UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
Form 10-K
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| ý | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended March 31, 20162018
Or
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| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
Commission file number 001-32312
Novelis Inc.
(Exact name of registrantRegistrant as specified in its charter)
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| Canada | | 98-0442987 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification Number) |
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3560 Lenox Road, Suite 2000, Atlanta, GA | | 30326 |
| (Address of principal executive offices) | | (Zip Code) |
(404) 760-4000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act of 1933.
Yes ¨ No ý
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”). Yes ¨ý No ý¨
Indicate by check mark whether the registrantRegistrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý¨ No ¨ý
The Registrant is a voluntary filer and is not subject to the filing requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934. However, the Registrant has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months.
Indicate by check mark whether the registrantRegistrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrantRegistrant was required to submit and post such files). Yes ý No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý
Indicate by check mark whether the registrantRegistrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company or an emerging grown company. See the definitions of “large accelerated filer,” “accelerated filer” andfiler,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
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| Large accelerated filer | ¨ | Accelerated filer | ¨ |
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| Non-accelerated filer | x (Do not check if a smaller reporting company) | Smaller reporting company | ¨ |
| Emerging growth company | ¨ | | |
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý
If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
As of May 9, 2016,7, 2018, the Registrant had 1,000 common shares outstanding. All of the Registrant’s outstanding shares were held indirectly by Hindalco Industries Ltd., the Registrant’s parent company.
DOCUMENTS INCORPORATED BY REFERENCEREFERENCE: None
None
TABLE OF CONTENTS
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| SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS AND MARKET DATA | |
| PART I | |
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| PART II | |
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| PART III | |
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| PART IV | |
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS AND MARKET DATA
This document contains forward-looking statements that are based on current expectations, estimates, forecasts and projections about the industry in which we operate, and beliefs and assumptions made by our management. Such statements include, in particular, statements about our plans, strategies and prospects under the headings “Item 1. Business,” “Item 1A. Risk Factors” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Words such as “expect,” “anticipate,” “intend,” “plan,” “believe,” “seek,” “estimate” and variations of such words and similar expressions are intended to identify such forward-looking statements. Examples of forward-looking statements in this Annual Report on Form 10-K include, but are not limited to, our expectations with respect to the impact of metal price movements on our financial performance; the effectiveness of our hedging programs and controls; and our future borrowing availability. These statements are based on beliefs and assumptions of Novelis’ management, which in turn are based on currently available information. These statements are not guarantees of future performance and involve assumptions and risks and uncertainties that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed, implied or forecasted in such forward-looking statements. We do not intend, and we disclaim any obligation, to update any forward-looking statements, whether as a result of new information, future events or otherwise.
This document also contains information concerning our markets and products generally, which is forward-looking in nature and is based on a variety of assumptions regarding the ways in which these markets and product categories will develop. These assumptions have been derived from information currently available to us and to the third party industry analysts quoted herein. This information includes, but is not limited to, product shipments and share of production. Actual market results may differ from those predicted. We do not know what impact any of these differences may have on our business, our results of operations, financial condition, and cash flow. FactorsFor a discussion of some of the specific factors that couldmay cause Novelis' actual results or outcomes to differ materially from the results expressed or implied bythose projected in any forward-looking statements, include, among other things:
relationships with, and financial and operating conditionssee the following sections of our customers, suppliers and other stakeholders;
changes in the prices and availability of aluminum (or premiums associated with aluminum prices) or other materials and raw materials we use;
fluctuations in the supply of, and prices for, energy in the areas in which we maintain production facilities;
our ability to access financing, repay existing debt or refinance existing debt to fund current operations and for future capital requirements;
the level of our indebtedness and our ability to generate cash to service our indebtedness;
lowering of our ratings by a credit rating agency;
changes in the relative values of various currencies and the effectiveness of our currency hedging activities;
union disputes and other employee relations issues;
factors affecting our operations, such as litigation (including product liability claims), environmental remediation and clean-up costs, breakdown of equipment and other events;
changes in general economic conditions, including deterioration in the global economy;
the capacity and effectiveness of our hedging activities;
impairment of our goodwill, other intangible assets, and long-lived assets;
loss of key management and other personnel, or an inability to attract such management and other personnel;
risks relating to future acquisitions or divestitures;
our inability to successfully implement our growth initiatives;
changes in interest rates that have the effect of increasing the amounts we pay under our senior secured credit facilities, other financing agreements and our defined benefit pension plans;
risks relating to certain joint ventures and subsidiaries that we do not entirely control;
the effect of derivatives legislation on our ability to hedge risks associated with our business;
competition from other aluminum rolled products producers as well as from substitute materials such as steel, glass, plastic and composite materials;
demand and pricing within the principal markets for our products as well as seasonality in certain of our customers’ industries;
economic, regulatory and political factors within the countries in which we operate or sell our products, including changes in duties or tariffs; and
changes in government regulations, particularly those affecting taxes and tax rates, health care reform, climate change, environmental, health or safety compliance.
The above list of factors is not exhaustive. These and other factors are discussed in more detail under “Item 1A.this report: Part I, Item IA. Risk Factors” and “ItemFactors, Part II. Item 7. Management’sManagement's Discussion and Analysis of Financial Condition and Results of Operations.”Operations and Critical Accounting Policies and Estimates.
In this Annual Report on Form 10-K, unless otherwise specified, the terms “we,” “our,” “us,” “Company,” and “Novelis” refer to Novelis Inc., a company incorporated in Canada under the Canadian Business Corporations Act, and its subsidiaries. References herein to “Hindalco” refer to Hindalco Industries Limited, which acquired Novelis in May 2007. In October 2007, Rio Tinto Group purchased all of the outstanding shares of Alcan Inc. References herein to “RT” refer to Rio Tinto Inc.
Exchange Rate Data
We report our financial statements in United States (U.S.) dollars. The following table sets forth exchange rate information expressed in terms of Canadian dollars per U.S. dollar based on exchange data published daily from Citibank as of 16:00 Greenwich Mean Time (GMT) (11:00 A.M. Eastern Standard Time). The rates set forth below may differ from the actual rates used in our accounting processes and in the preparation of our consolidated financial statements.
| | | Period | | At Period End | | Average Rate(A) | | High | | Low | | At Period End | | Average Rate (A) | | High | | Low |
| Year Ended March 31, 2012 | | 0.9973 |
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| | 1.0433 |
| | 0.9510 |
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| Year Ended March 31, 2013 | | 1.0160 |
| | 1.0030 |
| | 1.0334 |
| | 0.9601 |
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| Year Ended March 31, 2014 | | 1.1044 |
| | 1.0577 |
| | 1.1127 |
| | 1.0074 |
| | 1.1044 |
| | 1.0577 |
| | 1.1127 |
| | 1.0074 |
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| Year Ended March 31, 2015 | | 1.2666 |
| | 1.1467 |
| | 1.2681 |
| | 1.0665 |
| | 1.2666 |
| | 1.1467 |
| | 1.2681 |
| | 1.0665 |
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| Year Ended March 31, 2016 | | 1.2978 |
| | 1.3115 |
| | 1.4015 |
| | 1.2065 |
| | 1.2978 |
| | 1.3115 |
| | 1.4015 |
| | 1.2065 |
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| Year Ended March 31, 2017 | | | 1.3289 |
| | 1.3137 |
| | 1.3439 |
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| Year Ended March 31, 2018 | | | 1.2889 |
| | 1.2826 |
| | 1.3667 |
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| (A) | This represents the average of the 16:00 GMT buying rates on the last day of each month during the period. |
All dollar figures herein are in U.S. dollars unless otherwise indicated.
Commonly Referenced Data
As used in this Annual Report, consolidated “aluminum rolled product shipments,” “flat rolled product shipments,” or "shipments" refers to aluminum rolled productsproduct shipments to third parties. “Aluminum rolled product shipments," “flat rolled product shipments,” or "shipments" associated with the regions refers to aluminum rolled product shipments to third parties and intersegment shipments to other Novelis regions. Shipment amounts also include tolling shipments. References to “total shipments” include aluminum rolled productsproduct shipments as well as certain other non-rolled productsproduct shipments, primarily scrap, used beverage cans (UBCs), ingot,ingots, billets, and primary remelt. The term “aluminum rolled products” is synonymous with the terms “flat rolled products” and “FRP” which are commonly used by manufacturers and third party analysts in our industry. All tonnages are stated in metric tonnes. One metric tonne is equivalent to 2,204.6 pounds. One kilotonne (kt) is 1,000 metric tonnes.
A significant amount of our business is conducted under a conversion model, which allows us to pass through increases or decreases in the price of aluminum to our customers. Nearly all of our flat-rolled products have a price structure with three components: (i) a base aluminum price quoted off the London Metal Exchange (LME); (ii) a local market premium; and (iii) a “conversion premium” to produce the rolled product which reflects, among other factors, the competitive market conditions for that product. The use of the term “conversion premium” in this Annual Report, refers to the conversion costs plus a margin we charge our customers to produce the rolled product which reflects, among other factors, the competitive market conditions for that product, exclusive of the pass through aluminum price.
PART I
Item 1. Business
Overview
We areNovelis is the world’s leading aluminum rolled products producer based on shipment volume of 3,123 kt in fiscal 2016, and on capacity, with 15% of the world’s flat-rolled aluminum products capacity as of December 31, 2015. We are alsoand the global leader in the recyclingworld's largest recycler of aluminum. We arework alongside our customers to provide innovative solutions to the only known companybeverage can, automotive and high-end specialty markets. Operating an integrated network of our sizetechnically advanced rolling and scope focused solely on aluminum rolled products markets and capable of local supply of technologically sophisticated aluminum products in all four major industrialized continents:recycling facilities across North America, South America, Europe and Asia. WeAsia, Novelis leverages its global manufacturing and recycling footprint to deliver consistent, high-quality products around the world. In fiscal year 2018, we had “Net sales”shipment volumes of $10 billion3,333 kt and "Net sales" of $11,462 million for the year ended March 31, 2016.2018.
