | | $ | (11 | ) |
Foreign (all other countries) | | | 72 | | | | 66 | | | | 80 | |
| | | | | | | | | | | | |
Total current | | | 73 | | | | 77 | | | | 69 | |
| | | | | | | | | | | | |
Deferred income taxes (benefit) | | | | | | | | | | | | |
Canada | | | 4 | | | | (15 | ) | | | 2 | |
Foreign (all other countries) | | | (81 | ) | | | 45 | | | | 95 | |
| | | | | | | | | | | | |
Total deferred | | | (77 | ) | | | 30 | | | | 97 | |
| | | | | | | | | | | | |
Total provision (benefit) for taxes on income (loss) | | $ | (4 | ) | | $ | 107 | | | $ | 166 | |
| | | | | | | | | | | | |
A reconciliation of the Canadian statutory income tax rates to our effective income tax rates for the periodsyears presented is as follows ($ in(in millions):.
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | | Year Ended December 31, | |
| | 2005 | | 2004 | | 2003 | | | 2006 | | 2005 | | 2004 | |
|
Canadian Statutory tax rate | | | 33.0 | % | | | 33.0 | % | | | 32.0 | % | | | 33.0 | % | | | 33.0 | % | | | 33.0 | % |
| | | | | | | | | | | | | | |
Income taxes at the Canadian statutory rate | | $ | 72 | | | $ | 74 | | | $ | 66 | | |
Income taxes (benefit) at the Canadian statutory rate | | | $ | (97 | ) | | $ | 72 | | | $ | 74 | |
Increase (decrease) in tax rate resulting from: | | | | | | | | | | | | | | | | | | | | | | | | |
Exchange translation items | | | 23 | | | | 13 | | | | 1 | | | | 15 | | | | 23 | | | | 13 | |
Exchange revaluation of deferred income taxes | | | 1 | | | | 2 | | | | 4 | | |
Change in valuation allowance | | | 5 | | | | 42 | | | | (14 | ) | |
Exchange remeasurement of deferred income taxes | | | | 3 | | | | 1 | | | | 2 | |
Change in valuation allowances | | | | 71 | | | | 5 | | | | 42 | |
Tax credits and other allowances | | | (2 | ) | | | (3 | ) | | | (3 | ) | | | — | | | | (2 | ) | | | (3 | ) |
Expense/income items with no tax effect | | | 7 | | | | (2 | ) | | | (4 | ) | |
Expense/income items with no tax effect — net | | | | 13 | | | | 7 | | | | (2 | ) |
Tax rate differences on foreign earnings | | | 5 | | | | 10 | | | | 9 | | | | (15 | ) | | | 5 | | | | 10 | |
Prior years’ tax adjustments | | | (10 | ) | | | 5 | | | | (13 | ) | |
Withholding tax in connection with the spin-off | | | — | | | | 21 | | | | — | | | | — | | | | — | | | | 21 | |
Other — net | | | 6 | | | | 4 | | | | 4 | | | | 6 | | | | (4 | ) | | | 9 | |
| | | | | | | | | | | | | | |
Provision for taxes on income | | $ | 107 | | | $ | 166 | | | $ | 50 | | |
Provision (benefit) for taxes on income (loss) | | | $ | (4 | ) | | $ | 107 | | | $ | 166 | |
| | | | | | | | | | | | | | |
Effective tax rate | | | 49.1 | % | | | 73.8 | % | | | 24.5 | % | | | 1.4 | % | | | 49.1 | % | | | 73.8 | % |
| | | | | | | | | | | | | | |
For the year ended December 31, 2006, our effective tax rate is less than the benefit at the Canadian statutory rate due primarily to (1) increases in valuation allowances primarily related to tax losses in certain jurisdictions where we believe it is more likely than not that we will not be able to utilize those losses and (2) pre-tax foreign currency gains or losses with no tax effect plus the tax effect of U.S. dollar denominated currency gains or losses with no pre-tax effect, collectively shown above as exchange translation items. These are also the predominant reconciling items between our effective tax rate and the Canadian statutory rate in the previous years.
Deferred income taxes recognize the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the carrying amounts used for income tax
160
Novelis Inc.
NOTES TO THE CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS — (Continued)
purposes, and the impact of available net operating loss (NOL) and tax credit carryforwards. These items are stated at the enacted tax rates that are expected to be in effect when taxes are actually paid or recovered.
144
Novelis Inc.
Notes to the Consolidated and Combined Financial Statements — (Continued)
TheOur deferred income tax assets and deferred income tax liabilities are as follows (in millions):.
| | | | | | | | | | | | | | | | |
| | As of December 31, | | | As of December 31, | |
| | 2005 | | 2004 | | | 2006 | | 2005 | |
|
Deferred income tax assets: | | | | | | | | | |
Deferred income tax assets | | | | | | | | | |
Provisions not currently deductible for tax purposes | | $ | 183 | | | $ | 100 | | | $ | 219 | | | $ | 183 | |
Tax losses/benefit carryforwards | | | 101 | | | | 174 | | | | 238 | | | | 101 | |
Other assets | | | 20 | | | | 41 | | | | 46 | | | | 20 | |
| | | | | | | | | | |
Total deferred income tax assets | | | 304 | | | | 315 | | | | 503 | | | | 304 | |
Less: valuation allowance | | | (73 | ) | | | (163 | ) | | | (123 | ) | | | (73 | ) |
| | | | | | | | | | |
Net deferred income tax assets | | $ | 231 | | | $ | 152 | | | $ | 380 | | | $ | 231 | |
| | | | | | | | | | |
Deferred income tax liabilities: | | | | | | | | | |
Deferred income tax liabilities | | | | | | | | | |
Property, plant and equipment | | $ | 239 | | | $ | 255 | | | $ | 223 | | | $ | 239 | |
Inventory valuation | | | 48 | | | | 42 | | | | 103 | | | | 48 | |
Other liabilities | | | 127 | | | | 93 | | | | 111 | | | | 127 | |
| | | | | | | | | | |
Total deferred income tax liabilities | | $ | 414 | | | $ | 390 | | | $ | 437 | | | $ | 414 | |
| | | | | | | | | | |
Total Deferred income tax liabilities | | $ | 414 | | | | 390 | | |
Total deferred income tax liabilities | | | $ | 437 | | | $ | 414 | |
Less: Net deferred income tax assets | | | 231 | | | | 152 | | | | 380 | | | | 231 | |
| | | | | | | | | | |
Net deferred income tax liabilities | | $ | 183 | | | $ | 238 | | | $ | 57 | | | $ | 183 | |
| | | | | | | | | | |
FASB Statement No. 109 requires that we reduce our deferred income tax assets by a valuation allowance if, based on the weight of the available evidence, it is more likely than not that all or a portion of a deferred tax asset will not be realized. After consideration of all evidence, both positive and negative, management concluded that it is more likely than not that we will not realize a portion of our deferred tax assets and that valuation allowances of $73$123 million and $163$73 million were necessary as of December 31, 2006 and 2005, respectively.
As of December 31, 2006, we had net operating loss carryforwards of approximately $200 million (tax effected) and 2004,tax credit carryforwards of $38 million, which will be available to offset future taxable income and tax liabilities, respectively. The carryforwards begin expiring in 2007 with some amounts being carried forward indefinitely. As of December 31, 2006, valuation allowances of $88 million and $21 million had been recorded against net operating loss carryforwards and tax credit carryforwards, respectively, where it appeared more likely than not that such benefits will not be realized. The net operating loss carryforwards are predominantly in the U.S., U.K., Canada, France, and Italy. For the year ended December 31, 2006, the benefit for taxes on loss excluded $19 million of tax benefits which were recorded as a spin-off and post-closing adjustment toAdditional paid-in capital.
As of December 31, 2005, we havehad net operating loss carryforwards of approximately $69 million (tax effected) and tax credit carryforwards of $32 million, which will be available to offset future taxable income and tax liabilities, respectively. The carryforwards expire startingbegan expiring in 2006 with some amounts being carried forward indefinitely. ValuationAs of December 31, 2005, valuation allowances of $50 million and $12 million havehad been recorded against net operating loss carryforwards and tax credit carryforwards, respectively, where it is appeared
161
Novelis Inc.
NOTES TO THE CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS — (Continued)
more likely than not that such benefits will not be realized. The net operating loss carryforwards arewere predominantly in the United Kingdom,U.K., Canada France, and Italy. For the year ended December 31, 2005, the provision for taxes on income excluded $8.7 million of tax benefits which was recorded as a purchase price adjustment reducing goodwill.
The 2004Our net operating losses and 2003 historical combined financial statements were prepared on a carve-out basis. Under this carve-out basis, we calculated our income taxes for the years ended December 31, 2004tax credit carryforwards are not currently subject to limitation. Certain net operating losses and 2003 astax credit carryforwards could be subject to limitation if all of our businesses had been separate tax paying legal entities, each filing a separate income tax return in its local tax jurisdiction. Because of differences between (i) the carve-out basis for the years 2004 and 2003 and (ii) the actual post-spin legal entity basis for 2005, the deferred income tax assets and respective valuation allowances were decreased by $53 million and $106 million, respectively.an ownership change occurred.
We have undistributed earnings in our foreign subsidiaries. For those subsidiaries where the earnings are considered to be permanently reinvested, no provision for Canadian income taxes has been provided. Upon repatriation of those earnings, in the form of dividends or otherwise, the Companywe would be subject to both Canadian income taxes (subject to an adjustment for foreign taxes paid) and withholding taxes payable to the
145
Novelis Inc.
Notes to the Consolidated and Combined Financial Statements — (Continued)
various foreign countries. For those subsidiaries where the earnings are not considered permanently reinvested, taxes have been provided as required. The determination of the unrecorded deferred income tax liability for temporary differences related to investments in foreign subsidiaries and foreign corporate joint ventures that are considered to be permanently reinvested is not considered practicable.
We believe that it is more likely than not that the remaining deferred income tax assets as shown above will be realized when future taxable income is generated through the reversal of existing temporary differences and income that is expected to be generated by businesses that have long-term contracts or a history of generating taxable income.
The Company and certain of its subsidiaries are under examination by the relevant taxing authorities for various tax years. We regularly assess the potential outcome of these examinations in each of the taxing jurisdictions when determining the adequacy of the provision for taxes on income. Tax reserves have been established, which we believe to be adequate in relation to the potential for additional assessments. Once established, reserves are adjusted only when there is more information available or when an event occurs necessitating a change to the reserves. While we believe that the amount of the tax estimates is reasonable, it is possible that the ultimate outcome of current or future examinations may exceed current reserves in amounts that could be material but cannot be estimated as of December 31, 2005.2006.
We have recorded an income tax payable of $42 million as of December 31, 2006 and $55 million as of December 31, 2005, and have made income tax payments to taxing authorities of $68 and $39 million during 2005.2006 and 2005, respectively.
162
Novelis Inc.
NOTES TO THE CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS — (Continued)
| |
19. | Earnings Per ShareEARNINGS (LOSS) PER SHARE |
The following table shows the information used in the calculation of basic and diluted earnings (loss) per share (in millions, except number of shares and per share amounts).
| | | | | | | | | | | | |
| | Year Ended December 31, | |
| | 2005 | | | 2004 | | | 2003 | |
|
Numerator: | | | | | | | | | | | | |
Net income before cumulative effect of accounting change | | $ | 96 | | | $ | 55 | | | $ | 157 | |
Cumulative effect of accounting change — net of tax | | | (6 | ) | | | — | | | | — | |
| | | | | | | | | | | | |
Net income | | $ | 90 | | | $ | 55 | | | $ | 157 | |
| | | | | | | | | | | | |
Denominator: | | | | | | | | | | | | |
Weighted average number of outstanding shares | | | 73.99 | | | | 73.99 | | | | 73.99 | |
Effect of dilutive shares | | | .24 | | | | .44 | | | | .44 | |
| | | | | | | | | | | | |
Adjusted number of outstanding shares | | | 74.23 | | | | 74.43 | | | | 74.43 | |
| | | | | | | | | | | | |
Earnings per share: | | | | | | | | | | | | |
Basic — | | | | | | | | | | | | |
Net income before cumulative effect of accounting change | | $ | 1.29 | | | $ | 0.74 | | | $ | 2.12 | |
Cumulative effect of accounting change — net of tax | | | (0.08 | ) | | | — | | | | — | |
| | | | | | | | | | | | |
Net income | | $ | 1.21 | | | $ | 0.74 | | | $ | 2.12 | |
| | | | | | | | | | | | |
Diluted — | | | | | | | | | | | | |
Net income before cumulative effect of accounting change | | $ | 1.29 | | | $ | 0.74 | | | $ | 2.11 | |
Cumulative effect of accounting change — net of tax | | | (0.08 | ) | | | — | | | | — | |
| | | | | | | | | | | | |
Net income | | $ | 1.21 | | | $ | 0.74 | | | $ | 2.11 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | Year Ended December 31, | |
| | 2006 | | | 2005 | | | 2004 | |
|
Numerator: | | | | | | | | | | | | |
Net income (loss) before cumulative effect of accounting change | | $ | (275 | ) | | $ | 96 | | | $ | 55 | |
Cumulative effect of accounting change — net of tax | | | — | | | | (6 | ) | | | — | |
| | | | | | | | | | | | |
Net income (loss) | | $ | (275 | ) | | $ | 90 | | | $ | 55 | |
| | | | | | | | | | | | |
Denominator: | | | | | | | | | | | | |
Weighted average number of outstanding shares — basic | | | 74,013,619 | | | | 73,996,752 | | | | 73,988,932 | |
Effect of dilutive shares | | | — | | | | 236,856 | | | | 443,351 | |
| | | | | | | | | | | | |
Weighted average number of outstanding shares — diluted | | | 74,013,619 | | | | 74,233,608 | | | | 74,432,283 | |
| | | | | | | | | | | | |
Earnings (loss) per share: | | | | | | | | | | | | |
Basic — | | | | | | | | | | | | |
Net income (loss) before cumulative effect of accounting change | | $ | (3.71 | ) | | $ | 1.29 | | | $ | 0.74 | |
Cumulative effect of accounting change — net of tax | | | — | | | | (0.08 | ) | | | — | |
| | | | | | | | | | | | |
Net income (loss) | | $ | (3.71 | ) | | $ | 1.21 | | | $ | 0.74 | |
| | | | | | | | | | | | |
Diluted — | | | | | | | | | | | | |
Net income (loss) before cumulative effect of accounting change | | $ | (3.71 | ) | | $ | 1.29 | | | $ | 0.74 | |
Cumulative effect of accounting change — net of tax | | | — | | | | (0.08 | ) | | | — | |
| | | | | | | | | | | | |
Net income (loss) | | $ | (3.71 | ) | | $ | 1.21 | | | $ | 0.74 | |
| | | | | | | | | | | | |
146
Novelis Inc.
Notes to the Consolidated and Combined Financial Statements — (Continued)
We use the treasury stock method to calculate the dilutive effect of stock options and other common stock equivalents (dilutive(potentially dilutive shares). Diluted earnings per share reflectsrecognizes the dilution that would occur if securities or other contracts to issue common stock were exercised or converted into common stock. These potentialpotentially dilutive shares include dilutive stock options, DDSUs and Director Deferred Share Units (DDSUs)Recognition Awards.
Options to purchase an aggregate of 3,372,777 of our common shares were held by our employees as of December 31, 2006. For the year ended December 31, 2006, 3,361,676 of these options are potentially dilutive at an average exercise price of $22.76. Additionally, there were 112,039 DDSUs and 145,800 Recognition Awards that were considered potentially dilutive shares for the 2006 year (see Note 14 — Share-Based Compensation). A total of 11,101 anti-dilutive options were held by our employees as of December 31, 2006 and were not included in our calculation of diluted loss per share because their exercise prices were greater than our average stock price during the year. The potentially dilutive shares described above were not included in our calculation of diluted loss per share for the year ended December 31, 2006 as they would be anti-dilutive due to our net loss reported for the 2006 year.
Options to purchase an aggregate of 2,704,790 of our common shares were held by our employees as of December 31, 2005. For the year ended December 31, 2005,Of these, 1,363,647 of these options were dilutive,to purchase common shares at an average exercise price of $19.44. These
163
Novelis Inc.
NOTES TO THE CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS — (Continued)
$19.44 were dilutive stock options are equivalent to 179,805 of our common shares for the year ended December 31, 2005. Additionally, there were 57,051 DDSUs that were included asconsidered dilutive shares for the 2005 year ended December 31, 2005 (see Note 14 — Stock-BasedShare Based Compensation). The numberA total of 1,341,143 anti-dilutive options were held by our employees as of December 31, 2005 was 1,341,143.and were not included in our calculation of diluted loss per share because their exercise prices were greater than our average stock price during the year.
For the yearsyear ended December 31, 2004, and 2003, the number of shares used to compute basic earnings per share was 73,988,932, based on the number of Novelis common shares outstanding on our spin-off date of January 6, 2005. For diluted earnings per share for 2004 and 2003 the effect of dilutive stock options was calculated based on an aggregate of 1,356,735 Alcan common shares held by Novelis employees. Of these, 685,285 options to purchase Alcan common shares at an average exercise price of $29.96 were dilutive for the yearsyear ended December 31, 2004 and 2003. These dilutive stock options were equivalent to 443,351 of Novelis common shares.2004. The number of anti-dilutive Alcan options attributable to Novelis employees as of December 31, 2004 and 2003 was 671,450.
| |
20. | Related Party Transactions |
In 2004 and prior, Alcan was considered a related party to Novelis. However, subsequent to the spin-off, Alcan is no longer a related party as defined in FASB Statement No. 57, and accordingly, all transactions between Novelis and Alcan subsequent to the spin-off are third party transactions. The following table describes the nature and amounts of transactions that we had with related parties during the years ended December 31, 2005, 2004 and 2003 (in millions).
| | | | | | | | | | | | |
| | Year Ended December 31, | |
| | 2005 | | | 2004 | | | 2003 | |
|
Net sales | | | | | | | | | | | | |
Alcan(A) | | $ | — | | | $ | 450 | | | $ | 472 | |
| | | | | | | | | | | | |
Cost of sales | | | | | | | | | | | | |
Alcan(A) | | $ | — | | | $ | 403 | | | $ | 436 | |
| | | | | | | | | | | | |
Research and development expenses | | | | | | | | | | | | |
Alcan(B) | | $ | — | | | $ | 38 | | | $ | 44 | |
| | | | | | | | | | | | |
Interest expense and amortization of debt issuance costs — net | | | | | | | | | | | | |
Alcan(C) | | $ | — | | | $ | 33 | | | $ | 19 | |
| | | | | | | | | | | | |
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Novelis Inc.
Notes to the Consolidated and Combined Financial Statements — (Continued)
| | | | | | | | | | | | |
| | Year Ended December 31, | |
| | 2005 | | | 2004 | | | 2003 | |
|
Other (income) expense — net | | | | | | | | | | | | |
Alcan: | | | | | | | | | | | | |
Service fee income(D) | | $ | — | | | $ | (42 | ) | | $ | (39 | ) |
Service fee expense(E) | | | — | | | | 25 | | | | 26 | |
Interest income(F) | | | — | | | | (22 | ) | | | (4 | ) |
Net gains on change in fair market value of derivatives(G) | | | — | | | | (23 | ) | | | (68 | ) |
Other | | | — | | | | 8 | | | | 2 | |
| | | | | | | | | | | | |
Total Other income — net, with Alcan | | | — | | | | (54 | ) | | | (83 | ) |
Aluminium Norf GmbH: | | | | | | | | | | | | |
Interest expense (income) | | | 1 | | | | (2 | ) | | | (1 | ) |
| | | | | | | | | | | | |
Total Other income — net, with all related parties | | $ | 1 | | | $ | (56 | ) | | $ | (84 | ) |
| | | | | | | | | | | | |
Purchases of inventory, tolling services and electricity | | | | | | | | | | | | |
Aluminium Norf GmbH(H) | | $ | 205 | | | $ | 203 | | | $ | 187 | |
Alcan(I) | | | — | | | | 1,739 | | | | 1,732 | |
Consorcio Candonga(J) | | | 8 | | | | 2 | | | | — | |
Petrocoque S.A. Industria e Comercio(K) | | | 2 | | | | 2 | | | | 2 | |
| | | | | | | | | | | | |
Total purchases from related parties | | $ | 215 | | | $ | 1,946 | | | $ | 1,921 | |
| | | | | | | | | | | | |
| | |
(A) | | We purchase from and sell materials to Alcan in the ordinary course of business. |
|
(B) | | These expenses represent an allocation of research and development expenses incurred by Alcan on behalf of Novelis. |
|
(C) | | As discussed further below and in Note 10 — Long-Term Debt, we had various short-term borrowings and long-term debt payable to Alcan where interest was charged on both a fixed and a floating rate basis. |
|
(D) | | Service fee income arose from sales of research and development and other corporate services to Alcan. |
|
(E) | | Service fee expense arose from the purchase of corporate services from Alcan. |
|
(F) | | Represents interest income earned on outstanding advances and loans to Alcan. |
|
(G) | | Alcan was the counterparty to most of our metal and currency derivatives. |
|
(H) | | Aluminium Norf GmbH provides tolling services to us. |
|
(I) | | Alcan is our primary third party supplier of prime and sheet ingot. Refer to Note 21 — Commitments and Contingencies. |
|
(J) | | Consorcio Candonga supplies approximately 25% of Novelis South America’s total electricity requirements. |
|
(K) | | Petrocoque S.A. Industria e Comercio supplies calcined-coke to our South America smelting operations. |
148
Novelis Inc.
Notes to the Consolidated and Combined Financial Statements — (Continued)
The table below describes the nature of and the period-end balances that we have with related parties.
| | | | | | | | |
| | As of December 31, | |
| | 2005 | | | 2004 | |
|
Customer accounts receivable | | | | | | | | |
Alcan(A) | | $ | — | | | $ | 87 | |
| | | | | | | | |
Other receivables | | | | | | | | |
Alcan(B) | | $ | — | | | $ | 666 | |
Aluminium Norf GmbH(C) | | | 33 | | | | 45 | |
| | | | | | | | |
| | $ | 33 | | | $ | 711 | |
| | | | | | | | |
Long-term receivables | | | | | | | | |
Alcan | | $ | — | | | $ | 2 | |
Aluminium Norf GmbH(C) | | | 71 | | | | 102 | |
| | | | | | | | |
| | $ | 71 | | | $ | 104 | |
| | | | | | | | |
Current portion of long-term debt | | | | | | | | |
Alcan(D) | | $ | — | | | $ | 290 | |
| | | | | | | | |
Short-term borrowings | | | | | | | | |
Alcan(E) | | $ | — | | | $ | 312 | |
| | | | | | | | |
Accounts payable | | | | | | | | |
Alcan(A) | | $ | — | | | $ | 297 | |
Aluminium Norf GmbH(A) | | | 38 | | | | 45 | |
| | | | | | | | |
| | $ | 38 | | | $ | 342 | |
| | | | | | | | |
Long-term debt — net of current portion | | | | | | | | |
Alcan(D) | | $ | — | | | $ | 2,307 | |
| | | | | | | | |
| | |
(A) | | We purchase from and sell materials to Alcan and we purchase services from an investee accounted for under the equity method, in the ordinary course of business. |
|
(B) | | The balance as of December 31, 2004 includes various short-term floating rate notes totaling Euro 266 million and $55 million maturing within one year that were settled by Alcan in 2005 as part of our spin-off. |
|
(C) | | The balances represent current and non-current portions of a loan to an investee accounted for under the equity method. |
|
(D) | | We had various loans payable to Alcan as of December 31, 2004 as described in Note 10 — Long-Term Debt that were repaid in the first quarter of 2005. |
|
(E) | | The balance as of December 31, 2004 is comprised of loans due to Alcan in various currencies including Euro 193 million and GBP 20 million that were repaid in 2005 as part of our spin-off. |
| |
21. | Commitments and ContingenciesCOMMITMENTS AND CONTINGENCIES |
As described in Note 208 — Investment in and Advances to Non-consolidated Affiliates and Related Party Transactions, Alcan is our primary supplier of prime and sheet ingot. Purchases from Alcan for the years ended December 31, 2006, 2005 and 2004 represented 42%, 40% and 2003 represented 40%, 43% and 42%, respectively, of our total combined prime and sheet ingot purchases.
149
Novelis Inc.
Notes to the Consolidated and Combined Financial Statements — (Continued)
In addition to the assumed liabilities and contingencies described below, we may, in the future, be involved in, or subject to, other disputes, claims and proceedings that arise in the ordinary course of our business, including some that we assert against others. Where appropriate, we have established reserves in respect of these matters (or, if required, we have posted cash guarantees). While the ultimate resolution of, and liability and costs related to, these matters cannot be determined with certainty due to the considerable uncertainties that exist, we do not believe that any of these pending actions, individually or in the aggregate, will materially impair our operations or materially adversely affect our financial position, results of operations or liquidity. Although there is a possibility that liabilities may arise in other instances for which no accruals have been made, or that actual losses may exceed our estimated liabilities for which we have provided accruals, we do not believe that it is probable that any associated losses or incremental losses would be sufficient to materially impair our operations or materially adversely affect our financial position, results of operations or liquidity for any particular reporting period, absent unusual circumstances.period.
Separation from Alcan
In connection with our separation from Alcan, we assumed a number of liabilities, commitments and contingencies mainly related to our historical rolled products operations, including liabilities in respect of legal claims and environmental matters. As a result, we may be required to indemnify Alcan for claims successfully brought against Alcan or for the defense of, or defend, legal actions that arise from time to time in the normal course of our rolled products business including commercialsuch as environmental, health and contract disputes, employee-related claimssafety, product liability, employee, tax, personal injury, contractual and tax disputesother (including several disputes with Brazil’s Ministry of Treasury regarding various forms of taxes and social security contributions, some of which are described below). In addition, we are involved in various legal actions that have arisen after our separation from Alcan in the normal course of our business.
Legal Proceedings
Reynolds Boat Case. As previously disclosed, we and Alcan Inc. were defendants in a case in the United States District Court for the Western District of Washington, in Tacoma, Washington, case number C04-0175RJB.
164
Novelis Inc.
NOTES TO THE CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS — (Continued)
Plaintiffs were Reynolds Metals Company, Alcoa, Inc. and National Union Fire Insurance Company of Pittsburgh Pennsylvania.PA. The case was tried before a jury beginning on May 1, 2006 under implied warranty theories, based on allegations that from 1998 to 2001 we and Alcan sold certain aluminum products that were ultimately used for marine applications and were unsuitable for such applications. The jury reached a verdict on May 22, 2006 against us and Alcan for approximately $60 million, and the court later awarded Reynolds and Alcoa approximately $16 million in prejudgment interest and court costs.
The case was settled during July 2006 as among us, Alcan, Reynolds, Alcoa and their insurers for $71 million. We contributed approximately $1 million toward the settlement, and the remaining $70 million was funded by our insurers. Although the settlement was substantially funded by our insurance carriers, certain of them have reserved the right to request a refund from us, after reviewing details of the plaintiffs’ damages to determine if they include costs of a nature not covered under the insurance contracts. Of the $70 million funded, $39 million is in dispute with and under further review by certain of our insurance carriers, who have six monthsuntil April 20, 2007 to complete their review. We have agreed to postreview, unless that review time is extended by mutual agreement. In the third quarter of 2006, we posted a letter of credit in the amount of approximately $10 million in favor of one of those insurance carriers, while we resolve the questions, if any, about the extent of coverage of the costs included in the settlement.
As of December 31, 2005, we recognized a liability for the full amount of the settlement, included inAccrued expenses and other current liabilitieson our consolidated balance sheet of $71 million, the full amount of the settlement, with a corresponding charge toagainst earnings. We also recognized an insurance receivable included inPrepaid expenses and other current assetson our consolidated balance sheet of $31 million, with a corresponding increase to earnings. Although $70 million of the settlement was funded by our insurers, we have only recognized an insurance receivable to the extent that coverage iswas not in dispute. We have presented therecognized a net losscharge of $40 million as a separate line item onduring the facefourth quarter of 2005.
In July 2006, we contributed and paid $1 million to our insurers who subsequently paid the entire settlement amount of $71 million to the plaintiffs. Accordingly, during the third quarter of 2006 we reversed the previously recorded insurance receivable of $31 million and reduced our recorded liability by the same amount plus the $1 million contributed by us. The remaining liability of $39 million represents the amount of the settlement claim that was funded by our insurers but is still in dispute with and under further review by certain of our statementinsurance carriers, who have yet to complete their review as described above. The $39 million liability is included inAccrued expenses and other current liabilitiesin our consolidated balance sheet as of income entitledLitigation settlement — net of insurance recoveries.December 31, 2006.
150
Novelis Inc.
Notes to the Consolidated and Combined Financial Statements — (Continued)
While the ultimate resolution of the nature and extent of any costs not covered under our insurance contracts cannot be determined with certainty or reasonably estimated at this time, if there is an adverse outcome with respect to insurance coverage, and we are required to reimburse our insurers, it could have a material impact on cash flows in the period of resolution. Alternatively, the ultimate resolution could be favorable such that insurance coverage is in excess of what we have recognized to date. This would result in our recording a non-cash gain in the period of resolution, and this non-cash gain could have a material impact on our results of operations during the period in which such a determination is made.
Environmental Matters
The following describes certain environmental matters relating to our business. None of the environmental matters include government sanctions of $100,000 or more.
We are involved in proceedings under the U.S. Comprehensive Environmental Response, Compensation, and Liability Act, also known as CERCLA or Superfund, or analogous state provisions regarding liability arising from the usage, storage, treatment or disposal of hazardous substances and wastes at a number of sites
165
Novelis Inc.
NOTES TO THE CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS — (Continued)
in the United States, as well as similar proceedings under the laws and regulations of the other jurisdictions in which we have operations, including Brazil and certain countries in the European Union. Such laws typically impose joint and several liability, without regard to fault or the legality of the original conduct, for the costs of environmental remediation, natural resource damages, third party claims, and other expenses, on those persons who contributed to the release of a hazardous substance into the environment. In addition, we are, from time to time, subject to environmental reviews and investigations by relevant governmental authorities.
As described further in the following paragraph, we have established procedures for regularly evaluating environmental loss contingencies, including those arising from such environmental reviews and investigations and any other environmental remediation or compliance matters. We believe we have a reasonable basis for evaluating these environmental loss contingencies, and we believe we have made reasonable estimates of the costs that are likely to be borne by us for these environmental loss contingencies. Accordingly, we have established reserves based on our reasonable estimates for the currently anticipated costs associated with these environmental matters. We estimate that the undiscounted remainingclean-up costs related to all of our known environmental matters will be approximately $47 million. A total liability of $47 million has been recorded on our consolidated balance sheet as of December 31, 2005.2006 will be approximately $50 million. Of this amount, $38$37 million is included inOther long-term liabilities, with the remaining $9$13 million included inAccrued expenses and other current liabilitiesin our consolidated balance sheet as of December 31, 2005.2006. Management has reviewed the environmental matters, including those for which we assumed liability as a result of our separationspin-off from Alcan. As a result of this review, management has determined that the currently anticipated costs associated with these environmental matters shouldwill not, individually or in the aggregate, materially impair our operations or materially adversely affect our financial position,condition, results of operations or liquidity.
With respect to environmental loss contingencies, we record a loss contingency on a non-discounted basis whenever such contingency is probable and reasonably estimable. The evaluation model includes all asserted and unasserted claims that can be reasonably identified. Under this evaluation model, the liability and the related costs are quantified based upon the best available evidence regarding actual liability loss and cost estimates. Except for those loss contingencies where no estimate can reasonably be made, the evaluation model is fact-driven and attempts to estimate the full costs of each claim. Management reviews the status of, and estimated liability related to, pending claims and civil actions on a quarterly basis. The estimated costs in respect of such reported liabilities are not offset by amounts related to cost-sharing between parties, insurance, indemnification arrangements or contribution from other potentially responsible parties unless otherwise noted.
Oswego North Ponds. As previously disclosed, Oswego North Ponds is currently our largest known single environmental loss contingency. In the late 1960s and early 1970s, Novelis Corporation (a wholly-owned subsidiary of ours and formerly known as Alcan Aluminum Corporation, or Alcancorp.)Alcancorp) in Oswego, New York used an oil containing
151
Novelis Inc.
Notes to the Consolidated and Combined Financial Statements — (Continued)
polychlorinated biphenyls (PCBs) in its re-melt operations. At the time, Novelis Corporation utilized a once-through cooling water system that discharged through a series of constructed ponds and wetlands, collectively referred to as the North Ponds. In the early 1980s, low levels of PCBs were detected in the cooling water system discharge and Novelis Corporation performed several subsequent investigations. The PCB-containing hydraulic oil, Pydraul, which was eliminated from use by Novelis Corporation in the early 1970s, was identified as the source of contamination. In the mid-1980s, the Oswego North Ponds site was classified as an “inactive hazardous waste disposal site” and added to the New York State Registry. Novelis Corporation ceased discharge through the North Ponds in mid-2002.
In cooperation with the New York State Department of Environmental Conservation (NYSDEC) and the New York State Department of Health, Novelis Corporation entered into a consent decree in August 2000 to develop and implement a remedial program to address the PCB contamination at the Oswego North Ponds site. A remedial investigation report was submitted in January 2004. The current estimated cost associated with this remediation is in the range of $12 million to $26 million. Based upon the report and other factors, we accrued $19 million as our estimated cost, which is included in the total liability for undiscounted
166
Novelis Inc.
NOTES TO THE CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS — (Continued)
remainingclean-up costs of $47$50 million described above. In addition, NYSDEC held a public hearing on the remediation plan on March 13, 2006 and wea Consent Order for implementation of the remediation plan was executed by NYSDEC and Novelis Corporation, effective January 1, 2007. We believe that our estimate of $19 million is reasonable, and that the remediation plan will be approved for implementationdesigned and implemented in 2007.2007 or 2008.
Borgofranco. A stockpile of salt cake, a by-product of the production process at our Borgofranco, Italy plant, has accumulated over several years. AAn initial reserve of approximately $8 million has been providedwas recorded for its processing and disposal. Further, tests on the soil at the Borgofranco site discovered additional contamination. AAn additional reserve of approximately $4 million was established to cover the expected remediation required. In the third quarter of 2005, we announced our intent to close the business. Additional land remediation reserves of $1.5 million and additional salt cake reserves of $4.5 million were established following the closure announcement.
Judicial DepositsBrazil Tax Matters
Primarily as a result of legal proceedings with Brazil’s Ministry of Treasury regarding certain taxes in South America, as of December 31, 2006 and 2005, we madehad cash deposits aggregating $8approximately $20 million during 2005 and $7 million during 2004. As of December 31, 2005, we have a total of $15 million, respectively, deposited in judicial depository accounts pending finalization of the related cases. These amounts are included inOther long-term assetson our consolidated and combined balance sheets. The depository accounts are in the name of the Brazilian government and will be expended towards these legal proceedings or released to us, depending on the outcome of the legal cases. These deposits are included inOther long-term assetson our consolidated balance sheets. In addition, we are involved in several disputes with Brazil’s Minister of Treasury about various forms of taxes and social security contributions, for which we have made no judicial deposit but for which we have established reserves ranging from less than $1.0 million to approximately $46 million as of December 31, 2006. The reserves are included inOther long-term liabilitieson our consolidated balance sheets.
Indirect Guarantees of the Indebtedness of Others
In addition to the aforementioned matters, weWe have also issued indirect guarantees of the indebtedness of others. In November 2002, the FASB issued FASB Interpretation No. 45 which requires that upon issuanceon behalf of certain guarantees, a guarantor must recognize a liability for the fair value of an obligation assumed under the guarantee.
Under FASB Interpretation No. 45, a guarantor must disclose significant information about the obligations it guaranteesour subsidiaries and non-consolidated affiliates, including: the nature of the guarantee, maximum amount of future payments, fair market value of the liability, recourse provisions available to the guarantor, and any associated recoverable collateral.
152
Novelis Inc.
Notes to the Consolidated and Combined Financial Statements — (Continued)
Under FASB Interpretation No. 45, there are four principal types of guarantees: financial guarantees, performance guarantees, indemnifications, and indirect guarantees of the indebtedness of others. Currently, we only issue indirect guarantees for the indebtedness of others. The guarantees may cover the following entities:
| | |
| • | certain of our wholly-owned and majority-owned subsidiaries; |
|
| • | variable interest entities consolidated under FASB Interpretation No. 46 (Revised); and |
|
| • | Aluminium Norf GmbH, which is a fifty percent (50%) owned joint venture whichthat does not meet the requirements for consolidation tests under FASB Interpretation No. 46 (Revised). |
In all cases,the case of our wholly-owned subsidiaries, the indebtedness guaranteed is for trade payablesaccounts payable to third parties. Some have annual terms subject to renewal while others have no expiration and have termination notice requirements. For our majority-owned subsidiaries, the indebtedness guaranteed is for short-term loan, overdraft and other debt facilities with financial institutions, which are currently scheduled to expire during the first half of fiscal 2007. Neither Novelis Inc. nor any of our subsidiaries or non-consolidated affiliates holds any assets of any third parties as collateral to offset the potential settlement of these guarantees.
Since we consolidate wholly-owned subsidiaries and variable interest entitiesmajority-owned subsidiaries in our financial statements, all liabilities associated with trade payables and short-term debt facilities for these entities are already included in our consolidated and combined balance sheets.
167
Novelis Inc.