Our History
Organization and Description of Business
All of the common shares of Novelis are owned directly by AV Metals Inc. and indirectly by Hindalco Industries Limited. We produce flat-rolled aluminum sheetproducts and light gauge products primarily for use inprovide innovative solutions to the beverage can, automotive specialty products (including consumer electronics, architecture, and other transportation) and foilhigh-end specialty markets. We also have aluminum recycling operations in many of our plants to recycle aluminum, such as UBCs and automotive scrap.plants. As of March 31, 2016,2018, we had manufacturing operations in eleventen countries on four continents: North America, South America, Europe and Asia, and Europe, through 2524 operating facilities, including recycling operations in eleven of these plants.
Our Industry
The aluminum rolled products market represents the global supply of, and demand for, aluminum sheet, plate and foil produced either from sheet ingot or continuously cast roll-stock in rolling mills operated by both independent aluminum rolled products producers and integrated aluminum companies.
Aluminum rolled products are semi-finished aluminum products that constitute the raw material for the manufacture of finished goods ranging from automotive structures and body panels to food and beverage cans. There are two major types of manufacturing processes for aluminum rolled products differing mainly in the process used to achieve the initial stage of processing:
hot mills — which require sheet ingot, a rectangular slab of aluminum, as starter material; and
continuous casting mills — which can convert molten metal directly into semi-finished sheet.
Both processes require subsequent rolling, which we refer to as cold rolling, and finishing steps such as annealing, coating, leveling or slitting to achieve the desired thickness, width and metal properties. Most customers receive shipments in the form of aluminum coil, a large roll of metal, which can be utilized in their fabrication processes.
Industry Sources of Metal
There are two sources of input material: (1) recycled aluminum, produced by remelting post-industrial and post-consumer scraps; and (2) primary aluminum, produced from bauxitealumina (extracted from bauxite), processed in a smelter.
Primary aluminum and sheet ingot can generally be purchased at prices set on the LME, plus a local market premium that varies by geographic region of delivery, alloying material, form (ingot or molten metal) and purity.
Recycled aluminum is an important source of input material. Aluminum is infinitely recyclable and recycling it requires approximately 5% of the energy needed to produce primary aluminum. As a result, in regions where aluminum is widely used, manufacturers and customers are active in setting up collection processes in which UBCs and other recyclable aluminum products are collected for re-melting and reuse. Manufacturers may also enter into agreements with customers who return processed scrap and pay to have it re-melted and rolled into the same product again.
Recycled aluminum is generally purchased at a discount compared to the price of primary aluminum. The spread between the prices for recycled aluminum and the price of primary aluminum varies by the LME primary aluminum price,depending on type and quality of the scrap, geographic region, and other market factors.
Industry End-use Markets
Aluminum rolled products companies produce and sell a wide range of products, which can be grouped into five end-use markets: (1) packaging; (2) transportation; (3) architectural; (4) industrial; and (5) consumer durables and other. Within each end-use market, aluminum rolled products are manufactured with a variety of alloy mixtures; a range of tempers (hardness), gauges (thickness) and widths; and various coatings and finishes. Large customers typically have customized needs resulting in the development of close relationships, including technical development relationships, with their supplying mills.
Aluminum, because of its light weight, recyclability and formability, has a wide variety of uses in packaging and other end-use markets. The recyclability of aluminum enables it to be used, collected, melted and returned to the original product form an unlimited number of times, unlike paper and polyethylene terephthalate (PET) plastic, which deteriorate with every iteration of recycling.
Packaging. Aluminum is used in beverage cans and bottles, food cans, beverage screw caps and foil, among others. Packaging is the largest aluminum rolled products application, according to market data from Commodity Research Unit International Limited (CRU), an independent business analysis and consultancy group. Beverage cans are one of the largest aluminum rolled products applications. In addition to their recyclability, aluminum beverage cans offer advantages in fabricating efficiency and product shelf life. Fabricators are able to produce and fill beverage cans at very high speeds, and non-porous aluminum cans provide longer shelf life than PET plastic containers. Additionally, the use of aluminum to package beverages such as craft beer is increasing, as aluminum blocks sunlight and therefore maintains the quality and taste of the product longer. Aluminum cans are light, stackable and use space efficiently, making them convenient and cost-efficient to ship.
Beverage can sheet is sold in coil form for the production of can bodies, ends and tabs. The material can be ordered as rolled, degreased, pre-lubricated, pre-treated and/or lacquered. Typically, can makers define their own specifications for material to be delivered in terms of alloy, gauge, width and surface finish.
Foil wrap or packaging foil is another packaging application and it includes household and institutional aluminum foil. Known in the industry as packaging foil, it is manufactured in thicknesses ranging from 11 microns to 23 microns. Container foil is used to produce semi-rigid containers such as pie plates and take-out food trays and is usually manufactured in thicknesses ranging from 60 microns to 200 microns.trays.
Transportation. Aluminum rolled products are used in vehicle structures (also known as "body-in-white") as well as automotive body panel applications, including hoods, deck lids, fenders and lift gates. These uses typically result from cooperative efforts between aluminum rolled products manufacturers and their customers that yield tailor-made solutions for specific requirements in alloy selection, fabrication procedure, surface quality and joining. There has been recent growth in certain geographic markets in passenger and commercial vehicle applications due to the lighter weight, better fuel economy and improved emissions performance associated with these applications. We expect increased growth in this end-use market driven by government regulations requiring improved emissions and better fuel economy; while also maintaining or improving vehicle handling, braking,performance and safety.
Heat exchangers, such as radiators and air conditioners, are an important application for aluminum rolled products in the transportation end-use market. Original equipment manufacturers also use aluminum sheet, with specially treated surfaces and other specific properties, for interior and exterior applications. Newly developed alloys are being used in transportation tanks and rigid containers allowing for safer and more economical transportation of hazardous and corrosive materials.
Aluminum is also used in aerospace applications, as well as in the construction of ships’ hulls, superstructures and passenger rail cars because of its strength, light weight, formability and corrosion resistance.
Architectural. Construction is the largest application within this end-use market. Aluminum rolled products developed for the construction industry are often decorative and non-flammable, offer insulating properties, are durable and corrosion resistant, and have a high strength-to-weight ratio. Aluminum siding, gutters, and downspouts comprise a significant amount of construction volume. Other applications include doors, windows, awnings, canopies, facades, roofs and ceilings.
Industrial. Industrial applications include heat exchangers, process and electrical machinery, lighting fixtures, furniture and insulation.
Consumer Durables and Other. Aluminum’s lightweight characteristics, high formability, ability to conduct electricity and dissipate heat and to offerits corrosion resistance makes it useful in a wide variety of electronic applications. Uses of aluminum rolled products in electronics include flat screen televisions, personal computers, laptops, mobile devices, and digital music players. Other uses of aluminum rolled products in consumer durables include microwaves, coffee makers, air conditioners and cooking utensils.
Market Structure and Competition
The aluminum rolled products market is highly competitive and is characterized by economies of scale; and significant capital investments are required to achieve and maintain technological capabilities and demanding customer qualification standards. We face competition from a number of companies in all of the geographic regions and end-use markets in which we operate. Our primary competitors are as follows: |
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| North America | Asia |
| Alcoa, Inc. (Alcoa) | Alcoa Bohai Aluminum Industries Co., LtdArconic |
| Aleris International, Inc. (Aleris) | UACJ CorporationBinzhou Weiqiao Aluminium Science & Technology Co., Ltd. |
| Arconic Inc. (Arconic) | China Zhongwang Holdings Limited |
| Constellium N.V. (Constellium) | Chinalco Group |
| Golden Aluminum | Henan Mingtai Aluminum Industrial Co., Ltd. |
| Gränges AB | Henan Zhongfu Industrial Co., Ltd. |
| Maaden - Saudi Arabian Mining Company | Kobe Steel Ltd. |
NorandaShandong Nanshan Aluminum Inc.Co., Ltd. | Shandong Nanshan Aluminum Co., LtdLtd. |
| UACJ Corporation/ Tri-Arrows Aluminum Inc. (Tri-Arrows) | Chinalco GroupSouthwest Aluminum (Group) Co., Ltd. |
| | Henan Mingtai Aluminum Industrial Co., LtdUACJ Corporation |
| Europe | |
| Aleris | South America |
| Amag Austria Metall AG | Arconic |
| Arconic | Companhia Brasileira de Alumínio |
| Constellium | Hulamin Limited |
| Elval Hellenic Aluminium Industry S.A. | Norsk Hydro A.S.A. |
Henan Zhongfu Industrial Co., LtdLtd. | Shandong Nanshan Aluminum Co., Ltd. |
AlcoaNanshan | Binzhou Weiqiao Aluminium Science & Technology Co., Ltd |
Aleris | China Zhongwang Holdings Limited |
| Norsk Hydro A.S.A. | |
ConstelliumShandong Nanshan Aluminum Co., Ltd. | South America |
| Alcoa |
| Companhia Brasileira de Alumínio |
The factors influencing competition vary by region and end-use market, but generally we compete on the basis of our value proposition; which includes price, product quality, the ability to meet customers’ specifications, range of products offered, lead times, technical support and customer service. In some end-use markets, competition is also affected by fabricators’ requirements that suppliers complete a qualification process to supply their plants. This process can be rigorous and may take many months to complete. As a result, obtaining business from these customers can be a lengthy and expensive process. However, the ability to obtain and maintain these qualifications can represent a competitive advantage.
In addition to competition from others within the aluminum rolled products industry, we also face competition from non-aluminum material producers. In the packaging end-use market (primarily beverage and food cans), aluminum rolled products compete mainly with glass, PET plastic, and in some regions, steel. In the transportation end-use market, aluminum rolled products compete mainly with steel and composites. Aluminum competes with wood, plastic, cement and steel in building products applications. In the consumer durables end-use market, aluminum rolled products compete mainly with plastic, steel, and magnesium. Additionally, aluminum competes with steel, cooper,copper, plastic, and glass in industrial applications. Factors affecting competition with substitute materials include price, ease to manufacture, consumer preference and performance characteristics.
Key Factors Affecting Supply and Demand
The following factors have historically affected the supply of aluminum rolled products:
Production Capacity and Alternative Technology. In the aluminum rolled products industry, theThe addition of rolling capacity requires large capital investments and significant plant construction or expansion, and typically requires long lead-time equipment orders. Advances in technological capabilities allow aluminum rolled products producers to better align product portfolios and supply with industry demand. There are lower cost ways to enter the industry such as continuous casting, which offers the ability to increase capacity in smaller increments than is possible with hot mill additions. This enables production capacity to better adjust to small year-over-year increases in demand;additions; however, the continuous casting process results in a more limited range of products.
Trade. Some trade flows do occur between regions despite shipping costs, import duties and the lack of localized customer support. Higher value-added products are more likely to be traded internationally, especially if demand in certain markets exceeds local supply. With respect to less technically demanding applications, emerging markets with low cost inputs may export commodity aluminum rolled products to larger, more mature markets, as we have seen with China. Accordingly, regional changes in supply, such as plant expansions, have some impact on the worldwide supply of aluminum rolled products.
The following factors have historically affected the demand for aluminum rolled products:
Economic Growth. We believe that economic growth is a significant driver of aluminum rolled products demand. In mature markets, growth in demand has typically correlated closely with industrial production growth. In many emerging markets, growth in demand typically exceeds industrial production growth largely because of expanding infrastructures, capital investments and rising incomes that often accompany economic growth in these markets.
Substitution Trends. Manufacturers’ willingness to substitute other materials for aluminum in their products and competition from substitution materials suppliers also affect demand. There has been a strong substitution trend toward aluminum in the use of vehicles as automobile manufacturers look for ways to meet fuel efficiency regulations, improve performance and reduce carbon emissions in a cost-efficient manner. As a result of aluminum’s durability, strength and light weight, automobile manufacturers are substituting heavier alternatives such as steel and iron with aluminum. Carbon fiber is anotherand plastics are other lightweight material option,options, but itstheir relatively high cost and limited end-of-life recyclability reduce itstheir competitiveness as a widespread material substitutesubstitutes today. Consequently, demand for flat rolled aluminum products has increased. We also see strong substitution trends toward aluminum and away from steel in the beverage can market globally; except for North America, which is already a mature market.in certain regions.
Seasonality. During our third fiscal quarter, we typically experience seasonal slowdowns resulting in lower shipment volumes.volumes, although this has been less significant as our product portfolio shifts and diversifies. This is a result of declines in overall production output due primarily to holidays and cooler weather in North America and Europe, our two largest operating regions. We also experience downtime at our mills and customers’ mills due to scheduled plant maintenance and are impacted to a lesser extent by the seasonal downturn in construction activity.
Sustainability. Growing awareness of environmentalism and demand for recyclable products has increased the demand for aluminum rolled products. Unlike other commonly recycled materials such as paper or PET plastic, aluminum can be infinitely recycled an unlimited number of times without affecting the quality of the product. Additionally, the recycling process uses approximately 95% less energy than is required to produce primary aluminum from mining and smelting, with an equivalent reduction in greenhouse gas emissions.
Our Business Strategy
Following the successful completion of a multi-year plan of significant investment to increase our capacity, reshape our product portfolio and expand our recycling capacity, our primary
Our objective as the world’s largest aluminum rolling and recycling company is to increase shareholder value by delivering top-notch customer service and high-quality,lead the aluminum industry as the partner of choice for innovative and premium solutions in aluminum flat rolled products. In addition, wesolutions. We will maximize shareholder returnsvalue through free cash flow generation and increasing return on capital employed. To achieve these objectives, we will focus on the following areas:
Defend the Core
Novelis is the leading global flat rolled aluminum supplier in the beverage can and automotive markets. We intend to achieve these objectives throughprotect our leadership position by continuing to deliver best-in-class customer service with improved quality, service and innovative solutions that differentiate Novelis products. We are committed to producing the following areasbest quality products and providing reliable on-time delivery in order to be a true partner in innovation and sustainable supply solutions. We are focused on building and maintaining strong, positive relationships with all of focus:our customers.
Focus on Manufacturing Excellence
We are drivingIn addition, we will maintain a competitive cost structure by managing metal input costs and employing initiatives to improve operational efficiencies across our business forward by focusing on manufacturing excellence.global network. This includes a commitment to employee safety, customer service, product quality and system reliability.
As a manufacturing organization, our primary concern is the health and safety of our employees. We are
committed to building a culture of safety across all levels of the organization. We are focused on optimizing our manufacturing and recycling operations to increase asset utilization and productivity. We continue to pursue a standardization of our manufacturing processes where possible;possible, while still allowing the flexibility to respond to local market demands.
Utilizing recycled material allows us to diversify our metal supply, helps control metal costs and provides environmental benefits. We define recycled content as the total amount of scrap metal used in production less melt loss. The percentage of recycled content within our aluminum rolled product shipments increased from 33% to 57% from fiscal 2011 to fiscal 2018. We work closely with our customers on innovation to drive more sustainable products for society. We are focused on maintaining a competitive cost structure by managing metal inputsthe only company of its size offering high-recycled content aluminum sheet for beverage and employing initiatives to improve operational efficiencies across our plants globally.
Our customers demand consistent, high quality products.specialty product customers. We are committedalso working closely with our automotive customers to producingredesign automotive alloys to be made with more recycled inputs, as well as purchasing the best quality products and providing reliable on-time delivery and be a true partner in innovation and sustainable supply solutions. We are focused on building and maintaining strong, positive relationships with all ofaluminum scrap resulting from our customers.automotive customers’ closed-loop recycling systems.
Operate as an Integrated Global CompanyStrengthen our Product Portfolio
We intend to continue operating asmaintain a globally integrated company to leverage our manufacturing excellence, risk management expertise, value-added conversion premium-based pricing and global assets according to a single, company-wide vision. We believe this integrated approach is the foundation for the effective execution of our strategy across the Novelis system.
We strive to service our customers in a consistent, global manner through seamless alignment of goals, methods and metrics across the organization. In fiscal 2016, we announced the creation of two new executive sales and marketing positions in Can and Automotive that will allow us to more seamlessly serve our global customer base in these market segments and accelerate our global integration strategy. We will continue to take actions to ensure we are aligned to best leverage our operations globally, while still allowing for local flexibility.
Focus on Premium Products
We focus on capturing global growth in beverage can, automotive and high-end specialty products markets. Our management approach helps us to systematically identify opportunities tothat improve the profitability of our operations through product portfolio analysis. This ensures that we grow in attractive market segments, while also taking actions to exit unattractive ones. In the recent past, we have taken steps to exit certain non-core operations, including aluminum smelting operations and hydroelectric facilities in Brazil, and consumer foil operations in North America and Europe. We will continue to focus on these core productsproduct markets to drive enhanced profitability.profitability, but will also continue to broaden our customer base and explore new verticals and product markets that fit within our overall strategic vision, which is to lead the aluminum industry as the partner of choice for innovative solutions.
Invest in Growth Opportunities
Over the past several years, we invested in world-class assets and technical capabilities to position ourselves to meet increasing global demand for aluminum from the automotive market. We now have automotive finishing lines in North America, Europe, and Asia. Additionally,Asia operating near full production levels. In February 2018, we believe there areannounced to add approximately 200 kt of additional automotive finishing capacity in North America with a greenfield expansion in Guthrie, Kentucky. Construction is underway at this new facility, which is expected to be commissioned in 2020. We will continue to explore other potential opportunities to capturethat will drive profitable volume growth in the automotive and other areas (e.g., beverage cans) driven by metal substitutioncore end markets, while maintaining a balanced and urbanization trendsdisciplined financial approach in emerging markets such as South America.
Utilize Recycled Metal Inputs
Utilizing recycled material allows us to diversify our metal supply, helps to control metal costs and provides environmental benefits. Since fiscal year 2011, our recycled inputs have increased from 33% to 53% in fiscal year 2016.
Novelis is working closely with our customers on innovation to drive more sustainable products for society. Novelis is the only company of our size offering independently certified, high-recycled content aluminum sheet for our beverage and specialty product customers. We are also working closely with our automotive customers to redesign automotive alloys to be made with more scrap, as well as seeking to purchase the aluminum scrap resulting from our automotive customers’ production processes.decision making process.
Raw Materials and Suppliers
The input materials we use in manufacturing include primary aluminum, recycled aluminum, sheet ingot, alloying elements and grain refiners. These raw materials are generally available from several sources and are not generally subject to supply constraints underin normal market conditions. We also consume considerable amounts of energy in the operation of our facilities.
Aluminum
We obtain aluminum from a number of sources, including the following:
Primary Aluminum Sourcing. We purchased or tolled approximately 1,5301,470 kt of primary aluminum in fiscal 20162018 in the form of sheet ingot, standard ingot and molten metal, approximately 25% of which we purchased from RT.metal.
Aluminum Products Recycling. We operate facilities in several plants to recycle post-consumer aluminum, such as UBCs collected through recycling programs. In addition, we have agreements with several of our large customers where we have a closed-looped system whereby we take production scrap material from their fabricating activity and re-melt, cast and roll it to re-supply these customers with aluminum sheet. Other sources of recycled material include lithographic plates, and products with longer lifespans, like vehicles and buildings, which are starting to become high volume sources of recycled material. We purchased or tolled approximately 1,7901,822 kt of recycled material inputs (less melt loss) in fiscal 2016 and have made recycling investments in all of our operating regions to increase the amount of recycled material we use as raw materials.2018.