NOTES TO THE CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS — (Continued)
The following table discloses information about our obligations under indirect guarantees of indebtedness of others as of December 31, 20052006 (in millions).
| | | | | | | | | | | | | | | | | | | | |
| | Maximum
| | | | | | | Maximum
| | Liability
| |
| | Potential Future
| | Liability
| | Assets Held for
| | | Potential
| | Carrying
| |
Type of Entity | | Payment | | Carrying Value | | Collateral | | | Future Payment | | Value | |
|
Wholly-Owned Subsidiaries | | $ | 14 | | | $ | 2 | | | $ | — | | |
Wholly-owned Subsidiaries | | | $ | 44 | | | $ | 26 | |
Majority-owned Subsidiaries | | | | 2 | | | | — | |
Aluminium Norf GmbH | | | 12 | | | | — | | | | — | | | | 13 | | | | — | |
| |
22.21. | Other IncomeOTHER INCOME — NetNET |
The following table presents the components ofOther income — net(in is comprised of the following (in millions).
| | | | | | | | | | | | |
| | Year Ended December 31, | |
| | 2005 | | | 2004 | | | 2003 | |
|
Net gains on change in fair market value of derivative instruments(A) | | $ | (269 | ) | | $ | (69 | ) | | $ | (20 | ) |
Gain on disposals of fixed assets — net | | | (17 | ) | | | (5 | ) | | | (28 | ) |
Exchange (gains) losses — net | | | (6 | ) | | | 2 | | | | 17 | |
Service fee income — net | | | — | | | | (17 | ) | | | (13 | ) |
Other | | | (7 | ) | | | 27 | | | | (5 | ) |
| | | | | | | | | | | | |
| | $ | (299 | ) | | $ | (62 | ) | | $ | (49 | ) |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | Year Ended December 31, | |
| | 2006 | | | 2005 | | | 2004 | |
|
Gains on change in fair value of derivative instruments — net(A) | | $ | (63 | ) | | $ | (269 | ) | | $ | (69 | ) |
Loss on disposal of business | | | 15 | | | | — | | | | — | |
Gain on sale of equity interest in non-consolidated affiliate | | | (15 | ) | | | — | | | | — | |
Gain on sale of rights to develop and operate hydroelectric power plants | | | (11 | ) | | | — | | | | — | |
Exchange (gains) losses — net | | | (8 | ) | | | (6 | ) | | | 2 | |
(Gains) losses on disposals of property, plant and equipment — net | | | 5 | | | | (17 | ) | | | (5 | ) |
Service fee income — net | | | — | | | | — | | | | (17 | ) |
Other (income) losses — net | | | (5 | ) | | | (7 | ) | | | 27 | |
| | | | | | | | | | | | |
| | $ | (82 | ) | | $ | (299 | ) | | $ | (62 | ) |
| | | | | | | | | | | | |
| | |
(A) | | Included in the year ended December 31, 2005 amount is $43 million in pre-tax unrealized losses ($29 million after-tax)net of tax) on the change in marketfair value of derivative contracts,instruments, primarily with Alcan, for the period from January 1 to January 5, 2005, as described in Note 1 — Business and Summary of Significant Accounting Policies —Basis of Combination: Pre-Spin-off. |
| |
23. | Segment, Geographical Area and Major Customer Information |
22. SEGMENT, GEOGRAPHICAL AREA AND MAJOR CUSTOMER INFORMATION
Due in part to the regional nature of supply and demand of aluminum rolled products and in order to best serve our customers, we manage our activities on the basis of geographical areas and are organized under four operating segments. The operating segments are Novelissegments: North America (NNA), Novelis Europe (NE), Novelis Asia (NA)America; Europe; Asia; and Novelis South America (NSA).America.
Our chief operating decision-maker uses regional financial information in deciding how to allocate resources to an individual segment, and in assessing performance of the segment. Novelis’ chief operating decision-maker is its chief executive officer.
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Novelis Inc.
Notes to the Consolidated and Combined Financial Statements — (Continued)
We measure the profitability and financial performance of our operating segments, based on Regional Income, in accordance with FASB Statement No. 131,Disclosure About the Segments of an Enterprise and Related Information. Regional Income provides a measure of our underlying regional segment results that is in line with our portfolio approach to risk management. We define Regional Income as income before (a) interest expense and amortization of debt issuance costs; (b) unrealized gains and losses due to changeson change in the fair market value of derivative instruments except for Korean foreign exchange derivatives;— net; (c) depreciation and amortization; (d) impairment charges on long-lived assets; (e) minority interests’ share; (f) adjustments to reconcile our proportional share of Regional Income from non-consolidated affiliates to income as determined on the equity method of accounting (proportional share to equity accounting adjustments);accounting; (g) restructuring charges;(charges) recoveries; (h) gains or losses on disposals of fixed assetsproperty, plant and businesses;equipment and businesses — net; (i) corporate costs;selling, general and administrative expenses; (j) other corporate costs — net; (k) litigation settlement — net of insurance recoveries; (k) gains on the monetization of cross-currency interest rate swaps; (l) provision or benefit for taxes on income;income (loss) and (m) cumulative effect of accounting change — net of tax.
168
We have recast our segment information for the years ended December 31, 2004 and 2003 to conform to our definition of Regional Income. Novelis Inc.
NOTES TO THE CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS — (Continued)
Net sales and expenses are measured in accordance with the policies and procedures described in Note 1 — Business and Summary of Significant Accounting Policies, except the operating segments include our proportionate share of net sales, expenses, assets and liabilities of our non-consolidated affiliates accounted for using the equity method, since they are managed within each operating segment.
We do not treat all derivative instruments as hedges under FASB Statement No. 133. Accordingly, changes in fair value are recognized immediately in earnings, which results in the recognition of fair value as a gain or loss in advance of the contract settlement. In the accompanying consolidated and combined statements of operations, change in fair value of derivative instruments not accounted for as hedges under FASB Statement No. 133 are recognized inOther (income) expenses — net. These gains or losses may or may not result from cash settlement. For Regional Income purposes we only include the impact of the derivative gains or losses to the extent they are settled in cash during that period.
During 2006, we added a line to our Regional Income reconciliation to improve the disclosure of gains or losses resulting from cash settlement of derivative instruments that have been included in Regional Income. Prior periods have been revised to conform to the current period presentation.
The following is a description of our operating segments:
| | |
| • | Novelis North America. Headquartered in Cleveland, Ohio, this segment manufactures aluminum sheet and light gauge products and operates 12 plants, including two fully dedicated recycling facilities, in two countries. |
|
| • | Novelis Europe. Headquartered in Zurich, Switzerland, this segment manufactures aluminum sheet and light gauge products and operates 1614 plants, including twoone recycling facilities,facility, in six countries. |
|
| • | Novelis Asia. Headquartered in Seoul, South Korea, this segment manufactures aluminum sheet and light gauge products and operates three plants in two countries. |
|
| • | Novelis South America. Headquartered in Sao Paulo, Brazil, this segment comprises bauxite mining, alumina refining, smelting operations, power generation, carbon products, aluminum sheet and light gauge products and operates fivefour plants in Brazil. |
Adjustment to Eliminate Proportional Share to Equity Accounting Adjustments.Consolidation. The financial information for our segments includes the results of our non-consolidated affiliates on a proportionately consolidated basis, which is consistent with the way we manage our business segments. However, under GAAP, these non-consolidated affiliates are accounted for using the equity method of accounting. Therefore, in order to reconcile the financial information for the segments shown in the tables below to the GAAP-based measure, we must remove our proportional share of each line item that we included in the segment amounts. See Note 8 — Investment in and Advances to Non-Consolidated Affiliates and Related Party Transactions to our consolidated and combined financial statements for further information about these non-consolidated affiliates.
169
Novelis Inc.
NOTES TO THE CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS — (Continued)
The tables below show selected segment financial information as of and for the years ended December 31, 2006, 2005 and 2004 (in millions). TheCorporate and Othercolumn in the tables below includes functions that are managed directly from our corporate office, which focuses on strategy development and oversees governance, policy, legal compliance, human resources and finance matters. It also includes consolidating and other elimination accounts.
Selected Segment Financial Information
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | Adjustment to
| | | | | | | |
| | | | | | | | | | | | | | Eliminate
| | | | | | | |
| | North
| | | | | | | | | South
| | | Proportional
| | | Corporate
| | | | |
Year Ended December 31, 2006 | | America | | | Europe | | | Asia | | | America | | | Consolidation | | | and Other | | | Total | |
|
Net sales (to third parties) | | $ | 3,691 | | | $ | 3,620 | | | $ | 1,692 | | | $ | 863 | | | $ | (17 | ) | | $ | — | | | $ | 9,849 | |
Intersegment sales | | | 2 | | | | 5 | | | | 15 | | | | 50 | | | | — | | | | (72 | ) | | | — | |
Regional Income | | | 22 | | | | 256 | | | | 85 | | | | 164 | | | | — | | | | — | | | | 527 | |
Interest income | | | 2 | | | | 3 | | | | 3 | | | | 2 | | | | — | | | | 5 | | | | 15 | |
Interest expense and amortization of debt issuance costs | | | 50 | | | | 11 | | | | 10 | | | | 6 | | | | — | | | | 144 | | | | 221 | |
Depreciation and amortization | | | 70 | | | | 92 | | | | 55 | | | | 44 | | | | (32 | ) | | | 4 | | | | 233 | |
Restructuring charges | | | — | | | | 18 | | | | — | | | | — | | | | — | | | | 1 | | | | 19 | |
Equity in net income of non-consolidated affiliates | | | — | | | | 8 | | | | — | | | | 8 | | | | — | | | | — | | | | 16 | |
Provision (benefit) for taxes on income (loss) | | | (111 | ) | | | 29 | | | | 11 | | | | 63 | | | | (5 | ) | | | 9 | | | | (4 | ) |
Total assets | | | 1,476 | | | | 2,474 | | | | 1,078 | | | | 821 | | | | (117 | ) | | | 60 | | | | 5,792 | |
Investment in and advances to Non-consolidated affiliates | | | 2 | | | | 98 | | | | — | | | | 50 | | | | — | | | | — | | | | 150 | |
Capital expenditures | | | 39 | | | | 45 | | | | 21 | | | | 26 | | | | (18 | ) | | | 3 | | | | 116 | |
154170
Novelis Inc.
NOTES TO THE CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS — (Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | Adjustment to
| | | | | | | |
| | | | | | | | | | | | | | Eliminate
| | | | | | | |
| | North
| | | | | | | | | South
| | | Proportional
| | | Corporate
| | | | |
Year Ended December 31, 2005 | | America | | | Europe | | | Asia | | | America | | | Consolidation | | | and Other | | | Total | |
|
Net sales (to third parties) | | $ | 3,265 | | | $ | 3,093 | | | $ | 1,391 | | | $ | 630 | | | $ | (16 | ) | | $ | — | | | $ | 8,363 | |
Intersegment sales | | | 2 | | | | 31 | | | | 8 | | | | 41 | | | | — | | | | (82 | ) | | | — | |
Regional Income | | | 196 | | | | 206 | | | | 108 | | | | 110 | | | | — | | | | — | | | | 620 | |
Interest income | | | 1 | | | | 3 | | | | 1 | | | | 1 | | | | — | | | | 3 | | | | 9 | |
Interest expense and amortization of debt issuance costs | | | 44 | | | | 10 | | | | 11 | | | | 3 | | | | — | | | | 135 | | | | 203 | |
Depreciation and amortization | | | 72 | | | | 96 | | | | 51 | | | | 44 | | | | (34 | ) | | | 1 | | | | 230 | |
Restructuring charges | | | — | | | | 10 | | | | — | | | | — | | | | — | | | | — | | | | 10 | |
Impairment charges on long-lived assets | | | — | | | | 7 | | | | — | | | | — | | | | — | | | | — | | | | 7 | |
Equity in net income of non-consolidated affiliates | | | — | | | | 4 | | | | — | | | | 2 | | | | — | | | | — | | | | 6 | |
Provision (benefit) for taxes on income | | | 33 | | | | 59 | | | | (8 | ) | | | 26 | | | | (4 | ) | | | 1 | | | | 107 | |
Total assets | | | 1,547 | | | | 2,139 | | | | 1,002 | | | | 790 | | | | (85 | ) | | | 83 | | | | 5,476 | |
Investment in and advances to Non-consolidated affiliates | | | 2 | | | | 90 | | | | — | | | | 52 | | | | — | | | | — | | | | 144 | |
Capital expenditures | | | 61 | | | | 80 | | | | 21 | | | | 24 | | | | (20 | ) | | | 12 | | | | 178 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | Adjustment to
| | | | | | | |
| | | | | | | | | | | | | | Eliminate
| | | | | | | |
| | North
| | | | | | | | | South
| | | Proportional
| | | Corporate
| | | | |
Year Ended December 31, 2004 | | America | | | Europe | | | Asia | | | America | | | Consolidation | | | and Other | | | Total | |
|
Net sales (to third parties) | | $ | 2,964 | | | $ | 3,081 | | | $ | 1,194 | | | $ | 525 | | | $ | (9 | ) | | $ | — | | | $ | 7,755 | |
Intersegment sales | | | 8 | | | | 30 | | | | 9 | | | | 57 | | | | — | | | | (104 | ) | | | — | |
Regional Income | | | 240 | | | | 200 | | | | 80 | | | | 134 | | | | — | | | | — | | | | 654 | |
Interest income | | | — | | | | 3 | | | | 1 | | | | — | | | | — | | | | 22 | | | | 26 | |
Interest expense and amortization of debt issuance costs | | | — | | | | 5 | | | | 15 | | | | — | | | | — | | | | 54 | | | | 74 | |
Depreciation and amortization | | | 69 | | | | 115 | | | | 46 | | | | 47 | | | | (37 | ) | | | 6 | | | | 246 | |
Restructuring charges | | | — | | | | 20 | | | | — | | | | — | | | | — | | | | — | | | | 20 | |
Impairment charges on long-lived assets | | | — | | | | 75 | | | | — | | | | — | | | | — | | | | — | | | | 75 | |
Equity in net income of non-consolidated affiliates | | | — | | | | 4 | | | | — | | | | — | | | | — | | | | 2 | | | | 6 | |
Provision for taxes on income | | | 75 | | | | 43 | | | | 1 | | | | 40 | | | | (4 | ) | | | 11 | | | | 166 | |
Total assets | | | 1,406 | | | | 2,885 | | | | 954 | | | | 779 | | | | (60 | ) | | | (10 | ) | | | 5,954 | |
Investment in and advances to non-consolidated affiliates | | | — | | | | 117 | | | | — | | | | — | | | | — | | | | 5 | | | | 122 | |
Capital expenditures | | | 41 | | | | 84 | | | | 31 | | | | 23 | | | | (16 | ) | | | 2 | | | | 165 | |
171
Novelis Inc.
Notes to the Consolidated and Combined Financial StatementsNOTES TO THE CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS — (Continued)
Selected Segment Financial Information (in millions)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | Proportional
| | | | | | | |
| | | | | | | | | | | | | | Share to
| | | | | | | |
| | Novelis
| | | | | | | | | Novelis
| | | Equity
| | | | | | | |
| | North
| | | Novelis
| | | Novelis
| | | South
| | | Accounting
| | | Corporate
| | | | |
Year Ended December 31, 2005 | | America | | | Europe | | | Asia | | | America | | | Adjustments | | | and Other | | | Total | |
|
Net sales (to third parties) | | $ | 3,265 | | | $ | 3,093 | | | $ | 1,391 | | | $ | 630 | | | $ | (16 | ) | | $ | — | | | $ | 8,363 | |
Intersegment sales | | | 2 | | | | 31 | | | | 8 | | | | 41 | | | | — | | | | (82 | ) | | | — | |
Regional Income | | | 196 | | | | 206 | | | | 108 | | | | 110 | | | | — | | | | — | | | | 620 | |
Interest income | | | 1 | | | | 3 | | | | 1 | | | | 1 | | | | — | | | | 3 | | | | 9 | |
Interest expense and amortization of debt issuance costs | | | 44 | | | | 10 | | | | 11 | | | | 3 | | | | — | | | | 135 | | | | 203 | |
Depreciation and amortization | | | 72 | | | | 96 | | | | 51 | | | | 44 | | | | (34 | ) | | | 1 | | | | 230 | |
Restructuring charges | | | — | | | | 10 | | | | — | | | | — | | | | — | | | | — | | | | 10 | |
Impairment charges on long-lived assets | | | — | | | | 7 | | | | — | | | | — | | | | — | | | | — | | | | 7 | |
Equity in net income of non-consolidated affiliates | | | — | | | | 4 | | | | — | | | | 2 | | | | — | | | | — | | | | 6 | |
Provision (benefit) for taxes on income | | | 33 | | | | 59 | | | | (8 | ) | | | 26 | | | | (4 | ) | | | 1 | | | | 107 | |
Total assets | | | 1,547 | | | | 2,139 | | | | 1,002 | | | | 790 | | | | (85 | ) | | | 83 | | | | 5,476 | |
Investment in and advances to Non-consolidated affiliates | | | 2 | | | | 90 | | | | — | | | | 52 | | | | — | | | | — | | | | 144 | |
Capital expenditures | | | 61 | | | | 80 | | | | 21 | | | | 24 | | | | (20 | ) | | | 12 | | | | 178 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | Proportional
| | | | | | | |
| | | | | | | | | | | | | | Share to
| | | | | | | |
| | Novelis
| | | | | | | | | Novelis
| | | Equity
| | | | | | | |
| | North
| | | Novelis
| | | Novelis
| | | South
| | | Accounting
| | | Corporate
| | | | |
Year Ended December 31, 2004 | | America | | | Europe | | | Asia | | | America | | | Adjustments | | | and Other | | | Total | |
|
Net sales (to third parties) | | $ | 2,964 | | | $ | 3,081 | | | $ | 1,194 | | | $ | 525 | | | $ | (9 | ) | | $ | — | | | $ | 7,755 | |
Intersegment sales | | | 8 | | | | 30 | | | | 9 | | | | 57 | | | | — | | | | (104 | ) | | | — | |
Regional Income | | | 240 | | | | 200 | | | | 80 | | | | 134 | | | | — | | | | — | | | | 654 | |
Interest income | | | — | | | | 3 | | | | 1 | | | | — | | | | — | | | | 22 | | | | 26 | |
Interest expense and amortization of debt issuance costs | | | — | | | | 5 | | | | 15 | | | | — | | | | — | | | | 54 | | | | 74 | |
Depreciation and amortization | | | 69 | | | | 115 | | | | 46 | | | | 47 | | | | (37 | ) | | | 6 | | | | 246 | |
Restructuring charges | | | — | | | | 20 | | | | — | | | | — | | | | — | | | | — | | | | 20 | |
Impairment charges on long-lived assets | | | — | | | | 75 | | | | — | | | | — | | | | — | | | | — | | | | 75 | |
Equity in net income of non-consolidated affiliates | | | — | | | | 4 | | | | — | | | | — | | | | — | | | | 2 | | | | 6 | |
Provision for taxes on income | | | 75 | | | | 43 | | | | 1 | | | | 40 | | | | (4 | ) | | | 11 | | | | 166 | |
Total assets | | | 1,406 | | | | 2,885 | | | | 954 | | | | 779 | | | | (60 | ) | | | (10 | ) | | | 5,954 | |
Investment in and advances to non-consolidated affiliates | | | — | | | | 117 | | | | — | | | | — | | | | — | | | | 5 | | | | 122 | |
Capital expenditures | | | 41 | | | | 84 | | | | 31 | | | | 23 | | | | (16 | ) | | | 2 | | | | 165 | |
155
Novelis Inc.
Notes toThe following table shows the Consolidated and Combined Financial Statements — (Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | Proportional
| | | | | | | |
| | | | | | | | | | | | | | Share to
| | | | | | | |
| | Novelis
| | | | | | | | | Novelis
| | | Equity
| | | | | | | |
| | North
| | | Novelis
| | | Novelis
| | | South
| | | Accounting
| | | Corporate
| | | | |
Year Ended December 31, 2003 | | America | | | Europe | | | Asia | | | America | | | Adjustments | | | and Other | | | Total | |
|
Net sales (to third parties) | | $ | 2,385 | | | $ | 2,510 | | | $ | 918 | | | $ | 414 | | | $ | (6 | ) | | $ | — | | | $ | 6,221 | |
Intersegment sales | | | 40 | | | | 23 | | | | 13 | | | | 23 | | | | — | | | | (99 | ) | | | — | |
Regional Income | | | 176 | | | | 175 | | | | 69 | | | | 88 | | | | — | | | | — | | | | 508 | |
Interest income | | | — | | | | 1 | | | | 1 | | | | — | | | | — | | | | 5 | | | | 7 | |
Interest expense and amortization of debt issuance costs | | | — | | | | 7 | | �� | | 14 | | | | — | | | | — | | | | 19 | | | | 40 | |
Depreciation and amortization | | | 68 | | | | 87 | | | | 45 | | | | 49 | | | | (32 | ) | | | 5 | | | | 222 | |
Restructuring charges | | | — | | | | 3 | | | | — | | | | — | | | | — | | | | 5 | | | | 8 | |
Impairment charges on long-lived assets | | | — | | | | 1 | | | | — | | | | — | | | | — | | | | 3 | | | | 4 | |
Equity in net income of non-consolidated affiliates | | | — | | | | 3 | | | | — | | | | — | | | | — | | | | 3 | | | | 6 | |
Provision for taxes on income | | | 17 | | | | 36 | | | | 1 | | | | 1 | | | | (4 | ) | | | (1 | ) | | | 50 | |
Total assets | | | 2,392 | | | | 2,364 | | | | 904 | | | | 808 | | | | (135 | ) | | | (17 | ) | | | 6,316 | |
Investment in and advances to non-consolidated affiliates | | | — | | | | 105 | | | | — | | | | — | | | | — | | | | 5 | | | | 110 | |
Capital expenditures | | | 38 | | | | 97 | | | | 25 | | | | 41 | | | | (14 | ) | | | 2 | | | | 189 | |
Segment Reconciliationreconciliation from Total Regional Income to Net Incomeincome (loss) for the years ended December 31, 2006, 2005 and 2004 (in millions).
| | | | | | | | | | | | |
| | Year Ended December 31, | |
| | 2005 | | | 2004 | | | 2003 | |
| | ($ in millions) | |
|
Total Regional Income | | $ | 620 | | | $ | 654 | | | $ | 508 | |
Interest expense and amortization of debt discounts and fees | | | (203 | ) | | | (74 | ) | | | (40 | ) |
Unrealized gains due to changes in the fair market value of derivatives (A) | | | 140 | | | | 77 | | | | 20 | |
Depreciation and amortization | | | (230 | ) | | | (246 | ) | | | (222 | ) |
Impairment charges on long-lived assets | | | (7 | ) | | | (75 | ) | | | (4 | ) |
Minority interests’ share | | | (21 | ) | | | (10 | ) | | | (3 | ) |
Adjustment to eliminate proportional consolidation(B) | | | (36 | ) | | | (41 | ) | | | (36 | ) |
Restructuring charges | | | (10 | ) | | | (20 | ) | | | (8 | ) |
Gain on disposals of fixed assets and businesses | | | 17 | | | | 5 | | | | 28 | |
Corporate costs(C) | | | (72 | ) | | | (49 | ) | | | (36 | ) |
Litigation settlement — net of insurance recoveries | | | (40 | ) | | | — | | | | — | |
Gains on the monetization of cross-currency interest rate swaps | | | 45 | | | | — | | | | — | |
Provision for taxes on income | | | (107 | ) | | | (166 | ) | | | (50 | ) |
| | | | | | | | | | | | |
Net income before cumulative effect of accounting change | | | 96 | | | | 55 | | | | 157 | |
Cumulative effect of accounting change — net of tax | | | (6 | ) | | | — | | | | — | |
| | | | | | | | | | | | |
Net income | | $ | 90 | | | $ | 55 | | | $ | 157 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | Year Ended December 31, | |
| | 2006 | | | 2005 | | | 2004 | |
|
Total Regional Income | | $ | 527 | | | $ | 620 | | | $ | 654 | |
Interest expense and amortization of debt issuance costs | | | (221 | ) | | | (203 | ) | | | (74 | ) |
(Gains) losses on cash settlement of derivative instruments — net, included in Regional Income | | | (248 | ) | | | (84 | ) | | | 8 | |
Gains on change in fair value of derivative instruments — net | | | 63 | | | | 269 | | | | 69 | |
Depreciation and amortization | | | (233 | ) | | | (230 | ) | | | (246 | ) |
Impairment charges on long-lived assets | | | — | | | | (7 | ) | | | (75 | ) |
Minority interests’ share | | | (1 | ) | | | (21 | ) | | | (10 | ) |
Adjustment to eliminate proportional consolidation(A) | | | (39 | ) | | | (36 | ) | | | (41 | ) |
Restructuring charges — net | | | (19 | ) | | | (10 | ) | | | (20 | ) |
Gain on disposals of property, plant and equipment and businesses — net | | | 6 | | | | 17 | | | | 5 | |
Corporate selling, general and administrative expenses | | | (127 | ) | | | (78 | ) | | | (39 | ) |
Other corporate costs — net | | | 13 | | | | 6 | | | | (10 | ) |
Litigation settlement — net of insurance recoveries | | | — | | | | (40 | ) | | | — | |
(Provision) benefit for taxes on income (loss) | | | 4 | | | | (107 | ) | | | (166 | ) |
| | | | | | | | | | | | |
Net income (loss) before cumulative effect of accounting change | | | (275 | ) | | | 96 | | | | 55 | |
Cumulative effect of accounting change — net of tax | | | — | | | | (6 | ) | | | — | |
| | | | | | | | | | | | |
Net income (loss) | | $ | (275 | ) | | $ | 90 | | | $ | 55 | |
| | | | | | | | | | | | |
156
Novelis Inc.
Notes to the Consolidated and Combined Financial Statements — (Continued)_ _
| | |
(A) | | Except for Korean foreign exchange derivatives. |
|
(B) | | Our financial information for our segments (including Regional Income) includes the results of our non-consolidated affiliates on a proportionately consolidated basis, which is consistent with the way we manage our business segments. However, under GAAP, these non-consolidated affiliates are accounted for using the equity method of accounting. Therefore, in order to reconcile Total Regional Income to Net income (loss), the proportional Regional Income of these non-consolidated affiliates is removed from Total Regional Income, net of our share of their net after-tax results, which is reported asEquity in net income of non-consolidated affiliateson our consolidated and combined statements of income.operations. See Note 8 — Investment in and Advances to Non-Consolidated Affiliates and Related Party Transactions to our consolidated and combined financial statements for further information about thesenon-consolidated affiliates. |
|
(C) | | These items are managed by our corporate head office, which focuses on strategy development and oversees governance, policy, legal compliance, human resources and finance matters. |
172
Novelis Inc.
NOTES TO THE CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS — (Continued)
Geographical Area Information
We had 3633 operating facilities in 11 countries as of December 31, 2005.2006. The tables below present Net sales and Long-lived assets by geographical area (in millions). Net sales are attributed to geographical areas based on the origin of the sale. Long-lived assets are attributed to geographical areas based on asset location.
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | | Year Ended December 31, | |
| | 2005 | | 2004 | | 2003 | | | 2006 | | 2005 | | 2004 | |
|
Net sales: | | | | | | | | | | | | | | | | | | | | | | | | |
United States | | $ | 3,029 | | | $ | 2,795 | | | $ | 2,174 | | | $ | 3,474 | | | $ | 3,029 | | | $ | 2,795 | |
Asia and Other Pacific | | | 1,391 | | | | 1,194 | | | | 917 | | | | 1,691 | | | | 1,391 | | | | 1,194 | |
Brazil | | | 616 | | | | 515 | | | | 408 | | | | 847 | | | | 616 | | | | 515 | |
Canada | | | 234 | | | | 182 | | | | 212 | | | | 217 | | | | 234 | | | | 182 | |
Germany | | | 1,850 | | | | 1,865 | | | | 1,705 | | | | 2,263 | | | | 1,850 | | | | 1,865 | |
United Kingdom | | | 339 | | | | 382 | | | | 302 | | | | 428 | | | | 339 | | | | 382 | |
Other Europe | | | 904 | | | | 822 | | | | 503 | | | | 929 | | | | 904 | | | | 822 | |
| | | | | | | | | | | | | | |
Total Net sales | | $ | 8,363 | | | $ | 7,755 | | | $ | 6,221 | | |
Total net sales | | | $ | 9,849 | | | $ | 8,363 | | | $ | 7,755 | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | | As of December 31, | |
| | 2005 | | 2004 | | | 2006 | | 2005 | | 2004 | |
|
Long-lived assets: | | | | | | | | | | | | | | | | | | | | |
United States | | $ | 431 | | | $ | 437 | | | $ | 405 | | | $ | 431 | | | $ | 437 | |
Asia and Other Pacific | | | 605 | | | | 622 | | | | 618 | | | | 605 | | | | 622 | |
Brazil | | | 472 | | | | 544 | | | | 447 | | | | 472 | | | | 544 | |
Canada | | | 121 | | | | 111 | | | | 113 | | | | 121 | | | | 111 | |
Germany | | | 211 | | | | 268 | | | | 211 | | | | 211 | | | | 268 | |
United Kingdom | | | 159 | | | | 167 | | | | 173 | | | | 159 | | | | 167 | |
Other Europe | | | 393 | | | | 481 | | | | 432 | | | | 393 | | | | 481 | |
| | | | | | | | | | | | |
Total Long-lived assets | | $ | 2,392 | | | $ | 2,630 | | |
Total long-lived assets | | | $ | 2,399 | | | $ | 2,392 | | | $ | 2,630 | |
| | | | | | | | | | | | |
157
Novelis Inc.
Notes to the Consolidated and Combined Financial Statements — (Continued)
Information about Major Customers
In 2006, 2005 and 2004, 43%, 40% and 2003, 40%, 41% and 39%, respectively, of our totalNet net sales were to our ten largest customers. All of our operating segments had sales to Rexam Plc (Rexam), our largest customer, during the three years in the period ended December 31, 2005.2006. Sales to Rexam and the percentage of our totalNet net salesare as follows:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | | Year Ended December 31, | |
| | 2005 | | 2004 | | 2003 | | | 2006 | | 2005 | | 2004 | |
|
Sales to Rexam (in millions) | | $ | 1,045 | | | $ | 861 | | | $ | 628 | | | $ | 1,392 | | | $ | 1,048 | | | $ | 861 | |
| | | | | | | | | | | | | | |
Percentage of total Net sales | | | 12.5 | % | | | 11.1 | % | | | 10.1 | % | |
Percentage of total net sales | | | | 14.1 | % | | | 12.5 | % | | | 11.1 | % |
| | | | | | | | | | | | | | |
173
Novelis Inc.
NOTES TO THE CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS — (Continued)
Potential Acquisition of Novelis Common Stock
On February 10, 2007, Novelis Inc., Hindalco Industries Limited (Hindalco) and AV Aluminum Inc., an indirect subsidiary of Hindalco (Acquisition Sub), entered into an Arrangement Agreement (the Arrangement Agreement). Under the Arrangement Agreement, Acquisition Sub will acquire all of the issued and outstanding common shares of Novelis for cash at a per share price of $44.93, without interest (the Purchase Price), to be implemented by way of a court-approved plan of arrangement (the Arrangement).
Pursuant to the Arrangement Agreement, at the effective time of the Arrangement, each common share of Novelis issued and outstanding immediately prior to the effective time (other than common shares held by (i) Hindalco or Acquisition Sub or any of their affiliates or (ii) any shareholders who properly exercise dissent rights under the Canada Business Corporations Act) will be automatically converted into the right to receive the Purchase Price. The acquisition of Novelis is an all-cash transaction which values Novelis at approximately $6 billion, including approximately $2.4 billion of debt. The transaction is not subject to a financing condition.
The consummation of the Arrangement is subject to various customary conditions, including Novelis shareholder approval and the expiration or termination of the applicable waiting periods under theHart-Scott-Rodino Antitrust Improvements Act of 1976 and similar antitrust laws in Canada and the European Union.
The Arrangement Agreement contains customary representations and warranties between Novelis and Hindalco and Acquisition Sub. The Arrangement Agreement also contains customary covenants and agreements, including covenants relating to (a) the conduct of Novelis’ business between the date of the signing of the Arrangement Agreement and the closing of the Arrangement, (b) solicitation of competing acquisition proposals and (c) the efforts of the parties to cause the Arrangement to be completed. Additionally, the Arrangement Agreement requires Novelis to use its reasonable best efforts to call and hold a meeting of its shareholders to approve the Arrangement.
The Arrangement Agreement contains certain termination rights and provides that, upon or following the termination of the Arrangement Agreement, under specified circumstances involving a competing acquisition proposal, Novelis may be required to pay Acquisition Sub a termination fee of $100 million or, in certain circumstances, to reimburse costs and expenses of Hindalco and its affiliates, to a maximum of $15 million.
174
Novelis Inc.
NOTES TO THE CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS — (Continued)
| |
24. | Quarterly Results (Unaudited)QUARTERLY RESULTS (UNAUDITED) |
The following tables present selected operating results and dividend information for the years ended December 31, 20052006 and 2004 (in millions). We previously restated our consolidated and combined financial statements for our quarters ended March 31, 2005 and June 30, 2005, and those restated results are included in the following tables.2005. Certain reclassifications of quarterly amounts have been made to conform to the presentation adopted for the current year.year.
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2005 | |
| | First
| | | Second
| | | Third
| | | Fourth
| | | Full
| |
| | Quarter | | | Quarter | | | Quarter | | | Quarter | | | Year | |
| | (restated) | | | (restated) | | | | | | | | | | |
| | ($ in millions, except per share data) | |
|
Net sales | | $ | 2,112 | | | $ | 2,172 | | | $ | 2,053 | | | $ | 2,026 | | | $ | 8,363 | |
Cost of goods sold (exclusive of depreciation and amortization shown below) | | | 1,884 | | | | 1,960 | | | | 1,834 | | | | 1,892 | | | | 7,570 | |
Selling, general and administrative expenses | | | 88 | | | | 82 | | | | 90 | | | | 92 | | | | 352 | |
Litigation settlement — net of insurance recoveries | | | — | | | | — | | | | — | | | | 40 | | | | 40 | |
Provision for depreciation and amortization | | | 59 | | | | 58 | | | | 56 | | | | 57 | | | | 230 | |
Research and development expenses | | | 8 | | | | 11 | | | | 10 | | | | 12 | | | | 41 | |
Restructuring charges (recoveries) | | | (2 | ) | | | (1 | ) | | | 7 | | | | 6 | | | | 10 | |
Impairment charges on long-lived assets | | | — | | | | 1 | | | | 4 | | | | 2 | | | | 7 | |
Interest expense and amortization of debt issuance costs — net | | | 54 | | | | 48 | | | | 46 | | | | 46 | | | | 194 | |
Equity in net income of non-consolidated affiliates | | | (2 | ) | | | (2 | ) | | | (2 | ) | | | — | | | | (6 | ) |
Other (income) expense — net | | | (34 | ) | | | 10 | | | | (48 | ) | | | (227 | ) | | | (299 | ) |
Provision for taxes on income | | | 30 | | | | — | | | | 37 | | | | 40 | | | | 107 | |
Minority interests’ share | | | 5 | | | | 5 | | | | 9 | | | | 2 | | | | 21 | |
| | | | | | | | | | | | | | | | | | | | |
Net income before cumulative effect of accounting change | | | 22 | | | | — | | | | 10 | | | | 64 | | | | 96 | |
Cumulative effect of accounting change — net of tax | | | — | | | | — | | | | — | | | | (6 | ) | | | (6 | ) |
| | | | | | | | | | | | | | | | | | | | |
Net income | | $ | 22 | | | $ | — | | | $ | 10 | | | $ | 58 | | | $ | 90 | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2006 | |
| | First
| | | Second
| | | Third
| | | Fourth
| | | Full
| |
| | Quarter | | | Quarter | | | Quarter | | | Quarter | | | Year | |
| | ($ in millions, except per share data) | |
|
Net sales | | $ | 2,319 | | | $ | 2,564 | | | $ | 2,494 | | | $ | 2,472 | | | $ | 9,849 | |
Cost of goods sold (exclusive of depreciation and amortization shown below) | | | 2,135 | | | | 2,407 | | | | 2,389 | | | | 2,386 | | | | 9,317 | |
Selling, general and administrative expenses | | | 92 | | | | 98 | | | | 103 | | | | 117 | | | | 410 | |
Depreciation and amortization | | | 58 | | | | 59 | | | | 57 | | | | 59 | | | | 233 | |
Research and development expenses | | | 9 | | | | 10 | | | | 10 | | | | 11 | | | | 40 | |
Restructuring charges — net | | | 1 | | | | 2 | | | | 10 | | | | 6 | | | | 19 | |
Interest expense and amortization of debt issuance costs — net | | | 48 | | | | 49 | | | | 52 | | | | 57 | | | | 206 | |
Equity in net income of non-consolidated affiliates | | | (3 | ) | | | (4 | ) | | | (5 | ) | | | (4 | ) | | | (16 | ) |
Other (income) expenses — net | | | (49 | ) | | | (47 | ) | | | 34 | | | | (20 | ) | | | (82 | ) |
Provision (benefit) for taxes on income (loss) | | | 102 | | | | (20 | ) | | | (52 | ) | | | (34 | ) | | | (4 | ) |
Minority interests’ share | | | — | | | | 4 | | | | (2 | ) | | | (1 | ) | | | 1 | |
| | | | | | | | | | | | | | | | | | | | |
Net income (loss) | | $ | (74 | ) | | $ | 6 | | | $ | (102 | ) | | $ | (105 | ) | | $ | (275 | ) |
| | | | | | | | | | | | | | | | | | | | |
Earnings (loss) per share: | | | | | | | | | | | | | | | | | | | | |
Basic — | | $ | (1.00 | ) | | $ | 0.08 | | | $ | (1.38 | ) | | $ | (1.41 | ) | | $ | (3.71 | ) |
| | | | | | | | | | | | | | | | | | | | |
Diluted — | | $ | (1.00 | ) | | $ | 0.08 | | | $ | (1.38 | ) | | $ | (1.41 | ) | | $ | (3.71 | ) |
| | | | | | | | | | | | | | | | | | | | |
Dividends per common share | | $ | 0.09 | | | $ | 0.09 | | | $ | 0.01 | | | $ | 0.01 | | | $ | 0.20 | |
| | | | | | | | | | | | | | | | | | | | |
158175
Novelis Inc.