The materials that we recycle are remelted, cast and then used in our operations. The net effect of all recycling activities was that on average approximately 53% of our total aluminum rolled products shipments in fiscal 2016 were made from recycled inputs. The overall benefit we receive from utilizing recycled metal is influenced by: 1) the overall price levels of the LME and local market premiums, 2) the spread between the price for recycled aluminum and the LME primary aluminum price and 3) our consumption levels of the recycled material inputs.
Our recycled content performance and methodology are detailed in our annual sustainability report, which can be found at www.novelis.com/sustainability. Information in our sustainability report does not constitute part of this Annual Report on Form 10-K.
Energy
We use several sources of energy in the manufacturemanufacturing and delivery of our aluminum rolled products. In fiscal 2016,2018, natural gas and electricity represented approximately 98% of our energy consumption by cost. We also use fuel oil and transport fuel. The majority of energy usage occurs at our casting centers and during the hot rolling process. Our cold rolling facilities require relatively less energy. We purchase our natural gas on the open market, which subjects us to market pricing fluctuations. We have in the past and may continue to seek to stabilize our future exposure to natural gas prices through the use of derivative instruments. Natural gas prices in Europe, Asia and South America have historically been more stable than in the United States. A portion of our electricity requirements are purchased pursuant to long-term contracts in the local regions in which we operate. A number of our facilities are located in regions with regulated prices, which affords relatively stable costs. We have fixed pricing on some of our energy supply arrangements.
Our Operating Segments
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: North America, Europe, Asia and South America. Each segment manufactures aluminum sheet and light gauge products, and recycles aluminum.
The table below shows “Net sales” and total shipments by segment. For additional financial information related to our operating segments, see Note 2120 — Segment, Geographical Area, Major Customer and Major Supplier Information to our accompanying audited consolidated financial statements.
| | | Net sales in millions | | Year Ended March 31, | | Year Ended March 31, |
| Shipments in kilotonnes | | 2016 | | 2015 | | 2014 | | 2018 | | 2017 | | 2016 |
| Consolidated | | | | | | | | | | | | |
| Net sales | | $ | 9,872 |
| | $ | 11,147 |
| | $ | 9,767 |
| | $ | 11,462 |
| | $ | 9,591 |
| | $ | 9,872 |
|
| Total shipments | | 3,325 |
| | 3,374 |
| | 3,061 |
| | 3,333 |
| | 3,176 |
| | 3,325 |
|
| North America(A) | | | | | | | |
| North America (A) | | | | | | | |
| Net sales | | $ | 3,266 |
| | $ | 3,483 |
| | $ | 3,050 |
| | $ | 3,951 |
| | $ | 3,228 |
| | $ | 3,266 |
|
| Total shipments | | 1,049 |
| | 1,030 |
| | 994 |
| | 1,090 |
| | 1,014 |
| | 1,049 |
|
| Europe(A) | | | | | | | |
| Europe (A) | | | | | | | |
| Net sales | | $ | 3,223 |
| | $ | 3,783 |
| | $ | 3,280 |
| | $ | 3,447 |
| | $ | 2,968 |
| | $ | 3,223 |
|
| Total shipments | | 1,076 |
| | 1,153 |
| | 977 |
| | 938 |
| | 951 |
| | 1,076 |
|
| Asia(A) | | | | | | | |
| Asia (A) | | | | | | | |
| Net sales | | $ | 1,992 |
| | $ | 2,340 |
| | $ | 1,876 |
| | $ | 2,110 |
| | $ | 1,791 |
| | $ | 1,992 |
|
| Total shipments | | 770 |
| | 770 |
| | 640 |
| | 719 |
| | 699 |
| | 770 |
|
| South America(A) | | | | | | | |
| South America (A) | | | | | | | |
| Net sales | | $ | 1,575 |
| | $ | 1,850 |
| | $ | 1,588 |
| | $ | 1,931 |
| | $ | 1,510 |
| | $ | 1,575 |
|
| Total shipments | | 569 |
| | 583 |
| | 534 |
| | 653 |
| | 562 |
| | 569 |
|
_________________________
| |
| (A) | "Net sales" and "Total shipments" by segment include intersegment sales and the results of our affiliates on a proportionately consolidated basis, which is consistent with the way we manage our business segments. |
The following is a description of our operating segments asduring all or part of March 31, 2016:2018:
North America
Headquartered in Atlanta, Georgia, Novelis North America operates eight aluminum rolled products facilities, including facilities. This includes two fully dedicated recycling facilities and one facility with recycling operations; and manufacturesoperations. These sites manufacture a broad range of aluminum sheet and light gauge products. End-use markets for this segment include beverage and food cans, containers and packaging, automotive and other transportation applications, architectural and other industrial applications. The majority of North America’s volumes are currently directed toward the beverage can sheet market.
In response to the lightweighting trend in the automotive industry, we have expanded our Oswego, New York facility by constructing three automotive finishing lines and supporting automotive scrap recycling capabilities.
Recycling is important in the manufacturing process and we have three facilities in North America that re-melt post-consumer aluminum and recycled process material. Most of the recycled material is from UBCs and automotive scrap, and the material is cast into sheet ingot at our plants in Greensboro, Georgia; Berea, Kentucky; and Oswego, New York. Additionally, our Logan Aluminum joint venture facility ("Logan facility") in Russellville, Kentucky is a manufacturer of aluminum sheet products for the can stock market and operates modern and high-speed equipment for ingot casting, hot-rolling, cold-rolling and finishing.
In response to the lightweighting trend in the automotive industry, we have expanded our Oswego, New York facility by constructing three automotive finishing lines and supporting automotive scrap recycling capabilities.
Europe
Headquartered in Küsnacht, Switzerland, Novelis Europe operates ten aluminum rolled product facilities, including facilities. This includes two fully dedicated recycling facilities and two facilities with recycling operations; and manufacturesoperations. These sites manufacture a broad range of sheet and foil products. We also have distribution centers in Italy and sales offices in several European countries. End-use markets for this segment include beverage and food can, automotive, architectural and industrial products, foil products and technical products and lithographic sheet.products. Beverage and food can represent the largest end-use market in terms of shipment volume for Europe. Operations include our 50% joint venture interest in Aluminium Norf GmbH (Alunorf), which is the world’s largest aluminum rolling and remelt facility. Alunorf supplies high quality can stock, foilstock and feeder stock for finishing at our other European operations.
We have built a fully integrated recycling facility at our Nachterstedt, Germany plant, which was commissioned in fiscal 2015 and is the largest aluminum recycling facility in the world. Additionally, a second automotive finishing line at our Nachterstedt, Germany facility was commissioned in fiscal 2016, to further expand our production of aluminum automotive sheet products in Europe.
Asia
Headquartered in Seoul, South Korea, Novelis Asia operates fivefour aluminum rolled product facilities, includingfacilities. This includes three facilities with recycling operations;operations at the Ulsan and manufacturesYeongju, South Korea plants and the Bin Doung, Vietnam plant. These sites manufacture a broad range of aluminum sheet and light gauge products. The Changzhou, China facility focuses primarily on heat treatment. End-use markets include beverage and food cans, electronics, architectural, automotive, foil, industrial and other products. The beverage can market represents the largest end-use market in terms of volume. Recycling is an important part of our operations with recycling facilities at both the Ulsan and Yeongju, South Korea plants. Additionally, we have a facility in Binh Duong, Vietnam, which handles the collection and processing of UBCs.
In response to the growing demand in the broader Asia region, we expanded our aluminum rolling operations beginning in fiscal 2014 and our recycling operations in fiscal 2013 in South Korea. The move is designed to rapidly bring to market high-quality aluminum rolling capacity aligned with the projected needs of a growing customer base. The expansion includes the construction of a state-of-the-art recycling center primarily for UBCs and a casting operation.
We built an aluminum automotive sheet finishing plant in Changzhou, China, which was commissioned in fiscal 2015.
South America
Headquartered in Sao Paulo, Brazil, Novelis South America operates two aluminum rolled product facilities, including facilities. This includes one facility with recycling operations; and manufacturesoperations. These facilities manufacture a broad range of can sheet, industrial sheet and light gauge products. The main markets are beverage and food can, specialty, industrial, foil and other packaging and transportation end-use applications. Beverage can represents the largest end-use application in terms of shipment volume.
In response to the growing demand for our products in South America, we expanded our aluminum rolling operations to increase capacity at our Pindamonhangaba (Pinda) facility in fiscal 2013. Additionally, we installed a new coating line for beverage can end stock and expanded our recycling capacity in our Pinda facility in fiscal 2014.
During fiscal 2015, we closed the Ouro Preto smelter facility and we sold the majority of our hydroelectric generation operations in Brazil.
Financial Information About Geographic Areas
Certain financial information about geographic areas is contained in Note 21—20 — Segment, Geographical Area, Major Customer and Major Supplier Information to our accompanying audited consolidated financial statements.
Our Customers
To address consolidation trends, weWe focus significant efforts on developing and maintaining close working relationships with our customers and end-users. Our major customers include:
|
| | |
| Beverage and Food Cans | | Automotive |
Anheuser-Busch LLCInBev | | BMW Group |
Affiliates of Ball Corporation (A)Ardagh Group | | Daimler Group |
Can-Pack S.A.Ball Corporation | | Fiat Chrysler Automobiles N.V. |
| Can-Pack S.A. | | Ford Motor Company |
| Crown Holdings Inc., formerly Crown Cork & Seal Company | | Ford Motor CompanyGeneral Motors LLC |
Rexam Plc (A)Pepsico | | GeneralHyundai Motors LLCCorporation |
| Various bottlers of the Coca-Cola System | | Jaguar Land Rover Limited |
| | | Volkswagen GroupNIO |
| Construction, Industrial and Other | | Volkswagen Group |
| Agfa Graphics | | |
| Aluflexpack | | Electronics |
| Amcor | | LG International Corporation |
| Facchini S.A. | | Samsung Electronics Co., Ltd. |
| Feron | | |
| Klöckner Metals | | |
Lotte Aluminum Co. Ltd.
| | Electronics |
| Prefa | | |
Reynolds Consumer Products LLC
| | LG International Corporation |
Ryerson Inc.
| | Samsung Electronics Co., Ltd |
| ThyssenKrupp | | |
(A) In February of 2015, Ball Corporation made an offer to acquire Rexam. This acquisition will be subject to regulatory and shareholder approval.
Our single largest end-use product is beverage can sheet. We sell can sheet directly to beverage makers and bottlers as well as to can fabricators that sell the cans they produce to bottlers. In certain cases, we operate under umbrella agreements with beverage makers and bottlers under which they direct their can fabricators to source their requirements for beverage can body, end and tab stock from us.
Additional information related to our top customers is contained in Note 21 -20 — Segment, Geographical Area, Major Customer and Major Supplier Information to our accompanying audited consolidated financial statements.
Distribution and Backlog
We have two principal distribution channels for the end-use markets in which we operate: direct sales to our customers and sales to distributors. | | | | | Year Ended March 31, | | Year Ended March 31, |
| | | 2016 | | 2015 | | 2014 | | 2018 | | 2017 | | 2016 |
| Direct sales as a percentage of total “Net sales” | | 95 | % | | 92 | % | | 94 | % | | 97 | % | | 94 | % | | 95 | % |
| Distributor sales as a percentage of total “Net sales” | | 5 | % | | 8 | % | | 6 | % | | 3 | % | | 6 | % | | 5 | % |
Direct Sales
We supply various end-use markets all over the world through a direct sales force operating from individual facilities or sales offices, as well as from regional sales offices in 13 countries.offices. The direct sales channel typically serves very large, sophisticated fabricators and original equipment manufacturers. Longstanding relationships are maintained with leading companies in industries using aluminum rolled products. Supply contracts for large global customers generally range from one to five years in length and historically there has been a high degree of renewal business with these customers. Given the customized nature of products and in some cases, large order sizes, switching costs are significant, thus adding to the overall consistency of the customer base.
We also use third party agents or traders in some regions to complement our own sales force. These agents provide service to our customers in countries where we do not have local expertise.
Distributors
We also sell our products through third party aluminum distributors. Customers of distributors are widely dispersed, and sales through this channel are highly fragmented. Distributors sell mostly commodity or less specialized products into many end-use markets in small quantities, including the architectural and industrial markets. We collaborate with our distributors to develop new end-use products and improve the supply chain and order efficiencies.
Backlog
We believe order backlog is not a material aspect of our business.
Research and Development
The table below summarizes our “Research and development expenses” in our plants and modern research facilities,, which include mini-scale production lines equipped with hot mills, can lines and continuous casters (in millions).
|
| | | | | | | | | | | | |
| | | Year Ended March 31, |
| | | 2016 | | 2015 | | 2014 |
| Research and development expenses | | $ | 54 |
| | $ | 50 |
| | $ | 45 |
|
|
| | | | | | | | | | | | |
| | | Year Ended March 31, |
| | | 2018 | | 2017 | | 2016 |
| Research and development expenses | | $ | 64 |
| | $ | 58 |
| | $ | 54 |
|
We conduct research and development activities at our facilities in order to satisfymeet current and future customer requirements, improve our products and reduce our conversion costs. Our customers work closely with our research and development professionals to improve their production processes and market options. We have approximately 330 employees dedicated to research and development, located in many of our facilities and research centers. We have a global research and technology center in Kennesaw, Georgia, which offers state of the art research and development capabilities to help Novelis meet the global long-term demand for aluminum used for the automotive, beverage can and specialty markets.
Our Employees
The table below summarizes our approximate number of employees by region, including our proportionate share of those employed by less than wholly owned affiliates.
|
| | | | | | | | | | | | | | | |
| Employees | | North America | | Europe | | Asia | | South America | | Total |
| March 31, 2016 | | 3,430 |
| | 4,970 |
| | 2,020 |
| | 1,550 |
| | 11,970 |
|
| March 31, 2015 | | 3,210 |
| | 4,890 |
| | 1,970 |
| | 1,490 |
| | 11,560 |
|
|
| | | | | | | | | | | | | | | |
| Employees | | North America (A) | | Europe | | Asia | | South America | | Total |
| March 31, 2018 | | 3,400 |
| | 4,770 |
| | 1,400 |
| | 1,570 |
| | 11,140 |
|
| March 31, 2017 | | 3,310 |
| | 4,880 |
| | 1,670 |
| | 1,590 |
| | 11,450 |
|
_________________________
| |
| (A) | Includes employees within our Corporate headquarters located in Atlanta, Georgia. |
We consider our employee relations to be satisfactory. A substantial portion of our employees are represented by labor unions and their employment conditions are governed by collective bargaining agreements. Collective bargaining agreements are negotiated on a site, regional or national level, and are of varying durations. As of March 31, 2016, approximately 2,670 of our employees were covered under collective bargaining agreements that expire within one year.
Intellectual PropertySouth America
Novelis South America operates two aluminum rolled product facilities. This includes one facility with recycling operations. These facilities manufacture a broad range of can sheet, industrial sheet and light gauge products. The main markets are beverage and food can, specialty, industrial, foil and other packaging and transportation end-use applications. Beverage can represents the largest end-use application in terms of shipment volume.
Financial Information About Geographic Areas
Certain financial information about geographic areas is contained in Note 20 — Segment, Geographical Area, Major Customer and Major Supplier Information to our accompanying audited consolidated financial statements.
Our Customers
We actively review intellectual property arisingfocus significant efforts on developing and maintaining close working relationships with our customers and end-users. Our major customers include:
|
| | |
| Beverage and Food Cans | | Automotive |
| Anheuser-Busch InBev | | BMW Group |
| Ardagh Group | | Daimler Group |
| Ball Corporation | | Fiat Chrysler Automobiles N.V. |
| Can-Pack S.A. | | Ford Motor Company |
| Crown Holdings Inc., formerly Crown Cork & Seal Company | | General Motors LLC |
| Pepsico | | Hyundai Motors Corporation |
| Various bottlers of the Coca-Cola System | | Jaguar Land Rover Limited |
| | NIO |
| Construction, Industrial and Other | | Volkswagen Group |
| Agfa Graphics | | |
| Aluflexpack | | Electronics |
| Amcor | | LG International Corporation |
| Facchini S.A. | | Samsung Electronics Co., Ltd. |
| Feron | | |
| Klöckner Metals | | |
Lotte Aluminum Co. Ltd.
| | |
| Prefa | | |
Reynolds Consumer Products LLC
| | |
Ryerson Inc.
| | |
| ThyssenKrupp | | |
Our single largest end-use product is beverage can sheet. We sell can sheet directly to beverage makers and bottlers as well as to can fabricators that sell the cans they produce to bottlers. In certain cases, we operate under umbrella agreements with beverage makers and bottlers under which they direct their can fabricators to source their requirements for beverage can body, end and tab stock from us.
Additional information related to our operationstop customers is contained in Note 20 — Segment, Geographical Area, Major Customer and Major Supplier Information to our accompanying audited consolidated financial statements.
Distribution and Backlog
We have two principal distribution channels for the end-use markets in which we operate: direct sales to our customers and sales to distributors. |
| | | | | | | | | |
| | | Year Ended March 31, |
| | | 2018 | | 2017 | | 2016 |
| Direct sales as a percentage of total “Net sales” | | 97 | % | | 94 | % | | 95 | % |
| Distributor sales as a percentage of total “Net sales” | | 3 | % | | 6 | % | | 5 | % |
Direct Sales
We supply various end-use markets all over the world through a direct sales force operating from individual facilities or sales offices, as well as from regional sales offices. The direct sales channel typically serves very large, sophisticated fabricators and original equipment manufacturers. Longstanding relationships are maintained with leading companies in industries using aluminum rolled products. Supply contracts for large global customers generally range from one to five years in length and historically there has been a high degree of renewal business with these customers. Given the customized nature of products and in some cases, large order sizes, switching costs are significant, thus adding to the overall consistency of the customer base.
We also use third party agents or traders in some regions to complement our own sales force. These agents provide service to our customers in countries where we do not have local expertise.
Distributors
We also sell our products through third party aluminum distributors. Customers of distributors are widely dispersed, and sales through this channel are highly fragmented. Distributors sell mostly commodity or less specialized products into many end-use markets in small quantities, including the architectural and industrial markets. We collaborate with our distributors to develop new end-use products and improve the supply chain and order efficiencies.
Backlog
We believe order backlog is not a material aspect of our business.
Research and Development
The table below summarizes our “Research and development expenses”, which include mini-scale production lines equipped with hot mills, can lines and continuous casters (in millions).
|
| | | | | | | | | | | | |
| | | Year Ended March 31, |
| | | 2018 | | 2017 | | 2016 |
| Research and development expenses | | $ | 64 |
| | $ | 58 |
| | $ | 54 |
|
We conduct research and development activities in order to meet current and when appropriate, we apply for patents in appropriate jurisdictions. We currently hold patentsfuture customer requirements, improve our products and patent applications on approximately 180 different items of intellectual property. While these patents and patent applications are important toreduce our business on an aggregate basis, no single patent or patent application is deemed to be material to our business.
conversion costs. We have applieda global research and technology center in Kennesaw, Georgia, which offers state of the art research and development capabilities to help Novelis meet the global long-term demand for or received registrationsaluminum used for the “Novelis” word trademark and the Novelis logo trademark in approximately 50 countries where we have significant sales or operations. Novelis uses the Aditya Birla logo under license from Aditya Birla Management Corporation Private Limited.