Notes to the Consolidated and Combined Financial StatementsNOTES TO THE CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS — (Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2005 | | | Year Ended December 31, 2005 | |
| | First
| | Second
| | Third
| | Fourth
| | Full
| | | First
| | Second
| | Third
| | Fourth
| | Full
| |
| | Quarter | | Quarter | | Quarter | | Quarter | | Year | | | Quarter | | Quarter | | Quarter | | Quarter | | Year | |
| | (restated) | | (restated) | | | | | | | | | ($ in millions, except per share data) | |
| | ($ in millions, except per share data) | |
Net sales | | | $ | 2,112 | | | $ | 2,172 | | | $ | 2,053 | | | $ | 2,026 | | | $ | 8,363 | |
Cost of goods sold (exclusive of depreciation and amortization shown below) | | | | 1,884 | | | | 1,960 | | | | 1,834 | | | | 1,892 | | | | 7,570 | |
Selling, general and administrative expenses | | | | 88 | | | | 82 | | | | 90 | | | | 92 | | | | 352 | |
Litigation settlement — net of insurance recoveries | | | | — | | | | — | | | | — | | | | 40 | | | | 40 | |
Depreciation and amortization | | | | 59 | | | | 58 | | | | 56 | | | | 57 | | | | 230 | |
Research and development expenses | | | | 8 | | | | 11 | | | | 10 | | | | 12 | | | | 41 | |
Restructuring charges (recoveries) — net | | | | (2 | ) | | | (1 | ) | | | 7 | | | | 6 | | | | 10 | |
Impairment charges on long-lived assets | | | | — | | | | 1 | | | | 4 | | | | 2 | | | | 7 | |
Interest expense and amortization of debt issuance costs — net | | | | 54 | | | | 48 | | | | 46 | | | | 46 | | | | 194 | |
Equity in net income of non-consolidated affiliates | | | | (2 | ) | | | (2 | ) | | | (2 | ) | | | — | | | | (6 | ) |
Other (income) expenses — net | | | | (34 | ) | | | 10 | | | | (48 | ) | | | (227 | ) | | | (299 | ) |
Provision for taxes on income | | | | 30 | | | | — | | | | 37 | | | | 40 | | | | 107 | |
Minority interests’ share | | | | 5 | | | | 5 | | | | 9 | | | | 2 | | | | 21 | |
| | | | | | | | | | | | |
Net income before cumulative effect of accounting change | | | | 22 | | | | — | | | | 10 | | | | 64 | | | | 96 | |
Cumulative effect of accounting change — net of tax | | | | — | | | | — | | | | — | | | | (6 | ) | | | (6 | ) |
| | | | | | | | | | | | |
Net income | | | $ | 22 | | | $ | — | | | $ | 10 | | | $ | 58 | | | $ | 90 | |
| | | | | | | | | | | |
Earnings per share: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Basic — | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income before cumulative effect of accounting change | | $ | 0.30 | | | $ | — | | | $ | 0.14 | | | $ | 0.86 | | | $ | 1.29 | | | $ | 0.30 | | | $ | — | | | $ | 0.14 | | | $ | 0.86 | | | $ | 1.29 | |
Cumulative effect of accounting change — net of tax | | | — | | | | — | | | | — | | | | (0.08 | ) | | | (0.08 | ) | | | — | | | | — | | | | — | | | | (0.08 | ) | | | (0.08 | ) |
| | | | | | | | | | | | | | | | | | | | | | |
Net earnings per share — basic | | $ | 0.30 | | | $ | — | | | $ | 0.14 | | | $ | 0.78 | | | $ | 1.21 | | | $ | 0.30 | | | $ | — | | | $ | 0.14 | | | $ | 0.78 | | | $ | 1.21 | |
| | | | | | | | | | | | | | | | | | | | | | |
Diluted — | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income before cumulative effect of accounting change | | $ | 0.30 | | | $ | — | | | $ | 0.14 | | | $ | 0.86 | | | $ | 1.29 | | | $ | 0.30 | | | $ | — | | | $ | 0.14 | | | $ | 0.86 | | | $ | 1.29 | |
Cumulative effect of accounting change — net of tax | | | — | | | | — | | | | — | | | | (0.08 | ) | | | (0.08 | ) | | | — | | | | — | | | | — | | | | (0.08 | ) | | | (0.08 | ) |
| | | | | | | | | | | | | | | | | | | | | | |
Net earnings per share — diluted | | $ | 0.30 | | | $ | — | | | $ | 0.14 | | | $ | 0.78 | | | $ | 1.21 | | | $ | 0.30 | | | $ | — | | | $ | 0.14 | | | $ | 0.78 | | | $ | 1.21 | |
| | | | | | | | | | | | | | | | | | | | | | |
Dividends per common share | | $ | 0.09 | | | $ | 0.09 | | | $ | 0.09 | | | $ | 0.09 | | | $ | 0.36 | | | $ | 0.09 | | | $ | 0.09 | | | $ | 0.09 | | | $ | 0.09 | | | $ | 0.36 | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2004 | |
| | First
| | | Second
| | | Third
| | | Fourth
| | | Full
| |
| | Quarter | | | Quarter | | | Quarter | | | Quarter | | | Year | |
| | ($ in millions, except per share data) | |
|
Net sales | | $ | 1,810 | | | $ | 1,929 | | | $ | 2,000 | | | $ | 2,016 | | | $ | 7,755 | |
Cost of goods sold (exclusive of depreciation and amortization shown below) | | | 1,585 | | | | 1,690 | | | | 1,757 | | | | 1,824 | | | | 6,856 | |
Selling, general and administrative expenses | | | 62 | | | | 54 | | | | 75 | | | | 98 | | | | 289 | |
Litigation settlement — net of insurance recoveries | | | — | | | | — | | | | — | | | | — | | | | — | |
Provision for depreciation and amortization | | | 61 | | | | 57 | | | | 60 | | | | 68 | | | | 246 | |
Research and development expenses | | | 10 | | | | 18 | | | | 13 | | | | 17 | | | | 58 | |
Restructuring charges | | | — | | | | 2 | | | | 10 | | | | 8 | | | | 20 | |
Impairment charges on long-lived assets | | | — | | | | — | | | | 9 | | | | 66 | | | | 75 | |
Interest expense and amortization of debt issuance costs — net | | | 13 | | | | 12 | | | | 11 | | | | 12 | | | | 48 | |
Equity in net income of non-consolidated affiliates | | | (2 | ) | | | (1 | ) | | | (1 | ) | | | (2 | ) | | | (6 | ) |
Other (income) expense — net | | | (35 | ) | | | 26 | | | | (15 | ) | | | (38 | ) | | | (62 | ) |
Provision for taxes on income | | | 43 | | | | 23 | | | | 45 | | | | 55 | | | | 166 | |
Minority interests’ share | | | 4 | | | | 3 | | | | 2 | | | | 1 | | | | 10 | |
| | | | | | | | | | | | | | | | | | | | |
Net income (loss) | | $ | 69 | | | $ | 45 | | | $ | 34 | | | $ | (93 | ) | | $ | 55 | |
| | | | | | | | | | | | | | | | | | | | |
Earnings (loss) per share: | | | | | | | | | | | | | | | | | | | | |
Basic | | $ | 0.93 | | | $ | 0.61 | | | $ | 0.47 | | | $ | (1.26 | ) | | $ | 0.74 | |
| | | | | | | | | | | | | | | | | | | | |
Diluted | | $ | 0.92 | | | $ | 0.61 | | | $ | 0.47 | | | $ | (1.26 | ) | | $ | 0.74 | |
| | | | | | | | | | | | | | | | | | | | |
Dividends per common share | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | |
159
Novelis Inc.
Notes to the Consolidated and Combined Financial Statements — (Continued)
| |
25. | Supplemental Guarantor InformationSUPPLEMENTAL GUARANTOR INFORMATION |
In connection with the issuance of our Senior Notes, certain of our wholly-owned subsidiaries provided guarantees of the Senior Notes. These guarantees are full and unconditional as well as joint and several. The guarantor subsidiaries (the Guarantors) comprise the majority of our businesses in Canada, the U.S., the U.K., Brazil and Switzerland, as well as certain businesses in Germany. Certain Guarantors may be subject to
176
Novelis Inc.
NOTES TO THE CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS — (Continued)
restrictions on their ability to distribute earnings to Novelis Inc. (the Parent). The remaining subsidiaries (the Non-Guarantors) of the Parent are not guarantors of the Senior Notes.
The following information presents condensed consolidating and combinedcombining statements of incomeoperations for the years ended December 31, 2006, 2005 2004 and 2003,2004, condensed consolidating and combined balance sheets as of December 31, 20052006 and December 31, 2004,2005, and condensed consolidating and combinedcombining statements of cash flows for the years ended December 31, 2006, 2005 2004 and 20032004 of the Parent, the Guarantors, and the Non-Guarantors. Investments include investmentsinvestment in and advances to non-consolidated affiliates as well as investments in net assets of divisions included in the Parent, and have been presented using the equity method of accounting. General corporate expenses and stock option and other stock-basedshare-based compensation expenses allocated by Alcan to us prior to the spin-off have also been included in the Parent’s information.
NOVELIS INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2006 | |
| | | | | | | | Non-
| | | | | | | |
| | Parent | | | Guarantors | | | Guarantors | | | Eliminations | | | Consolidated | |
| | (In millions) | |
|
Net sales | | $ | 1,572 | | | $ | 8,340 | | | $ | 2,822 | | | $ | (2,885 | ) | | $ | 9,849 | |
| | | | | | | | | | | | | | | | | | | | |
Cost of goods sold (exclusive of depreciation and amortization shown below) | | | 1,522 | | | | 8,010 | | | | 2,670 | | | | (2,885 | ) | | | 9,317 | |
Selling, general and administrative expenses | | | 72 | | | | 269 | | | | 69 | | | | — | | | | 410 | |
Depreciation and amortization | | | 15 | | | | 153 | | | | 65 | | | | — | | | | 233 | |
Research and development expenses | | | 28 | | | | 12 | | | | — | | | | — | | | | 40 | |
Restructuring charges — net | | | — | | | | 16 | | | | 3 | | | | — | | | | 19 | |
Interest expense and amortization of debt issuance costs — net | | | 48 | | | | 140 | | | | 18 | | | | — | | | | 206 | |
Equity in net income of affiliates | | | 115 | | | | (16 | ) | | | — | | | | (115 | ) | | | (16 | ) |
Other (income) expenses — net | | | 38 | | | | (124 | ) | | | 4 | | | | — | | | | (82 | ) |
| | | | | | | | | | | | | | | | | | | | |
| | | 1,838 | | | | 8,460 | | | | 2,829 | | | | (3,000 | ) | | | 10,127 | |
| | | | | | | | | | | | | | | | | | | | |
Loss before provision (benefit) for taxes on loss and minority interests’ share | | | (266 | ) | | | (120 | ) | | | (7 | ) | | | 115 | | | | (278 | ) |
Provision (benefit) for taxes on loss | | | 9 | | | | (28 | ) | | | 15 | | | | — | | | | (4 | ) |
| | | | | | | | | | | | | | | | | | | | |
Loss before minority interests’ share | | | (275 | ) | | | (92 | ) | | | (22 | ) | | | 115 | | | | (274 | ) |
Minority interests’ share | | | — | | | | — | | | | (1 | ) | | | — | | | | (1 | ) |
| | | | | | | | | | | | | | | | | | | | |
Net loss | | $ | (275 | ) | | $ | (92 | ) | | $ | (23 | ) | | $ | 115 | | | $ | (275 | ) |
| | | | | | | | | | | | | | | | | | | | |
160177
Novelis Inc.
Notes to the Consolidated and Combined Financial StatementsNOTES TO THE CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS — (Continued)
Novelis Inc.NOVELIS INC.
Condensed Consolidating and Combining Statement of IncomeCONDENSED CONSOLIDATING AND COMBINING STATEMENT OF OPERATIONS
| | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2005 | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | Consolidated
| | | Year Ended December 31, 2005 | |
| | | | | | Non-
| | | | and
| | | | | | | Non-
| | | | Consolidated and
| |
| | Parent | | Guarantors | | Guarantors | | Eliminations | | Combined | | | Parent | | Guarantors | | Guarantors | | Eliminations | | Combined | |
| | (In millions) | | | (In millions) | |
|
Net sales | | $ | 1,284 | | | $ | 6,872 | | | $ | 2,479 | | | $ | (2,272 | ) | | $ | 8,363 | | | $ | 1,284 | | | $ | 6,872 | | | $ | 2,479 | | | $ | (2,272 | ) | | $ | 8,363 | |
| | | | | | | | | | | | | | | | | | | | | | |
Cost of goods sold (exclusive of depreciation and amortization shown below) | | | 1,245 | | | | 6,283 | | | | 2,314 | | | | (2,272 | ) | | | 7,570 | | | | 1,245 | | | | 6,283 | | | | 2,314 | | | | (2,272 | ) | | | 7,570 | |
Selling, general and administrative expenses | | | 43 | | | | 242 | | | | 67 | | | | — | | | | 352 | | | | 43 | | | | 242 | | | | 67 | | | | — | | | | 352 | |
Litigation settlement — net of insurance recoveries | | | — | | | | 40 | | | | — | | | | — | | | | 40 | | | | — | | | | 40 | | | | — | | | | — | | | | 40 | |
Provision for depreciation and amortization | | | 11 | | | | 158 | | | | 61 | | | | — | | | | 230 | | |
Depreciation and amortization | | | | 11 | | | | 158 | | | | 61 | | | | — | | | | 230 | |
Research and development expenses | | | 28 | | | | 12 | | | | 1 | | | | — | | | | 41 | | | | 28 | | | | 12 | | | | 1 | | | | — | | | | 41 | |
Restructuring charges | | | — | | | | (1 | ) | | | 11 | | | | — | | | | 10 | | |
Restructuring charges — net | | | | — | | | | (1 | ) | | | 11 | | | | — | | | | 10 | |
Impairment charges on long-lived assets | | | — | | | | 1 | | | | 6 | | | | — | | | | 7 | | | | — | | | | 1 | | | | 6 | | | | — | | | | 7 | |
Interest expense and amortization of debt issuance costs — net | | | 55 | | | | 119 | | | | 20 | | | | — | | | | 194 | | | | 55 | | | | 119 | | | | 20 | | | | — | | | | 194 | |
Equity in net income of non-consolidated affiliates | | | (133 | ) | | | (6 | ) | | | — | | | | 133 | | | | (6 | ) | |
Equity in net income of affiliates | | | | (139 | ) | | | (6 | ) | | | — | | | | 139 | | | | (6 | ) |
Other income — net | | | (58 | ) | | | (222 | ) | | | (19 | ) | | | — | | | | (299 | ) | | | (58 | ) | | | (222 | ) | | | (19 | ) | | | — | | | | (299 | ) |
| | | | | | | | | | | | | | | | | | | | | | |
| | | 1,191 | | | | 6,626 | | | | 2,461 | | | | (2,139 | ) | | | 8,139 | | | | 1,185 | | | | 6,626 | | | | 2,461 | | | | (2,133 | ) | | | 8,139 | |
| | | | | | | | | | | | | | | | | | | | | | |
Income before provision (benefit) for taxes on income, minority interests’ share and cumulative effect of accounting change | | | 93 | | | | 246 | | | | 18 | | | | (133 | ) | | | 224 | | | | 99 | | | | 246 | | | | 18 | | | | (139 | ) | | | 224 | |
Provision (benefit) for taxes on income | | | 3 | | | | 107 | | | | (3 | ) | | | — | | | | 107 | | | | 3 | | | | 107 | | | | (3 | ) | | | — | | | | 107 | |
| | | | | | | | | | | | | | | | | | | | | | |
Income before minority interests’ share and cumulative effect of accounting change | | | 90 | | | | 139 | | | | 21 | | | | (133 | ) | | | 117 | | |
Income before minority interests’ share | | | | 96 | | | | 139 | | | | 21 | | | | (139 | ) | | | 117 | |
Minority interests’ share | | | — | | | | — | | | | (21 | ) | | | — | | | | (21 | ) | | | — | | | | — | | | | (21 | ) | | | — | | | | (21 | ) |
| | | | | | | | | | | | | | | | | | | | | | |
Net income (loss) before cumulative effect of accounting change | | | 90 | | | | 139 | | | | — | | | | (133 | ) | | | 96 | | |
Net income before cumulative effect of accounting change | | | | 96 | | | | 139 | | | | — | | | | (139 | ) | | | 96 | |
Cumulative effect of accounting change — net of tax | | | — | | | | (6 | ) | | | — | | | | — | | | | (6 | ) | | | (6 | ) | | | (6 | ) | | | — | | | | 6 | | | | (6 | ) |
| | | | | | | | | | | | | | | | | | | | | | |
Net income (loss) | | $ | 90 | | | $ | 133 | | | $ | — | | | $ | (133 | ) | | $ | 90 | | |
Net income | | | $ | 90 | | | $ | 133 | | | $ | — | | | $ | (133 | ) | | $ | 90 | |
| | | | | | | | | | | | | | | | | | | | | | |
161178
Novelis Inc.
Notes to the Consolidated and Combined Financial StatementsNOTES TO THE CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS — (Continued)
Novelis Inc.NOVELIS INC.
Condensed Combining Statement of IncomeCONDENSED COMBINING STATEMENT OF OPERATIONS
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2004 | | | Year Ended December 31, 2004 | |
| | | | | | Non-
| | | | | | | | | | | Non-
| | | | | |
| | Parent | | Guarantors | | Guarantors | | Eliminations | | Combined | | | Parent | | Guarantors | | Guarantors | | Eliminations | | Combined | |
| | (In millions) | | | (In millions) | |
|
Net sales | | $ | 1,152 | | | $ | 6,428 | | | $ | 2,101 | | | $ | (1,926 | ) | | $ | 7,755 | | | $ | 1,152 | | | $ | 6,428 | | | $ | 2,101 | | | $ | (1,926 | ) | | $ | 7,755 | |
| | | | | | | | | | | | | | | | | | | | | | |
Cost of goods sold (exclusive of depreciation and amortization shown below) | | | 1,106 | | | | 5,721 | | | | 1,955 | | | | (1,926 | ) | | | 6,856 | | | | 1,106 | | | | 5,721 | | | | 1,955 | | | | (1,926 | ) | | | 6,856 | |
Selling, general and administrative expenses | | | 44 | | | | 178 | | | | 67 | | | | — | | | | 289 | | | | 44 | | | | 178 | | | | 67 | | | | — | | | | 289 | |
Provision for depreciation and amortization | | | 10 | | | | 165 | | | | 71 | | | | — | | | | 246 | | |
Depreciation and amortization | | | | 10 | | | | 165 | | | | 71 | | | | — | | | | 246 | |
Research and development expenses | | | — | | | | 58 | | | | — | | | | — | | | | 58 | | | | — | | | | 58 | | | | — | | | | — | | | | 58 | |
Restructuring charges | | | — | | | | 20 | | | | — | | | | — | | | | 20 | | |
Restructuring charges — net | | | | — | | | | 20 | | | | — | | | | — | | | | 20 | |
Impairment charges on long-lived assets | | | — | | | | 8 | | | | 67 | | | | — | | | | 75 | | | | — | | | | 8 | | | | 67 | | | | — | | | | 75 | |
Interest expense and amortization of debt issuance costs — net | | | — | | | | 30 | | | | 18 | | | | — | | | | 48 | | | | — | | | | 30 | | | | 18 | | | | — | | | | 48 | |
Equity in net income of non-consolidated affiliates | | | (82 | ) | | | (6 | ) | | | — | | | | 82 | | | | (6 | ) | |
Equity in net income of affiliates | | | | (82 | ) | | | (6 | ) | | | — | | | | 82 | | | | (6 | ) |
Other (income) expense — net | | | 8 | | | | (63 | ) | | | (7 | ) | | | — | | | | (62 | ) | | | 8 | | | | (63 | ) | | | (7 | ) | | | — | | | | (62 | ) |
| | | | | | | | | | | | | | | | | | | | | | |
| | | 1,086 | | | | 6,111 | | | | 2,171 | | | | (1,844 | ) | | | 7,524 | | | | 1,086 | | | | 6,111 | | | | 2,171 | | | | (1,844 | ) | | | 7,524 | |
| | | | | | | | | | | | | | | | | | | | | | |
Income (loss) before provision for taxes on income and minority interests’ share | | | 66 | | | | 317 | | | | (70 | ) | | | (82 | ) | | | 231 | | | | 66 | | | | 317 | | | | (70 | ) | | | (82 | ) | | | 231 | |
Provision for taxes on income | | | 11 | | | | 153 | | | | 2 | | | | — | | | | 166 | | | | 11 | | | | 153 | | | | 2 | | | | — | | | | 166 | |
| | | | | | | | | | | | | | | | | | | | | | |
Income (loss) before minority interests’ share | | | 55 | | | | 164 | | | | (72 | ) | | | (82 | ) | | | 65 | | | | 55 | | | | 164 | | | | (72 | ) | | | (82 | ) | | | 65 | |
Minority interests’ share | | | — | | | | — | | | | (10 | ) | | | — | | | | (10 | ) | | | — | | | | — | | | | (10 | ) | | | — | | | | (10 | ) |
| | | | | | | | | | | | | | | | | | | | | | |
Net income (loss) | | $ | 55 | | | $ | 164 | | | $ | (82 | ) | | $ | (82 | ) | | $ | 55 | | | $ | 55 | | | $ | 164 | | | $ | (82 | ) | | $ | (82 | ) | | $ | 55 | |
| | | | | | | | | | | | | | | | | | | | | | |
162179
Novelis Inc.
Notes to the Consolidated and Combined Financial StatementsNOTES TO THE CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS — (Continued)
Novelis Inc.NOVELIS INC.
Condensed Combining Statement of IncomeCONDENSED CONSOLIDATING BALANCE SHEET
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2003 | |
| | | | | | | | Non-
| | | | | | | |
| | Parent | | | Guarantors | | | Guarantors | | | Eliminations | | | Combined | |
| | (In millions) | |
|
Net sales | | $ | 919 | | | $ | 5,499 | | | $ | 1,253 | | | $ | (1,450 | ) | | $ | 6,221 | |
| | | | | | | | | | | | | | | | | | | | |
Cost of goods sold (exclusive of depreciation and amortization shown below) | | | 878 | | | | 4,899 | | | | 1,155 | | | | (1,450 | ) | | | 5,482 | |
Selling, general and administrative expenses | | | 55 | | | | 155 | | | | 45 | | | | — | | | | 255 | |
Provision for depreciation and amortization | | | 10 | | | | 158 | | | | 54 | | | | — | | | | 222 | |
Research and development expenses | | | — | | | | 62 | | | | — | | | | — | | | | 62 | |
Restructuring charges | | | — | | | | 8 | | | | — | | | | — | | | | 8 | |
Impairment charges on long-lived assets | | | — | | | | 4 | | | | — | | | | — | | | | 4 | |
Interest expense and amortization of debt issuance costs — net | | | — | | | | 15 | | | | 18 | | | | — | | | | 33 | |
Equity in net income of non-consolidated affiliates | | | (165 | ) | | | (6 | ) | | | — | | | | 165 | | | | (6 | ) |
Other (income) expense — net | | | (9 | ) | | | (1 | ) | | | (39 | ) | | | — | | | | (49 | ) |
| | | | | | | | | | | | | | | | | | | | |
| | | 769 | | | | 5,294 | | | | 1,233 | | | | (1,285 | ) | | | 6,011 | |
| | | | | | | | | | | | | | | | | | | | |
Income before provision (benefit) for taxes on income and minority interests’ share | | | 150 | | | | 205 | | | | 20 | | | | (165 | ) | | | 210 | |
Provision (benefit) for taxes on income | | | (7 | ) | | | 66 | | | | (9 | ) | | | — | | | | 50 | |
| | | | | | | | | | | | | | | | | | | | |
Income before minority interests’ share | | | 157 | | | | 139 | | | | 29 | | | | (165 | ) | | | 160 | |
Minority interests’ share | | | — | | | | — | | | | (3 | ) | | | — | | | | (3 | ) |
| | | | | | | | | | | | | | | | | | | | |
Net income | | $ | 157 | | | $ | 139 | | | $ | 26 | | | $ | (165 | ) | | $ | 157 | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | As of December 31, 2006 | |
| | | | | | | | Non-
| | | | | | | |
| | Parent | | | Guarantors | | | Guarantors | | | Eliminations | | | Consolidated | |
| | (In millions) | |
|
ASSETS |
Current assets | | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 3 | | | $ | 37 | | | $ | 33 | | | $ | — | | | $ | 73 | |
Accounts receivable — net of allowances | | | | | | | | | | | | | | | | | | | | |
— third parties | | | 40 | | | | 864 | | | | 417 | | | | — | | | | 1,321 | |
— related parties | | | 399 | | | | 414 | | | | 52 | | | | (844 | ) | | | 21 | |
Inventories | | | 56 | | | | 963 | | | | 372 | | | | — | | | | 1,391 | |
Prepaid expenses and other current assets | | | 2 | | | | 30 | | | | 10 | | | | — | | | | 42 | |
Current portion of fair value of derivative instruments | | | — | | | | 102 | | | | 4 | | | | — | | | | 106 | |
Deferred income tax assets | | | 2 | | | | 1 | | | | 6 | | | | — | | | | 9 | |
| | | | | | | | | | | | | | | | | | | | |
Total current assets | | | 502 | | | | 2,411 | | | | 894 | | | | (844 | ) | | | 2,963 | |
Property, plant and equipment — net | | | 114 | | | | 1,253 | | | | 776 | | | | — | | | | 2,143 | |
Goodwill | | | — | | | | 28 | | | | 208 | | | | — | | | | 236 | |
Intangible assets — net | | | — | | | | 18 | | | | 2 | | | | — | | | | 20 | |
Investments | | | 409 | | | | 150 | | | | — | | | | (409 | ) | | | 150 | |
Fair value of derivative instruments — net of current portion | | | — | | | | 44 | | | | — | | | | — | | | | 44 | |
Deferred income tax assets | | | 17 | | | | 22 | | | | 37 | | | | — | | | | 76 | |
Other long-term assets | | | 1,224 | | | | 161 | | | | 129 | | | | (1,354 | ) | | | 160 | |
| | | | | | | | | | | | | | | | | | | | |
Total assets | | $ | 2,266 | | | $ | 4,087 | | | $ | 2,046 | | | $ | (2,607 | ) | | $ | 5,792 | |
| | | | | | | | | | | | | | | | | | | | |
|
LIABILITIES AND SHAREHOLDERS’ EQUITY |
Current liabilities | | | | | | | | | | | | | | | | | | | | |
Current portion of long-term debt | | $ | — | | | $ | 3 | | | $ | 141 | | | $ | — | | | $ | 144 | |
Short-term borrowings | | | | | | | | | | | | | | | | | | | | |
— third parties | | | — | | | | 129 | | | | 4 | | | | — | | | | 133 | |
— related parties | | | 7 | | | | 502 | | | | 63 | | | | (572 | ) | | | — | |
Accounts payable | | | | | | | | | | | | | | | | | | | | |
— third parties | | | 108 | | | | 914 | | | | 520 | | | | — | | | | 1,542 | |
— related parties | | | 47 | | | | 207 | | | | 62 | | | | (272 | ) | | | 44 | |
Accrued expenses and other current liabilities | | | 96 | | | | 320 | | | | 92 | | | | — | | | | 508 | |
Deferred income tax liabilities | | | — | | | | 60 | | | | 1 | | | | — | | | | 61 | |
| | | | | | | | | | | | | | | | | | | | |
Total current liabilities | | | 258 | | | | 2,135 | | | | 883 | | | | (844 | ) | | | 2,432 | |
Long-term debt — net of current portion | | | | | | | | | | | | | | | | | | | | |
— third parties | | | 1,659 | | | | 497 | | | | 2 | | | | — | | | | 2,158 | |
— related parties | | | — | | | | 1,107 | | | | 247 | | | | (1,354 | ) | | | — | |
Deferred income tax liabilities | | | 16 | | | | 49 | | | | 16 | | | | — | | | | 81 | |
Accrued postretirement benefits | | | 21 | | | | 296 | | | | 108 | | | | — | | | | 425 | |
Other long-term liabilities | | | 117 | | | | 204 | | | | 22 | | | | — | | | | 343 | |
| | | | | | | | | | | | | | | | | | | | |
| | | 2,071 | | | | 4,288 | | | | 1,278 | | | | (2,198 | ) | | | 5,439 | |
| | | | | | | | | | | | | | | | | | | | |
Commitments and contingencies | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Minority interests in equity of consolidated affiliates | | | — | | | | — | | | | 158 | | | | — | | | | 158 | |
| | | | | | | | | | | | | | | | | | | | |
Shareholders’ equity | | | | | | | | | | | | | | | — | | | | | |
Preferred stock | | | — | | | | — | | | | — | | | | — | | | | — | |
Common stock | | | — | | | | — | | | | — | | | | — | | | | — | |
Additional paid-in capital | | | 398 | | | | — | | | | — | | | | — | | | | 398 | |
Retained earnings/(accumulated deficit)/owner’s net investment | | | (198 | ) | | | (410 | ) | | | 585 | | | | (175 | ) | | | (198 | ) |
Accumulated other comprehensive income (loss) | | | (5 | ) | | | 209 | | | | 25 | | | | (234 | ) | | | (5 | ) |
| | | | | | | | | | | | | | | | | | | | |
Total shareholders’ equity | | | 195 | | | | (201 | ) | | | 610 | | | | (409 | ) | | | 195 | |
| | | | | | | | | | | | | | | | | | | | |
Total liabilities and shareholders’ equity | | $ | 2,266 | | | $ | 4,087 | | | $ | 2,046 | | | $ | (2,607 | ) | | $ | 5,792 | |
| | | | | | | | | | | | | | | | | | | | |
163180
Novelis Inc.
Notes to the Consolidated and Combined Financial StatementsNOTES TO THE CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS — (Continued)
Novelis Inc.NOVELIS INC.
Condensed Consolidating Balance SheetCONDENSED CONSOLIDATING BALANCE SHEET
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | As of December 31, 2005 | |
| | As of December 31, 2005 | | | | | | | Non-
| | | | | |
| | Parent | | Guarantors | | Non-Guarantors | | Eliminations | | Consolidated | | | Parent | | Guarantors | | Guarantors | | Eliminations | | Consolidated | |
| | (In millions) | | | (In millions) | |
|
ASSETS | ASSETS | ASSETS |
Current assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 2 | | | $ | 34 | | | $ | 64 | | | $ | — | | | $ | 100 | | | $ | 2 | | | $ | 34 | | | $ | 64 | | | $ | — | | | $ | 100 | |
Accounts receivable | | | | | | | | | | | | | | | | | | | | | |
Accounts receivable — net of allowances | | | | | | | | | | | | | | | | | | | | | |
— third parties | | | 67 | | | | 689 | | | | 342 | | | | — | | | | 1,098 | | | | 67 | | | | 689 | | | | 342 | | | | — | | | | 1,098 | |
— related parties | | | 381 | | | | 318 | | | | 22 | | | | (688 | ) | | | 33 | | | | 381 | | | | 318 | | | | 22 | | | | (688 | ) | | | 33 | |
Inventories | | | 49 | | | | 769 | | | | 310 | | | | — | | | | 1,128 | | | | 49 | | | | 769 | | | | 310 | | | | — | | | | 1,128 | |
Prepaid expenses and other current assets | | | 2 | | | | 55 | | | | 9 | | | | — | | | | 66 | | | | 2 | | | | 55 | | | | 9 | | | | — | | | | 66 | |
Current portion of fair value of derivative contracts | | | — | | | | 186 | | | | 8 | | | | — | | | | 194 | | |
Current portion of fair value of derivative instruments | | | | — | | | | 186 | | | | 8 | | | | — | | | | 194 | |
Deferred income tax assets | | | — | | | | — | | | | 8 | | | | — | | | | 8 | | | | — | | | | — | | | | 8 | | | | — | | | | 8 | |
| | | | | | | | | | | | | | | | | | | | | | |
Total current assets | | | 501 | | | | 2,051 | | | | 763 | | | | (688 | ) | | | 2,627 | | | | 501 | | | | 2,051 | | | | 763 | | | | (688 | ) | | | 2,627 | |
Property and equipment — net | | | 121 | | | | 1,297 | | | | 742 | | | | — | | | | 2,160 | | |
Property, plant and equipment — net | | | | 121 | | | | 1,297 | | | | 742 | | | | — | | | | 2,160 | |
Goodwill | | | — | | | | 25 | | | | 186 | | | | — | | | | 211 | | | | — | | | | 25 | | | | 186 | | | | — | | | | 211 | |
Intangible assets — net | | | — | | | | 18 | | | | 3 | | | | — | | | | 21 | | | | — | | | | 18 | | | | 3 | | | | — | | | | 21 | |
Investments in and advances to non-consolidated affiliates | | | 729 | | | | 144 | | | | — | | | | (729 | ) | | | 144 | | |
Fair value of derivative contracts — net of current portion | | | — | | | | 90 | | | | — | | | | — | | | | 90 | | |
Investments | | | | 729 | | | | 144 | | | | — | | | | (729 | ) | | | 144 | |
Fair value of derivative instruments — net of current portion | | | | — | | | | 90 | | | | — | | | | — | | | | 90 | |
Deferred income tax assets | | | 8 | | | | 5 | | | | 8 | | | | — | | | | 21 | | | | 8 | | | | 5 | | | | 32 | | | | — | | | | 45 | |
Other long-term assets | | | 1,129 | | | | 173 | | | | 143 | | | | (1,243 | ) | | | 202 | | | | 1,129 | | | | 173 | | | | 119 | | | | (1,243 | ) | | | 178 | |
| | | | | | | | | | | | | | | | | | | | | | |
Total assets | | $ | 2,488 | | | $ | 3,803 | | | $ | 1,845 | | | $ | (2,660 | ) | | $ | 5,476 | | | $ | 2,488 | | | $ | 3,803 | | | $ | 1,845 | | | $ | (2,660 | ) | | $ | 5,476 | |
| | | | | | | | | | | | | | | | | | | | | | |
| LIABILITIES AND SHAREHOLDERS’ EQUITY | LIABILITIES AND SHAREHOLDERS’ EQUITY | LIABILITIES AND SHAREHOLDERS’ EQUITY |
Current liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Current portion of long-term debt | | $ | — | | | $ | 2 | | | $ | 1 | | | $ | — | | | $ | 3 | | | $ | — | | | $ | 2 | | | $ | 1 | | | $ | — | | | $ | 3 | |
Short-term borrowings | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
— third parties | | | — | | | | 23 | | | | 4 | | | | — | | | | 27 | | | | — | | | | 23 | | | | 4 | | | | — | | | | 27 | |
— related parties | | | 45 | | | | 409 | | | | 17 | | | | (471 | ) | | | — | | | | 45 | | | | 409 | | | | 17 | | | | (471 | ) | | | — | |
Accounts payable | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
— third parties | | | 76 | | | | 442 | | | | 348 | | | | — | | | | 866 | | | | 78 | | | | 521 | | | | 365 | | | | — | | | | 964 | |
— related parties | | | 62 | | | | 152 | | | | 41 | | | | (217 | ) | | | 38 | | | | 62 | | | | 152 | | | | 41 | | | | (217 | ) | | | 38 | |
Accrued expenses and other current liabilities | | | 105 | | | | 411 | | | | 125 | | | | — | | | | 641 | | | | 103 | | | | 332 | | | | 108 | | | | — | | | | 543 | |
Deferred income tax liabilities | | | — | | | | 26 | | | | — | | | | — | | | | 26 | | | | — | | | | 26 | | | | — | | | | — | | | | 26 | |
| | | | | | | | | | | | | | | | | | | | | | |
Total current liabilities | | | 288 | | | | 1,465 | | | | 536 | | | | (688 | ) | | | 1,601 | | | | 288 | | | | 1,465 | | | | 536 | | | | (688 | ) | | | 1,601 | |
Long-term debt — net of current portion | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
— third parties | | | 1,742 | | | | 640 | | | | 218 | | | | — | | | | 2,600 | | | | 1,742 | | | | 640 | | | | 218 | | | | — | | | | 2,600 | |
— related parties | | | — | | | | 1,017 | | | | 226 | | | | (1,243 | ) | | | — | | | | — | | | | 1,017 | | | | 226 | | | | (1,243 | ) | | | — | |
Deferred income tax liabilities | | | — | | | | 176 | | | | 10 | | | | — | | | | 186 | | | | — | | | | 176 | | | | 10 | | | | — | | | | 186 | |
Accrued post-retirement benefits | | | 9 | | | | 213 | | | | 83 | | | | — | | | | 305 | | |
Accrued postretirement benefits | | | | 9 | | | | 213 | | | | 83 | | | | — | | | | 305 | |
Other long-term liabilities | | | 16 | | | | 163 | | | | 13 | | | | — | | | | 192 | | | | 16 | | | | 163 | | | | 13 | | | | — | | | | 192 | |
| | | | | | | | | | | | |
| | | | 2,055 | | | | 3,674 | | | | 1,086 | | | | (1,931 | ) | | | 4,884 | |
| | | | | | | | | | | | |
Commitments and contingencies | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | |
Minority interests in equity of consolidated affiliates | | | — | | | | — | | | | 159 | | | | — | | | | 159 | | | | — | | | | — | | | | 159 | | | | — | | | | 159 | |
| | |
Shareholders’ equity | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Preferred stock | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
Common stock | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
Additional paid-in capital | | | 425 | | | | — | | | | — | | | | — | | | | 425 | | | | 425 | | | | — | | | | — | | | | — | | | | 425 | |
Retained earnings | | | 92 | | | | — | | | | — | | | | — | | | | 92 | | |
Retained earnings/(accumulated deficit)/owner’s net investment | | | | 92 | | | | (2 | ) | | | 621 | | | | (619 | ) | | | 92 | |
Accumulated other comprehensive income (loss) | | | (84 | ) | | | 131 | | | | (21 | ) | | | (110 | ) | | | (84 | ) | | | (84 | ) | | | 131 | | | | (21 | ) | | | (110 | ) | | | (84 | ) |
Owner’s net investment | | | — | | | | (2 | ) | | | 621 | | | | (619 | ) | | | — | | |
| | | | | | | | | | | | | | | | | | | | | | |
Total shareholders’ equity | | | 433 | | | | 129 | | | | 600 | | | | (729 | ) | | | 433 | | | | 433 | | | | 129 | | | | 600 | | | | (729 | ) | | | 433 | |
| | | | | | | | | | | | | | | | | | | | | | |
Total liabilities and shareholders’ equity | | $ | 2,488 | | | $ | 3,803 | | | $ | 1,845 | | | $ | (2,660 | ) | | $ | 5,476 | | | $ | 2,488 | | | $ | 3,803 | | | $ | 1,845 | | | $ | (2,660 | ) | | $ | 5,476 | |
| | | | | | | | | | | | | | | | | | | | | | |
164181
Novelis Inc.
Notes to the Consolidated and Combined Financial StatementsNOTES TO THE CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS — (Continued)
Novelis Inc.NOVELIS INC.
Condensed Combined Balance SheetCONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
| | | | | | | | | | | | | | | | | | | | |
| | As of December 31, 2004 | |
| | Parent | | | Guarantors | | | Non-Guarantors | | | Eliminations | | | Combined | |
| | (In millions) | |
|
ASSETS |
Current assets | | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | — | | | $ | 12 | | | $ | 19 | | | $ | — | | | $ | 31 | |
Accounts receivable | | | | | | | | | | | | | | | | | | | | |
— third parties | | | 1 | | | | 439 | | | | 330 | | | | — | | | | 770 | |
— related parties | | | 129 | | | | 870 | | | | 37 | | | | (238 | ) | | | 798 | |
Inventories | | | 50 | | | | 801 | | | | 375 | | | | — | | | | 1,226 | |
Prepaid expenses and other current assets | | | 2 | | | | 10 | | | | 24 | | | | — | | | | 36 | |
Current portion of fair value of derivative contracts | | | | | | | | | | | | | | | | | | | | |
— third parties | | | — | | | | 20 | | | | 2 | | | | — | | | | 22 | |
— related parties | | | — | | | | 134 | | | | — | | | | — | | | | 134 | |
| | | | | | | | | | | | | | | | | | | | |
Total current assets | | | 182 | | | | 2,286 | | | | 787 | | | | (238 | ) | | | 3,017 | |
Property and equipment — net | | | 112 | | | | 1,404 | | | | 831 | | | | — | | | | 2,347 | |
Goodwill | | | — | | | | 28 | | | | 228 | | | | — | | | | 256 | |
Intangible assets — net | | | — | | | | 23 | | | | 4 | | | | — | | | | 27 | |
Investments in and advances to non-consolidated affiliates | | | 1,242 | | | | 168 | | | | — | | | | (1,288 | ) | | | 122 | |
Fair value of derivative contracts — net of current portion | | | — | | | | 1 | | | | 2 | | | | — | | | | 3 | |
Deferred income tax assets | | | — | | | | 12 | | | | — | | | | — | | | | 12 | |
Other long-term assets | | | 210 | | | | 133 | | | | 37 | | | | (210 | ) | | | 170 | |
| | | | | | | | | | | | | | | | | | | | |
Total assets | | $ | 1,746 | | | $ | 4,055 | | | $ | 1,889 | | | $ | (1,736 | ) | | $ | 5,954 | |
| | | | | | | | | | | | | | | | | | | | |
|
LIABILITIES AND INVESTED EQUITY |
Current liabilities | | | | | | | | | | | | | | | | | | | | |
Current portion of long-term debt | | | | | | | | | | | | | | | | | | | | |
— third parties | | $ | — | | | $ | — | | | $ | 1 | | | $ | — | | | $ | 1 | |
— related parties | | | 290 | | | | — | | | | — | | | | — | | | | 290 | |
Short-term borrowings | | | | | | | | | | | | | | | | | | | | |
— third parties | | | — | | | | 122 | | | | 107 | | | | — | | | | 229 | |
— related parties | | | — | | | | 231 | | | | 152 | | | | (71 | ) | | | 312 | |
Accounts payable | | | | | | | | | | | | | | | | | | | | |
— third parties | | | 6 | | | | 156 | | | | 330 | | | | — | | | | 492 | |
— related parties | | | 79 | | | | 370 | | | | 60 | | | | (167 | ) | | | 342 | |
Accrued expenses and other current liabilities | | | 16 | | | | 281 | | | | 128 | | | | — | | | | 425 | |
Deferred income tax liabilities | | | — | | | | — | | | | 1 | | | | — | | | | 1 | |
| | | | | | | | | | | | | | | | | | | | |
Total current liabilities | | | 391 | | | | 1,160 | | | | 779 | | | | (238 | ) | | | 2,092 | |
Long-term debt — net of current portion | | | | | | | | | | | | | | | | | | | | |
— third parties | | | — | | | | — | | | | 139 | | | | — | | | | 139 | |
— related parties | | | 749 | | | | 1,751 | | | | 17 | | | | (210 | ) | | | 2,307 | |
Deferred income tax liabilities | | | 43 | | | | 183 | | | | 23 | | | | — | | | | 249 | |
Accrued post-retirement benefits | | | — | | | | 199 | | | | 85 | | | | — | | | | 284 | |
Other long-term liabilities | | | 8 | | | | 174 | | | | 6 | | | | — | | | | 188 | |
Commitments and contingencies | | | | | | | | | | | | | | | | | | | | |
Minority interests in equity of consolidated affiliates | | | — | | | | — | | | | 140 | | | | — | | | | 140 | |
Invested equity | | | | | | | | | | | | | | | | | | | | |
Accumulated other comprehensive income | | | 88 | | | | 59 | | | | 29 | | | | (88 | ) | | | 88 | |
Owner’s net investment | | | 467 | | | | 529 | | | | 671 | | | | (1,200 | ) | | | 467 | |
| | | | | | | | | | | | | | | | | | | | |
Total invested equity | | | 555 | | | | 588 | | | | 700 | | | | (1,288 | ) | | | 555 | |
| | | | | | | | | | | | | | | | | | | | |
Total liabilities and invested equity | | $ | 1,746 | | | $ | 4,055 | | | $ | 1,889 | | | $ | (1,736 | ) | | $ | 5,954 | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2006 | |
| | | | | | | | Non-
| | | | | | | |
| | Parent | | | Guarantors | | | Guarantors | | | Eliminations | | | Consolidated | |
| | (In millions) | |
|
OPERATING ACTIVITIES | | | | | | | | | | | | | | | | | | | | |
Net cash provided by (used in) operating activities | | $ | 104 | | | $ | (9 | ) | | $ | 87 | | | $ | (166 | ) | | $ | 16 | |
| | | | | | | | | | | | | | | | | | | | |
INVESTING ACTIVITIES | | | | | | | | | | | | | | | | | | | | |
Capital expenditures | | | (8 | ) | | | (72 | ) | | | (36 | ) | | | — | | | | (116 | ) |
Disposal of business — net | | | (7 | ) | | | — | | | | — | | | | — | | | | (7 | ) |
Proceeds from sales of assets | | | — | | | | 38 | | | | — | | | | — | | | | 38 | |
Proceeds from loans receivable — net | | | | | | | | | | | | | | | | | | | | |
— related parties | | | 48 | | | | (60 | ) | | | (28 | ) | | | 77 | | | | 37 | |
Changes in investment in and advances to non-consolidated affiliates | | | — | | | | 3 | | | | — | | | | — | | | | 3 | |
Premiums paid to purchase derivative instruments | | | — | | | | (4 | ) | | | — | | | | — | | | | (4 | ) |
Net proceeds from settlement of derivative instruments | | | (34 | ) | | | 283 | | | | (7 | ) | | | — | | | | 242 | |
| | | | | | | | | | | | | | | | | | | | |
Net cash provided by (used in) investing activities | | | (1 | ) | | | 188 | | | | (71 | ) | | | 77 | | | | 193 | |
| | | | | | | | | | | | | | | | | | | | |
FINANCING ACTIVITIES | | | | | | | | | | | | | | | | | | | | |
Proceeds from issuance of debt | | | | | | | | | | | | | | | | | | | | |
— third parties | | | — | | | | — | | | | 41 | | | | — | | | | 41 | |
— related parties | | | — | | | | 1,300 | | | | 460 | | | | (1,760 | ) | | | — | |
Principal repayments | | | | | | | | | | | | | | | | | | | | |
— third parties | | | (83 | ) | | | (147 | ) | | | (123 | ) | | | — | | | | (353 | ) |
— related parties | | | — | | | | (1,247 | ) | | | (397 | ) | | | 1,644 | | | | — | |
Short-term borrowings — net | | | | | | | | | | | | | | | | | | | | |
— third parties | | | — | | | | 103 | | | | — | | | | — | | | | 103 | |
Dividends | | | | | | | | | | | | | | | | | | | | |
— preference shares | | | — | | | | (12 | ) | | | — | | | | 12 | | | | — | |
— common shareholders | | | (15 | ) | | | (175 | ) | | | (18 | ) | | | 193 | | | | (15 | ) |
— minority interests | | | — | | | | — | | | | (15 | ) | | | — | | | | (15 | ) |
Net receipts from Alcan | | | 5 | | | | — | | | | — | | | | — | | | | 5 | |
Debt issuance costs | | | (11 | ) | | | — | | | | — | | | | — | | | | (11 | ) |
Proceeds from issuance of common stock in connection with stock plans | | | 2 | | | | — | | | | — | | | | — | | | | 2 | |
| | | | | | | | | | | | | | | | | | | | |
Net cash provided by (used in) financing activities | | | (102 | ) | | | (178 | ) | | | (52 | ) | | | 89 | | | | (243 | ) |
| | | | | | | | | | | | | | | | | | | | |
Net increase (decrease) in cash and cash equivalents | | | 1 | | | | 1 | | | | (36 | ) | | | — | | | | (34 | ) |
Effect of exchange rate changes on cash balances held in foreign currencies | | | — | | | | 2 | | | | 5 | | | | — | | | | 7 | |
Cash and cash equivalents — beginning of year | | | 2 | | | | 34 | | | | 64 | | | | — | | | | 100 | |
| | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents — end of year | | $ | 3 | | | $ | 37 | | | $ | 33 | | | $ | — | | | $ | 73 | |
| | | | | | | | | | | | | | | | | | | | |
165182
Novelis Inc.
Notes to the Consolidated and Combined Financial StatementsNOTES TO THE CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS — (Continued)
Novelis Inc.NOVELIS INC.
Condensed Consolidating and Combined Statement of Cash FlowsCONDENSED CONSOLIDATING AND COMBINING STATEMENT OF CASH FLOWS
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2005 | | | Year Ended December 31, 2005 | |
| | | | | | | | | | Consolidated
| | | | | | | | | | | Consolidated
| |
| | | | | | Non-
| | | | and
| | | | | | | Non-
| | | | and
| |
| | Parent | | Guarantors | | Guarantors | | Eliminations | | Combined | | | Parent | | Guarantors | | Guarantors | | Eliminations | | Combined | |
| | (In millions) | | | (In millions) | |
|
OPERATING ACTIVITIES | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net cash provided by (used in) operating activities | | $ | 181 | | | $ | 407 | | | $ | 39 | | | $ | (178 | ) | | $ | 449 | | | $ | 181 | | | $ | 407 | | | $ | 39 | | | $ | (178 | ) | | $ | 449 | |
| | | | | | | | | | | | | | | | | | | | | | |
INVESTING ACTIVITIES | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Capital expenditures | | | (19 | ) | | | (120 | ) | | | (39 | ) | | | — | | | | (178 | ) | | | (19 | ) | | | (120 | ) | | | (39 | ) | | | — | | | | (178 | ) |
Proceeds from sales of assets | | | — | | | | 10 | | | | 9 | | | | — | | | | 19 | | | | — | | | | 10 | | | | 9 | | | | — | | | | 19 | |
Proceeds from (advances on) loans receivable — net — third parties | | | — | | | | 4 | | | | 15 | | | | — | | | | 19 | | |
Proceeds from (advances on) loans receivable — net | | | | | | | | | | | | | | | | | | | | | |
— third parties | | | | — | | | | 4 | | | | 15 | | | | — | | | | 19 | |
— related parties | | | (1,171 | ) | | | (156 | ) | | | (118 | ) | | | 1,819 | | | | 374 | | | | (1,171 | ) | | | (156 | ) | | | (118 | ) | | | 1,819 | | | | 374 | |
Share repurchase — intercompany | | | 400 | | | | — | | | | — | | | | (400 | ) | | | — | | | | 400 | | | | — | | | | — | | | | (400 | ) | | | — | |
Premiums paid to purchase derivative instruments | | | — | | | | (57 | ) | | | — | | | | — | | | | (57 | ) | | | — | | | | (57 | ) | | | — | | | | — | | | | (57 | ) |
Net proceeds from settlement of derivative instruments | | | 45 | | | | 94 | | | | 9 | | | | — | | | | 148 | | | | 45 | | | | 94 | | | | 9 | | | | — | | | | 148 | |
| | | | | | | | | | | | | | | | | | | | | | |
Net cash provided by (used in) investing activities | | | (745 | ) | | | (225 | ) | | | (124 | ) | | | 1,419 | | | | 325 | | | | (745 | ) | | | (225 | ) | | | (124 | ) | | | 1,419 | | | | 325 | |
| | | | | | | | | | | | | | | | | | | | | | |
FINANCING ACTIVITIES | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Proceeds from issuance of new debt | | | | | | | | | | | | | | | | | | | | | |
Proceeds from issuance of debt | | | | | | | | | | | | | | | | | | | | | |
— third parties | | | 1,875 | | | | 825 | | | | 79 | | | | — | | | | 2,779 | | | | 1,875 | | | | 825 | | | | 79 | | | | — | | | | 2,779 | |
— related parties | | | 40 | | | | 1,526 | | | | 253 | | | | (1,819 | ) | | | — | | | | 40 | | | | 1,526 | | | | 253 | | | | (1,819 | ) | | | — | |
Principal repayments | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
— third parties | | | (1,153 | ) | | | (574 | ) | | | (95 | ) | | | — | | | | (1,822 | ) | | | (1,153 | ) | | | (574 | ) | | | (95 | ) | | | — | | | | (1,822 | ) |
— related parties | | | (192 | ) | | | (988 | ) | | | — | | | | — | | | | (1,180 | ) | | | (192 | ) | | | (988 | ) | | | — | | | | — | | | | (1,180 | ) |
Short-term borrowings — net | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
— third parties | | | 2 | | | | (47 | ) | | | (100 | ) | | | — | | | | (145 | ) | | | 2 | | | | (47 | ) | | | (100 | ) | | | — | | | | (145 | ) |
— related parties | | | (30 | ) | | | (281 | ) | | | 9 | | | | — | | | | (302 | ) | | | (30 | ) | | | (281 | ) | | | 9 | | | | — | | | | (302 | ) |
Share repurchase — intercompany | | | — | | | | (400 | ) | | | — | | | | 400 | | | | — | | | | — | | | | (400 | ) | | | — | | | | 400 | | | | — | |
Dividends — common shareholders | | | (27 | ) | | | (176 | ) | | | (2 | ) | | | 178 | | | | (27 | ) | |
Dividends — minority interests | | | — | | | | — | | | | (7 | ) | | | — | | | | (7 | ) | |
Dividends | | | | | | | | | | | | | | | | | | | | | |
— common shareholders | | | | (27 | ) | | | (176 | ) | | | (2 | ) | | | 178 | | | | (27 | ) |
— minority interests | | | | — | | | | — | | | | (7 | ) | | | — | | | | (7 | ) |
Net receipts from (payments to) Alcan | | | 100 | | | | (21 | ) | | | (7 | ) | | | — | | | | 72 | | | | 100 | | | | (21 | ) | | | (7 | ) | | | — | | | | 72 | |
Debt issuance costs | | | (49 | ) | | | (22 | ) | | | — | | | | — | | | | (71 | ) | | | (49 | ) | | | (22 | ) | | | — | | | | — | | | | (71 | ) |
| | | | | | | | | | | | | | | | | | | | | | |
Net cash provided by (used in) financing activities | | | 566 | | | | (158 | ) | | | 130 | | | | (1,241 | ) | | | (703 | ) | | | 566 | | | | (158 | ) | | | 130 | | | | (1,241 | ) | | | (703 | ) |
| | | | | | | | | | | | | | | | | | | | | | |
Net increase in cash and cash equivalents | | | 2 | | | | 24 | | | | 45 | | | | — | | | | 71 | | | | 2 | | | | 24 | | | | 45 | | | | — | | | | 71 | |
Effect of exchange rate changes on cash balances held in foreign currencies | | | — | | | | (2 | ) | | | — | | | | — | | | | (2 | ) | | | — | | | | (2 | ) | | | — | | | | — | | | | (2 | ) |
Cash and cash equivalents — beginning of year | | | — | | | | 12 | | | | 19 | | | | — | | | | 31 | | | | — | | | | 12 | | | | 19 | | | | — | | | | 31 | |
| | | | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents — end of year | | $ | 2 | | | $ | 34 | | | $ | 64 | | | $ | — | | | $ | 100 | | | $ | 2 | | | $ | 34 | | | $ | 64 | | | $ | — | | | $ | 100 | |
| | | | | | | | | | | | | | | | | | | | | | |
166183
Novelis Inc.
Notes to the Consolidated and Combined Financial StatementsNOTES TO THE CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS — (Continued)
Novelis Inc.
NOVELIS INC.
Condensed Combined Statement of Cash FlowsCONDENSED COMBINING STATEMENT OF CASH FLOWS
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, 2004 | | | Year Ended December 31, 2004 | |
| | | | | | Non-
| | | | | | | | | | | Non-
| | | | | |
| | Parent | | Guarantors | | Guarantors | | Eliminations | | Combined | | | Parent | | Guarantors | | Guarantors | | Eliminations | | Combined | |
| | (In millions) | | | (In millions) | |
|
OPERATING ACTIVITIES | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net cash provided by (used in) operating activities | | $ | (60 | ) | | $ | 255 | | | $ | 19 | | | $ | (6 | ) | | $ | 208 | | | $ | (60 | ) | | $ | 255 | | | $ | 19 | | | $ | (6 | ) | | $ | 208 | |
| | | | | | | | | | | | | | | | | | | | | | |
INVESTING ACTIVITIES | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Capital expenditures | | | (6 | ) | | | (93 | ) | | | (66 | ) | | | — | | | | (165 | ) | | | (6 | ) | | | (93 | ) | | | (66 | ) | | | — | | | | (165 | ) |
Proceeds from sales of assets | | | — | | | | 15 | | | | 2 | | | | — | | | | 17 | | | | — | | | | 15 | | | | 2 | | | | — | | | | 17 | |
Business acquisitions — net of cash and cash equivalents acquired | | | — | | | | 1 | | | | (1 | ) | | | — | | | | — | | | | — | | | | 1 | | | | (1 | ) | | | — | | | | — | |
Proceeds from (advances on) loans receivable — net | | | (259 | ) | | | 895 | | | | 5 | | | | 233 | | | | 874 | | | | (259 | ) | | | 895 | | | | 5 | | | | 233 | | | | 874 | |
| | | | | | | | | | | | | | | | | | | | | | |
Net cash provided by (used in) investing activities | | | (265 | ) | | | 818 | | | | (60 | ) | | | 233 | | | | 726 | | | | (265 | ) | | | 818 | | | | (60 | ) | | | 233 | | | | 726 | |
| | | | | | | | | | | | | | | | | | | | | | |
FINANCING ACTIVITIES | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Proceeds from issuance of new debt | | | 1,039 | | | | 1,173 | | | | 134 | | | | (210 | ) | | | 2,136 | | |
Proceeds from issuance of debt | | | | 1,039 | | | | 1,173 | | | | 134 | | | | (210 | ) | | | 2,136 | |
Principal repayments | | | — | | | | (935 | ) | | | (63 | ) | | | — | | | | (998 | ) | | | — | | | | (935 | ) | | | (63 | ) | | | — | | | | (998 | ) |
Short-term borrowings — net | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
— third parties | | | — | | | | (614 | ) | | | (160 | ) | | | — | | | | (774 | ) | | | — | | | | (614 | ) | | | (160 | ) | | | — | | | | (774 | ) |
— related parties | | | — | | | | 166 | | | | 78 | | | | (23 | ) | | | 221 | | | | — | | | | 166 | | | | 78 | | | | (23 | ) | | | 221 | |
Issuance of preference shares | | | — | | | | (32 | ) | | | 32 | | | | — | | | | — | | | | — | | | | (32 | ) | | | 32 | | | | — | | | | — | |
Dividends — minority interests | | | — | | | | — | | | | (10 | ) | | | 6 | | | | (4 | ) | | | — | | | | — | | | | (10 | ) | | | 6 | | | | (4 | ) |
Net receipts from (payments to) Alcan | | | (714 | ) | | | (828 | ) | | | 30 | | | | — | | | | (1,512 | ) | | | (714 | ) | | | (828 | ) | | | 30 | | | | — | | | | (1,512 | ) |
| | | | | | | | | | | | | | | | | | | | | | |
Net cash provided by (used in) financing activities | | | 325 | | | | (1,070 | ) | | | 41 | | | | (227 | ) | | | (931 | ) | | | 325 | | | | (1,070 | ) | | | 41 | | | | (227 | ) | | | (931 | ) |
| | | | | | | | | | | | | | | | | | | | | | |
Net increase in cash and cash equivalents | | | — | | | | 3 | | | | — | | | | — | | | | 3 | | | | — | | | | 3 | | | | — | | | | — | | | | 3 | |
Effect of exchange rate changes on cash balances held in foreign currencies | | | — | | | | 1 | | | | — | | | | — | | | | 1 | | | | — | | | | 1 | | | | — | | | | — | | | | 1 | |
Cash and cash equivalents — beginning of year | | | — | | | | 8 | | | | 19 | | | | — | | | | 27 | | | | — | | | | 8 | | | | 19 | | | | — | | | | 27 | |
| | | | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents — end of year | | $ | — | | | $ | 12 | | | $ | 19 | | | $ | — | | | $ | 31 | | | $ | — | | | $ | 12 | | | $ | 19 | | | $ | — | | | $ | 31 | |
| | | | | | | | | | | | | | | | | | | | | | |
167
Novelis Inc.
Notes to the Consolidated and Combined Financial Statements — (Continued)
Novelis Inc.
Condensed Combined Statement of Cash Flows
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2003 | |
| | | | | | | | Non-
| | | | | | | |
| | Parent | | | Guarantors | | | Guarantors | | | Eliminations | | | Combined | |
| | (In millions) | |
|
OPERATING ACTIVITIES | | | | | | | | | | | | | | | | | | | | |
Net cash provided by operating activities | | $ | 107 | | | $ | 65 | | | $ | 213 | | | $ | 59 | | | $ | 444 | |
| | | | | | | | | | | | | | | | | | | | |
INVESTING ACTIVITIES | | | | | | | | | | | | | | | | | | | | |
Capital expenditures | | | (7 | ) | | | (147 | ) | | | (35 | ) | | | — | | | | (189 | ) |
Proceeds from sales of assets | | | — | | | | 8 | | | | 25 | | | | — | | | | 33 | |
Business acquisitions — net of cash and cash equivalents acquired | | | — | | | | 8 | | | | (9 | ) | | | (10 | ) | | | (11 | ) |
Proceeds from (advances on) loans receivable — net | | | 35 | | | | (1,229 | ) | | | (28 | ) | | | 12 | | | | (1,210 | ) |
| | | | | | | | | | | | | | | | | | | | |
Net cash provided by (used in) investing activities | | | 28 | | | | (1,360 | ) | | | (47 | ) | | | 2 | | | | (1,377 | ) |
| | | | | | | | | | | | | | | | | | | | |
FINANCING ACTIVITIES | | | | | | | | | | | | | | | | | | | | |
Proceeds from issuance of new debt | | | — | | | | 971 | | | | — | | | | — | | | | 971 | |
Short-term borrowings — net | | | | | | | | | | | | | | | | | | | | |
— third parties | | | — | | | | 621 | | | | (44 | ) | | | — | | | | 577 | |
— related parties | | | (77 | ) | | | 52 | | | | 8 | | | | (12 | ) | | | (29 | ) |
Net receipts from (payments to) Alcan | | | (58 | ) | | | (359 | ) | | | (126 | ) | | | (49 | ) | | | (592 | ) |
| | | | | | | | | | | | | | | | | | | | |
Net cash provided by (used in) financing activities | | | (135 | ) | | | 1,285 | | | | (162 | ) | | | (61 | ) | | | 927 | |
| | | | | | | | | | | | | | | | | | | | |
Net increase (decrease) in cash and cash equivalents | | | — | | | | (10 | ) | | | 4 | | | | — | | | | (6 | ) |
Effect of exchange rate changes on cash balances held in foreign currencies | | | — | | | | 2 | | | | — | | | | — | | | | 2 | |
Cash and cash equivalents — beginning of year | | | — | | | | 16 | | | | 15 | | | | — | | | | 31 | |
| | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents — end of year | | $ | — | | | $ | 8 | | | $ | 19 | | | $ | — | | | $ | 27 | |
| | | | | | | | | | | | | | | | | | | | |
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Item 9. | Changes In and Disagreements with Accountants on Accounting and Financial Disclosure |
None.
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Item 9A. | Controls and Procedures |
As a result of the restatement of our unaudited condensed consolidated and combined financial statements for the quarters ended March 31, 2005 and June 30, 2005, we delayed the filing of this Annual Report onForm 10-K for the year ended December 31, 2005 and our quarterly reports onForm 10-Q for the quarters ended March 31, 2006 and June 30, 2006. The delay in filing these financial statements is a direct result of the time needed to complete our recent financial review and restatement, which we concluded on May 16, 2006.
As a result of the identification of errors requiring us to restate our unaudited condensed consolidated and combined financial statements for the quarters ended March 31, 2005 and June 30, 2005, the Audit Committee engaged special legal counsel and accounting advisors to assist management in conducting a full review of matters relating to reserves and contingencies as well as adjustments made to arrive at our opening balance sheet entries as of January 6, 2005. This review identified additional accounting errors in our unaudited condensed consolidated and combined financial statements. The review uncovered no evidence of fraud, intentional misconduct or concealment on the part of us, our officers or employees.
Evaluation of disclosureDisclosure Controls and Procedures
Disclosure controls and procedures are controls and other procedures that are designed to provide reasonable assurance that the information required to be disclosed in reports filed or submitted under the Securities Exchange Act of 1934, as amended (Exchange Act), is (1) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s (SEC’s) rules and forms and (2) accumulated and communicated to management, including the chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.
In connection with the preparation of this Annual Report onForm 10-K for the year ended December 31, 2005,2006, members of management, at the direction (and with the participation) of our chief executive officer and chief financial officer, performed an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined inRule 13a-15(e) and15d-15(e)under the Securities Exchange Act of 1934, as amended (Exchange Act)), as of December 31, 2005 and concluded2006. Based on that they were not effective as a result of the material weaknesses described below that were identified in connection with the restatement of our unaudited condensed consolidated and combined financial statements for the interim periods ended March 31, 2005 and June 30, 2005. Disclosure controls and procedures are controls and other procedures that are designed to ensure that the information required to be disclosed in reports filed or submitted under the Exchange Act, is (1) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (2) accumulated and communicated to management, includingevaluation, the chief executive officer and chief financial officer concluded that our disclosure controls and procedures were not effective as appropriate to allow timely decisions regarding required disclosure.of December 31, 2006, as a result of a material weakness in the company’s accounting for income taxes. Notwithstanding this material weakness which is discussed in further detail below, management has concluded that the consolidated financial statements included in this report present fairly, in all material respects, the Company’s financial position and results of operations and cash flows for the periods presented in conformity with accounting principles generally accepted in the United States of America.
Changes in Internal Control Over Financial Reporting and Remediation of Previously Disclosed Material weaknessesWeaknesses
A material weakness is a control deficiency, or a combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected.
We were not required by Section 404 of the Sarbanes-Oxley Act of 2002 (Section 404) and related SEC rules and regulations to perform an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2005; however, we identified and reported five material weaknesses in internal control in our Annual Report onForm 10-K for the year ended December 31, 2005. A material weakness is a control deficiency, or a combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected.
The five material weaknesses we reported as of December 31, 2005 are summarized as follows:
1. Lack of sufficient resources in our accounting and finance organization.We are, however,lacked a sufficient complement of personnel with a level of financial reporting expertise commensurate with our financial reporting requirements, which resulted in our not maintaining effective controls over the financial statement close and reporting process. We also did not maintain an effective internal audit function.
2. Inadequate monitoring of non-routine and non-systematic transactions. We did not have effective controls in place to monitor and accurately record non-routine and non-systematic transactions. This primarily related to our accounting for the spin-related capital and debt transactions required to form Novelis.
3. Accounting for accrued expenses. We did not maintain effective controls over the completeness and accuracy of certain of our accrued liabilities and related expense accounts, in particular, the ongoing monitoring of developments affecting our accrued liabilities.
4. Accounting for income taxes. We did not maintain effective controls over the completeness, accuracy, presentation and disclosure of our accounting for income taxes, including the determination of income tax expense, income taxes payable and deferred income tax assets and liabilities.
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5. Accounting for derivative transactions. We did not maintain effective controls over the evaluation, documentation and accounting for derivative transactions, including transactions that we attempted to qualify for hedge accounting.
As of December 31, 2006 we were required to perform, suchand we did perform, an evaluation forof the year ending December 31, 2006 and sucheffectiveness of our internal control over financial reporting in accordance with Section 404. This evaluation will bewas based on the criteria set forth inInternal Control-Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). We cannot assure you that the material weaknesses described below will be fully remediated prior to the conclusion ofBased on this evaluation, ormanagement has concluded that we will not uncover additional material weaknesses as of December 31, 2006, the following previously reported material weaknesses have been remediated as a result of changes in internal control we implemented and we were able to observe and test as operating effectively over an appropriate period of time including the fourth quarter ending December 31, 2006. The key changes in internal control during the year and fourth fiscal quarter and remedial actions taken related to these previously reported material weaknesses are as follows:
While we were not required to conduct a Section 404 evaluation, as1. Lack of December 31, 2005, we identified the following material weaknesses:sufficient resources in our accounting and finance organization.
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| • | Lack of sufficient resources in our accounting and finance organization. We lacked a sufficient complement of personnel with a level of financial reporting expertise commensurate with our financial |
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a. We hired a new chief financial officer on July 17, 2006, appointed a new chief accounting officer on June 29, 2006 (initially hired on March 27, 2006 and appointed controller on April 27, 2006), hired a new chief internal auditor on January 9, 2006 and hired a new assistant controller on May 1, 2006. These individuals previously worked for global public companies, have public accounting experience and are certified public accountants. They possess the requisite technical accounting, internal audit, and risk management experience necessary to effectively manage our financial reporting and close process.
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| | reporting requirements, which resulted in our not maintaining effective controls over the financial statement close and reporting process. Specifically, as a result of our separation from Alcan, which involved a series of complex transactions, including corporate restructurings and refinancing activities, we lacked sufficient resources to properly perform the quarterly and annual financial statement close processes, including the review of certain account reconciliations and financial statement preparation and disclosures. Further, we did not maintain an effective internal audit function. Following our separation from Alcan, there was a lack of leadership of the internal audit function and lack of independence of internal audit personnel from the finance and accounting function due to the lines of reporting, which impacted the effectiveness of the monitoring of our internal control over financial reporting. This control deficiency contributed to the material weaknesses discussed below. |
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| • | Inadequate monitoring of non-routine and non-systematic transactions. We did not have effective controls in place to monitor and accurately record non-routine and non-systematic transactions. Specifically, the accounting for the spin-related capital and debt transactions required to form Novelis was not adequately monitored to ensure that these transactions were appropriately accounted for in accordance with GAAP. This control deficiency primarily affected Additional paid-in capital, Currency translation adjustments and Income taxes. |
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| • | Accounting for accrued expenses. We did not maintain effective controls over the completeness and accuracy of certain of our accrued liabilities and related expense accounts, in particular, the ongoing monitoring of developments affecting our accrued liabilities. Specifically, lines of communication between our internal legal department and external counsel in Brazil were inadequate to timely identify and accurately report new developments in legal proceedings to ensure they were accounted for in accordance with GAAP. In addition, we did not maintain effective controls to ensure that liabilities related to Brazilian labor claims were accurately presented and appropriately reviewed to ensure recognition in the proper period in accordance with GAAP. These matters primarily affected Accrued expenses and other current liabilities, Other long-term liabilities, Cost of sales and operating expenses and Other income — net. |
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| • | Accounting for Income Taxes. We did not maintain effective controls over the completeness, accuracy, presentation and disclosure of our accounting for income taxes, including the determination of income tax expense, income taxes payable and deferred income tax assets and liabilities. Specifically, we did not maintain effective controls to (1) timely record additional income taxes related to the deemed disposal of goodwill, (2) account for income taxes on the currency translations related to intercompany loans to our European subsidiaries, (3) ensure that proper allocation of currency gains/losses between capital and operating were used in calculating the quarterly effective tax rate, and (4) account for certain Brazilian tax loss carryforwards. This control deficiency affected Income taxes, Accrued income taxes, Deferred income taxes and Accumulated other comprehensive income. |
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| • | Accounting for derivative transactions. We did not maintain effective controls over the evaluation, documentation and accounting for derivative transactions, including transactions that we attempted to qualify for hedge accounting, in compliance with GAAP, which affected the accounting for Fair value of derivative contracts, Cost of sales and operating expenses, Other income — net, and Other comprehensive income (loss). |
Theb. We engaged outside experts, supervised by the newly hired individuals named above, control deficiencies resultedto supplement our team, specifically in the needareas of income tax reporting and stock compensation valuation.
c. Led by our chief accounting officer, and as asub-part of a revised Management Disclosure Committee, we formed a Financial Review Compliance Committee in July 2006, which also included our assistant controller, in-house SEC counsel, outside legal counsel and accounting experts. This committee was responsible for restatement of our unaudited condensed consolidatedreviewing all Quarterly Reports onForm 10-Q and combined financial statements for the quarters ended March 31, 2005 and June 30, 2005, audit adjustments to the quarter ended September 30, 2005 and the delay of the filing of this Annual Report onForm 10-K, to provide reasonable assurance such public filings were in compliance with applicable SEC and U.S. GAAP reporting requirements. We also reviewed the updated Management Disclosure Committee charter with our Audit Committee during the December 2006 regular meeting.
d. In May 2006, our current chief accounting officer began holding bi-weekly calls with the segment CFO’s. The purpose of the calls was to have formal communication between the key members of the accounting leadership team related to ongoing financial reporting, identification and discussion of significant, non-routine transactions,out-of-period adjustments, changes in internal control or financial reporting and any other areas of concern where shared communication across the regions is necessary. These calls provide a formal avenue for the year ended December 31, 2005 and our quarterly reports onForm 10-Q for the quarters ended March 31, 2006 and June 30, 2006. Additionally, these control deficiencies could result in a misstatementeffectuating change in the aforementioned account balances or disclosures that would result in a material misstatementorganization and to our annual initially disclose and document potential issues and related remediationand/or interim financial statements that would not be prevented or detected. process improvement initiatives.
Notwithstandinge. We redesigned the above material weaknesses,internal audit function such that the chief internal auditor reports to and is directly accountable to the Audit Committee of the Board of Directors thereby, helping to provide reasonable assurance of the independence of the role and the function. The internal audit function performson-site review procedures at the regions and plants and reports its findings to management and the Audit Committee. Identified issues are assigned to process owners for remediation andfollow-up procedures are performed to provide reasonable assurance that issue remediation has concluded that our annual consolidatedtaken place.
2. Inadequate monitoring of non-routine and combined financial statements were prepared in accordance with GAAP. Accordingly,non-systematic transactions.
a. While this specific weakness primarily related to the annual consolidatedaccounting for spin-related capital and combined financial statements included in our Annual Report on thisForm 10-K fairlydebt transactions required to form Novelis, we made broader changes to the internal control over
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present infinancial reporting related to non-routine and non-systematic transactions. With input from the Office of the General Counsel (OGC) and other functional resources, our chief accounting officer developed and circulated a list of known non-routineand/or non-systematic transactions. This list is sent to all material respectsmembers of the executive leadership team, the President and CFO for each segment, key functional leaders within the regions (i.e. legal, environmental, and health and safety (EHS)) and members of the corporate accounting staff prior to the filing of our financial condition, resultsQuarterly Reports onForm 10-Q and this Annual Report onForm 10-K. This list itemizes known transactions that might be considered non-routine or non-systematic, key facts and dates, and outlines the accounting and disclosure conclusions given those key facts and dates. The recipients of operationsthe list are required to review its content for completeness as well as inform the chief accounting officer of any potential changes to key facts or datesand/or the related accounting and cash flows fordisclosure. This list, along with any comments received, is reviewed by the periods presented in accordance with GAAP.Financial Review Compliance Committee.
b. As discussed above, in May 2006, our current chief accounting officer began holdingRemediation effortsbi-weekly calls with the segment CFO’s to have formal communication between the key members of the accounting leadership team related to, among other things, non-routine transactions.
Management,c. In May 2006, we implemented a formal analytical review process whereby balance sheet and or income statement account fluctuations that exceed certain, pre-established thresholds are identified, investigated and explained. These procedures assist with Audit Committee oversight, has begun implementing the following actions to remediateidentification of non-routine or non-systematic transactionsand/or the material weaknessesimproper or inconsistent application of our policies and deficiencies in disclosure controls and procedures described above:procedures.
1.3. EffortsAccounting for accrued expenses.
a. The OGC circulated new Legal Proceedings Guidelines (the Guidelines) to strengthen accountingthe corporate and finance department through additional professional staff. We have hired a number of additional professional staff overregional legal groups, and to the past several monthsEHS group leadership. This included written instructions on the reporting to the OGC any significant cases. Additionally, the Guidelines were developed with the skills and experience needed for a global public company of our size and complexity, including an individual with expertise in and responsibility for derivative accounting. We will continue to seek to strengtheninput from our accounting and finance department and strivedepartments to appropriately balance the allocation of full-time staff and consultants. As previously announced,assist in the second quarteridentification and evaluation of legal proceeding loss contingencies that should be considered for reserve or disclosure.
b. As discussed above, under non-routine transactions, we implemented a formal analytical review process and reporting package. This package is completed by the segment and plant financial leaders and account variances that exceed specific thresholds must be explained, including accrued expense accounts in the balance sheet.
c. In November of 2006 we hired Rick Dobsonimplemented a new Delegation of Authority Policy. This policy requires more active oversight, involvement and ultimate approval by the corporate management team of accrued expenses and changes in accrued expenses. This includes, but is not limited to, approving inventory reserve adjustments and accounts receivable write-offs in excess of certain limits and all asset retirement obligations, environmental liabilities, and restructuring charges. We also have refined guidelines for assessing and reporting legal claims to the OGC as our new senior vice president and chief financial officer and Robert M. Patterson as our new vice president, controller and chief accounting officer. The development of adequate corporate level accounting and finance oversight is still ongoing. We are still recruiting accounting and finance personnel and do not yet have permanent resources in place sufficient to close our books without significant reliance on third-party contractors.described above.