We have also registered the word “Novelis” and several derivations thereof as domain names in numerous top level domains around the world to protect our presence on the world wide web.
Environment, Health and Safety
We own and operate numerous manufacturing and other facilities in various countries around the world. Our operations are subject to environmental laws and regulations from various jurisdictions, which govern, among other things, air emissions, wastewater discharges, the handling, storage and disposal of hazardous substances and wastes, the remediation of contaminated sites, post-mining reclamation and restoration of natural resources, and employee health and safety. Future environmental regulations may impose stricter compliance requirements on the industries in which we operate. Additional equipment or process changes at some of our facilities may be needed to meet future requirements. The cost of meeting these requirements may be significant. Failure to comply with such laws and regulations could subject us to administrative, civil or criminal penalties, obligations to pay damages or other costs, and injunctions and other orders, including orders to cease operations.
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 our liability arising from the usage, storage, treatment or disposal of hazardous substances and wastes at a number of sites 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. Many of these jurisdictions have laws that 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. In addition, we are, from time to time, subject to environmental reviews and investigations by relevant governmental authorities.
We have established procedures for regularly evaluating environmental loss contingencies, including those arising from 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 also believe we have made reasonable estimates for the costs that are reasonably possible for these environmental loss contingencies. Accordingly, we have established liabilities based on our estimates for the currently anticipated costs that are deemed probable associated with these environmental matters. Management has determined the currently anticipated costs associated with these environmental matters will not, individually or in the aggregate, materially impair our operations or materially adversely affect our financial condition.
Available Information
We are subject to the reporting and information requirements of the Securities Exchange Act of 1934, as amended (Exchange Act) and, as a result, we file periodic reports and other information with the Securities and Exchange Commission (SEC). We make these filings available on our website free of charge, the URL of which is http://www.novelis.com, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. The SEC maintains a website (http://www.sec.gov) that contains our annual, quarterly and current reports and other information we file electronically with the SEC. You can read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Information on our website does not constitute part of this Annual Report on Form 10-K.
Item 1A.Risk Factors
In addition to the factors discussed elsewhere in this report, you should consider the following factors, which could materially affect our business, financial condition or results of operations in the future. The following factors, among others, could cause our actual results to differ from those projected in any forward looking statements we make.
Certain of our customers are significant to our revenues, and we could be adversely affected by changes in the business or financial condition of these significant customers or by the loss of their business.
Our ten largest customers accounted for approximately 60%, 55% and 54% of our total “Net sales” for the year ended March 31, 2016, 2015 and 2014, respectively, with Rexam Plc, a leading globalautomotive, beverage can maker, and its affiliates representing approximately 19%, 18% and 17% of our total “Net sales” in the respective periods. A significant downturn in the business or financial condition of our significant customers could materially adversely affect our results of operations and cash flows. In addition, some of our customer contracts are subject to renewal, renegotiation or re-pricing at periodic intervals or upon changes in competitive supply conditions. Our failure to successfully renew, renegotiate or re-price such agreements could result in a reduction or loss in customer purchase volume or revenue, and if we are not successful in replacing business lost from such customers, our results of operations and cash flows could be adversely affected. Additionally, in the event of consolidation among our customers, our customers may be able to use increased leverage in negotiating prices and other contract terms. Consolidation in our customer base may also lead to reduced demand for our products or cancellations of sales orders, which could adversely affect our results of operations and cash flows.
We face significant price and other forms of competition from other aluminum rolled products producers, which could hurt our results of operations and cash flows.
Generally, the markets in which we operate are highly competitive. We compete primarily on the basis of our value proposition, including price, product quality, ability to meet customers' specifications, range of products offered, lead times, technical support and customer service. Some of our competitors may benefit from greater capital resources, more efficient technologies, lower raw material and energy costs and may be able to sustain longer periods of price competition. In particular, we face increased competition from producers in China, which have significantly lower production costs and pricing. This lower pricing could erode the market prices of our products in the Chinese market and elsewhere.
In addition, our competitive position within the global aluminum rolled products industry may be affected by, among other things, consolidation among our competitors, exchange rate fluctuations that may make our products less competitive in relation to the products of companies based in other countries (despite the U.S. dollar-based input cost and the marginal costs of shipping) and economies of scale in purchasing, production and sales, which accrue to the benefit of some of our competitors. For example, the price gap for aluminum between the Shanghai Futures Exchange ("SHFE") and the LME may make our products manufactured in Asia based off LME prices less competitive compared to products manufactured by competitors in China based off SHFE prices.
Increased competition could cause a reduction in our shipment volumes and profitability or increase our expenditures, either of which could have a material adverse effect on our financial results and cash flows.
The end-use markets for certain of our products are highly competitive and customers are willing to accept substitutes for our products.
The end-use markets for certain aluminum rolled products are highly competitive. Aluminum competes with other materials, such as steel, plastics, composite materials and glass, among others, for various applications, including in packaging, transportation, architectural, industrial, and consumer durables end-usespecialty markets. In the past, customers have demonstrated a willingness to substitute other materials for aluminum. For example, changes in consumer preferences in beverage containers have increased the use of PET plastic containers and glass bottles in recent years. These trends may continue. The willingness of customers to accept substitutes for aluminum products could have a material adverse effect on our financial results and cash flows.
Economic conditions could negatively affect our financial condition and results of operations.
Our financial condition and results of operations depend significantly on worldwide economic conditions. Uncertainty about current or future global economic conditions poses a risk as our customers may postpone purchases in response to tighter credit and negative financial news, which could adversely impact demand for our products. In addition, there can be no assurance that actions we may take in response to economic conditions will be sufficient to counter any continuation or any downturn or disruption. A significant global economic downturn or disruption in the financial markets could have a material adverse effect on our financial condition and results of operations.
If we are unable to obtain sufficient quantities of primary aluminum, recycled aluminum, sheet ingot and other raw materials used in the production of our products, our ability to produce and deliver products or to manufacture products using the desired mix of metal inputs could be adversely affected.
The supply risks relating to our metal inputs vary by input type. Our sheet ingot requirements have historically been supplied, in part, by Rio Tinto pursuant to agreements with us. For the year ended March 31, 2016, we purchased a majority of our third party sheet ingot requirements from Rio Tinto's primary metal group. If Rio Tinto is unable to deliver sufficient quantities of this material on a timely basis, our production in North America could be disrupted and our net sales, profitability and cash flows could be adversely affected. Although aluminum is traded on the world markets, developing alternative suppliers of sheet ingot could be time consuming and expensive.
Certain of our manufacturing operations rely on UBCs and other types of aluminum scrap for a portion of our base metal inputs. Competition for UBCs and other types of aluminum scrap is significant, and while we believe we will be able to obtain sufficient quantities to meet our production needs, if we are unable to do so, we could be required to purchase more expensive metal inputs which could have an adverse effect on our profitability and cash flows.
Remelt ingot, which is traded on the LME, may become subject to supply risk created by supply and demand anomalies associated with speculative financing transactions. In a period of rapidly rising demand, restrictions on access to metal that is stored in LME warehouses or restrained in financing transactions could create shortages in the spot market which could interfere with supplies to our facilities and limit production.
Our operations consume energy andEmployees
The table below summarizes our profitability and cash flows may decline if energy costs were to rise, or ifapproximate number of employees by region, including our energy supplies were interrupted.proportionate share of those employed by less than wholly owned affiliates.
|
| | | | | | | | | | | | | | | |
| Employees | | North America (A) | | Europe | | Asia | | South America | | Total |
| March 31, 2018 | | 3,400 |
| | 4,770 |
| | 1,400 |
| | 1,570 |
| | 11,140 |
|
| March 31, 2017 | | 3,310 |
| | 4,880 |
| | 1,670 |
| | 1,590 |
| | 11,450 |
|
_________________________
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| (A) | Includes employees within our Corporate headquarters located in Atlanta, Georgia. |
We consume substantial amounts of energy inconsider our rolling and casting operations. The factors affecting our energy costs and supply reliability tendemployee relations to be specific to each of our facilities. A number of factors could materially affect our energy position adversely including:
increases in costs of natural gas;
increases in costs of supplied electricity or fuel oil related to transportation;
interruptions in energy supply due to equipment failure or other causes;
the inability to extend energy supply contracts upon expiration on economical terms; and
the inability to pass through energy costs in certain sales contracts.
In addition, global climate change may increase our costs for energy sources, supplies or raw materials. See We may be affected by global climate change or by legal, regulatory or market responses to such change. If energy costs were to rise, or if energy supplies or supply arrangements were disrupted, our profitability and cash flows could decline.
Our results and short term liquidity can be negatively impacted by timing differences between the prices we pay under purchase contracts and metal prices we charge our customers.
Our purchase and sales contracts for primary aluminum are based on the LME price plus a regional market premium, which is a surcharge in addition to the LME price. There are typically timing differences between the pricing periods for purchases and sales where purchase prices we pay tend to be fixed and paid earlier than sales prices we charge our customers. This creates a price exposure we call “metal price lag.” We use derivative instruments to manage the timing differences related to LME associated with metal price lag. However, we do not use derivative contracts for local market premiums, as there are not adequate cost effective hedges in the market. The timing difference associated with metal price lag could positively or negatively impact our operating results and short term liquidity position.
A deterioration of our financial condition or a downgrade of our ratings by a credit rating agency could limit our ability or increase our costs to enter into hedging and financing transactions, and our business relationships and financial condition could be adversely affected.
A deterioration of our financial condition or a downgrade of our credit ratings for any reason could increase our borrowing costs and have an adverse effect on our business relationships with customers, suppliers and hedging counterparties. We enter into various forms of hedging activities against currency, interest rate, energy or metal price fluctuations. We also factor and forfeit trade receivables from time to time to manage working capital. Financial strength and credit ratings are important to the availability and terms of these hedging and financing activities. As a result, any deterioration of our financial condition or downgrade of our credit ratings may make it more difficult or costly for us to engage in these activities in the future.