2. Hiring of chief internal auditor. In Januaryd. By September 2006, a new chief internal auditor was hired. The new chief internal auditor reports to our Audit Committee and has been charged with the responsibility of improving the overall effectiveness of the internal audit function. In addition, the new chief internal auditor has been charged with strengthening the internal audit department and overseeing our Section 404 evaluation of internal control over financial reporting, which will include evaluating and recommending improvements in the existing internal controls at both the corporate and business group level and establishing a mechanism to monitor the effectiveness of internal controls on an ongoing basis.
3. Use of outside consultants and advisors. While we ultimately intend to reduce our reliance on outside consultants, for the near term we have engaged additional outside consultants and advisors to assist management in oversight and preparation of our financial statements, periodic reports filed with the SEC and related matters. As we strengthen our accounting and finance department, we intend to transition more of these functions to full-time staff.
4. Increased communication internally and with outside advisors. We have increased communication byhad also implemented cross functional discussions within and among senior management, external advisors and other third parties relevant to the disclosure process. Specifically, the chief executive officer meets weekly with his management team to review operational developments and he receives written departmental reports from his executive team monthly. The Board of Directors receives timely and regular updates on issues of importance. The chief executive officer also prepares a report to the Board of Directors highlighting operational and financial results which is also distributed to his executive team.
5. Enhanced efforts to identify non-routine transactions. We have initiated bi-weekly meetings with regional finance leaders to identify non-routine transactions and their related accounting treatment at an early stage. Additionally, each quarter our controller distributes a list of non-routine transactions to members of management for their review and verification.
6. Disclosure controls and procedures improvements. With respect to the preparation of periodic reports to be filed with the SEC, we have instituted formal meetings of key personnel involved in the process and developed detailed checklists and timetables with appropriate responsibilities and structural processes. In addition, we are utilizing a system of uniform document management (e.g., numbering, dating, and red-lining drafts) and improved coordination of the drafting process with respect to our earnings releases and periodic reports.
7. Corporate level review. Several corporate level accounting and finance review practices have been implemented to improve oversight into regional accounting issues, including quarterly balance sheet and income statement analytical reviews, quarterly reviews of legal matters, income taxes, derivatives,
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currency translation adjustments, and roll forward analyses of key balance sheet and income statement accounts and footnote disclosures. We have also implemented enhanced reporting procedures within our legal, EHS, accounting and finance departments to improve the accuracy, completeness and timeliness of reporting of legal matters, non-routineaccrued expenses.
e. Led by our chief accounting officer, we held a training session in November 2006 with segment accounting and tax leaders to review, among other things, accounting for restructuring actions, asset impairments, discontinued operations and repairs and maintenance expense. In addition, we discussed our disclosure controls and procedures and Section 404 compliance. We also conducted specific training related to income tax accounting and reporting, which is discussed in more detail below.
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4. Accounting for derivative transactions.
a. At the end of 2005, and as a result of this material weakness, we elected to account for all of our derivative transactions other than the principal-only swaps on amark-to-market basis.
b. During the first quarter of 2006, we updated our hedging policy to provide additional procedural guidance to our segment financial leaders with specific account numbers in Other Income/Expense for the regions and plants to book keep themark-to-market adjustments for derivatives that do not qualify for hedge accounting, and for Regional Income purposes, the cash-settled gains or losses. During this same quarter and using our new policy we were able to qualify for hedge accounting for certain cross-currency swaps and foreign exchange transactions.
c. We also formalized a derivative fair value roll-forward template and made it part of the regional quarterly reporting packages. This roll-forward provides a proof mechanism for the changes in fair value of derivative instruments. The corporate accounting department is able to re-perform and does re-perform a significant portion of themark-to-market adjustments using third party fair value statements. This template allows us to agree the changes in fair value of derivative instruments to Other Income/Expense that do not qualify for hedge accounting; Other Comprehensive Income for the effective portion of derivatives that do qualify for hedge accounting; and the current and long-term assets and liabilities recorded in the balance sheet. We also use this template to support our related fair value disclosures of derivative instruments.
As described above, there were changes in our internal control deficiencies.during the year and during the last fiscal quarter over financial reporting that have, or are reasonably likely to have, materially affected our internal control over financial reporting as of December 31, 2006.
Remediation Plan for Material Weakness Existing as of December 31, 2006
As of December 31, 2006 we did not maintain effective controls over the accounting for income taxes. Specifically, we did not maintain effective controls as to the completeness and accuracy of the income tax provision and related deferred tax accounts. This control deficiency resulted in audit adjustments identified and recorded during the fiscal fourth quarter of 2006, including adjustments for differences between the income tax basis and financial reporting basis of our assets and liabilities.
We have implemented several control improvements during 2006 to remediate this material weakness. These are described below:
a. In May 2006, we designed and implemented a new quarterly tax package to support the preparation and global review of the income tax provision, balance sheet and footnote disclosures for our quarterly and annual reports.
b. In May 2006, we engaged outside experts to assist us with the preparation and review of the tax packages as well with the overall review and preparation of the consolidated tax provision, balance sheet and footnote disclosures. In addition to assisting us with this work in our corporate headquarters in Atlanta, we also engaged this firm to performon-site reviews and detailed testing procedures to assist with the accuracy and completeness of the tax packages at a local level and to review and discuss any potential changes in local tax law or accounting rules that may impact the current or future period accounting for income taxes. We continue to utilize these experts to assist us as described above.
c. We held multiple training sessions, including one in November, for the regional tax leaders and we covered several topics, including but not limited to, SFAS 109, FIN 18, APB 23 and the recent accounting standard FIN 48. This training was conducted in conjunction with and in the context of reviewing and preparing the quarterly and annual tax packages.
Although we believe that these remediation actions and changes in internal control will allow us to ultimately remediate this material weakness, we concluded as of December 31, 2006, that there is more than a remote likelihood that a material misstatement of our annual or interim financial statements related to
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accounting for income taxes will not be prevented or detected. Management believes it is prudent to observe and test these controls over a longer period of time prior to concluding that this weakness has been remediated, and we are further considering our current mix of internal and external staffing in the area of income taxes and may make further changes as necessary to remediate this material weakness as quickly as possible. In addition, we will continue to provide training to our tax leaders and specifically focus on areas where adjustments and errors have been previously identified.
Management’s Report on Internal Control Over Financial Reporting
Management will considerof the designCompany is responsible for establishing and operating effectivenessmaintaining adequate internal control over financial reporting as defined inRule 13a-15(f) under the Exchange Act, as amended. The Company’s internal control over financial reporting is designed to provide reasonable assurance as to the reliability of these actionsthe Company’s financial reporting and will make additional changes it determines appropriate.the preparation of financial statements in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that:
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| • | Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company, |
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| • | Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company, and; |
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| • | Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the company’s consolidated financial statements. |
Internal control over financial reporting, no matter how well designed, has inherent limitations. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,Therefore, internal control over financial reporting determined to be effective can provide only reasonable assurance with respect to financial statement preparation and may not prevent or detect all misstatements. Moreover, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Changes inThe Company’s management has assessed the effectiveness of the company’s internal control over financial reporting and related mattersas of December 31, 2006. In making this assessment, the Company used the criteria established by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in “Internal Control-Integrated Framework.”
As announcedBased on June 28,the Company’s processes and assessment, as described above, management has concluded that, as of December 31, 2006, we appointed Rick Dobson as our new senior vice president and chief financial officer. Prior to joining our company, Mr. Dobson was the chief financial officer of Aquila, Inc., a Kansas City, Missouri based operator of electricity and natural gas distribution utilities, since 2002. On March 20, 2006, we announced that Robert M. Patterson joined Novelis as a senior finance professional; Mr. Patterson later assumedresult of a material weakness as described below, the responsibilities of vice president, controller and chief accounting officer in the second quarter of 2006 once our previous controller completed her work for us. While we expect a smooth transition in the leadership of our accounting and finance organization, we cannot assure you that the departure of our previous chief financial officer and our previous controller will not lead to one or more material changes in ourCompany’s internal control over financial reporting during a future period.was not effective.
OtherA material weakness is a control deficiency, or a combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the remedial measures described aboveannual or interim financial statements will not be prevented or detected. As of December 31, 2006 we did not maintain effective controls over the accounting for income taxes. Specifically, we did not maintain effective controls as to the completeness and accuracy of the income tax provision and related deferred tax accounts. This control deficiency resulted in audit adjustments identified and recorded during the fiscal fourth quarter of 2006, including adjustments for differences between the income tax basis and financial reporting basis of our assets and liabilities. Additionally, this control deficiency could result in a material misstatement to income tax expense and deferred income tax assets and liabilities that impacted ourwould result in a material misstatement of the Company’s annual or interim
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consolidated financial statements that would not be prevented or detected. Accordingly management has determined that this control deficiency constitutes a material weakness.
Management’s assessment of the effectiveness of the Company’s internal control over financial reporting during the quarter endedas of December 31, 2005, there were no other changes2006 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting during the quarter ended December 31, 2005.their report which appears herein.
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Item 9B. | Other Information |
Our 2006 annual meeting of shareholders is scheduled to be held on October 26, 2006. Shareholders wishing to submit a proposal for possible inclusion in our proxy statement must submit the proposal in writing to our Corporate Secretary at 3399 Peachtree Road NE, Suite 1500, Atlanta, Georgia, 30326, so that it is received on or before September 8, 2006. If we are not notified of an intent to present a proposal at our 2006 annual meeting of shareholders by September 8, 2006, the holders of proxies will have the right to exercise their discretionary voting authority with respect to such proposal, if presented at the meeting, even if we do not include information regarding such proposal in our proxy statement.None.
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PART III
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Item 10. | Directors and Executive Officers of the Registrant |
Our Directors
Our board of directors is currently comprised of 13 directors. Our directors’ terms will expire at each annual shareholders meeting. The number of directors was expanded to 14 from 12 on April 27, 2006. Subsequently, Kevin Twomey and Edward Blechschmidt were appointed as directors on May 25 and June 29, 2006, respectively. J.E. Newall, our former Chairman and director, tendered his resignation from the board of directors in a letter dated July 5, 2006.
The following table sets forth information for persons currently serving as our directors. Except in the case of David FitzPatrick, Kevin Twomey and Edward Blechschmidt, all of the directors listed below have served on our board of directors since the spin-off. Mr. FitzPatrick joined our board of directors on March 24, 2005. Biographical details for each of our directors are set forth below.
| | | | | | |
Name
| | Age
| | Position
|
|
Brian W. Sturgell | | | 56 | | | Director, President and Chief Executive Officer |
William T. Monahan | | | 58 | | | Chairman of the Board |
Edward Blechschmidt(1)(4) | | | 54 | | | Director |
Jacques Bougie, O.C | | | 58 | | | Director |
Charles G. Cavell(2)(3) | | | 63 | | | Director |
Clarence J. Chandran(3)(4) | | | 57 | | | Director |
C. Roberto Cordaro(3)(4) | | | 56 | | | Director |
Helmut Eschwey(2)(3) | | | 56 | | | Director |
David J. FitzPatrick(1)(2) | | | 52 | | | Director |
Suzanne Labarge(1)(4) | | | 59 | | | Director |
Rudolf Rupprecht(4) | | | 66 | | | Director |
Kevin M. Twomey(1)(2) | | | 59 | | | Director |
Edward V. Yang(3)(4) | | | 60 | | | Director |
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(1) | | Member of our Audit Committee. |
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(2) | | Member of our Nominating and Corporate Governance Committee. |
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(3) | | Member of our Human Resources Committee. |
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(4) | | Member of our Customer Relations Committee. |
Brian W. Sturgellis the President and Chief Executive Officer of Novelis. Mr. Sturgell has 33 years of experience in the aluminum business and worked for Alcan for 15 years prior to the spin-off of Novelis from Alcan. From January 2002 until January, 2005, Mr. Sturgell was Executive Vice President and a member of the Office of the President at Alcan, and responsible for Alcan’s Rolled Products Americas and Asia, Rolled Products Europe and Packaging business groups. In this role, he oversaw the global operations of Alcan’s rolled products and packaging businesses. Mr. Sturgell has held several other positions of increasing responsibility with Alcan since 1989. Mr. Sturgell graduated from Michigan State University with a B.S. degree. He has also attended the Executive Development Program at the Kellogg Graduate School at Northwestern University in the United States.
William T. Monahanis Chairman of our board of directors. Mr. Monahan is the retired chairman and chief executive officer of Imation Corporation (imaging and data storage), where he served in that capacity from its spin-off from 3M Co. (industrial, medical, consumer and office products) in 1996 to May 2004. Prior to that, he held numerous executive positions at 3M, including Group Vice President, Senior Vice President of 3M Italy and Vice President of the data storage division. Mr. Monahan is a member of the board of directors
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of Pentair, Inc. (water industry), Hutchinson Technology Inc. (computer industry) and Mosaic, Inc. (chemicals).
Edward Blechschmidtwas Chairman, Chief Executive Officer and President of Gentiva Health Services, Inc., a leading provider of specialty pharmaceutical and home health care services, from March 2000 to June 2002. From March 1999 to March 2000, Mr. Blechschmidt served as Chief Executive Officer and a director of Olsten Corporation, the conglomerate from which Gentiva Health Services was spun off and taken public. He served as President of Olsten Corporation (staffing services) from October 1998 to March 1999. He also served as President and Chief Executive Officer of Siemens Nixdorf Americas and Siemens Pyramid Technologies (information technology) from July 1996 to October 1998. Prior to Siemens, he spent more than 20 years with Unisys Corporation (information technology), including serving as its Chief Financial Officer. Mr. Blechschmidt serves as a director of Healthsouth Corp. (healthcare), Lionbridge Technologies, Inc. (software), Option Care, Inc. (healthcare) and Columbia Laboratories, Inc. (pharmaceuticals).
Jacques Bougie, O.C. was President and Chief Executive Officer of Alcan Inc. from 1993 to 2001, at which time he retired. Mr. Bougie is also Chairman of the International Advisory Council of CGI Group Inc. (information technology) and is a member of the boards of directors of NOVA Chemicals Corporation (chemicals and plastics manufacturer) and Abitibi Consolidated Inc. (paper).
Charles G. Cavellis a retired former President and Chief Executive Officer of Quebecor World Inc., one of the world’s largest commercial printers, with plants throughout Europe, South America and North America. He served in such capacity from 1989 to his retirement in 2003. He currently serves on the board of several private companies and charitable institutions and he is Vice Chairman of the Board of Governors of Concordia University.
Clarence J. Chandranis Chairman of the Chandran Family Foundation Inc. (health care research and education) and, since 2001, Chairman of Conros Corporation (private mass market consumer products company — including LePages USA and PineMountain). He retired as President, Business Process Services, of CGI Group Inc. (information technology) in 2004 and retired as Chief Operating Officer of Nortel Networks Corporation (communications) in 2001. Mr. Chandran is a member of the Duke University Board of Visitors and the Strategic Plan Executive Committee of the Pratt School of Engineering at Duke.
C. Roberto Cordarohas been President and Chief Executive Officer and a member of the board of directors of Nuvera Fuel Cells, Inc. (fuel cell power systems manufacturing) since 2002. He was Chief Executive Officer of Motor Coach Industries International (coach manufacturing) from 2000 to 2001 and was Executive Vice President and Group President — Automotive of Cummins Inc. (engine manufacturing) from 1996 to 1999.
Helmut Eschweyhas been Chairman of the Board of Management of Heraeus Holding GmbH (precious metals) in Germany since 2003. From 1994 to 2003, Dr. Eschwey was the head of the plastics technology business at SMS AG (engineering). Before he joined SMS AG, he held management positions at Freudenberg Group of Companies (industrial products), Pirelli & C. S.p.A. (tires) and the Henkel Group (chemicals).
David J. FitzPatrickwas the senior advisor to the chief executive officer of Tyco International Ltd. (Tyco) (fire, security, electronics, healthcare and other industrial products) from March 2005 until December 2005, at which time he retired. Previously, he was Executive Vice President and Chief Financial Officer of Tyco, a post he held from September 2002 until March 2005. He was Senior Vice President and Chief Financial Officer of United Technologies Corporation (aerospace and building) from June 1998 until September 2002.
Suzanne Labargeretired in 2004 from her position as Vice Chairman and Chief Risk Officer of the Royal Bank of Canada, which she held since 1999. She was Executive Vice President, Corporate Treasury, of the Royal Bank of Canada from 1995 to 1998. She is a member of the Board of Governors of McMaster University.
Rudolf Rupprechtwas the chairman of the executive board of MAN AG (mechanical engineering and trucks), in Germany from 1996 until the end of 2004, at which time he retired. Prior to that, Dr. Rupprecht was chairman of various supervisory boards within that company which he joined in 1966. Dr. Rupprecht is
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also a member of the supervisory boards of Salzgitter AG (steel mill), MAN AG, KME AG (copper manufacturer) and Bayerische Staatsforsten (forestry and related products) and is the chairman of the supervisory board of SMS GmbH (steel mill equipment).
Kevin M. Twomeyrecently retired as President and Chief Operating Officer of The St. Joe Company (real estate), having joined the company in 1999. He currently serves as a consultant to the St. Joe Company. Mr. Twomey formerly served as Vice Chairman and Chief Financial Officer of H.F. Ahmanson & Company and its principal subsidiary, Home Savings of America (financial services). Prior to joining Ahmanson in 1993, Mr. Twomey was Chief Financial Officer at First Gibraltar Bank, owned by MacAndrews and Forbes Holdings of New York. Mr. Twomey also held management positions with MCorp and Bank of America. Mr. Twomey is a trustee of the University of North Florida and serves on the board of trustees of the United Way of Northeast Florida and the Schultz Center for Teaching and Leadership Executive Board. Mr. Twomey is also a member of the board of Trustees of the U.S. Navy Supply Corps Foundation. Mr. Twomey is a director of PartnerRe Ltd. (reinsurance) and Intergraph Corporation (computer software).
Edward V. Yanghas been Chairman of Cross Shore Acquisition Corporation (service outsourcing) since April 2006. From 2001 to 2006 he has been a senior advisor at ING Barings Private Equity Partners Asia (financial services). He was formerly Vice Chairman and Chief Executive Officer of the Netstar Group (network management services) from 2002 to 2006. Prior to this role, Mr. Yang was also a corporate senior vice president and the president of Asia Pacific at Electronic Data Systems Corporation (information technology outsourcing) from 1992 to 2000.
On November 21, 2005, we announced that due to the delay in filing our third quarter 2005 results, the Ontario Securities Commission (OSC) issued a temporary order that prohibited all trading in our securities by our directors, officers and certain other employees. The Alberta Securities Commission issued a similar order with respect to an Alberta resident director. On December 5, 2005 we announced that the OSC issued a permanent order that prohibited all trading in our securities by our directors, officers and certain other employees. The Alberta Securities Commission and the Autorite des Marches Financiers issued similar orders with respect to our directors, officers and certain other employees in Alberta and Quebec. These permanent trade orders will remain in place until two full business days after the date we have made all filings required to be made by Canadian securities laws. These cease trade orders do not apply to Messrs. Blechschmidt and Twomey.
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Our Executive Officers
The following table sets forth information for the executive officers of our company who are not directors. Biographical details for each of our executive officers who are not directors are also set forth below. Except in the cases of Leslie J. Parrette, Jr. who joined Novelis in March 2005, and Messrs. de Weert, Dobson, Fisher and Patterson, who joined our company in 2006, all of the individuals listed below have been employed by our company since the spin-off. None of the identified officers have retained their positions with Alcan after the spin-off.
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Name
| | Age
| | Position
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Martha Finn Brooks | | | 46 | | | Chief Operating Officer |
Rick Dobson | | | 47 | | | Senior Vice President and Chief Financial Officer |
Arnaud de Weert | | | 42 | | | Senior Vice President and President — Europe |
Kevin Greenawalt | | | 49 | | | Senior Vice President and President — North America |
Jack Morrison | | | 54 | | | Senior Vice President and President — Asia |
Antonio Tadeu Coelho Nardocci | | | 48 | | | Senior Vice President and President — South America |
Steven Fisher | | | 35 | | | Vice President, Strategic Planning and Corporate Development |
Steven Fehling | | | 59 | | | Vice President Global Procurement and Metal Management |
David Godsell | | | 50 | | | Vice President, Human Resources and Environment, Health and Safety |
Robert M. Patterson | | | 33 | | | Vice President and Controller |
Orville G. Lunking | | | 50 | | | Vice President and Treasurer |
Leslie J. Parrette, Jr. | | | 44 | | | General Counsel |
Brenda Pulley | | | 48 | | | Vice President, Corporate Affairs and Communications |
Thomas Walpole | | | 51 | | | Vice President and General Manager, Can Products Business Unit |
David Kennedy | | | 56 | | | Corporate Secretary |
Martha Finn Brooksis our Chief Operating Officer. Ms. Brooks joined Alcan as the President and Chief Executive Officer of Alcan’s Rolled Products Americas and Asia business group in August 2002. Ms. Brooks led three of Alcan’s business units, namely North America, Asia and Latin America. Prior to joining Alcan, Ms. Brooks was the Vice President, Engine Business, Global Marketing and Sales at Cummins Inc., a global leader in the manufacture of electric power generation systems, engines and related products. She was with Cummins Inc. for 16 years, where she held a variety of positions in strategy, international business development, marketing and sales, engineering and general management. Ms. Brooks is a member of the board of directors of International Paper Company, a member of the Board of Trustees of Manufacturers Alliance, a director of Keep America Beautiful and a Trustee of the Hathaway Brown School. Ms. Brooks holds a B.A. in Economics and Political Science and a Masters of Public and Private Management specializing in international business from Yale University in the United States.
Rick Dobsonis our Senior Vice President and Chief Financial Officer. He was the Chief Financial Officer of Aquila, Inc., the Kansas City, Missouri-based operator of electricity and natural gas distribution utilities, from 2002 until mid-2006. Mr. Dobson was Vice President of Financial Management for Aquila Merchant Services, a top five energy merchant company, from 1997 to 2002. He served as Vice President and Controller of ProEnergy, a natural gas marketing venture for Apache, from 1995 to 1997, and of Aquila Energy Corporation from 1989 to 1995. Mr. Dobson began his career in 1981 with Arthur Andersen LLP, specializing in the energy, telecommunications and homebuilding sectors and left in 1989 as an audit manager. Mr. Dobson
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earned a BBA in Accounting from the University of Wisconsin at Madison and an MBA from the University of Nebraska at Omaha. He is a certified public accountant.
Arnaud de Weertjoined Novelis in May 2006 as Senior Vice President and the President of our European Operations. Mr. de Weert was previously chief executive officer of Ontex, Europe’s largest manufacturer of private label hygienic disposables. Prior to joining Ontex in 2004, Mr. de Weert was President, Europe, Middle East and Africa, forU.S.-based tools manufacturer, Stanley Works. From 1993 to 2001, he held executive roles with GE Power Controls in Europe, reaching the position of Vice President Sales and Marketing.
Kevin Greenawaltis a Senior Vice President and the President of our North American operations. Mr. Greenawalt was the President of Rolled Products North America from April 2004 until January 2005. Mr. Greenawalt was with Alcan since 1983, holding various managerial positions in corporate and business planning, operations planning, manufacturing, sales and business unit management. Prior to the Rolled Products North America position, his most recent position at Alcan was Vice President, Manufacturing for Rolled Products Europe based in Zurich, Switzerland, where he was responsible for ten facilities in Germany, Switzerland, Italy and the United Kingdom. In the late 1990s, Mr. Greenawalt led the Alcan North American Light Gauge Products business unit. Mr. Greenawalt holds an MBA and a B.S. in Industrial Administration from Carnegie-Mellon University in the United States. He participated in the International Masters Program in Practicing Management (UK, Canada, India, Japan, and France) and was trained in Japan in Kaizen and Lean Manufacturing.
Jack Morrisonis a Senior Vice President and the President of our Asian operations. Mr. Morrison was the President, Rolled Products Asia and Chief Executive Officer of Alcan Taihan Aluminum Limited from June 2000 until January 2005. Mr. Morrison has been responsible for Aluminium Company of Malaysia since November 2001. He is also on the boards of directors of Novelis Korea Limited and Aluminium Company of Malaysia. Mr. Morrison has over 30 years experience in the aluminum industry having worked for Alcoa and Consolidated Aluminum prior to joining Alcan in 1981. Prior to his assignment in Asia, Mr. Morrison was the President of Alcan Sheet Products, North America located in Cleveland, Ohio, United States. Mr. Morrison holds a B.S. in Industrial Management from Purdue University.
Antonio Tadeu Coelho Nardocciis a Senior Vice President and the President of our South American operations following the spin-off. Mr. Nardocci joined Alcan in 1980. Mr. Nardocci was the President of Rolled Products South America from March 2002 until January 2005. Prior to that, he was a Vice President of Rolled Products operations in Southeast Asia and Managing Director of the Aluminium Company of Malaysia in Kuala Lumpur, Malaysia. Mr. Nardocci graduated from the University of São Paulo in Brazil with a degree in metallurgy. Mr. Nardocci is a member of the executive board of the Brazilian Aluminum Association.
Steven Fisheris a Vice President, Strategic Planning and Corporate Development. He is responsible for formulating the corporate strategy and originating and executing corporate mergers and acquisition transactions, as well as potential divestiture of non-core assets. This role includes ensuring consistent and rigorous valuation of all major portfolio management decisions and communicating the strategic vision to key stakeholders. Mr. Fisher served as Vice President and Controller for TXU Energy, the non-regulated subsidiary of TXU Corp. at its headquarters in Dallas, Texas from July 2005 to February 2006. Prior to joining TXU Energy, Mr. Fisher served in various senior finance roles at Aquila, Inc., including Vice President, Controller and Strategic Planning, from 2001 to 2005. Mr. Fisher is a graduate of the University of Iowa in 1993, where he holds a B.B.A. in finance and accounting. He is a certified public accountant.
Steven Fehlingis Vice President, Global Procurement and Metal Management for Novelis Inc. He is responsible for developing procurement strategy, driving global procurement improvement initiatives and for large and multi-continent contracts. He is also responsible for leading the development and implementation of policies on metal pricing, hedging, trading and the global procurement of metal. Mr. Fehling has 20 years of experience in the aluminum industry. Since joining Alcan in 1990 as Vice President Planning and Marketing for the company’s Recycling Division, Mr. Fehling held a series of senior level management positions for the organization. Prior to the spin-off from Alcan, he led global purchasing, maintained a leadership role in strategic metal policy development andday-to-day metal management and hedging activities for Alcan Rolled Products Americas and Asia business group as Vice President Metal Management and Purchasing. Mr. Fehling
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holds an MBA with a major in Logistics from Indiana University, and a B.S. in Industrial Management from Purdue University. He is also a graduate of the advanced management program at Harvard University. Active in the aluminum industry, Mr. Fehling has served on the Executive Committee and the Board of Directors of the Aluminum Association. Mr. Fehling will retire later this year.
David Godsellis our Vice President, Human Resources and Environment, Health and Safety. In this position, he has global responsibilities for all aspects of our organization’s human resources function as well as environment, health and safety. Mr. Godsell joined Alcan in 1979. After joining Alcan, he held human resources positions of increasing responsibility within the downstream Alcan fabrication group before transferring to Alcan’s smelting company in British Columbia. From 1996 until January 2005, Mr. Godsell was the Vice President of Human Resources and Environment, Health and Safety for Alcan Rolled Products Americas and Asia. Mr. Godsell began his career with the Continental Can Company in 1978 prior to joining Alcan. Mr. Godsell holds a B.A. in Economics from Carleton University in Ottawa, Canada.
Robert M. Pattersonjoined Novelis in March 2006 and is our Vice President and Controller. Mr. Patterson also currently serves as our principal accounting officer. From May 2001 until March of 2006, Mr. Patterson was with SPX Corporation, where he held a number of senior financial roles, most recently Vice President and Segment Chief Financial Officer. Prior to that he was with Arthur Andersen LLP from May 1996 to May 2001, most recently as an audit manager. His experience includes extensive work in Europe and China. Mr. Patterson, a certified public accountant, earned a B.B.A. in Business Administration and a Master’s Degree in Accounting from the University of Michigan.
Orville G. Lunkingis our Vice President and Treasurer. From August 2001 until January 2005, Mr. Lunking was the Corporate Treasurer of Smithfield Foods, Inc. From July 1997 to August 2001, Mr. Lunking was the Assistant Treasurer for Sara Lee Corporation. From 1991 to July 1997, Mr. Lunking was the Director of Global Finance for AlliedSignal Inc., now known as Honeywell International Inc. Mr. Lunking also worked for seven years, from 1984 to 1991, as a senior associate and then Vice President in a broad range of corporate financial service areas at Bankers Trust in New York. He began his career in the Treasurer’s Office of General Motors in New York, from 1981 to 1984. Mr. Lunking graduated with an undergraduate degree in geography from Dartmouth College and an MBA in Finance from the Wharton School of the University of Pennsylvania.
Leslie J. Parrette, Jr. joined Novelis as General Counsel in March 2005. From July 2000 until February 2005, he served as Senior Vice President and General Counsel of Aquila, Inc., an international electric and gas utility and energy trading company. From September 2001 to February 2005, he also served as Corporate Secretary of Aquila. Prior to joining Aquila, Mr. Parrette was a partner in the Kansas City-based law firm of Blackwell Sanders Peper Martin LLP from April 1992 through June 2000. Mr. Parrette holds an A.B.,magna cum laude, in Sociology from Harvard College and received his J.D. from Harvard Law School.
Brenda D. Pulleyis our Vice President, Corporate Affairs and Communications. She has global responsibility for our organization’s corporate affairs and communication efforts, which include branding, strategic internal and external communications and government relations. Prior to our spin-off from Alcan, Ms. Pulley was Vice President, Corporate Affairs and Government Relations of Alcan from September 2000 to 2004. Upon joining Alcan in 1998, Ms. Pulley was named Director, Government Relations. She has served as Legislative Assistant to Congressman Ike Skelton of Missouri and to the U.S. House of Representatives Subcommittee on Small Business, specializing in energy, environment, and international trade issues. She also served as Executive Director for the National Association of Chemical Recyclers, and as Director, Federal Government Relations for Safety-Kleen Corp. Ms. Pulley currently serves on the board of directors for the Junior Achievement of Georgia and is the immediate past Chairperson for America Recycles Day. Ms. Pulley earned her B.S. degree from Central Missouri State University in the United States majoring in Social Science, with a minor in communications.
Thomas Walpoleis our Vice President and General Manager, Can Products Business Unit. He is responsible for developing and coordinating Novelis’ global strategy in the can market, including recycling and promotion and also leads the Can Product business unit in North America. Mr. Walpole has over twenty-five years of aluminum industry experience having worked for Alcan since 1979. Prior to his recent
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assignment, Mr. Walpole held international positions within Alcan in Europe and Asia until 2004. He began as Vice President, Sales, Marketing & Business Development for Alcan Taihan Aluminum Ltd. and most recently was President of the Litho/Can and Painted Products for the European region. Mr. Walpole graduated from State University of New York at Oswego with a B.S. degree in Accounting, and holds a Master of Business from Case Western Reserve University.
David Kennedyis our Corporate Secretary. Since joining Alcan in 1979, Mr. Kennedy has held various legal and business positions within the Canadian downstream businesses of the Alcan Group, including Senior Counsel, with a general focus on business transactions. Mr. Kennedy is a member of many professional and business associations, including the Canadian Bar Association. Mr. Kennedy is a graduate of the University of Western Ontario and University of Toronto Law School. He has been a member of the Ontario Bar since 1976.
Board of Directors and Corporate Governance Matters
We are committed to the highest levels of corporate governance practices, which we believe are essential to our success and to the enhancement of shareholder value. Our shares are listed on the Toronto Stock Exchange and New York Stock Exchange and we make required filings with the Canadian and U.S. securities regulators. We make these filings available on our website at www.novelis.com as soon as reasonably practicable after they are electronically filed. We are subject to a variety of corporate governance and disclosure requirements. Our corporate governance practices meet the Toronto Stock Exchange Corporate Governance Guidelines (the TSX Guidelines), the New York Stock Exchange rules and other applicable regulatory requirements to ensure transparency and effective governance of the company.
Our board of directors regularly reviews corporate governance practices in light of developing requirements in this field. As new provisions come into effect, our board of directors will reassess our corporate governance practices and implement changes as and when appropriate. The following is an overview of our corporate governance practices.
Novelis Board of Directors
Our board of directors has the responsibility for stewardship of our company, including the responsibility to ensure that we are managed in the interest of our shareholders as a whole, while taking into account the interests of other stakeholders. Our board of directors supervises the management of our business and affairs and discharges its duties and obligations in accordance with the provisions of: (1) the Canada Business Corporations Act (CBCA); (2) our articles of incorporation and bylaws; (3) the charters of our board of directors and its committees; and (4) other applicable legislation and company policies.
Our corporate governance practices require that, in addition to its statutory duties, the following matters be subject to our board of directors approval: (1) capital expenditure budgets and significant investments and divestments; (2) our strategic and value-maximizing plans; (3) the number of directors within the limits provided in our articles of incorporation; and (4) any matter which may have the potential for substantial impact on our company. Our board of directors reviews the composition and size of our board of directors once a year. All new directors will receive a board of directors manual containing a record of historical public information about the company, as well as the charters of our board of directors and its committees, and other relevant corporate and business information. Senior management makes regular presentations to our board of directors on the main areas of our business. Directors are invited to tour our various facilities.
Corporate Governance Guidelines
The board of directors has adopted a charter that establishes various corporate governance guidelines relating to, among other things, the composition and organization of the board of directors, the duties and responsibilities of the board of directors and the resources and authority of the board of directors (the Board of Directors Charter). Under the Board of Directors Charter, which is available on our website at www.novelis.com and is available in print from our Corporate Secretary upon request, every meeting of the board of directors is to be followed by an executive session at which no executive directors or other members of management are present. These executive sessions are designed to ensure free and open discussion and
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communication among the non-management directors. The chairman of the board of directors leads these meetings. Mr. Monahan currently serves as chairman. Shareholders and other interested parties may communicate with the board of directors, a committee or an individual director by writing to Novelis Inc., 3399 Peachtree Rd. NE, Suite 1500, Atlanta, GA 30326, Attention: Corporate Secretary — Board Communication. All such communications will be compiled by the Corporate Secretary and submitted to the appropriate director or board committee. The Corporate Secretary will reply or take other actions in accordance with instructions from the applicable board contact.
Independence of Our Board of Directors
To assist in determining the independence of its members, our board of directors has established Guidelines on the Independence of the Directors of Novelis Inc. (Guidelines on Independence). The definition of an Independent Director under the Guidelines on Independence, which is available on our website at www.novelis.com and is available in print from our Corporate Secretary upon request, encompasses both the definition of an “unrelated” director within the meaning of the TSX Guidelines and of an “independent” director within the meaning of the rules of the New York Stock Exchange. Such a director: (1) must not have any relationship with us or any of our employees which is likely to be perceived to interfere with the exercise of his or her judgment in a manner that is independent from management; and (2) must not have an interest or relationship which could reasonably be perceived to materially interfere with his or her ability to act in the best interests of our company (an Independent Director). Under the Guidelines on Independence, the following relationships generally will be considered not to be material relationships that would impair a director’s independence: (1) if a director is an officer, partner or significant shareholder in an entity that does business with us and the annual sales or purchases, for goods or services, to or from us are less than two percent of the consolidated gross annual revenues of that entity; (2) if a director is a limited partner, a non-managing member or occupies a similar position in an entity that does business with us, or has a shareholding in such entity which is not significant, and who, in each case, has no active role in sales to or in providing services to us and derives no direct material personal benefit from the same; and (3) if a director serves as an officer, director or trustee of a charitable organization and our charitable contributions to the organization are less than two percent of that organization’s total consolidated gross annual revenues. For purposes of the Guidelines on Independence, a “significant shareholding” means direct or indirect beneficial ownership of five percent or more of the outstanding equity or voting rights of the relevant entity. Our board of directors has determined that all members of the board of directors, with the exception of Brian W. Sturgell, are Independent Directors.
The Guidelines on Independence establish standards for members of our Audit, Human Resources and Nominating and Corporate Governance Committees. These standards comply with the audit committee member independence qualifications under the U.S. Sarbanes-Oxley Act of 2002 (SOX). To satisfy the SOX audit committee qualifications, a director must not, directly or indirectly, accept any consulting, advisory or other compensatory fee from us (except in his or her capacity as director) and may not be an affiliated person of our company or any subsidiary other than in his or her capacity as a member of our board of directors or any committee of our board of directors.
Committees of Our Board of Directors
Our board of directors has established four standing committees: the Audit Committee, the Nominating and Corporate Governance Committee, the Human Resources Committee and the Customer Relations Committee. Each committee is governed by its own charter which is available on our website at www.novelis.com and is available in print from our Corporate Secretary upon request. All four standing committees are required to be composed entirely of Independent Directors.
According to their authority as set out in their charters, our board and each of its committees may engage outside advisors at the expense of Novelis.
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Audit Committee and Financial Experts
Our board of directors has a separately-designated standing Audit Committee established in accordance with Section 3(a)(58)(A) of the Exchange Act, the requirements of the CBCA and the New York Stock Exchange and Toronto Stock Exchange rules. Our board of directors has determined that Edward Blechschmidt, David J. FitzPatrick, Suzanne Labarge and Kevin M. Twomey are Audit Committee financial experts as defined by the rules of the SEC and that each member of our Audit Committee is an Independent Director within the meaning of the applicable New York Stock Exchange and Toronto Stock Exchange listing standards.
Our Audit Committee’s main objective is to assist our board of directors in fulfilling its oversight responsibilities for the integrity of our financial statements, our compliance with legal and regulatory requirements, the qualifications and independence of our independent registered public accounting firm and the performance of both our internal audit function and our independent registered public accounting firm. Under the Audit Committee charter, the Audit Committee is responsible for, among other matters:
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| • | directly appointing, retaining, evaluating, compensating and terminating our independent registered public accounting firm; |
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| • | discussing with our independent registered public accounting firm their independence; |
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| • | reviewing with our independent registered public accounting firm the scope and results of their audit; |
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| • | pre-approving all audit and permissible non-audit services to be performed by our independent registered public accounting firm; |
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| • | overseeing the financial reporting process and discussing with management and our independent registered public accounting firm the interim and annual financial statements that we file with the SEC; and |
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| • | reviewing and monitoring our accounting principles, accounting policies and disclosure, internal control over financial reporting and disclosure controls and procedures. |
Our Audit Committee will also assist us in ensuring that our process for monitoring compliance with, and dealing with violations of, our Code of Conduct, which is described below, is established and updated. In particular, our Audit Committee has established procedures in relation to complaints or concerns that we may receive involving accounting, internal accounting controls or audit matters, including the anonymous handling thereof. Such procedures are available at www.novelis.com under our Code of Conduct.
Nominating and Corporate Governance Committee
Our Nominating and Corporate Governance Committee has the broad responsibility of regularly reviewing our corporate governance practices in general. Our Nominating and Corporate Governance Committee is composed entirely of Independent Directors.
In addition to its responsibilities for the design, implementation, review, and evaluation of our corporate governance policies and practices, our Nominating and Corporate Governance Committee oversees the composition and size of our board of directors. The committee reviews candidates for nomination as directors and recommends candidates for election to our board of directors. The committee also considers nominees submitted by shareholders to our Corporate Secretary. You may submit director nominations in writing to Novelis Inc., 3399 Peachtree Road, NE Suite 1500, Atlanta Georgia, 30326, Attention: Corporate Secretary.
In identifying and evaluating candidates for nomination to our board of directors, our Nominating and Corporate Governance Committee considers several factors, including judgment, independence, skill, diversity and experience with businesses and other organizations of comparable size. The qualifications and backgrounds of prospective candidates are reviewed in the context of the current composition of the board of directors to ensure it maintains the proper balance of knowledge, experience and diversity to effectively manage our business for the long-term interests of our shareholders. Our Nominating and Corporate Governance Committee is allowed to employ search firms for identifying and evaluating director nominees.
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Our Nominating and Corporate Governance Committee assesses and ensures on an annual basis the effectiveness of our board of directors as a whole, of each committee of our board of directors and the contribution of individual directors. Each director will complete a survey of board effectiveness on an annual basis which we anticipate will cover the subjects under the categories of board composition, responsibility, meetings and committees. As part of this survey, each of our directors will be asked to complete a self-evaluation and an evaluation of the board of directors as a whole and its committees. Our Nominating and Corporate Governance Committee also assesses our board’s relationship with management.
Human Resources Committee
Our Human Resources Committee has the broad responsibility to review human resources policy and employee relations matters and makes recommendations with respect to such matters to our board of directors or our chief executive officer, as appropriate. Our Human Resources Committee is composed entirely of Independent Directors. Its specific roles and responsibilities are set out in its charter. Our Human Resources Committee will periodically review the effectiveness of our overall management organization structure and succession planning for senior management, review recommendations for the appointment of executive officers, and consider and make recommendations to our board of directors based on trends and developments in the area of human resource management.
Our Human Resources Committee will establish our general compensation philosophy and oversee the development and implementation of compensation policies and programs. It also will review and approve the level ofand/or changes in the compensation of individual executive officers, except that in the case of the chief executive officer and chief operating officer, it will make recommendations regarding compensation and objectives to the board of directors, in each case taking into consideration individual performance and competitive compensation practices.
Our Human Resources Committee has the responsibility of reviewing our policies, management practices and performance in environment, health and safety matters and making recommendations to our board of directors on such matters in light of current and changing requirements. Our Human Resources Committee will also review, assess and provide advice to our board of directors on policy, legal, regulatory and consumer trends and developments related to the environment, as they impact us, our employees, businesses, processes and products.
Customer Relations Committee
In an advisory capacity, our Customer Relations Committee reviews information furnished by management, provides advice and counsel, and serves as a conduit for communications with our board of directors for the purposes of deepening our board’s understanding of: (1) key end-use markets served by us; (2) our existing and prospective customers in such markets; (3) the nature of our relationships with such customers (and efforts to further develop such relationships); (4) the needs of, and trends facing, our customers and key end-use markets; (5) the fact base regarding FRP markets and competitive environments that, in the foreseeable future, may be served by the company; and (6) our efforts to identify and implement best practices in the areas of marketing and sales.
Code of Ethics and Code of Conduct
Novelis has adopted a Code of Ethics for Senior Financial Officers (Code of Ethics) that applies to our senior financial officers including our chief executive officer, chief financial officer and controller. We have also adopted a Code of Conduct that governs all our employees as well as our directors. As an annex to the Code of Conduct and supplemental thereto, we have adopted additional standards specifically tailored to our business operations around the globe. Copies of the Code of Ethics and Code of Conduct are available on our website at www.novelis.com under the “Investors/Corporate Governance Practices” captions. We will promptly disclose any future amendments to these codes on our website as well as any waivers from these codes for executive officers and directors. Copies of these codes are also available in print upon request by our shareholders from our Corporate Secretary.
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We have also established “whistleblower” procedures so that an employee can anonymously report concerns that he or she may have regarding compliance with corporate policies, the Code of Conduct, the Code of Ethics, applicable laws or auditing, internal accounting controls and accounting matters. These procedures are part of the Code of Conduct.
Section 16(a) Beneficial Ownership Reporting Compliance
The rules of the SEC require that we disclose late filings of reports of share ownership by Novelis directors and executive officers. Because we were a “foreign private issuer” for U.S. securities law purposes throughout the 2005 fiscal year, our directors and officers were exempt from the filing requirements of Section 16(a) of the Exchange Act. Accordingly, we have nothing to report in respect of Section 16(a) compliance in 2005. We determined that under the rules and regulations promulgated by the SEC, as of February 27, 2006, a majority of our outstanding shares are now directly or indirectly held by U.S. residents and, accordingly, we ceased to qualify as a foreign private issuer. We will henceforth assume the status of a domestic issuer for purposes of the Exchange Act. Therefore, our directors and officers are now required to file reports under Section 16(a) of the Exchange Act.
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Item 11. | Executive Compensation |
Directors’ Compensation
Each of our non-executive directors is entitled to receive compensation equal to $150,000 per year, payable in quarterly installments, except that the directors who are members of our Audit Committee are entitled to $155,000. The chairman of our board of directors is to receive compensation equal to $250,000 per year, and the chair of our Audit Committee is entitled to receive $175,000 per year. We have adopted a Deferred Share Unit Plan for Non-Executive Directors, pursuant to which 50% of our directors’ compensation is required to be paid in the form of director’s deferred share units (DDSUs), and 50% in the form of either cash, additional DDSUs, or a combination of the two at the election of each non-executive director, unless otherwise determined by our Human Resources Committee. An employee of our company who is a director is not entitled to receive fees for serving on our board of directors.
Because at least half of our non-executive directors’ compensation will be paid in DDSUs, our non-executive directors are not required to own a specific amount of our common shares. DDSUs are the economic equivalent of our common shares. A director cannot redeem the accumulated DDSUs until he or she ceases to be a member of our board of directors.
Our board of directors believes that compensation in the form of DDSUs together with the requirement that our non-executive directors retain all DDSUs until they cease to be a director helps to align the interests of our non-executive directors with those of our shareholders.
The number of DDSUs to be credited to the account of a non-executive director each quarter will be determined by dividing the quarterly amount payable in DDSUs, by the average closing prices of a common share on the Toronto and New York stock exchanges on the last five trading days of each quarter. Additional DDSUs will be credited to each non-executive director corresponding to dividends declared on our common shares. The DDSUs are redeemable only upon termination of the directorship and may be redeemed in cash, our common shares or a combination thereof, at the election of the director. The amount to be paid by us upon redemption will be calculated by multiplying the accumulated balance of DDSUs by the average closing prices of a common share on the Toronto and New York stock exchanges on the last five trading days prior to the redemption date. For services rendered by directors in 2005, 57,051 DDSUs were granted.
Our non-executive directors are entitled to reimbursement for transportation, lodging and other expenses incurred in attending meetings of our board of directors and meetings of committees of our board of directors. Our non-executive directors who are not Canadian residents are entitled to reimbursement for tax advice related to compensation.
The following table sets out the individual election of each non-executive director in relation to their compensation.
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| | | | | | | | | | | | |
| | Portion of Fees
| | | | | | | |
| | Paid in the Form of
| | | Portion of Fees
| | | Amount of Fees
| |
Name | | DDSUs | | | Paid in Cash | | | Paid in Cash (US$) | |
|
Edward Blechschmidt | | | 100 | % | | | 0 | % | | | — | |
Jacques Bougie, O.C | | | 100 | % | | | 0 | % | | | — | |
Charles G. Cavell | | | 50 | % | | | 50 | % | | | 77,500 | |
Clarence J. Chandran | | | 100 | % | | | 0 | % | | | — | |
C. Roberto Cordaro | | | 50 | % | | | 50 | % | | | 75,000 | |
Helmut Eschwey | | | 50 | % | | | 50 | % | | | 75,000 | |
David J. FitzPatrick | | | 50 | % | | | 50 | % | | | 64,583 | |
Suzanne Labarge | | | 50 | % | | | 50 | % | | | 87,500 | |
William T. Monahan | | | 50 | % | | | 50 | % | | | 75,000 | |
J.E. Newall | | | 100 | % | | | 0 | % | | | — | |
Rudolf Rupprecht | | | 50 | % | | | 50 | % | | | 77,500 | |
Kevin Twomey | | | 50 | % | | | 50 | % | | | — | |
Edward Yang | | | 50 | % | | | 50 | % | | | 77,500 | |
Executive Compensation
Our Human Resources Committee is responsible for administering the compensation program for our executive officers. Our executive compensation program is based upon apay-for-performance philosophy. Under our program, an executive’s compensation has three components, namely, base salary, short-term (annual) incentive awards (STIP) and long-term incentives. Our Human Resources Committee is assisted by independent consultants.
Base Salary
The target base salary is the median of a salary range for an executive officer and reflects the competitive level of similar positions in a compensation peer group and as reported in the survey information. Actual base salaries for executive officers reflect the individual’s performance and contribution to the company. Base salaries of executive officers are therefore reviewed annually and any proposed changes are approved by our Human Resources Committee before implementation. The board of directors must approve base salaries for the most senior of the executive officers including those listed in the Summary Compensation Table. We have established a compensation peer group, and we utilize published survey information from established human resources consulting firms.
Short-Term (Annual) Incentives
We provide annual incentive benefits, which are administered by our Human Resources Committee. Short-term incentive awards are determined by three components, each based on a different aspect of our performance. For each position, a target award is set (expressed as “percent of base salary midpoint”) reflecting both the responsibilities of the position and the competitive compensation levels. For 2005, the short-term incentive awards were determined by performance measured against the following three components:
1. 50% of the incentive opportunity of an executive is based on our overall cash flow generation as measured against working capital turns improvement;
2. 40% of the incentive opportunity is based on our profitability as measured against economic value added targets, or EVA (a registered trademark of Stern Stewart & Co.); and
3. 10% of the incentive opportunity is based on the achievement of environment, health and safety objectives as measured against pre-established continuous improvement targets.
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The overall award paid is the sum of the weighted results of each component, modified for individual performance and contribution to the company. Currently, short-term incentive awards are paid in cash. For 2006, the three measurement criteria described above will remain unchanged except that 40% of the incentive opportunity will now be measured against Regional Income targets instead of EVA targets. If the 2006 Incentive Plan is approved by our shareholders at the 2006 annual meeting of shareholders, short-term incentive awards may be paid in cash, common shares or a combination of both. The award paid may range from zero when the results achieved are less than the minimum target thresholds set by our Human Resources Committee, up to 200% of the target award when the results achieved are at or exceed the maximum target level which was set by our Human Resources Committee. For 2005, executive officers earned STIP awards that were generally above the target amounts reflecting performance on the three performance components that was above the pre-established targets.
Long-Term Incentives
The purpose of our long-term incentives is to attract and retain employees and to encourage them to contribute to our growth and long-term success. Long-term incentives are tied to the successful share price performance of the company thereby aligning the interests of our executives with those of our shareholders.
Stock Options
On January 5, 2005, our board of directors adopted the Novelis Conversion Plan of 2005 (the Conversion Plan) to allow for all Alcan stock options held by employees of Alcan who became our employees following our spin-off from Alcan to be replaced with options to purchase our common shares. While new options may be granted under the Conversion Plan, there were no new options granted in 2005 under the plan. As of December 31, 2005 our employees held stock options covering 2,704,790 of our common shares at a weighted average exercise price per share of $21.60. No future awards will be granted under the Conversion Plan if the 2006 Incentive Plan is approved by our shareholders at the 2006 annual meeting of shareholders. All converted options that were vested on the spin-off date continued to be vested. Unvested options vest in four equal annual installments beginning on January 6, 2006, the first anniversary of the spin-off date. In the case of an unsolicited change of control of Novelis, all options will become immediately exercisable.
Stock Price Appreciation Units
Our board of directors approved the Stock Price Appreciation Unit Plan, effective as of January 5, 2005. Prior to the spin-off date, a small number of Alcan employees held Alcan stock price appreciation units (SPAUs) entitling them to receive cash in an amount equal to the excess of the market value of an Alcan common share on the SPAU exercise date over the market value of an Alcan common share on the SPAU grant date. As of the spin-off date, we replaced all of the Alcan SPAUs held by employees of Alcan who became our employees, including our executive officers, with Novelis SPAUs. There were no new SPAUs granted in 2005 under the plan. No future awards will be granted under the Stock Price Appreciation Unit Plan if the 2006 Incentive Plan is approved by our shareholders at the 2006 annual meeting of shareholders. As of December 31, 2005, our employees held 418,777 SPAUs at a weighted average price of $22.04. All converted SPAUs that were vested on the spin-off date continued to be vested. Unvested SPAUs vest in four equal annual installments beginning on January 6, 2006, the first anniversary of the spin-off date. In the case of a change of control of Novelis, all SPAUs will become immediately exercisable.
Novelis Founders Performance Awards
On March 24, 2005, our board of directors adopted the Novelis Founders Performance Award Plan (the Founders Plan) to allow for an additional compensation opportunity tied to Novelis share price improvement targets for certain of our executives approved by the Human Resources Committee, including those listed in the Summary Compensation Table. Participants earn performance share units (PSUs) if Novelis share price improvement targets are achieved within prescribed time periods. The Founders Plan identifies three relevant performance periods. The first performance period runs from March 24, 2005 to March 23, 2008, the second performance period runs from March 24, 2006 to March 23, 2008 and the third performance period runs from
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March 24, 2007 to March 23, 2008. The share price improvement targets for these three tranches are $23.57, $25.31 and $27.28, respectively. Participants are eligible to receive an aggregate of 536,100 PSUs under the plan, but only if the share price improvement targets are achieved. An equal amount of PSUs may be earned during each performance period if the applicable share price improvement target is achieved during such period. As described below in footnote 1 under the caption “Long-Term Incentive Plan Table — Founders Plan,” in March 2006 Mr. Sturgell and our board of directors agreed to alter the allocation of Mr. Sturgell’s PSUs for each of the three tranches.
If earned, a particular tranche will be paid in cash on a particular “payment date,” which is defined as the later of six months from the date the specific share price improvement target is achieved or twelve months after the start of the applicable performance period. The value of a PSU equals the average of the daily closing price of our common stock as reported on the New York Stock Exchange for the last five trading days prior to the payment date. For example, the share price improvement target for the performance period running from March 24, 2005 to March 23, 2008 has already been achieved and 180,350 PSUs were earned on June 20, 2005. Subsequent to June 30, 2005, 48,500 PSUs were forfeited, leaving 131,850 PSUs still active. The value of each of these PSU’s was calculated in the manner described above using a valuation date of March 24, 2006 (which is the date that is twelve months after the start of the applicable performance period). In April 2006, these PSUs were settled in cash in the amount of $2,655,459.
On March 14, 2006, the board of directors amended the Founders Plan in order to clarify when PSUs will be earned under the second and third tranches of the Founders Plan for periods beginning in 2006 and 2007, respectively. The amended Founders Plan now provides that the second and third tranches of PSUs will be earned if, during the period of each tranche, the share price reaches (or exceeds) the target price and is maintained or exceeded for 15 consecutive trading days during an open trading period for directors and executive officers. An open trading period is any period, other than a trading blackout period, in which directors and executives are free to purchase or sell shares of our common stock. Previously, the plan did not specify that the15-day vesting period must occur during an open trading period.
Summary Compensation Table
The following table sets out the compensation for our chief executive officer and the four other most highly compensated executive officers (collectively, the Named Executive Officers) for the years ended December 31, 2005, December 31, 2004 and December 31, 2003.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Long-Term
| | |
| | | | Annual Compensation | | Compensation Awards | | |
| | | | | | | | | | | | Shares
| | |
| | | | | | Bonus
| | | | | | Under
| | |
| | | | | | (Executive
| | | | | | Options
| | All
|
| | | | | | Performance
| | Other Annual
| | Restricted
| | Granted/
| | Other
|
| | | | Salary
| | Award)
| | Compensation(1)
| | Share Units
| | SPAUs(2)
| | Compensation(3)
|
Name And Principal Position | | Year | | ($) | | ($) | | ($) | | ($) | | (#) | | ($) |
|
Brian W. Sturgell | | | 2005 | | | | 985,000 | | | | 820,147 | | | | 426,371 | (4) | | | 3,876,090 | (5) | | | — | | | | 223,157 | (7) |
(President and Chief | | | 2004 | | | | 781,200 | | | | 932,257 | | | | 280,686 | (4) | | | — | | | | 438,751 | | | | 41,301 | |
Executive Officer) | | | 2003 | | | | 600,000 | | | | 561,845 | | | | 254,115 | (4) | | | 347,212 | (6) | | | 138,114 | | | | 29,679 | |
Martha Finn Brooks | | | 2005 | | | | 655,000 | | | | 716,252 | | | | 298,669 | (8) | | | 1,828,600 | (5) | | | — | | | | 1,889,844 | (9) |
(Chief Operating Officer) | | | 2004 | | | | 514,400 | | | | 631,538 | | | | 50,723 | (8) | | | — | | | | 155,974 | | | | 14,666 | |
| | | 2003 | | | | 440,000 | | | | 445,608 | | | | 32,661 | | | | — | | | | 71,438 | | | | 16,440 | |
Christopher Bark-Jones | | | 2005 | | | | 440,611 | | | | 472,667 | | | | 20,289 | | | | 1,440,034 | (5) | | | — | | | | — | |
(President — European | | | 2004 | | | | 440,600 | | | | 395,210 | | | | 43,892 | | | | — | | | | 127,398 | | | | — | |
Operations)(12) | | | 2003 | | | | 375,000 | | | | 465,972 | | | | 9,659 | | | | — | | | | 54,769 | | | | 8,348 | |
Kevin Greenawalt | | | 2005 | | | | 310,000 | | | | 323,190 | | | | 18,450 | | | | 439,044 | (5) | | | — | | | | 11,933 | |
(President — North | | | 2004 | | | | 255,400 | | | | 192,850 | | | | 582,751 | (10) | | | — | | | | 29,766 | | | | 15,655 | |
American Operations) | | | 2003 | | | | 230,800 | | | | 175,440 | | | | 381,849 | (10) | | | — | | | | 16,669 | | | | 16,922 | |
Pierre Arseneault | | | 2005 | | | | 300,000 | | | | 247,720 | | | | 113,207 | (11) | | | 568,108 | (5) | | | — | | | | 5,208 | |
(Vice President Strategic | | | 2004 | | | | 300,000 | | | | 257,731 | | | | 37,285 | | | | — | | | | 47,030 | | | | 12,214 | |
Planning and Information | | | 2003 | | | | 272,000 | | | | 186,045 | | | | 23,145 | | | | — | | | | 19,646 | | | | 10,880 | |
Technology)(13) | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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| | |
(1) | | In addition to tax equalization payments and perquisites listed separately below, amounts included in this column for one or more Named Executive Officers include the following perquisites that are either in the aggregate valued at the lesser of $50,000 or 10% of the Named Executive Officer’s total salary and bonus or represent less than 25% of the perquisites reported for a given year: amounts relating to professional financial advice, club memberships, automobile allowance, education expenses, relocation allowances, housing expenses (including interest on housing-related loans transferred to third party financial institutions) and cash payments to be used for perquisites at the Named Executive Officer’s discretion. |
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(2) | | See “— Long-Term Incentives — Stock Options” above for a description of the Conversion Plan and “— Long-Term Incentives — Stock Price Appreciation Units” above for a description of the Stock Price Appreciation Unit Plan. On January 6, 2005, Alcan stock options held by employees of Alcan who became our employees following our spin-off from Alcan were replaced with options to purchase our common shares. The number of options shown for periods prior to 2005 have been recast from the number of Alcan options granted into the as-converted number of Novelis options. On January 6, 2005, all Alcan SPAUs held by our employees were replaced with Novelis SPAUs. The number of SPAUs for periods prior to 2005 have been recalculated from the number of Alcan SPAUs granted into the as-converted number of Novelis SPAUs. |
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(3) | | In addition to the other amounts stated separately below, “All Other Compensation” for each of our Named Executive Officers for 2005 includes: |
| | |
| • | savings plan contributions; and |
|
| • | amounts paid by us for term life insurance. |
The following table shows the amount of these benefits received by each Named Executive Officer for 2005:
| | | | | | | | |
| | Savings Plan
| | | Life
| |
| | Contributions
| | | Insurance
| |
Name | | ($) | | | ($) | |
|
Brian W. Sturgell | | | 57,614 | | | | 16,452 | |
Martha Finn Brooks | | | 22,509 | | | | 2,644 | |
Christopher Bark-Jones | | | 0 | | | | 0 | |
Kevin Greenawalt | | | 10,617 | | | | 1,316 | |
Pierre Arseneault | | | 3,686 | | | | 1,522 | |
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(4) | | Amounts include $393,941 (in 2005), $254,756 (in 2004) and $219,155 (in 2003) for tax equalization payments (i.e., amounts paid such that net income after taxes was not less than it would have been in the United States). |
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(5) | | The Named Executive Officers were participants in the Alcan Total Shareholder Returns Performance Plan (TSR Plan) prior to the spin-off. On January 6, 2005, our employees who were Alcan employees immediately prior to the spin-off and who were eligible to participate in the Alcan TSR Plan ceased to actively participate in and accrue benefits under the TSR Plan. The accrued award amounts for each participant in the TSR Plan were converted into Novelis restricted share units. The then current three-year performance periods, namely 2002 - 2005 and 2003 - 2006, were truncated as of the date of the spin-off. At the end of each performance period, each holder of restricted share units will receive the net proceeds based on our common share price at that time, including declared dividends. The number of restricted share units granted to our Named Executive Officers and the dollar value of such restricted share units as of January 6, 2005 was as follows: |
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| | | | | | | | |
| | Restricted
| | | Value of Restricted
| |
| | Share Units
| | | Share Units
| |
Name | | (#) | | | ($) | |
|
Brian W. Sturgell | | | 166,213 | | | | 3,876,090 | |
Martha Finn Brooks | | | 78,413 | | | | 1,828,600 | |
Christopher Bark-Jones | | | 61,751 | | | | 1,440,034 | |
Kevin Greenawalt | | | 18,827 | | | | 439,044 | |
Pierre Arseneault | | | 24,361 | | | | 568,108 | |
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(6) | | Represents the value, at the time of the grant, of restricted share units granted prior to our spin-off from Alcan. These restricted share units vested in full and were paid in January 2005. |
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(7) | | Includes $149,092 that we were obligated to pay under an Alcan employee compensation plan as part of our spin-off from Alcan. No future payments will be required under the plan. |
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(8) | | Amounts for 2005 include reimbursement of relocation expenses of $266,245. Amounts for 2004 include $18,211 for tax equalization. |
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(9) | | Includes $1,864,691 for the cash payout of deferred share units received prior to the spin-off that were converted to Novelis deferred share units as part of the spin-off. The deferred units vested and were paid in August 2005. |
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(10) | | Amounts include $369,293 (in 2004) and $154,815 (in 2003) for tax equalization payments. |
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(11) | | Amounts for 2005 include reimbursement of relocation expenses of $84,031. |
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(12) | | Chris Bark-Jones stepped down as Senior Vice President and President — European Operations on May 1, 2006. |
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(13) | | Pierre Arseneault retired from Novelis on June 1, 2006. |
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Fiscal Year-End Option/ SPAU Table
The following table summarizes, for each of the Named Executive Officers, the total number of shares underlying unexercised options held on December 31, 2005 and the aggregate value of unexercisedin-the-money options on December 31, 2005, which is the difference between the exercise price of the options and the market value of the shares on December 31, 2005, which was $20.89 per share. The aggregate values indicated with respect to unexercisedin-the-money options at fiscal year-end have not been, and may never be, realized. These options have not been, and may never be exercised and actual gains, if any, on exercise will depend on the value of the shares on the date of exercise. There can be no assurance that these values will be realized.
| | | | | | | | | | | | | | | | |
| | | | Value of Unexercised
|
| | | | In-the-Money
|
| | Shares Underlying Unexercised
| | Options and SPAUs
|
| | Options and SPAUs
| | on December 31,
|
| | on December 31, 2005(1)
| | 2005(1)
|
Name | | (#) | | ($) |
|
Brian W. Sturgell | | | Options (E | ): | | | — | | | | E: | | | | — | |
(President and Chief Executive | | | Options (U | ): | | | 753,477 | | | | U: | | | | 508,995 | |
Officer) | | | | | | | | | | | | | | | | |
Martha Finn Brooks | | | Options (E | ): | | | 89,960 | | | | E: | | | | — | |
(Chief Operating Officer) | | | Options (U | ): | | | 298,121 | | | | U: | | | | 129,679 | |
Christopher Bark-Jones | | | Options (E | ): | | | — | | | | E: | | | | — | |
(President — European | | | Options (U | ): | | | 4,630 | | | | U: | | | | 9,029 | |
Operations) | | | SPAUs (E | ): | | | — | | | | E: | | | | — | |
| | | SPAUs (U | ): | | | 213,850 | | | | U: | | | | 123,926 | |
Kevin Greenawalt | | | Options (E | ): | | | — | | | | E: | | | | — | |
(President — North American | | | Options (U | ): | | | 48,550 | | | | U: | | | | 35,438 | |
Operations) | | | SPAUs (E | ): | | | — | | | | E: | | | | — | |
| | | SPAUs (U | ): | | | 22,952 | | | | U: | | | | 31,666 | |
Pierre Arseneault | | | Options (E | ): | | | — | | | | E: | | | | — | |
(Vice President Strategic | | | Options (U | ): | | | 89,032 | | | | U: | | | | 68,598 | |
Planning and Information | | | | | | | | | | | | | | | | |
Technology) | | | | | | | | | | | | | | | | |
| | |
(1) | | E: Exercisable U: Unexercisable |
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Long-Term Incentive Plan Table — Founders Plan
As described above under the caption “Long-Term Incentives — Founders Performance Awards,” on March 24, 2005, our board of directors adopted the Founders Plan to allow for an additional compensation opportunity tied to Novelis share price improvement targets for certain of our executives approved by the Human Resources Committee. Participants earn PSUs if Novelis share price improvement targets are achieved within three performance periods: March 24, 2005 to March 23, 2008; March 24, 2006 to March 23, 2008; and March 24, 2007 to March 23, 2008. The table below sets forth performance share unit tranches representing the number of PSUs that participants are eligible to receive for the three performance periods under the plan if share improvement targets are achieved. The share price improvement targets for these three tranches are $23.57, $25.31 and $27.28, respectively.
| | | | | | | | |
Name | | Units Granted | | | Performance Period | |
|
Brian W. Sturgell(1) | | | 0 | | | | March 24, 2005 to March 23, 2008 | |
(President and Chief Executive | | | 70,275 | | | | March 24, 2006 to March 23, 2008 | |
Officer) | | | 70,275 | | | | March 24, 2007 to March 23, 2008 | |
Martha Finn Brooks | | | 23,750 | (2) | | | March 24, 2005 to March 23, 2008 | |
(Chief Operating Officer) | | | 23,750 | | | | March 24, 2006 to March 23, 2008 | |
| | | 23,750 | | | | March 24, 2007 to March 23, 2008 | |
Christopher Bark-Jones | | | 7,200 | (2) | | | March 24, 2005 to March 23, 2008 | |
(President — European Operations) | | | 7,200 | | | | March 24, 2006 to March 23, 2008 | |
| | | 7,200 | | | | March 24, 2007 to March 23, 2008 | |
Kevin Greenawalt | | | 7,200 | (2) | | | March 24, 2005 to March 23, 2008 | |
(President — North American | | | 7,200 | | | | March 24, 2006 to March 23, 2008 | |
Operations) | | | 7,200 | | | | March 24, 2007 to March 23, 2008 | |
Pierre Arseneault | | | 6,000 | (2) | | | March 24, 2005 to March 23, 2008 | |
(Vice President Strategic Planning | | | 6,000 | | | | March 24, 2006 to March 23, 2008 | |
and Information Technology) | | | 6,000 | | | | March 24, 2007 to March 23, 2008 | |
| | |
(1) | | On March 14, 2006, Mr. Sturgell agreed with the board of directors’ decision that, in light of our 2005 and 2006 financial reporting delay and restatement, Mr. Sturgell would forfeit his performance share unit award for the first tranche of the award. The board of directors also approved an increase in the size of the award opportunity for Mr. Sturgell for the second and third tranches under the plan to provide an additional incentive for reaching the share price improvement targets for those tranches. The award size for each tranche was increased from a potential of 46,850 PSUs to a potential of 70,275 PSUs. The PSUs for the second and third tranches will not be earned unless the share price improvement targets specified in the Plan ($25.31 and $27.28, respectively) are achieved. |
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(2) | | The share price improvement targets for the first tranche were satisfied in June 2005. As a result, Ms. Brooks and Messrs. Bark-Jones, Greenawalt and Arseneault received the full amount of their performance unit tranche for the performance period from March 24, 2005 to March 23, 2008. Ms. Brooks and Messrs. Bark-Jones, Greenawalt and Arseneault received cash payments for the payout of these awards in April 2006 in the amounts of $478,325, $145,008, $145,008 and $120,840, respectively, which will be reported as 2006 compensation. |
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Retirement Benefits
Novelis Pension Plan for Officers
Our Human Resources Committee determines participants in the Pension Plan for Officers (PPO). This plan is a supplemental executive retirement plan that provides an additional pension benefit based on combined service up to 20 years as an officer of our company or of Alcan and eligible earnings which consist of the excess of the average annual salary and target short-term incentive award during the 60 consecutive months when they were the greatest over eligible earnings in the U.S. Plan or the U.K. Plan, as applicable. Both the U.S. Plan and U.K. Plan are described below. Each provides for a maximum pension benefit on eligible earnings that is established with reference to the position of the officer prior to being designated a PPO participant. The following table shows the percentage of eligible earnings in the PPO, payable upon normal retirement after age 60, according to combined years of service as an officer of our company or of Alcan.
| | | | | | |
Years as Officer |
5 | | 10 | | 15 | | 20 |
|
15% | | 30% | | 40% | | 50% |
The normal form of payment of pensions is a lifetime annuity. Pensions are not subject to any deduction for social security or other offset amounts.
Brian W. Sturgell and Christopher Bark-Jones are currently the only participants in the PPO. At age 65, the estimated credited years of combined service for Mr. Sturgell would be approximately 18 years and the estimated credited years of combined service for Mr. Bark-Jones would be approximately 10 years. Eligible earnings under the PPO for 2005 for Mr. Sturgell were $983,556 and were $282,414 for Mr. Bark-Jones.
U.S. Plan
During 2005, those of our employees previously participating in the Alcancorp Pension Plan and the Alcan Supplemental Executive Retirement Plan (collectively referred to as the U.S. Plan) received up to one year of additional service under each plan to the extent that such employees continued to be employed by us during the year. We paid to Alcan the normal cost (in the case of the Alcancorp Pension Plan) and the current service cost (in the case of the Alcan Supplemental Executive Retirement Plan) with respect to those employees. The U.S. Plan provides for pensions calculated based upon combined service with us or Alcan of up to 35 years. Eligible earnings consist of the average annual salary and the short-term incentive award up to its target during the 3 consecutive calendar years when they were the greatest, subject to a cap for those participating in the PPO.
Effective January 1, 2006, Novelis adopted the Novelis Pension Plan which provides benefits identical to the benefits provided under the Alcancorp Pension Plan. Executive officers who were participants in the Alcancorp Pension Plan will participate in the Novelis Plan. Executive officers who were not participants in the Alcancorp Pension Plan will not participate in the Novelis Plan. Executive officers who were hired on January 1, 2005 or later will participate in the Novelis Savings and Retirement Plan.
The following table shows estimated retirement benefits, expressed as a percentage of eligible earnings, payable upon normal retirement at age 65 according to years of combined service.
| | | | | | | | | | |
Years of Service |
10 | | 15 | | 20 | | 25 | | 30 | | 35 |
|
17% | | 25% | | 34% | | 42% | | 51% | | 59% |
The normal form of payment of pensions is a lifetime annuity with either a guaranteed minimum of 60 monthly payments or a 50% lifetime pension to the surviving spouse.
At age 65, the estimated credited years of combined service for Brian W. Sturgell, Martha Finn Brooks, Kevin Greenawalt and Pierre Arseneault would be approximately 25 years, 22 years, 39 years and 40 years, respectively. Eligible earnings under the plan for 2005 for Mr. Sturgell, Ms. Brooks, Mr. Greenawalt and Mr. Arseneault were $938,340, $1,029,800, $443,000 and $460,380, respectively.
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Individual Pension Undertakings
In addition to participation in the U.S. Plan described above, Martha Finn Brooks will receive from us a supplemental pension equal to the excess, if any, of the pension she would have received from her employer prior to joining Alcan had she been covered by her prior employer’s pension plan until her separation or retirement from Novelis, over the sum of her pension from the U.S. Plan and the pension rights actually accrued with her previous employer.
U.K. Plan.
The U.K. Plan, which was transferred to us from Alcan in connection with the spin-off, provides for pensions calculated on service of up to 40 years and eligible earnings, which consist of the average annual salary and the short-term incentive award up to its target during the last 12 months before retirement, subject to a cap for those participating in the PPO.
The following table shows estimated retirement benefits, expressed as a percentage of eligible earnings, payable upon normal retirement at age 65 according to combined years of service.
| | | | | | | | | | |
Years of Service |
10 | | 15 | | 20 | | 25 | | 30 | | 35 |
|
17% | | 26% | | 35% | | 43% | | 52% | | 60% |
The normal form of payment of pensions is a lifetime annuity with a guaranteed minimum of 60 monthly payments and a 60% lifetime pension to the surviving spouse.
Christopher Bark-Jones is the only executive officer entitled to participate in the U.K. Plan. At age 65, the estimated credited years of combined service for Mr. Bark-Jones would be approximately 34 years and his eligible earnings in 2005 were $480,386.
Value of the Retirement Benefits
A measure of the value of the U.S. Plan, U.K. Plan and of the Pension Plan for Officers that can be deemed to be part of the total 2005 compensation of the five aforementioned Named Executive Officers is the service cost of the plans. The service cost is the estimated present value of benefits attributable by the pension benefit formula to services rendered by the plan members during a given period. The valuation of benefits is based on actuarial assumptions in relation to future events that will vary by plan to take into account the general characteristics of its membership.
Another measure of the value of pension plans or pension benefits is the projected benefit obligation (PBO). The PBO is the actuarial present value of the part of the total pension payable at retirement that is attributable to service rendered up to the date of valuation.
The following table indicates the total projected annual pension of each Named Executive Officer from the plans described above, based on years of credited combined service up to the normal retirement age of 65 and eligible earnings to the end of 2005. The table also indicates 2005 service cost and the PBO as of December 31, 2005 in relation to each Named Executive Officer.
The service cost and the PBO amounts are only estimates using prevailing interest rates of the discounted value of contractual entitlements. The value of these estimated entitlements may change over time because they are based on long-term assumptions, such as the expected distribution of retirement ages, future compensation increases and life expectancy, that may not represent actual developments. Furthermore, the methods used to determine these amounts will not be the same as those used by other companies and therefore will not be directly comparable. The actuarial assumptions applied are the same as those used to determine the service cost and the benefit obligation as described in Note 15 to our combined and consolidated financial
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statements for the year ended December 31, 2005. There is no contractual undertaking by the company to pay benefits of equivalent amounts.
| | | | | | | | | | | | |
| | Projected Annual
| | | | | | Projected Benefit
| |
| | Pension Payable at
| | | 2005 Service
| | | Obligation as of
| |
| | Age 65
| | | Cost
| | | December 31, 2005
| |
Name | | ($) | | | ($) | | | ($) | |
|
Brian W. Sturgell | | | 850,068 | | | | 425,124 | | | | 5,261,224 | |
Martha Finn Brooks | | | 306,821 | | | | 109,686 | | | | 396,400 | |
Christopher Bark-Jones | | | 396,084 | | | | 194,751 | | | | 4,739,233 | |
Kevin Greenawalt | | | 235,673 | | | | 52,933 | | | | 1,271,600 | |
Pierre Arseneault | | | 270,369 | | | | 65,899 | | | | 1,422,000 | |
Employment Agreements and Change of Control Agreements
In connection with our spin-off from Alcan, we entered into employment agreements with Brian W. Sturgell, our Chief Executive Officer, Martha Finn Brooks, our Chief Operating Officer, Chris Bark-Jones, President of our European operations, Kevin Greenawalt, President of our North American operations and Pierre Arseneault, our Vice President of Strategic Planning and Information Technology, and other executive officers, setting out the terms and conditions of their employment. In 2005, under their respective employment agreements, Brian W. Sturgell was entitled to a base salary of $985,000, Martha Finn Brooks was entitled to a base salary of $655,000, Chris Bark-Jones was entitled to a base salary of $440,611, Kevin Greenawalt was entitled to a base salary of $310,000 and Pierre Arseneault was entitled to a base salary of $300,000. Each of these officers was also eligible for participation in programs providing short-term incentives, long-term incentives and other types of compensation that reflect the competitive level of similar positions in the compensation peer groups or as included in published survey information.
Certain of our executive officers have also entered into change of control agreements that provide for payment by us upon the termination of the executive officer’s employment without cause or by the executive officer for good reason. Except in the case of Brian W. Sturgell, upon the occurrence of such an event, the executive would be entitled to an amount equal to 24 months of their base salary and target short-term incentive award. Mr. Sturgell would be entitled to an amount equal to 36 months of his base salary and target short-term incentive award. Change in control provisions will expire after 24 months of employment with us.