Adverse changes in currency exchange rates could negatively affect our financial results or cash flows and the competitiveness of our aluminum rolled products relative to other materials.
Our businesses and operations are exposed to the effects of changes in the exchange rates of the U.S. dollar, the Euro, the British pound, the Brazilian real, the Canadian dollar, the Korean won, the Swiss franc and other currencies. We have implemented a hedging policy that attempts to manage currency exchange rate risks to an acceptable level based on management's judgment of the appropriate trade-off between risk, opportunity and cost; however, this hedging policy may not successfully or completely eliminate the effects of currency exchange rate fluctuations which could have a material adverse effect on our financial results and cash flows.
We prepare our consolidated financial statements in U.S. dollars, but a portion of our earnings and expenditures are denominated in other currencies, primarily the Euro, the Korean won and the Brazilian real. Changes in exchange rates will result in increases or decreases in our operating results and may also affect the book value of our assets located outside the U.S.
Most of our facilities are staffed by a unionized workforce, and union disputes and other employee relations issues could materially adversely affect our financial results.
satisfactory. A substantial portion of our employees are represented by labor unions under a large number of collective bargaining agreements with varying durations and expiration dates. 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.
Loss of our key management and other personnel, or an inability to attract and retain such management and other personnel, could adversely impact our business.
We employ all of our senior executive officers and other highly-skilled key employees on an at-will basis, and their employment can be terminatedconditions are governed by uscollective bargaining agreements. Collective bargaining agreements are negotiated on a site, regional or them at any time, for any reason and without notice, subject, in certain cases, to severance payment obligations. Competition for qualified employees among companies that rely heavily on engineering and technology is intense, and if our highly skilled key employees leave us, we may be unable to promptly attract and retain qualified replacement personnel, which could result in our inability to improve manufacturing operations, conduct research activities successfully, develop marketable products, execute expansion projects, and compete effectively for our share of the growth in key markets.
We could be adversely affected by disruptions of our operations.
Breakdown of equipment or other events, including catastrophic events such as war or natural disasters, leading to production interruptions at our plants could have a material adverse effect on our financial results and cash flows. Further, because many of our customers are, to varying degrees, dependent on planned deliveries from our plants, those customers that have to reschedule their own production due to our missed deliveries could pursue claims against us and reduce their future business with us. We may incur costs to correct any of these problems, in addition to facing claims from customers. Further, our reputation among actual and potential customers may be harmed, resulting in a loss of business. While we maintain insurance policies covering, among other things, physical damage, business interruptions and product liability, these policies would not cover all of our losses.
Our operations have been and will continue to be exposed to various business and other risks, changes in conditions and events beyond our control in countries where we have operations or sell products.
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 China, Brazil, Korea and Malaysia, and we market our products in these countries, as well as certain other countries in Asia, the Middle East and emerging markets in South America. 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 results and cash flows.
We face risks relating to certain joint ventures and subsidiaries that we do not entirely control.
Some of our activities are, and will in the future be, conducted through entities that we do not entirely control or wholly-own. These entities include our Alunorf, Germany; and Logan, Kentucky joint ventures, as well as our majority-owned Malaysian subsidiary. Our Malaysian subsidiary is a public company whose shares are listed for trading on the Bursa Malaysia exchange. Under the governing documents, agreements or securities laws applicable to, or stock exchange listing rules relative to, certain of these joint ventures and subsidiaries, our ability to fully control certain operational matters may be limited. Further, in some cases we do not have rights to prevent a joint venture partner from selling its joint venture interests to a third party.
Our results of operations, cash flows and liquidity could be adversely affected if we were unable to purchase derivative instruments or if counterparties to our derivative instruments fail to honor their agreements.
We use various derivative instruments to manage the risks arising from fluctuations in aluminum prices, exchange rates, energy prices and interest rates. If for any reason we were unable to purchase derivative instruments to manage these risks, our results of operations, cash flows and liquidity could be adversely affected. In addition, we may be exposed to losses in the future if the counterparties to our derivative instruments fail to honor their agreements. In particular, deterioration in the financial condition of our counterparties and any resulting failure to pay amounts owed to us or to perform obligations or services owed to us could have a negative effect on our business and financial condition. Further, if major financial institutions consolidatenational level, and are forced to operate under more restrictive capital constraints and regulations, there could be less liquidity in the derivative markets, which could have a negative effect on our ability to hedge and transact with creditworthy counterparties.
Derivatives legislation could have an adverse impact on our ability to hedge risks associated with our business and on the cost of our hedging activities.
We use over-the-counter (OTC) derivative products to hedge our metal commodity risks and our interest rate and currency risks. The Commodity Futures Trading Commission and the SEC recently have finalized certain rules and regulations to increase regulatory oversight of the OTC markets and the entities that participate in those markets. Other regulations implementing the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) remain to be finalized or implemented and it is not possible to predict when this will be accomplished or what impact these regulations will have on our ability to hedge our business risks, or the costs of doing so.
In addition, the European Market Infrastructure Regulation (EMIR) and the Financial Market Infrastructure Act (FMIA), which became effective in 2012 and 2016, respectively, include regulations related to the trading, reporting and clearing of derivatives. We have entities and counterparties located in jurisdictions subject to EMIR and FMIA. Our efforts to comply with EMIR and FMIA, and EMIR and FMIA's effects on the derivatives markets and their participants, create similar risks and could have similar adverse impacts as those under the Dodd-Frank Act.
If future regulations subject us to additional capital or margin requirements or other restrictions on our trading and commodity positions, they could have an adverse effect on our ability to hedge risks associated with our business and on the cost of our hedging activities. It is also possible that additional similar regulations may be imposed in other jurisdictions where we conduct business and any such regulations could pose risks and have adverse effects on our operations and profitability.
We may not be able to successfully develop and implement new technology initiatives.
We have invested in, and are involved with, a number of technology and process initiatives. Several technical aspects of these initiatives are still unproven, and the eventual commercial outcomes cannot be assessed with any certainty. Even if we are successful with these initiatives, we may not be able to deploy them in a timely fashion. Accordingly, the costs and benefits from our investments in new technologies and the consequent effects on our financial results may vary from present expectations.
Security breaches and other disruptions to our information technology networks and systems could interfere with our operations, and could compromise the confidentiality of our proprietary information.
We rely upon information technology networks and systems, some of which are managed by third parties, to process, transmit and store electronic information, and to manage or support a variety of business and manufacturing processes and activities. Additionally, we collect and store sensitive data, including intellectual property, proprietary business information, as well as personally identifiable information of our employees, in data centers and on information technology networks. The secure operation of these information technology networks, and the processing and maintenance of this information is important to our business operations and strategy. Despite security measures and business continuity plans, our information technology networks and systems may be vulnerable to damage, disruptions or shutdowns due to attacks by hackers or breaches due to errors or malfeasance by employees, contractors and others who have access to our networks and systems, or other disruptions during the process of upgrading or replacing computer software or hardware, power outages, computer viruses, telecommunication or utility failures or natural disasters or other catastrophic events. The occurrence of any of these events could compromise our networks and the information stored there could be accessed, publicly disclosed, lost or stolen. Any such access, disclosure or other loss of information could result in legal claims or proceedings, liability or regulatory penalties under laws protecting the privacy of personal information, disrupt operations and reduce the competitive advantage we hope to derive from our investment in new or proprietary business initiatives.
Future acquisitions, divestitures or restructuring actions may adversely affect our financial results.
As part of our strategy for growth, we may pursue acquisitions, divestitures or strategic alliances, which may not be completed or, if completed, may not be ultimately beneficial to us. There are numerous risks commonly encountered in strategic transactions, including the risk that we may not be able to complete a transaction that has been announced, effectively integrate businesses acquired or generate the cost savings and synergies anticipated. Failure to do so could have a material adverse effect on our financial results.
Any additional restructuring efforts we may undertake in the future could result in significant severance-related costs, environmental remediation expenses, impairment charges, restructuring charges and related costs and expenses, which could adversely affect our profitability and cash flows.
Capital investments in organic growth initiatives may not produce the returns we anticipate.
A significant element of our strategy has been to invest in opportunities to increase the production capacity of our operating facilities through modifications of and investments in existing facilities and equipment and to evaluate other investments in organic growth in our target markets. In particular, over the past several years we have invested substantial resources into projects intended to raise the recycled content of our products, increase our global automotive finishing capacity and grow our portfolio of premium products. These projects involve numerous risks and uncertainties, including the risk that our forecasted demand levels prove to be inaccurate and the risk that aluminum price trends diminish the benefits we anticipate from our recycling investments. If our capital investments do not produce the benefits we anticipate, our financial condition and results of operations could be adversely affected.
Our goodwill, other intangible assets and other long-lived assets could become impaired, which could require us to take non-cash charges against earnings.
We assess, at least annually and potentially more frequently, whether the value of our goodwill has been impaired. We assess the recoverability of finite-lived other intangible assets and other long-lived assets whenever events or changes in circumstances indicate we may not be able to recover the asset's carrying amount. Any impairment of goodwill, other intangible assets, or long-lived assets as a result of such analysis would result in a non-cash charge against earnings, which could materially adversely affect our reported results of operations. A significant and sustained decline in our future cash flows, a significant adverse change in the economic environment or slower growth rates could result in the need to perform additional impairment analysis in future periods.
We could be required to make unexpected contributions to our defined benefit pension plans as a result of adverse changes in interest rates and the capital markets.