On July 1, 2002, Alcancorp entered into a Deferred Share Agreement with Martha Finn Brooks pursuant to which Alcancorp agreed to grant to Ms. Brooks 33,500 shares of Alcan common shares on August 1, 2005, the date of her third anniversary of employment, as compensation for the loss by Ms. Brooks of accrued benefits and unvested restricted shares at her former employer. In connection with our spin-off from Alcan, on January 6, 2005, we assumed Alcancorp’s obligations under the Deferred Share Agreement and the 33,500 shares of Alcan common stock to be granted were converted into 66,477 common shares. On July 27, 2005, the Deferred Share Agreement was amended to provide that we will, in lieu of granting Ms. Brooks 66,477 common shares, pay Ms. Brooks cash in an amount equal to the value of such shares based on the closing price of such shares on the New York Stock Exchange on August 1, 2005, subject to applicable withholding taxes. Ms. Brooks received a payment in the gross amount of $1,864,691.
Human Resources Committee Interlocks and Insider Participation
In fiscal 2005, only Independent Directors served on our Human Resources Committee. Clarence J. Chandran was the chairman of our Human Resources Committee. The other committee members during all or part of the year were Charles G. Cavell, C. Robert Cordaro, Helmut Eschwey, Suzanne Labarge, William Monahan and J.E. Newall. No member of our Human Resources Committee had any relationship with us requiring disclosure under Item 404 of SECRegulation S-K. No executive officer of Novelis served on any board of directors or compensation committee of any other company for which any of our directors served as an executive officer at any time during fiscal 2005.
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| |
Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
Share Ownership of Certain Beneficial Owners
Based on filings with the SEC, the following shareholders are known by us to own more than 5% of our common shares, no par value, as of June 30, 2006:
| | | | | | | | |
| | Shares Beneficially
| | | | |
Name and Address of Beneficial Owner | | Owned | | | Percentage of Class* | |
|
FMR Corp.(i) | | | 11,405,602 | | | | 15.4 | % |
82 Devonshire Street | | | | | | | | |
Boston, MA 02109 | | | | | | | | |
Barclays Global Investors, NA. (ii) | | | 3,738,694 | | | | 5.1 | % |
45 Fremont Street | | | | | | | | |
San Francisco, CA 94105 | | | | | | | | |
McLean Budden Ltd.(iii) | | | 7,270,318 | | | | 9.8 | % |
145 King Street West | | | | | | | | |
Suite 2525 | | | | | | | | |
Toronto, ON M5H 1J8 | | | | | | | | |
| | |
* | | As of June 30, 2006, we had 74,005,649 common shares outstanding. |
|
(i) | | The following information is based on the Schedule 13G, filed on February 14, 2006 with the SEC by FMR Corp. Fidelity Management & Research Company (Fidelity), 82 Devonshire Street, Boston, Massachusetts 02109, a wholly-owned subsidiary of FMR Corp., and an investment adviser registered under the Investment Advisers Act of 1940, is the beneficial owner of 10,830,102 common shares as a result of acting as investment adviser to various investment companies. The ownership of one investment company, FA Mid Cap Stock Fund, 82 Devonshire Street, Boston, Massachusetts 02109, amounted to 6,553,560 shares. Edward C. Johnson 3d, FMR Corp., through its control of Fidelity, and the funds each has sole power to dispose of the 10,830,102 shares owned by the Funds. Neither FMR Corp., nor Edward C. Johnson 3d, Chairman of FMR Corp., has the sole power to vote or direct the voting of the shares owned directly by the Fidelity Funds, which power resides with the Funds’ Boards of Trustees. Fidelity carries out the voting of the shares under written guidelines established by the Funds’ Boards of Trustees. Fidelity Management Trust Company, 82 Devonshire Street, Boston, Massachusetts 02109, a wholly-owned subsidiary of FMR Corp., is the beneficial owner of 129,800 common shares as a result of its serving as investment manager of the institutional account(s). Edward C. Johnson 3d and FMR Corp., through its control of Fidelity Management Trust Company, each has sole dispositive power over 129,800 shares and sole power to vote or to direct the voting of 129,800 shares owned by the institutional account(s). Members of the Edward C. Johnson 3d family are the predominant owners of Class B shares of common stock of FMR Corp., representing approximately 49% of the voting power of FMR Corp. The Johnson family group and all other Class B shareholders have entered into a shareholders’ voting agreement under which all Class B shares will be voted in accordance with the majority vote of Class B shares. Accordingly, through their ownership of voting common stock and the execution of the shareholders’ voting agreement, members of the Johnson family may be deemed, under the United States Investment Company Act of 1940, to form a controlling group with respect to FMR Corp. Fidelity International (FIL), Pembroke Hall, 42 Crowlane, Hamilton, Bermuda, and various foreign-based subsidiaries provide investment advisory and management services to a number ofnon-U.S. investment companies and certain institutional investors. FIL is the beneficial owner of 445,700 common shares and has the sole power to vote and dispose of such shares. FMR Corp. and FIL are of the view that they are not acting as a “group” for purposes of Section 13(d) under the Exchange Act and that they are not otherwise required to attribute to each other the “beneficial ownership” of securities “beneficially owned” by the other corporation within the meaning ofRule 13d-3 under the Exchange Act. The Schedule 13G states that FMR Corp. is making the filing on a voluntary basis as if all the shares are beneficially owned by FMR Corp. and FIL on a joint basis. |
194
| | |
(ii) | | The following information is based on the Schedule 13G, filed on January 26, 2006 with the SEC by Barclays Global Investors, NA. (Barclays Global). The Schedule 13G indicates that Barclays Global is the beneficial owner of 3,738,694 shares. Barclays Global has sole voting power over 2,938,955 shares and has sole dispositive power over 3,625,453 shares. Barclays Global Fund Advisors (Barclays Global Fund), 45 Fremont Street, San Francisco, CA 94105, has sole voting power over 113,241 shares and has sole dispositive power over 113,241 shares. |
| | |
(iii) | | The following information is based on the Form 13F filed on August 11, 2006 with the SEC by McLean Budden Ltd. (McLean Budden). The Form 13F indicates that McLean Budden is the beneficial owner of 7,270,318 shares. McLean Budden has sole voting power over 7,270,318 shares and has sole dispositive power over 7,270,318 shares. |
Share Ownership of Directors and Executive Officers
The following table sets forth, as of August 10, 2006, beneficial ownership of shares of our common stock, no par value, by each director and each executive officer named in the Summary Compensation Table, and all directors, nominees and executive officers as a group.
Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities. Common shares and options, warrants and convertible securities that are currently exercisable or convertible within 60 days of August 10, 2006, into our common shares are deemed to be outstanding and to be beneficially owned by the person holding the options, warrants or convertible securities for the purpose of computing the percentage ownership of the person, but are not treated as outstanding for the purpose of computing the percentage ownership of any other person.
The address for the following individuals is: c/o Novelis Inc., 3399 Peachtree Road NE; Suite 1500; Atlanta, GA 30326.
| | | | | | | | |
| | Shares
| | | | |
| | Beneficially
| | | Percentage
| |
Name of Beneficial Owner
| | Owned | | | of Class ** | |
|
Brian W. Sturgell, Director and Chief Executive Officer(i) | | | 222,621 | | | | * | |
William T. Monahan, Chairman of the Board (ii) | | | 8,622 | | | | * | |
Edward Blechschmidt, Director(iii) | | | 136 | | | | * | |
Jacques Bougie, O.C., Director(iv) | | | 10,459 | | | | * | |
Charles G. Cavell, Director(v) | | | 5,404 | | | | * | |
Clarence J. Chandran, Director(vi) | | | 11,259 | | | | * | |
C. Roberto Cordaro, Director(vii) | | | 5,230 | | | | * | |
Helmut Eschwey, Director(viii) | | | 5,230 | | | | * | |
David J. FitzPatrick, Director(ix) | | | 9,798 | | | | * | |
Suzanne Labarge, Director(x) | | | 9,101 | | | | * | |
Rudolf Rupprecht, Director(xi) | | | 5,404 | | | | * | |
Kevin M. Twomey, Director(xii) | | | 361 | | | | * | |
Edward V. Yang, Director(xiii) | | | 5,404 | | | | * | |
Martha Finn Brooks, Chief Operating Officer(xiv) | | | 189,489 | | | | * | |
Chris Bark-Jones, Senior Vice President and President — Europe(xv) | | | 1,177 | | | | * | |
Kevin Greenawalt, Senior Vice President and President — North America(xvi) | | | 12,166 | | | | * | |
Pierre Arseneault, Vice President, Strategic Planning and Information Technology(xvii) | | | 22,256 | | | | * | |
Directors and executive officers as a group (28 persons)(xviii) | | | 566,000 | | | | * | |
| | |
* | | Indicates less than 1% of the common shares. |
195
| | |
** | | As of August 10, 2006, we had 74,005,649 common shares outstanding. |
| | |
(i) | | Includes 14,957 shares held in the Savings and Retirement Plan and options to purchase approximately 188,367 shares that are exercisable within 60 days. |
|
(ii) | | Includes 5,622 DDSUs. See “Directors’ Compensation.” |
|
(iii) | | Includes 136 DDSUs. See “Directors’ Compensation.” |
|
(iv) | | Includes 10,459 DDSUs. See “Directors’ Compensation.” |
|
(v) | | Includes 5,404 DDSUs. See “Directors’ Compensation.” |
|
(vi) | | Includes 10,459 DDSUs. See “Directors’ Compensation.” |
|
(vii) | | Includes 5,230 DDSUs. See “Directors’ Compensation.” |
|
(viii) | | Includes 5,230 DDSUs. See “Directors’ Compensation.” |
|
(ix) | | Includes 4,798 DDSUs. See “Directors’ Compensation.” |
|
(x) | | Includes 6,101 DDSUs. See “Directors’ Compensation.” |
|
(xi) | | Includes 5,404 DDSUs. See “Directors’ Compensation.” |
|
(xii) | | Includes 361 DDSUs. See “Directors’ Compensation.” |
|
(xiii) | | Includes 5,404 DDSUs. See “Directors’ Compensation.” |
|
(xiv) | | Includes options to purchase 164,489 shares that are exercisable within 60 days. |
|
(xv) | | Includes options to purchase 1,157 shares that are exercisable within 60 days. |
|
(xvi) | | Includes options to purchase 12,137 shares that are exercisable within 60 days. |
|
(xvii) | | Includes options to purchase 22,256 shares that are exercisable within 60 days. |
|
(xviii) | | Our directors and executive officers as a group hold 566,000 of our shares. Our directors and executive officers as a group hold options to purchase 426,829 of our shares that are currently exercisable or are exercisable within 60 days. Our directors as a group hold 64,608 DDSUs. |
Securities Authorized for Issuance under Equity Compensation Plans
The following table provides information as of December 31, 2005 regarding the shares issuable upon the exercise of options under the Conversion Plan, as well as the number of shares remaining available for issuance under the Conversion Plan. If the 2006 Incentive Plan is approved by our shareholders at the 2006 annual meeting of shareholders, then no new options will be granted under the Conversion Plan on or after the proposed effective date of the 2006 Incentive Plan.
| | | | | | | | | | | | |
| | | | | | | | Number of
| |
| | | | | | | | Securities
| |
| | | | | | | | Remaining Available
| |
| | | | | | | | for Future Issuance
| |
| | | | | | | | Under Equity
| |
| | Number of
| | | | | | Compensation Plans
| |
| | Securities to be
| | | | | | (Excluding
| |
| | Issued Upon
| | | Weighted-Average
| | | Securities
| |
| | Exercise of Options
| | | Exercise Price of
| | | Reflected in First
| |
Plan Category | | / DDSUs | | | Outstanding Options | | | Column) | |
|
Equity compensation plans approved by security holders (i) | | | | | | | | | | | | |
Novelis Conversion Plan of 2005(ii) | | | 2,704,790 | | | $ | 21.60 | | | | 2,291,937(iv | ) |
Novelis Inc. Deferred Share Unit Plan for Non-Executive Directors(iii) | | | 57,051 | | | | N/A | | | | N/A | |
Equity compensation plans not approved by security holders | | | — | | | | — | | | | — | |
| | |
(i) | | Such plans were approved by Alcan, as our sole shareholder, prior to the spin-off date. |
|
(ii) | | On January 5, 2005, our board of directors adopted the Conversion Plan to allow for all Alcan stock options held by employees of Alcan who became employees of Novelis following our spin-off from |
196
| | |
| | Alcan to be replaced with options to purchase our common shares and for new options to be granted. There were no new options granted in 2005 under the Conversion Plan. In the case of a change of control of the company, vesting of stock options will accelerate. |
|
(iii) | | On January 5, 2005, our board of directors adopted the Deferred Share Unit Plan for Non-Executive Directors. Fifty percent of our non-executive directors’ compensation is required to be paid in the form of DDSUs, and 50% in the form of either cash, additional DDSUs or a combination of the two at the election of each non-executive director. DDSUs are the economic equivalent of shares. The DDSUs are redeemable only upon termination of the directorship and may be redeemed in cash, shares or a combination of both, at the election of the non-executive director. The amount to be paid by us upon redemption will be calculated by multiplying the accumulated balance of DDSUs by the average per share price of our shares on the Toronto and New York Stock exchanges on the last five trading days prior to the redemption date. As of December 31, 2005, approximately 41,862 DDSUs had been granted with an additional 15,189 units granted January 1, 2006, all for services rendered in 2005. |
|
(iv) | | Under the Conversion Plan, we may issue new options in aggregate not exceeding 3% of the shares outstanding immediately after our spin-off from Alcan on January 6, 2005, provided that the total number of new options and conversion options (options granted to replace options in the share capital of Alcan held by our employees at the time of the spin-off) do not exceed 10% of the shares outstanding immediately after the spin-off. |
| |
Item 13. | Certain Relationships and Related Transactions |
Alcancorp established a real estate loan program to assist relocating employees in the United States. Under the program, an employee was permitted to obtain an interest-free loan from Alcancorp, the proceeds of which were to be used only to purchase a new principal residence. The loan is secured by a mortgage on the new principal residence. On July 1, 2003, Jo-Ann Longworth, our former Vice President and Controller, received a loan from Alcancorp in the amount of $75,000 under this program. As of January 20, 2005, the loan was transferred to a third-party bank. The largest amount outstanding under the loan in 2005 was $73,125. There was no interest paid to us for the loan prior to it being transferred to the third party bank.
| |
Item 14. | Principal Accountant Fees and Services |
For the 2005 fiscal year, we retainedInformation regarding these items will appear in our principal auditor, PricewaterhouseCoopers LLP to perform servicesproxy statement and is hereby incorporated by reference in the following categories and amounts:this Annual Report onForm 10-K.
| | | | |
| | 2005 | |
|
Audit Fees | | $ | 12,975,000 | |
Audit-Related Fees | | | N/A | |
Tax Fees | | | N/A | |
All Other Fees | | $ | 18,043 | |
Pre-Approval of Audit and Permissible Non-Audit Services
Effective May 9, 2005, the Audit Committee established a policy requiring its pre-approval of all audit and permissible non-audit services provided by our independent registered public accounting firm. The policy gives detailed guidance to management as to the specific services that are eligible for general pre-approval and provides specific cost limits for certain services on an annual basis. Pursuant to the policy and the Audit Committee charter, the Audit Committee has granted to its chairman the authority to address any requests for pre-approval of individual services. None of the services provided by our independent registered public accounting firm for 2005 that were approved by the Audit Committee made use of the de minimus exception to pre-approval set forth in applicable rules of the SEC.
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PART IV
| |
Item 15. | Exhibits and Financial Statement Schedules |
| |
1. | Financial Statement Schedules |
None.
| | | | | | | | |
Exhibit
| Exhibit
| | | Exhibit
| | |
No. | No. | | Description | No. | | Description |
|
| 3 | .1 | | Restated Certificate and Articles of Incorporation of Novelis Inc. (incorporated by reference to Exhibit 3.1 to theForm 8-K filed by Novelis Inc. on January 7, 2005 (FileNo. 001-32312)) | 3 | .1 | | Restated Certificate and Articles of Incorporation of Novelis Inc. (incorporated by reference to Exhibit 3.1 to ourForm 8-K filed on January 7, 2005 (FileNo. 001-32312)) |
| 3 | .2 | | By-law No. 1 of Novelis Inc. (incorporated by reference to Exhibit 3.2 to the Form 10 filed by Novelis Inc. on November 17, 2004 (FileNo. 001-32312)) | 3 | .2 | | By-law No. 1 of Novelis Inc. (incorporated by reference to Exhibit 3.2 to our Form 10 filed on November 17, 2004 (FileNo. 001-32312)) |
| 4 | .1 | | Shareholder Rights Agreement between Novelis and CIBC Mellon Trust Company (incorporated by reference to Exhibit 4.1 to theForm 10-K filed by Novelis Inc. on March 30, 2005 (File No.001-32312)) | 4 | .1 | | Shareholder Rights Agreement between Novelis Inc. and CIBC Mellon Trust Company (incorporated by reference to Exhibit 4.1 to ourForm 10-K filed on March 30, 2005 (FileNo. 001-32312)) |
| 4 | .2 | | Specimen Certificate of Novelis Inc. Common Shares (incorporated by reference to Exhibit 4.2 to the Form 10 filed by Novelis Inc. on December 27, 2004 (FileNo. 001-32312)) | 4 | .2 | | Specimen Certificate of Novelis Inc. Common Shares (incorporated by reference to Exhibit 4.2 to our Form 10 filed on December 27, 2004 (FileNo. 001-32312)) |
| 4 | .3 | | Indenture, relating to the Notes, dated as of February 3, 2005, between the Company, the guarantors named on the signature pages thereto and The Bank of New York Trust Company, N.A., as trustee (incorporated by reference to Exhibit 4.1 to our Current Report onForm 8-K filed on February 3, 2005 (FileNo. 001-32312)) | 4 | .3 | | Indenture, relating to the Notes, dated as of February 3, 2005, between the Company, the guarantors named on the signature pages thereto and The Bank of New York Trust Company, N.A., as trustee (incorporated by reference to Exhibit 4.1 to ourForm 8-K filed on February 3, 2005 (FileNo. 001-32312)) |
| 4 | .4 | | Registration Rights Agreement, dated as of February 3, 2005, among the Company, the guarantors named on the signature pages thereto, Citigroup Global Markets Inc., Morgan Stanley & Co. Incorporated and UBS Securities LLC, as Representatives of the Initial Purchasers (incorporated by reference to Exhibit 4.2 to our Current Report onForm 8-K filed on February 3, 2005 (File No.001-32312)) | 4 | .4 | | Registration Rights Agreement, dated as of February 3, 2005, among the Company, the guarantors named on the signature pages thereto, Citigroup Global Markets Inc., Morgan Stanley & Co. Incorporated and UBS Securities LLC, as Representatives of the Initial Purchasers (incorporated by reference to Exhibit 4.2 to ourForm 8-K filed on February 3, 2005 (FileNo. 001-32312)) |
| 4 | .5 | | Form of Note for 71/4% Senior Notes due 2015 (incorporated by reference to Exhibit 4.1 to theForm S-4 filed by Novelis Inc. on August 3, 2005 (FileNo. 331-127139)) | 4 | .5 | | Form of Note for 71/4% Senior Notes due 2015 (incorporated by reference to Exhibit 4.1 to ourForm S-4 filed on August 3, 2005 (FileNo. 333-127139)) |
| 10 | .1 | | Separation Agreement between Alcan Inc. and Novelis Inc. (incorporated by reference to Exhibit 10.1 to our Annual Report onForm 10-K filed on March 30, 2005 (FileNo. 001-32312)) | |
| 10 | .2 | | Metal Supply Agreement between Novelis Inc., as Purchaser, and Alcan Inc., as Supplier, for the supply of re-melt aluminum ingot (incorporated by reference to Exhibit 10.2 to our Annual Report onForm 10-K filed on March 30, 2005 (FileNo. 001-32312)) | |
| 10 | .3 | | Molten Metal Supply Agreement between Novelis Inc., as Purchaser, and Alcan Inc., as Supplier, for the supply of molten metal to Purchaser’s Saguenay Works facility (incorporated by reference to Exhibit 10.3 to our Annual Report onForm 10-K filed on March 30, 2005 (FileNo. 001-32312)) | |
| 10 | .4 | | Metal Supply Agreement between Novelis Inc., as Purchaser, and Alcan Inc., as Supplier, for the supply of sheet ingot in North America (incorporated by reference to Exhibit 10.4 to our Annual Report onForm 10-K filed on March 30, 2005 (FileNo. 001-32312)) | |
| 10 | .5 | | Metal Supply Agreement between Novelis Inc., as Purchaser, and Alcan Inc., as Supplier, for the supply of sheet ingot in Europe (incorporated by reference to Exhibit 10.5 to our Annual Report onForm 10-K filed on March 30, 2005 (FileNo. 001-32312)) | |
| 10 | .6 | | Tax Sharing and Disaffiliation Agreement between Alcan Inc., Novelis Inc., Arcustarget Inc., Alcan Corporation and Novelis Corporation (incorporated by reference to Exhibit 10.6 to our Annual Report onForm 10-K filed on March 30, 2005 (FileNo. 001-32312)) | |
| 10 | .7 | | Transitional Services Agreement between Alcan Inc. and Novelis Inc. (incorporated by reference to Exhibit 10.7 to our Annual Report onForm 10-K filed on March 30, 2005 (FileNo. 001-32312)) | |
| 10 | .8 | | Principal Intellectual Property Agreement between Alcan International Limited and Novelis Inc. (incorporated by reference to Exhibit 10.8 to our Annual Report onForm 10-K filed on March 30, 2005 (FileNo. 001-32312)) | |
198190
| | | | |
Exhibit
| | |
No. | | Description |
|
| 10 | .9 | | Secondary Intellectual Property Agreement between Novelis Inc. and Alcan International Limited (incorporated by reference to Exhibit 10.9 to our Annual Report onForm 10-K filed on March 30, 2005 (FileNo. 001-32312)) |
| 10 | .10 | | Master Metal Hedging Agreement between Alcan Inc. and Novelis Inc. (incorporated by reference to Exhibit 10.10 to our Annual Report onForm 10-K filed on March 30, 2005 (FileNo. 001-32312)) |
| 10 | .11 | | Credit Agreement, dated as of January 7, 2005, among Novelis Inc., Novelis Corporation, Novelis Deutschland GmbH, Novelis UK Ltd. and Novelis AG, as Borrowers, the Lenders and Issuers Party (as defined in the agreement), Citigroup North America, Inc., as Administrative Agent and Collateral Agent, Morgan Stanley Senior Funding, Inc. and UBS Securities LLC, as Co-Syndication Agents, and Citigroup Global Markets Inc., Morgan Stanley Senior Funding, Inc. and UBS Securities LLC, as Joint Lead Arrangers and Joint Book-Running Managers. (incorporated by reference to Exhibit 10.11 to our Annual Report onForm 10-K filed on March 30, 2005 (FileNo. 001-32312)) |
| 10 | .11.1 | | Amendment No. 1 to Credit Agreement dated as of September 19, 2005 (incorporated by reference to Exhibit 10.1 to our Current Report onForm 8-K filed on September 20, 2005 (FileNo. 001-32312)) |
| 10 | .11.2 | | Waiver and Consent to Credit Agreement dated as of November 11, 2005 (incorporated by reference to Exhibit 99.1 to our Current Report onForm 8-K filed on November 14, 2005 (File No.001-32312)) |
| 10 | .11.3 | | Waiver and Consent to Credit Agreement dated as of February 9, 2006 (incorporated by reference to Exhibit 10.1 to our Current Report onForm 8-K filed on February 14, 2006 (FileNo. 001-32312)) |
| 10 | .12* | | Employee Matters Agreement between Alcan Inc. and Novelis Inc. (incorporated by reference to Exhibit 10.12 to our Annual Report onForm 10-K filed on March 30, 2005 (FileNo. 001-32312)) |
| 10 | .13* | | Employment Agreement of Brian W. Sturgell (incorporated by reference to Exhibit 10.32 to the Form 10 filed by Novelis Inc. on December 22, 2004 (FileNo. 001-32312)) |
| 10 | .14* | | Employment Agreement of Martha Finn Brooks (incorporated by reference to Exhibit 10.33 to the Form 10 filed by Novelis Inc. on December 22, 2004 (FileNo. 001-32312)) |
| 10 | .15* | | Employment Agreement of Christopher Bark-Jones (incorporated by reference to Exhibit 10.34 to the Form 10 filed by Novelis Inc. on December 27, 2004 (FileNo. 001-32312)) |
| 10 | .16* | | Employment Agreement of Pierre Arseneault (incorporated by reference to Exhibit 10.35 to the Form 10 filed by Novelis Inc. on December 22, 2004 (FileNo. 001-32312)) |
| 10 | .17* | | Employment Agreement of Geoffrey P. Batt (incorporated by reference to Exhibit 10.36 to the Form 10 filed by Novelis Inc. on December 22, 2004 (FileNo. 001-32312)) |
| 10 | .17.1* | | Employment Agreement of Jack Morrison (incorporated by reference to Exhibit 10.27 to our Annual Report onForm 10-K filed on March 30, 2005 (File No. 001-32312)) |
| 10 | .18* | | Form of Change of Control Agreement between Alcan Inc. and executive officers of Novelis Inc. (incorporated by reference to Exhibit 10.37 to the Form 10 filed by Novelis Inc. on December 22, 2004 (FileNo. 001-32312)) |
| 10 | .19* | | Change of Control Agreement dated as of December 22, 2004 between Alcan Inc. and Martha Finn Brooks (incorporated by reference to Exhibit 10.2 to theForm 8-K filed by Novelis Inc. on January 7, 2005 (FileNo. 001-32312)) |
| 10 | .20* | | Change of Control Agreement dated as of December 23, 2004 between Alcan Inc. and Christopher Bark-Jones (incorporated by reference to Exhibit 10.3 to theForm 8-K filed by Novelis Inc. on January 7, 2005 (FileNo. 001-32312)) |
| 10 | .21* | | Change of Control Agreement dated as of November 12, 2004 between Alcan Inc. and Pierre Arseneault (incorporated by reference to Exhibit 10.4 to theForm 8-K filed by Novelis Inc. on January 7, 2005 (FileNo. 001-32312)) |
199
| | | | |
Exhibit
| | |
No. | | Description |
|
| 4 | .6 | | Supplemental Indenture, between the Company, Novelis Finances USA LLC, Novelis South America Holdings LLC, Aluminum Upstream Holdings LLC and the Bank of New York Trust Company, N.A. (incorporated by reference to Exhibit 4.6 to our Post-Effective Amendment No. 1 to ourForm S-4 Registration Statement filed on December 1, 2006 (FileNo. 333-127139)) |
| 10 | .1 | | Second Waiver, dated as of February 9, 2006, under the Credit Agreement dated January 7, 2005 among Novelis Inc., Novelis Corporation, Novelis Deutschland GmbH, Novelis UK Ltd., Novelis AG, Citigroup North America, Inc. and the issuers and lenders a party thereto (incorporated by reference to Exhibit 10.1 to ourForm 8-K filed on February 14, 2006 (FileNo. 001-32312)) |
| 10 | .2* | | Employment Agreement of Arnaud de Weert (incorporated by reference to Exhibit 10.1 to ourForm 8-K filed on April 3, 2006 (FileNo. 001-32312)) |
| 10 | .3* | | Agreement Concerning Transition from Employment between Novelis and Geoff Batt dated March 31, 2006 (incorporated by reference to Exhibit 10.1 to ourForm 8-K filed on April 6, 2006 (FileNo. 001-32312)) |
| 10 | .4 | | Novelis Founders Performance Award Notification for Brian Sturgell dated March 31, 2005, as amended and restated as of March 14, 2006 (incorporated by reference to Exhibit 10.1 to ourForm 8-K filed on March 20, 2006 (FileNo. 001-32312)) |
| 10 | .5 | | Novelis Founders Performance Award Notification for Martha Brooks dated March 31, 2005 (incorporated by reference to Exhibit 10.2 to ourForm 8-K filed on March 20, 2006 (FileNo. 001-32312)) |
| 10 | .6 | | Novelis Founders Performance Award Notification for Chris Bark-Jones dated March 31, 2005(incorporated by reference to Exhibit 10.3 to ourForm 8-K filed on March 20, 2006 (FileNo. 001-32312)) |
| 10 | .7 | | Novelis Founders Performance Award Notification for Jack Morrison dated March 31, 2005(incorporated by reference to Exhibit 10.4 to ourForm 8-K filed on March 20, 2006 (FileNo. 001-32312)) |
| 10 | .8 | | Novelis Founders Performance Award Notification for Pierre Arseneault dated March 31, 2005(incorporated by reference to Exhibit 10.5 to ourForm 8-K filed on March 20, 2006 (FileNo. 001-32312)) |
| 10 | .9 | | Novelis Founders Performance Award Notification for Geoff Batt dated March 31, 2005(incorporated by reference to Exhibit 10.6 to ourForm 8-K filed on March 20, 2006 (FileNo. 001-32312)) |
| 10 | .10 | | Novelis Founders Performance Awards Plan, as amended and restated as of March 14, 2006(incorporated by reference to Exhibit 10.7 to ourForm 8-K filed on March 20, 2006 (FileNo. 001-32312)) |
| 10 | .11* | | Description of Retention Payment for Geoff Batt (incorporated by reference to Exhibit 10.8 to ourForm 8-K filed on March 20, 2006 (FileNo. 001-32312)) |
| 10 | .12* | | Third Waiver, dated as of April 12, 2006, under the Credit Agreement dated January 7, 2005 among Novelis Inc., Novelis Corporation, Novelis Deutschland GmbH, Novelis UK Ltd., Novelis AG, Citigroup North America, Inc. and the issuers and lenders a party thereto (incorporated by reference to Exhibit 10.1 to ourForm 8-K filed on April 18, 2006 (FileNo. 001-32312)) |
| 10 | .13 | | Fourth Waiver, dated as of May 10, 2006, under the Credit Agreement dated January 7, 2005 among Novelis Inc., Novelis Corporation, Novelis Deutschland GmbH, Novelis UK Ltd., Novelis AG, Citigroup North America, Inc. and the issuers and lenders a party thereto (incorporated by reference to Exhibit 10.1 to ourForm 8-K filed on May 16, 2006 (FileNo. 001-32312)) |
| 10 | .14* | | Transition Agreement, dated June 15, 2006, by and between Jo-Ann Longworth and Novelis Inc. (incorporated by reference to Exhibit 10.45 to our Annual Report onForm 10-K filed on August 25, 2006 (FileNo. 001-32312)) |
| 10 | .15* | | Release and Separation Agreement, dated June 15, 2006, by and between Jo-Ann Longworth and Novelis Corp. (incorporated by reference to Exhibit 10.46 to our Annual Report onForm 10-K filed on August 25, 2006 (FileNo. 001-32312)) |
| | | | |
Exhibit
| | |
No. | | Description |
|
| 10 | .22* | | Change of Control Agreement dated as of November 8, 2004 between Alcan Inc. and Geoffrey P. Batt (incorporated by reference to Exhibit 10.5 to theForm 8-K filed by Novelis Inc. on January 7, 2005 (FileNo. 001-32312)) |
| 10 | .22.1* | | Change of Control Agreement dated as of December 5, 2005 between Novelis Inc. and Brian W. Sturgell (incorporated by reference to Exhibit 10.1 to theForm 8-K filed by Novelis Inc. on December 9, 2005 (FileNo. 001-32312)) |
| 10 | .23* | | Novelis Conversion Plan of 2005 (incorporated by reference to Exhibit 10.6 to theForm 8-K filed by Novelis Inc. on January 7, 2005 (FileNo. 001-32312)) |
| 10 | .24* | | Written description of Novelis Short-term Incentive Plan — 2005 Performance Measures (incorporated by reference to Exhibit 10.25 to our Annual Report onForm 10-K filed on March 30, 2005 (FileNo. 001-32312)) |
| 10 | .25* | | Novelis Inc. Deferred Share Unit Plan for Non-Executive Directors (incorporated by reference to Exhibit 10.26 to our Annual Report onForm 10-K filed on March 30, 2005 (FileNo. 001-32312)) |
| 10 | .26* | | Form of Offer Letter with certain Novelis executive officers (incorporated by reference to Exhibit 10.28 to our Annual Report onForm 10-K filed on March 30, 2005 (FileNo. 001-32312)) |
| 10 | .27* | | Written description of Novelis Pension Plan for Officers (incorporated by reference to Exhibit 10.29 to our Annual Report onForm 10-K filed on March 30, 2005 (FileNo. 001-32312)) |
| 10 | .28* | | Written description of Novelis Founders Performance Award Plan (incorporated by reference to Exhibit 10.30 to our Annual Report onForm 10-K filed on March 30, 2005 (FileNo. 001-32312)) |
| 10 | .29* | | Deferred Share Agreement, dated as of July 1, 2002, between Alcan Corporation and Martha Finn Brooks (incorporated by reference to Exhibit 10.1 to theForm 8-K filed by Novelis Inc. on August 1, 2005 (FileNo. 001-32312)) |
| 10 | .30* | | Amendment to Deferred Share Agreement, dated as of July 27, 2005, between Novelis Inc. and Martha Finn Brooks (incorporated by reference to Exhibit 10.2 to theForm 8-K filed by Novelis Inc. on August 1, 2005 (FileNo. 001-32312)) |
| 10 | .31 | | Waiver, dated as of November 11, 2005, under the Credit Agreement dated January 7, 2005 among Novelis Inc., Novelis Corporation, Novelis Deutschland GmbH, Novelis UK Ltd., Novelis AG, Citigroup North America, Inc. and the issuers and lenders a party thereto (incorporated by reference to Exhibit 99.1 to theForm 8-K filed by Novelis Inc. on November 7, 2005 (File No.001-32312)) |
| 10 | .32 | | Second Waiver, dated as of February 9, 2006, under the Credit Agreement dated January 7, 2005 among Novelis Inc., Novelis Corporation, Novelis Deutschland GmbH, Novelis UK Ltd., Novelis AG, Citigroup North America, Inc. and the issuers and lenders a party thereto (incorporated by reference to Exhibit 10.1 to theForm 8-K filed by Novelis Inc. on February 14, 2006 (File No.001-32312)) |
| 10 | .33 | | Novelis Founders Performance Award Notification for Brian Sturgell dated March 31, 2005, as amended and restated as of March 14, 2006 (incorporated by reference to Exhibit 10.1 to theForm 8-K filed by Novelis Inc. on March 20, 2006 (FileNo. 001-32312)) |
| 10 | .34 | | Novelis Founders Performance Award Notification for Martha Brooks dated March 31, 2005 (incorporated by reference to Exhibit 10.2 to theForm 8-K filed by Novelis Inc. on March 20, 2006 (FileNo. 001-32312)) |
| 10 | .35 | | Novelis Founders Performance Award Notification for Chris Bark-Jones dated March 31, 2005(incorporated by reference to Exhibit 10.3 to theForm 8-K filed by Novelis Inc. on March 20, 2006 (FileNo. 001-32312)) |
| 10 | .36 | | Novelis Founders Performance Award Notification for Jack Morrison dated March 31, 2005(incorporated by reference to Exhibit 10.4 to theForm 8-K filed by Novelis Inc. on March 20, 2006 (FileNo. 001-32312)) |
| 10 | .37 | | Novelis Founders Performance Award Notification for Pierre Arseneault dated March 31, 2005(incorporated by reference to Exhibit 10.5 to theForm 8-K filed by Novelis Inc. on March 20, 2006 (FileNo. 001-32312)) |
200191
| | | | | | | | |
Exhibit
| Exhibit
| | | Exhibit
| | |
No. | No. | | Description | No. | | Description |
|
| 10 | .38 | | Novelis Founders Performance Award Notification for Geoff Batt dated March 31, 2005(incorporated by reference to Exhibit 10.6 to theForm 8-K filed by Novelis Inc. on March 20, 2006 (File No.001-32312)) | 10 | .16* | | Transition Agreement, dated June 28, 2006, by and between Geoff Batt and Novelis Inc. (incorporated by reference to Exhibit 10.47 to our Annual Report onForm 10-K filed on August 25, 2006 (FileNo. 001-32312)) |
| 10 | .39 | | Novelis Founders Performance Awards Plan, as amended and restated as of March 14, 2006(incorporated by reference to Exhibit 10.7 to theForm 8-K filed by Novelis Inc. on March 20, 2006 (FileNo. 001-32312)) | 10 | .17* | | Release and Separation Agreement, dated June 28, 2006, by and between Geoff Batt and Novelis Corp. (incorporated by reference to Exhibit 10.48 to our Annual Report onForm 10-K filed on August 25, 2006 (FileNo. 001-32312)) |
| 10 | .40* | | Description of Retention Payment for Geoff Batt (incorporated by reference to Exhibit 10.8 to theForm 8-K filed by Novelis Inc. on March 20, 2006 (FileNo. 001-32312)) | 10 | .18* | | Offer Letter, dated February 23, 2006, by and between Robert M. Patterson and Novelis Inc. (incorporated by reference to Exhibit 10.49 to our Annual Report onForm 10-K filed on August 25, 2006 (FileNo. 001-32312)) |
| 10 | .41* | | Employment Agreement of Arnaud de Weert (incorporated by reference to Exhibit 10.1 to theForm 8-K filed by Novelis Inc. on April 3, 2006 (FileNo. 001-32312)) | 10 | .19* | | Offer Letter, dated June 23, 2006, by and between Rick Dobson and Novelis Inc. (incorporated by reference to Exhibit 10.50 to our Annual Report onForm 10-K filed on August 25, 2006 (FileNo. 001-32312)) |
| 10 | .42* | | Agreement Concerning Transition from Employment between Novelis and Geoff Batt dated March 31, 2006 (incorporated by reference to Exhibit 10.1 to theForm 8-K filed by Novelis on April 6, 2006 (FileNo. 001-32312)) | 10 | .20* | | Addendum to Rick Dobson Offer Letter, dated June 20, 2006, by and between Rick Dobson and Novelis Inc. (incorporated by reference to Exhibit 10.51 to our Annual Report onForm 10-K filed on August 25, 2006 (FileNo. 001-32312)) |
| 10 | .43 | | Third Waiver, dated as of April 12, 2006, under the Credit Agreement dated January 7, 2005 among Novelis Inc., Novelis Corporation, Novelis Deutschland GmbH, Novelis UK Ltd., Novelis AG, Citigroup North America, Inc. and the issuers and lenders a party thereto (incorporated by reference to Exhibit 10.1 to theForm 8-K filed by Novelis Inc. on April 18, 2006 (File No.001-32312)) | 10 | .21 | | Fifth Waiver, dated as of August 11, 2006, under the Credit Agreement dated January 7, 2005 among Novelis Inc., Novelis Corporation, Novelis Deutschland GmbH, Novelis UK Ltd., Novelis AG, Citigroup North America, Inc. and the issuers and lenders a party thereto (incorporated by reference to Exhibit 10.1 to ourForm 8-K filed on August 17, 2006 (FileNo. 001-32312)) |
| 10 | .44 | | Fourth Waiver, dated as of May 10, 2006, under the Credit Agreement dated January 7, 2005 among Novelis Inc., Novelis Corporation, Novelis Deutschland GmbH, Novelis UK Ltd., Novelis AG, Citigroup North America, Inc. and the issuers and lenders a party thereto (incorporated by reference to Exhibit 10.1 to theForm 8-K filed by Novelis Inc. on May 16, 2006 (File No.001-32312)) | 10 | .22* | | Form of Change in Control Agreement between Novelis Inc. and certain executive officers (incorporated by reference to Exhibit 99.1 to ourForm 8-K filed on September 27, 2006 (FileNo. 001-32312)) |
| 10 | .45* | | Transition Agreement, dated June 15, 2006, by and between Jo-Ann Longworth and Novelis Inc. | 10 | .23* | | Form of Change in Control Agreement between Novelis Inc. and certain executive officers and key employees (incorporated by reference to Exhibit 99.2 to ourForm 8-K filed on September 27, 2006 (FileNo. 001-32312)) |
| 10 | .46* | | Separation and Release Agreement, dated June 15, 2006, by and between Jo-Ann Longworth and Novelis Corp. | 10 | .24* | | Form of Recognition Agreement between Novelis Inc. and certain executive officers and key employees (incorporated by reference to Exhibit 99.3 to ourForm 8-K filed on September 27, 2006 (FileNo. 001-32312)) |
| 10 | .47* | | Transition Agreement, dated June 27, 2006, by and between Geoff Batt and Novelis Inc. | 10 | .25* | | Letter Agreement between Novelis Inc. and William T. Monahan dated as of October 11, 2006 (incorporated by reference to Exhibit 10.1 to ourForm 8-K filed on October 17, 2006 (FileNo. 001-32312)) |
| 10 | .48* | | Separation and Release Agreement, dated June 27, 2006, by and between Geoff Batt and Novelis Corp. | 10 | .26 | | Amendment No. 2 to Credit Agreement, dated October 16, 2006 (incorporated by reference to Exhibit 10.1 to ourForm 8-K filed on October 19, 2006 (FileNo. 001-32312)) |
| 10 | .49* | | Offer Letter, dated February 24, 2006, by and between Robert M. Patterson and Novelis Inc. | 10 | .27* | | Novelis Conversion Plan of 2005, as amended on October 19, 2006 (incorporated by reference to Exhibit 10.1 to ourForm 8-K filed on October 25, 2006 (FileNo. 001-32312)) |
| 10 | .50* | | Offer Letter, dated June 20, 2006, by and between Rick Dobson and Novelis Inc. | 10 | .28* | | Letter Agreement between Novelis Inc. and David Godsell dated as of November 10, 2004 (incorporated by reference to Exhibit 10.1 to ourForm 8-K filed on October 26, 2006 (FileNo. 001-32312)) |
| 10 | .51* | | Addendum to Rick Dobson Offer Letter, dated June 20, 2006, by and between Rick Dobson and Novelis Inc. | 10 | .29* | | Letter Agreement, dated October 20, 2006, by and between Novelis Inc. and Thomas Walpole (incorporated by reference to Exhibit 10.1 to ourForm 8-K filed on October 26, 2006 (FileNo. 001-32312)) |
| 10 | .52 | | Fifth Waiver, dated as of August 11, 2006, under the Credit Agreement dated January 7, 2005 among Novelis Inc., Novelis Corporation, Novelis Deutschland GmbH, Novelis UK Ltd., Novelis AG, Citigroup North America, Inc. and the issuers and lenders a party thereto (incorporated by reference to Exhibit 10.1 to theForm 8-K filed by Novelis Inc. on August 17, 2006 (FileNo. 001-32312)) | 10 | .30* | | Form of SAR Award (incorporated by reference to Exhibit 10.3 to ourForm 8-K filed on November 1, 2006 (FileNo. 001-32312)) |
| 11 | .1 | | Statement regarding computation of per share earnings (incorporated by reference to Item 8. Financial Statements and Supplementary Data — Note 19 — Earnings Per Share to the Consolidated and Combined Financial Statements) | 10 | .31* | | Novelis Inc. 2006 Incentive Plan, as amended (incorporated by reference to Exhibit 10.1 to ourForm 8-K filed on November 1, 2006 (FileNo. 001-32312)) |
| 21 | .1 | | List of subsidiaries of Novelis Inc. | 10 | .32* | | Form of Non-Qualified Stock Option Award (incorporated by reference to Exhibit 10.2 to ourForm 8-K filed on November 1, 2006 (FileNo. 001-32312)) |
| 31 | .1 | | Section 302 Certification of Principal Executive Officer | 10 | .33* | | Separation and Release Agreement between Novelis Inc. and Brian Sturgell dated October 26, 2006 (incorporated by reference to Exhibit 10.60.1 to our Post-Effective Amendment No. 1 to ourForm S-4 Registration Statement filed on December 1, 2006 (FileNo. 333-127139)) |
| 31 | .2 | | Section 302 Certification of Principal Financial Officer | |
| 32 | .1 | | Section 906 Certification of Principal Executive Officer | |
| 32 | .2 | | Section 906 Certification of Principal Financial Officer | |
192
| | | | |
Exhibit
| | |
No. | | Description |
|
| 11 | .1 | | Statement regarding computation of per share earnings (incorporated by reference to Item 8. Financial Statements and Supplementary Data — Note 19 — Earnings per Share to the Consolidated and Combined Financial Statements.) |
| 21 | .1 | | List of subsidiaries of Novelis Inc. |
| 23 | .1 | | Consent of PricewaterhouseCoopers LLP |
| 23 | .2 | | Consent of PricewaterhouseCoopers LLP |
| 31 | .1 | | Section 302 Certification of Principal Executive Officer |
| 31 | .2 | | Section 302 Certification of Principal Financial Officer |
| 32 | .1 | | Section 906 Certification of Principal Executive Officer |
| 32 | .2 | | Section 906 Certification of Principal Financial Officer |
| | |
* | | Indicates a management contract or compensatory plan or arrangement. |
201193
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
NOVELIS INC.
| | |
| By:By | /s/ Brian W. Sturgell Edward A. Blechschmidt |
Name: Brian W. Sturgell
Edward A. Blechschmidt
| | |
| Title: | Acting Chief Executive Officer |
Date: August 24, 2006March 1, 2007
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| | | | | | |
/s/ Brian W. SturgellEdward A. Blechschmidt
Brian W. SturgellEdward A. Blechschmidt | | (Director and Acting Principal Executive Officer) | | Date: August 24, 2006March 1, 2007 |
| | | | |
/s/ Rick Dobson Rick Dobson | | (Principal Financial Officer) | | Date: August 24, 2006March 1, 2007 |
| | | | |
/s/ Robert M. Patterson Robert M. Patterson | | (Principal Accounting Officer) | | Date: August 24, 2006March 1, 2007 |
| | | | |
/s/ William T. Monahan William T. Monahan | | (Chairman of the Board of Directors) | | Date: August 24, 2006March 1, 2007 |
| | | | |
/s/ Edward A. Blechschmidt
Edward A. Blechschmidt | | (Director) | | Date: August 24, 2006 |
| | | | |
/s/ Jacques Bougie
Jacques Bougie | | (Director) | | Date: August 24, 2006 |
| | | | |
/s/ Charles G. Cavell
Charles G. Cavell | | (Director) | | Date: August 24, 2006March 1, 2007 |
| | | | |
/s/ Clarence J. Chandran Clarence J. Chandran | | (Director) | | Date: August 24, 2006March 1, 2007 |
| | | | |
/s/ C. Roberto Cordaro C. Roberto Cordaro | | (Director) | | Date: August 24, 2006March 1, 2007 |
| | | | |
/s/ Helmut Eschwey Helmut Eschwey | | (Director) | | Date: August 24, 2006March 1, 2007 |
| | | | |
/s/ David J. FitzPatrick David J. FitzPatrick | | (Director) | | Date: August 24, 2006March 1, 2007 |
| | | | |
/s/ Suzanne Labarge Suzanne Labarge | | (Director) | | Date: March 1, 2007 |
| | | | |
/s/ Patrick J. Monahan Patrick J. Monahan | | (Director) | | Date: March 1, 2007 |
202194
| | | | | | |
/s/ Suzanne LabargeSheldon Plener
Suzanne LabargeSheldon Plener | | (Director) | | Date: August 24, 2006March 1, 2007 |
| | | | |
/s/ Rudolf Rupprecht Rudolf Rupprecht | | (Director) | | Date: August 24, 2006March 1, 2007 |
| | | | |
/s/ Kevin M. Twomey Kevin M. Twomey | | (Director) | | Date: August 24, 2006March 1, 2007 |
| | | | |
/s/ Edward V. Yang Edward V. Yang | | (Director) | | Date: August 24, 2006March 1, 2007 |
203
195
EXHIBIT INDEX
| | | | | | | | |
Exhibit
| Exhibit
| | | Exhibit
| | |
No. | No. | | Description | No. | | Description |
|
| 3 | .1 | | Restated Certificate and Articles of Incorporation of Novelis Inc. (incorporated by reference to Exhibit 3.1 to theForm 8-K filed by Novelis Inc. on January 7, 2005 (FileNo. 001-32312)) | 3 | .1 | | Restated Certificate and Articles of Incorporation of Novelis Inc. (incorporated by reference to Exhibit 3.1 to ourForm 8-K filed on January 7, 2005 (FileNo. 001-32312)) |
| 3 | .2 | | By-law No. 1 of Novelis Inc. (incorporated by reference to Exhibit 3.2 to the Form 10 filed by Novelis Inc. on November 17, 2004 (FileNo. 001-32312)) | 3 | .2 | | By-law No. 1 of Novelis Inc. (incorporated by reference to Exhibit 3.2 to our Form 10 filed on November 17, 2004 (FileNo. 001-32312)) |
| 4 | .1 | | Shareholder Rights Agreement between Novelis and CIBC Mellon Trust Company (incorporated by reference to Exhibit 4.1 to theForm 10-K filed by Novelis Inc. on March 30, 2005 (File No.001-32312)) | 4 | .1 | | Shareholder Rights Agreement between Novelis Inc. and CIBC Mellon Trust Company (incorporated by reference to Exhibit 4.1 to ourForm 10-K filed on March 30, 2005 (FileNo. 001-32312)) |
| 4 | .2 | | Specimen Certificate of Novelis Inc. Common Shares (incorporated by reference to Exhibit 4.2 to the Form 10 filed by Novelis Inc. on December 27, 2004 (FileNo. 001-32312)) | 4 | .2 | | Specimen Certificate of Novelis Inc. Common Shares (incorporated by reference to Exhibit 4.2 to our Form 10 filed on December 27, 2004 (FileNo. 001-32312)) |
| 4 | .3 | | Indenture, relating to the Notes, dated as of February 3, 2005, between the Company, the guarantors named on the signature pages thereto and The Bank of New York Trust Company, N.A., as trustee (incorporated by reference to Exhibit 4.1 to our Current Report onForm 8-K filed on February 3, 2005 (FileNo. 001-32312)) | 4 | .3 | | Indenture, relating to the Notes, dated as of February 3, 2005, between the Company, the guarantors named on the signature pages thereto and The Bank of New York Trust Company, N.A., as trustee (incorporated by reference to Exhibit 4.1 to ourForm 8-K filed on February 3, 2005 (FileNo. 001-32312)) |
| 4 | .4 | | Registration Rights Agreement, dated as of February 3, 2005, among the Company, the guarantors named on the signature pages thereto, Citigroup Global Markets Inc., Morgan Stanley & Co. Incorporated and UBS Securities LLC, as Representatives of the Initial Purchasers (incorporated by reference to Exhibit 4.2 to our Current Report onForm 8-K filed on February 3, 2005 (File No.001-32312)) | 4 | .4 | | Registration Rights Agreement, dated as of February 3, 2005, among the Company, the guarantors named on the signature pages thereto, Citigroup Global Markets Inc., Morgan Stanley & Co. Incorporated and UBS Securities LLC, as Representatives of the Initial Purchasers (incorporated by reference to Exhibit 4.2 to ourForm 8-K filed on February 3, 2005 (FileNo. 001-32312)) |
| 4 | .5 | | Form of Note for 71/4% Senior Notes due 2015 (incorporated by reference to Exhibit 4.1 to theForm S-4 filed by Novelis Inc. on August 3, 2005 (FileNo. 331-127139)) | 4 | .5 | | Form of Note for 71/4% Senior Notes due 2015 (incorporated by reference to Exhibit 4.1 to ourForm S-4 filed on August 3, 2005 (FileNo. 333-127139)) |
| 10 | .1 | | Separation Agreement between Alcan Inc. and Novelis Inc. (incorporated by reference to Exhibit 10.1 to our Annual Report onForm 10-K filed on March 30, 2005 (FileNo. 001-32312)) | 4 | .6 | | Supplemental Indenture, between the Company, Novelis Finances USA LLC, Novelis South America Holdings LLC, Aluminum Upstream Holdings LLC and the Bank of New York Trust Company, N.A. (incorporated by reference to Exhibit 4.6 to our Post-Effective Amendment No. 1 to ourForm S-4 Registration Statement filed on December 1, 2006 (FileNo. 333-127139)) |
| 10 | .2 | | Metal Supply Agreement between Novelis Inc., as Purchaser, and Alcan Inc., as Supplier, for the supply of re-melt aluminum ingot (incorporated by reference to Exhibit 10.2 to our Annual Report onForm 10-K filed on March 30, 2005 (FileNo. 001-32312)) | 10 | .1 | | Second Waiver, dated as of February 9, 2006, under the Credit Agreement dated January 7, 2005 among Novelis Inc., Novelis Corporation, Novelis Deutschland GmbH, Novelis UK Ltd., Novelis AG, Citigroup North America, Inc. and the issuers and lenders a party thereto (incorporated by reference to Exhibit 10.1 to ourForm 8-K filed on February 14, 2006 (FileNo. 001-32312)) |
| 10 | .3 | | Molten Metal Supply Agreement between Novelis Inc., as Purchaser, and Alcan Inc., as Supplier, for the supply of molten metal to Purchaser’s Saguenay Works facility (incorporated by reference to Exhibit 10.3 to our Annual Report onForm 10-K filed on March 30, 2005 (FileNo. 001-32312)) | 10 | .2* | | Employment Agreement of Arnaud de Weert (incorporated by reference to Exhibit 10.1 to ourForm 8-K filed on April 3, 2006 (FileNo. 001-32312)) |
| 10 | .4 | | Metal Supply Agreement between Novelis Inc., as Purchaser, and Alcan Inc., as Supplier, for the supply of sheet ingot in North America (incorporated by reference to Exhibit 10.4 to our Annual Report onForm 10-K filed on March 30, 2005 (FileNo. 001-32312)) | 10 | .3* | | Agreement Concerning Transition from Employment between Novelis and Geoff Batt dated March 31, 2006 (incorporated by reference to Exhibit 10.1 to ourForm 8-K filed on April 6, 2006 (FileNo. 001-32312)) |
| 10 | .5 | | Metal Supply Agreement between Novelis Inc., as Purchaser, and Alcan Inc., as Supplier, for the supply of sheet ingot in Europe (incorporated by reference to Exhibit 10.5 to our Annual Report onForm 10-K filed on March 30, 2005 (FileNo. 001-32312)) | 10 | .4 | | Novelis Founders Performance Award Notification for Brian Sturgell dated March 31, 2005, as amended and restated as of March 14, 2006 (incorporated by reference to Exhibit 10.1 to ourForm 8-K filed on March 20, 2006 (FileNo. 001-32312)) |
| 10 | .6 | | Tax Sharing and Disaffiliation Agreement between Alcan Inc., Novelis Inc., Arcustarget Inc., Alcan Corporation and Novelis Corporation (incorporated by reference to Exhibit 10.6 to our Annual Report onForm 10-K filed on March 30, 2005 (FileNo. 001-32312)) | 10 | .5 | | Novelis Founders Performance Award Notification for Martha Brooks dated March 31, 2005 (incorporated by reference to Exhibit 10.2 to ourForm 8-K filed on March 20, 2006 (FileNo. 001-32312)) |
| 10 | .7 | | Transitional Services Agreement between Alcan Inc. and Novelis Inc. (incorporated by reference to Exhibit 10.7 to our Annual Report onForm 10-K filed on March 30, 2005 (FileNo. 001-32312)) | 10 | .6 | | Novelis Founders Performance Award Notification for Chris Bark-Jones dated March 31, 2005(incorporated by reference to Exhibit 10.3 to ourForm 8-K filed on March 20, 2006 (FileNo. 001-32312)) |
| 10 | .8 | | Principal Intellectual Property Agreement between Alcan International Limited and Novelis Inc. (incorporated by reference to Exhibit 10.8 to our Annual Report onForm 10-K filed on March 30, 2005 (FileNo. 001-32312)) | 10 | .7 | | Novelis Founders Performance Award Notification for Jack Morrison dated March 31, 2005(incorporated by reference to Exhibit 10.4 to ourForm 8-K filed on March 20, 2006 (FileNo. 001-32312)) |
| 10 | .9 | | Secondary Intellectual Property Agreement between Novelis Inc. and Alcan International Limited (incorporated by reference to Exhibit 10.9 to our Annual Report onForm 10-K filed on March 30, 2005 (FileNo. 001-32312)) | 10 | .8 | | Novelis Founders Performance Award Notification for Pierre Arseneault dated March 31, 2005(incorporated by reference to Exhibit 10.5 to ourForm 8-K filed on March 20, 2006 (FileNo. 001-32312)) |
| 10 | .10 | | Master Metal Hedging Agreement between Alcan Inc. and Novelis Inc. (incorporated by reference to Exhibit 10.10 to our Annual Report onForm 10-K filed on March 30, 2005 (FileNo. 001-32312)) | 10 | .9 | | Novelis Founders Performance Award Notification for Geoff Batt dated March 31, 2005(incorporated by reference to Exhibit 10.6 to ourForm 8-K filed on March 20, 2006 (FileNo. 001-32312)) |
204196
| | | | | | | | |
Exhibit
| Exhibit
| | | Exhibit
| | |
No. | No. | | Description | No. | | Description |
|
| 10 | .11 | | Credit Agreement, dated as of January 7, 2005, among Novelis Inc., Novelis Corporation, Novelis Deutschland GmbH, Novelis UK Ltd. and Novelis AG, as Borrowers, the Lenders and Issuers Party (as defined in the agreement), Citigroup North America, Inc., as Administrative Agent and Collateral Agent, Morgan Stanley Senior Funding, Inc. and UBS Securities LLC, as Co-Syndication Agents, and Citigroup Global Markets Inc., Morgan Stanley Senior Funding, Inc. and UBS Securities LLC, as Joint Lead Arrangers and Joint Book-Running Managers. (incorporated by reference to Exhibit 10.11 to our Annual Report onForm 10-K filed on March 30, 2005 (FileNo. 001-32312)) | 10 | .10 | | Novelis Founders Performance Awards Plan, as amended and restated as of March 14, 2006(incorporated by reference to Exhibit 10.7 to ourForm 8-K filed on March 20, 2006 (FileNo. 001-32312)) |
| 10 | .11.1 | | Amendment No. 1 to Credit Agreement dated as of September 19, 2005 (incorporated by reference to Exhibit 10.1 to our Current Report onForm 8-K filed on September 20, 2005 (FileNo. 001-32312)) | 10 | .11* | | Description of Retention Payment for Geoff Batt (incorporated by reference to Exhibit 10.8 to ourForm 8-K filed on March 20, 2006 (FileNo. 001-32312)) |
| 10 | .11.2 | | Waiver and Consent to Credit Agreement dated as of November 11, 2005 (incorporated by reference to Exhibit 99.1 to our Current Report onForm 8-K filed on November 14, 2005 (File No.001-32312)) | 10 | .12* | | Third Waiver, dated as of April 12, 2006, under the Credit Agreement dated January 7, 2005 among Novelis Inc., Novelis Corporation, Novelis Deutschland GmbH, Novelis UK Ltd., Novelis AG, Citigroup North America, Inc. and the issuers and lenders a party thereto (incorporated by reference to Exhibit 10.1 to ourForm 8-K filed on April 18, 2006 (FileNo. 001-32312)) |
| 10 | .11.3 | | Waiver and Consent to Credit Agreement dated as of February 9, 2006 (incorporated by reference to Exhibit 10.1 to our Current Report onForm 8-K filed on February 14, 2006 (FileNo. 001-32312)) | 10 | .13 | | Fourth Waiver, dated as of May 10, 2006, under the Credit Agreement dated January 7, 2005 among Novelis Inc., Novelis Corporation, Novelis Deutschland GmbH, Novelis UK Ltd., Novelis AG, Citigroup North America, Inc. and the issuers and lenders a party thereto (incorporated by reference to Exhibit 10.1 to ourForm 8-K filed on May 16, 2006 (FileNo. 001-32312)) |
| 10 | .12* | | Employee Matters Agreement between Alcan Inc. and Novelis Inc. (incorporated by reference to Exhibit 10.12 to our Annual Report onForm 10-K filed on March 30, 2005 (FileNo. 001-32312)) | 10 | .14* | | Transition Agreement, dated June 15, 2006, by and between Jo-Ann Longworth and Novelis Inc. (incorporated by reference to Exhibit 10.45 to our Annual Report onForm 10-K filed on August 25, 2006 (FileNo. 001-32312)) |
| 10 | .13* | | Employment Agreement of Brian W. Sturgell (incorporated by reference to Exhibit 10.32 to the Form 10 filed by Novelis Inc. on December 22, 2004 (FileNo. 001-32312)) | 10 | .15* | | Release and Separation Agreement, dated June 15, 2006, by and between Jo-Ann Longworth and Novelis Corp. (incorporated by reference to Exhibit 10.46 to our Annual Report onForm 10-K filed on August 25, 2006 (FileNo. 001-32312)) |
| 10 | .14* | | Employment Agreement of Martha Finn Brooks (incorporated by reference to Exhibit 10.33 to the Form 10 filed by Novelis Inc. on December 22, 2004 (FileNo. 001-32312)) | 10 | .16* | | Transition Agreement, dated June 28, 2006, by and between Geoff Batt and Novelis Inc. (incorporated by reference to Exhibit 10.47 to our Annual Report onForm 10-K filed on August 25, 2006 (FileNo. 001-32312)) |
| 10 | .15* | | Employment Agreement of Christopher Bark-Jones (incorporated by reference to Exhibit 10.34 to the Form 10 filed by Novelis Inc. on December 27, 2004 (FileNo. 001-32312)) | 10 | .17* | | Release and Separation Agreement, dated June 28, 2006, by and between Geoff Batt and Novelis Corp. (incorporated by reference to Exhibit 10.48 to our Annual Report onForm 10-K filed on August 25, 2006 (FileNo. 001-32312)) |
| 10 | .16* | | Employment Agreement of Pierre Arseneault (incorporated by reference to Exhibit 10.35 to the Form 10 filed by Novelis Inc. on December 22, 2004 (FileNo. 001-32312)) | 10 | .18* | | Offer Letter, dated February 23, 2006, by and between Robert M. Patterson and Novelis Inc. (incorporated by reference to Exhibit 10.49 to our Annual Report onForm 10-K filed on August 25, 2006 (FileNo. 001-32312)) |
| 10 | .17* | | Employment Agreement of Geoffrey P. Batt (incorporated by reference to Exhibit 10.36 to the Form 10 filed by Novelis Inc. on December 22, 2004 (FileNo. 001-32312)) | 10 | .19* | | Offer Letter, dated June 23, 2006, by and between Rick Dobson and Novelis Inc. (incorporated by reference to Exhibit 10.50 to our Annual Report onForm 10-K filed on August 25, 2006 (FileNo. 001-32312)) |
| 10 | .17.1* | | Employment Agreement of Jack Morrison (incorporated by reference to Exhibit 10.27 to our Annual Report onForm 10-K filed on March 30, 2005 (File No. 001-32312)) | 10 | .20* | | Addendum to Rick Dobson Offer Letter, dated June 20, 2006, by and between Rick Dobson and Novelis Inc. (incorporated by reference to Exhibit 10.51 to our Annual Report onForm 10-K filed on August 25, 2006 (FileNo. 001-32312)) |
| 10 | .18* | | Form of Change of Control Agreement between Alcan Inc. and executive officers of Novelis Inc. (incorporated by reference to Exhibit 10.37 to the Form 10 filed by Novelis Inc. on December 22, 2004 (FileNo. 001-32312)) | 10 | .21 | | Fifth Waiver, dated as of August 11, 2006, under the Credit Agreement dated January 7, 2005 among Novelis Inc., Novelis Corporation, Novelis Deutschland GmbH, Novelis UK Ltd., Novelis AG, Citigroup North America, Inc. and the issuers and lenders a party thereto (incorporated by reference to Exhibit 10.1 to ourForm 8-K filed on August 17, 2006 (FileNo. 001-32312)) |
| 10 | .19* | | Change of Control Agreement dated as of December 22, 2004 between Alcan Inc. and Martha Finn Brooks (incorporated by reference to Exhibit 10.2 to theForm 8-K filed by Novelis Inc. on January 7, 2005 (FileNo. 001-32312)) | 10 | .22* | | Form of Change in Control Agreement between Novelis Inc. and certain executive officers (incorporated by reference to Exhibit 99.1 to ourForm 8-K filed on September 27, 2006 (FileNo. 001-32312)) |
| 10 | .20* | | Change of Control Agreement dated as of December 23, 2004 between Alcan Inc. and Christopher Bark-Jones (incorporated by reference to Exhibit 10.3 to theForm 8-K filed by Novelis Inc. on January 7, 2005 (FileNo. 001-32312)) | 10 | .23* | | Form of Change in Control Agreement between Novelis Inc. and certain executive officers and key employees (incorporated by reference to Exhibit 99.2 to ourForm 8-K filed on September 27, 2006 (FileNo. 001-32312)) |
| 10 | .21* | | Change of Control Agreement dated as of November 12, 2004 between Alcan Inc. and Pierre Arseneault (incorporated by reference to Exhibit 10.4 to theForm 8-K filed by Novelis Inc. on January 7, 2005 (FileNo. 001-32312)) | 10 | .24* | | Form of Recognition Agreement between Novelis Inc. and certain executive officers and key employees (incorporated by reference to Exhibit 99.3 to ourForm 8-K filed on September 27, 2006 (FileNo. 001-32312)) |
| 10 | .22* | | Change of Control Agreement dated as of November 8, 2004 between Alcan Inc. and Geoffrey P. Batt (incorporated by reference to Exhibit 10.5 to theForm 8-K filed by Novelis Inc. on January 7, 2005 (FileNo. 001-32312)) | 10 | .25* | | Letter Agreement between Novelis Inc. and William T. Monahan dated as of October 11, 2006 (incorporated by reference to Exhibit 10.1 to ourForm 8-K filed on October 17, 2006 (FileNo. 001-32312)) |
| 10 | .22.1* | | Change of Control Agreement dated as of December 5, 2005 between Novelis Inc. and Brian W. Sturgell (incorporated by reference to Exhibit 10.1 to theForm 8-K filed by Novelis Inc. on December 9, 2005 (FileNo. 001-32312)) | |
| 10 | .23* | | Novelis Conversion Plan of 2005 (incorporated by reference to Exhibit 10.6 to theForm 8-K filed by Novelis Inc. on January 7, 2005 (FileNo. 001-32312)) | |
205197
| | | | |
Exhibit
| | |
No. | | Description |
|
| 10 | .24* | | Written description of Novelis Short-term Incentive Plan — 2005 Performance Measures (incorporated by reference to Exhibit 10.25 to our Annual Report onForm 10-K filed on March 30, 2005 (FileNo. 001-32312)) |
| 10 | .25* | | Novelis Inc. Deferred Share Unit Plan for Non-Executive Directors (incorporated by reference to Exhibit 10.26 to our Annual Report onForm 10-K filed on March 30, 2005 (FileNo. 001-32312)) |
| 10 | .26* | | Form of Offer Letter with certain Novelis executive officers (incorporated by reference to Exhibit 10.28 to our Annual Report onForm 10-K filed on March 30, 2005 (FileNo. 001-32312)) |
| 10 | .27* | | Written description of Novelis Pension Plan for Officers (incorporated by reference to Exhibit 10.29 to our Annual Report onForm 10-K filed on March 30, 2005 (FileNo. 001-32312)) |
| 10 | .28* | | Written description of Novelis Founders Performance Award Plan (incorporated by reference to Exhibit 10.30 to our Annual Report onForm 10-K filed on March 30, 2005 (FileNo. 001-32312)) |
| 10 | .29* | | Deferred Share Agreement, dated as of July 1, 2002, between Alcan Corporation and Martha Finn Brooks (incorporated by reference to Exhibit 10.1 to theForm 8-K filed by Novelis Inc. on August 1, 2005 (FileNo. 001-32312)) |
| 10 | .30* | | Amendment to Deferred Share Agreement, dated as of July 27, 2005, between Novelis Inc. and Martha Finn Brooks (incorporated by reference to Exhibit 10.2 to theForm 8-K filed by Novelis Inc. on August 1, 2005 (FileNo. 001-32312)) |
| 10 | .31 | | Waiver, dated as of November 11, 2005, under the Credit Agreement dated January 7, 2005 among Novelis Inc., Novelis Corporation, Novelis Deutschland GmbH, Novelis UK Ltd., Novelis AG, Citigroup North America, Inc. and the issuers and lenders a party thereto (incorporated by reference to Exhibit 99.1 to theForm 8-K filed by Novelis Inc. on November 7, 2005 (File No.001-32312)) |
| 10 | .32 | | Second Waiver, dated as of February 9, 2006, under the Credit Agreement dated January 7, 2005 among Novelis Inc., Novelis Corporation, Novelis Deutschland GmbH, Novelis UK Ltd., Novelis AG, Citigroup North America, Inc. and the issuers and lenders a party thereto (incorporated by reference to Exhibit 10.1 to theForm 8-K filed by Novelis Inc. on February 14, 2006 (File No.001-32312)) |
| 10 | .33 | | Novelis Founders Performance Award Notification for Brian Sturgell dated March 31, 2005, as amended and restated as of March 14, 2006 (incorporated by reference to Exhibit 10.1 to theForm 8-K filed by Novelis Inc. on March 20, 2006 (FileNo. 001-32312)) |
| 10 | .34 | | Novelis Founders Performance Award Notification for Martha Brooks dated March 31, 2005 (incorporated by reference to Exhibit 10.2 to theForm 8-K filed by Novelis Inc. on March 20, 2006 (FileNo. 001-32312)) |
| 10 | .35 | | Novelis Founders Performance Award Notification for Chris Bark-Jones dated March 31, 2005(incorporated by reference to Exhibit 10.3 to theForm 8-K filed by Novelis Inc. on March 20, 2006 (FileNo. 001-32312)) |
| 10 | .36 | | Novelis Founders Performance Award Notification for Jack Morrison dated March 31, 2005(incorporated by reference to Exhibit 10.4 to theForm 8-K filed by Novelis Inc. on March 20, 2006 (FileNo. 001-32312)) |
| 10 | .37 | | Novelis Founders Performance Award Notification for Pierre Arseneault dated March 31, 2005(incorporated by reference to Exhibit 10.5 to theForm 8-K filed by Novelis Inc. on March 20, 2006 (FileNo. 001-32312)) |
| 10 | .38 | | Novelis Founders Performance Award Notification for Geoff Batt dated March 31, 2005(incorporated by reference to Exhibit 10.6 to theForm 8-K filed by Novelis Inc. on March 20, 2006 (File No.001-32312)) |
| 10 | .39 | | Novelis Founders Performance Awards Plan, as amended and restated as of March 14, 2006(incorporated by reference to Exhibit 10.7 to theForm 8-K filed by Novelis Inc. on March 20, 2006 (FileNo. 001-32312)) |
| 10 | .40* | | Description of Retention Payment for Geoff Batt (incorporated by reference to Exhibit 10.8 to theForm 8-K filed by Novelis Inc. on March 20, 2006 (FileNo. 001-32312)) |
| 10 | .41* | | Employment Agreement of Arnaud de Weert (incorporated by reference to Exhibit 10.1 to theForm 8-K filed by Novelis Inc. on April 3, 2006 (FileNo. 001-32312)) |
206
| | | | | | | | |
Exhibit
| Exhibit
| | | Exhibit
| | |
No. | No. | | Description | No. | | Description |
|
| 10 | .42* | | Agreement Concerning Transition from Employment between Novelis and Geoff Batt dated March 31, 2006 (incorporated by reference to Exhibit 10.1 to theForm 8-K filed by Novelis on April 6, 2006 (FileNo. 001-32312)) | 10 | .26 | | Amendment No. 2 to Credit Agreement, dated October 16, 2006 (incorporated by reference to Exhibit 10.1 to ourForm 8-K filed on October 19, 2006 (FileNo. 001-32312)) |
| 10 | .43 | | Third Waiver, dated as of April 12, 2006, under the Credit Agreement dated January 7, 2005 among Novelis Inc., Novelis Corporation, Novelis Deutschland GmbH, Novelis UK Ltd., Novelis AG, Citigroup North America, Inc. and the issuers and lenders a party thereto (incorporated by reference to Exhibit 10.1 to theForm 8-K filed by Novelis Inc. on April 18, 2006 (File No.001-32312)) | 10 | .27* | | Novelis Conversion Plan of 2005, as amended on October 19, 2006 (incorporated by reference to Exhibit 10.1 to ourForm 8-K filed on October 25, 2006 (FileNo. 001-32312)) |
| 10 | .44 | | Fourth Waiver, dated as of May 10, 2006, under the Credit Agreement dated January 7, 2005 among Novelis Inc., Novelis Corporation, Novelis Deutschland GmbH, Novelis UK Ltd., Novelis AG, Citigroup North America, Inc. and the issuers and lenders a party thereto (incorporated by reference to Exhibit 10.1 to theForm 8-K filed by Novelis Inc. on May 16, 2006 (File No.001-32312)) | 10 | .28* | | Letter Agreement between Novelis Inc. and David Godsell dated as of November 10, 2004 (incorporated by reference to Exhibit 10.1 to ourForm 8-K filed on October 26, 2006 (FileNo. 001-32312)) |
| 10 | .45* | | Transition Agreement, dated June 15, 2006, by and between Jo-Ann Longworth and Novelis Inc. | 10 | .29* | | Letter Agreement, dated October 20, 2006, by and between Novelis Inc. and Thomas Walpole (incorporated by reference to Exhibit 10.1 to ourForm 8-K filed on October 26, 2006 (FileNo. 001-32312)) |
| 10 | .46* | | Separation and Release Agreement, dated June 15, 2006, by and between Jo-Ann Longworth and Novelis Corp. | 10 | .30* | | Form of SAR Award (incorporated by reference to Exhibit 10.3 to ourForm 8-K filed on November 1, 2006 (FileNo. 001-32312)) |
| 10 | .47* | | Transition Agreement, dated June 27, 2006, by and between Geoff Batt and Novelis Inc. | 10 | .31* | | Novelis Inc. 2006 Incentive Plan, as amended (incorporated by reference to Exhibit 10.1 to ourForm 8-K filed on November 1, 2006 (FileNo. 001-32312)) |
| 10 | .48* | | Separation and Release Agreement, dated June 27, 2006, by and between Geoff Batt and Novelis Corp. | 10 | .32* | | Form of Non-Qualified Stock Option Award (incorporated by reference to Exhibit 10.2 to ourForm 8-K filed on November 1, 2006 (FileNo. 001-32312)) |
| 10 | .49* | | Offer Letter, dated February 24, 2006, by and between Robert M. Patterson and Novelis Inc. | 10 | .33* | | Separation and Release Agreement between Novelis Inc. and Brian Sturgell dated October 26, 2006 (incorporated by reference to Exhibit 10.60.1 to our Post-Effective Amendment No. 1 to ourForm S-4 Registration Statement filed on December 1, 2006 (FileNo. 333-127139)) |
| 10 | .50* | | Offer Letter, dated June 20, 2006, by and between Rick Dobson and Novelis Inc. | 11 | .1 | | Statement regarding computation of per share earnings (incorporated by reference to Item 8. Financial Statements and Supplementary Data — Note 19 — Earnings per Share to the Consolidated and Combined Financial Statements.) |
| 10 | .51* | | Addendum to Rick Dobson Offer Letter, dated June 20, 2006, by and between Rick Dobson and Novelis Inc. | 21 | .1 | | List of subsidiaries of Novelis Inc. |
| 10 | .52 | | Fifth Waiver, dated as of August 11, 2006, under the Credit Agreement dated January 7, 2005 among Novelis Inc., Novelis Corporation, Novelis Deutschland GmbH, Novelis UK Ltd., Novelis AG, Citigroup North America, Inc. and the issuers and lenders a party thereto (incorporated by reference to Exhibit 10.1 to theForm 8-K filed by Novelis Inc. on August 17, 2006 (FileNo. 001-32312)) | 23 | .1 | | Consent of PricewaterhouseCoopers LLP |
| 11 | .1 | | Statement regarding computation of per share earnings (incorporated by reference to Item 8. Financial Statements and Supplementary Data — Note 19 — Earnings Per Share to the Consolidated and Combined Financial Statements) | 23 | .2 | | Consent of PricewaterhouseCoopers LLP |
| 21 | .1 | | List of subsidiaries of Novelis Inc. | 31 | .1 | | Section 302 Certification of Principal Executive Officer |
| 31 | .1 | | Section 302 Certification of Principal Executive Officer | 31 | .2 | | Section 302 Certification of Principal Financial Officer |
| 31 | .2 | | Section 302 Certification of Principal Financial Officer | 32 | .1 | | Section 906 Certification of Principal Executive Officer |
| 32 | .1 | | Section 906 Certification of Principal Executive Officer | 32 | .2 | | Section 906 Certification of Principal Financial Officer |
| 32 | .2 | | Section 906 Certification of Principal Financial Officer | |
| | |
* | | Indicates a management contract or compensatory plan or arrangement. |
207198