Most of our pension obligations relate to funded defined benefit pension plans for our employees in the U.S., the U.K. Switzerland, and Canada, unfunded pension benefits in Germany and lump sum indemnities payable to our employees in France, Italy, Korea and Malaysia upon retirement or termination. Our pension plan assets consist primarily of funds invested in listed stocks and bonds. Our estimates of liabilities and expenses for pensions and other postretirement benefits incorporate a number of assumptions, including expected long-term rates of return on plan assets and interest rates used to discount future benefits. Our results of operations, liquidity or shareholder's (deficit) equity in a particular period could be adversely affected by capital market returns that are less than their assumed long-term rate of return or a decline of the rate used to discount future benefits. These factors or others may require us to make unexpected cash contributions to the pension plans in the future, preventing the use of such cash for other purposes.
We are subject to a broad range of environmental, health and safety laws and regulations, and we may be exposed to substantial environmental, health and safety costs and liabilities.
We are 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 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, the remediation of environmental contamination, post-mining reclamation and working conditions for our employees. Some environmental laws, such as Superfund and comparable laws in the U.S. and other jurisdictions worldwide, impose joint and several liability for the cost of environmental remediation, natural resource damages, third party claims, and other expenses, without regard to the fault or the legality of the original conduct.
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 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 efforts, remediation activities and legal proceedings concerning environmental matters, including certain activities and proceedings arising under Superfund and comparable laws in the U.S. and other jurisdictions worldwide in which we have operations.
We have established liabilities for environmental remediation activities where appropriate. However, the cost of addressing environmental matters (including the timing of any charges related thereto) cannot be predicted with certainty, and these liabilities may not ultimately be adequate, especially in light of 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 including, for example, the possibility of increased regulation of the use of bisphenol-A, a chemical component commonly used in the coating of aluminum cans. Such future developments could result in increased environmental costs and liabilities, which could have a material adverse effect on our financial condition, results 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 operations. In addition, the presence of environmental contamination at our properties could adversely affect our ability to sell the 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. Community objections could have a material adverse impact upon the profitability or, in extreme cases, the viability of an operation.
We use a variety of hazardous materials and chemicals in our rolling processes 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 occupational 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 or other hazards 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 results of operations and cash flows could be adversely affected.
We may be exposed to significant legal proceedings or investigations.
From time to time, we are involved in, or the subject of, disputes, proceedings and investigations with respect to a variety of matters, including environmental, health and safety, product liability, employee, tax, personal injury, contractual and other matters as well as other disputes and proceedings that arise in the ordinary course of business. Certain of these matters are discussed in the preceding risk factor. Any claims against us or any investigations involving us, whether meritorious or not, could be costly to defend or comply with and could divert management's attention as well as operational resources. Any such dispute, litigation or investigation, whether currently pending or threatened or in the future, may have a material adverse effect on our financial results and cash flows.
In addition, we are sometimes exposed to warranty and product liability claims. There can be no assurance that we will not experience material product liability losses arising from individual suits or class actions alleging product liability defects or related claims in the future and that these will not have a negative impact on us. We generally maintain insurance against many product liability risks, but there can be no assurance that this coverage will be adequate for any liabilities ultimately incurred. In addition, there is no assurance that insurance will continue to be available on terms acceptable to us. A successful claim that exceeds our available insurance coverage could have a material adverse effect on our financial results and cash flows.
We may be affected by global climate change or by legal, regulatory, or market responses to such change.
Increased concern over climate change has led to new and proposed legislative and regulatory initiatives, such as cap-and-trade systems and additional limits on emissions of greenhouse gases. New laws enacted could directly and indirectly affect our customers and suppliers (through an increase in the cost of production or their ability to produce satisfactory products) or our business (through an impact on our inventory availability, cost of sales, operations or demand for the products we sell), which could result in an adverse effect on our financial condition, results of operations and cash flows. Compliance with any new or more stringent laws or regulations, or stricter interpretations of existing laws, could require additional expenditures by us, our customers or our suppliers. Also, we rely on natural gas, electricity, fuel oil and transport fuel to operate our facilities. Any increased costs of these energy sources because of new laws could be passed along to us and our customers and suppliers, which could also have a negative impact on our profitability.
Income tax payments may ultimately differ from amounts currently recorded by the Company. Future tax law changes may materially increase the Company's prospective income tax expense.
We are subject to income taxation in many jurisdictions. Judgment is required in determining our worldwide income tax provision and accordingly there are many transactions and computations for which our final income tax determination is uncertain. We are routinely audited by income tax authorities in many tax jurisdictions. Although we believe the recorded tax estimates are reasonable, the ultimate outcome from any audit (or related litigation) could be materially different from amounts reflected in our income tax provisions and accruals. Future settlements of income tax audits may have a material effect on earnings between the period of initial recognition of tax estimates in the financial statements and the point of ultimate tax audit settlement. Additionally, it is possible that future income tax legislation in any jurisdiction to which we are subject may be enacted that could have a material impact on our worldwide income tax provision beginning with the period that such legislation becomes effective.
Hindalco and its interests as equity holder may conflict with the interests of the holders of our senior notes in the future.
Novelis is an indirectly wholly-owned subsidiary of Hindalco. As a result, Hindalco may exercise control over our decisions to enter into any corporate transaction or capital restructuring and has the ability to approve or prevent any transaction that requires the approval of our shareholder. Hindalco may have an interest in pursuing acquisitions, divestitures, financings or other transactions that, in its judgment, could enhance its equity investment, even though such transactions might involve risks to holders of our Senior Notes.
Additionally, Hindalco operates in the aluminum industry and may from time to time acquire and hold interests in businesses that compete, directly or indirectly, with us. Hindalco has no obligation to provide us with financing and is able to sell their equity ownership in us at any time.
Our substantial indebtedness could adversely affect our business.
We have a relatively high degree of leverage. As of March 31, 2016, we had $5.1 billion of indebtedness outstanding. Our substantial indebtedness and interest expense could have important consequences to our Company and holders of notes, including:
limiting our ability to borrow additional amounts for working capital, capital expenditures or other general corporate purposes;
increasing our vulnerability to general adverse economic and industry conditions, including volatility in LME aluminum prices;
limiting our ability to capitalize on business opportunities and to react to competitive pressures and adverse changes in government regulation; and
limiting our ability or increasing the costs to refinance indebtedness.
The covenants in our senior secured credit facilities and the indentures governing our Senior Notes impose operating and financial restrictions on us.
Our senior secured credit facilities and the indentures governing our Senior Notes impose certain operating and financial restrictions on us. These restrictions limit our ability and the ability of our restricted subsidiaries, among other things, to:
incur additional debt and provide additional guarantees;
pay dividends and make other restricted payments, including certain investments;
create or permit certain liens;
make certain asset sales;
use the proceeds from the sales of assets and subsidiary stock;
create or permit restrictions on the ability of our restricted subsidiaries to pay dividends or make other distributions to us;
engage in certain transactions with affiliates;
enter into sale and leaseback transactions; and
consolidate, merge or transfer all or substantially all of our assets or the assets of our restricted subsidiaries.
See Note 11 - Debt for additional discussion.
Item 1B.Unresolved Staff Comments
None.
Item 2.Properties
Our global headquarters are located in Atlanta, Georgia. Our global research and technology center is located in Kennesaw, Georgia, which contains state-of-the-art research and development capabilities to help us better partner and innovate with our customers. Our regional headquarters are located in the following cities: North America - Atlanta, Georgia; Europe - Küsnacht, Switzerland; Asia - Seoul, South Korea; and South America - Sao Paulo, Brazil. We also have a research facility in Spokane, Washington specializing in molten metal processing.
The total number of operating facilities within our operating segments as of March 31, 2016 is shown in the table below, including operating facilities we jointly own and operate with third parties.
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| | | | | | |
| | | Total Operating Facilities | | Facilities with Recycling Operations |
| North America | | 8 |
| | 3 |
|
| Europe | | 10 |
| | 4 |
|
| Asia | | 5 |
| | 3 |
|
| South America | | 2 |
| | 1 |
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| Total | | 25 |
| | 11 |
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The following tables provide information, by operating segment, about the plant locations, processes and major end-use markets/applications for the aluminum rolled products, recycling and primary metal facilities we operated during all or part of the year ended March 31, 2016.
North America
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Locations | | Plant Processes | | Major Products |
Berea, Kentucky | | Recycling, sheet ingot casting | | Sheet ingot from recycled metal |
Fairmont, West Virginia | | Cold rolling, finishing | | Foil, HVAC material |
Greensboro, Georgia | | Recycling, sheet ingot casting | | Sheet ingot from recycled metal |
Kingston, Ontario | | Cold rolling, finishing | | Automotive sheet, construction sheet, industrial sheet |
Russellville, Kentucky (A) | | Hot rolling, cold rolling, finishing | | Can stock |
Oswego, New York (B) | | Sheet ingot casting, hot rolling, cold rolling, recycling, brazing, finishing, heat treatment | | Can stock, automotive sheet,
construction sheet, industrial sheet,
semi-finished coil
|
Terre Haute, Indiana | | Cold rolling, finishing | | Foil |
Warren, Ohio | | Coating | | Can stock |
| |
(A) | We own 40% of the outstanding common shares of Logan, but we have made equipment investments such that our portion of Logan’s total machine hours provides us approximately 55% of Logan’s total production. |
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(B) | In fiscal 2015, we began production at two automotive sheet finishing lines and expanded our recycling operations in our Oswego, New York facility. In fiscal 2016, we commissioned a third automotive sheet finishing line. |
Our Oswego, New York facility operates modern equipment used for recycling beverage cans and other aluminum scrap, ingot casting, hot rolling, cold rolling and finishing. The Oswego facility produces can stock, automotive sheet, as well as building and industrial products. The facility also provides feedstock to our Kingston, Ontario facility, which produces automotive sheet and products for construction and industrial applications, and to our Fairmont, West Virginia facility, which produces foil and light-gauge sheet.
Our Logan facility in Russellville, Kentucky is a processing joint venture between us and Tri-Arrows Aluminum Inc. (Tri-Arrows). Logan is a dedicated manufacturer of aluminum sheet products for the can stock market and operates modern and high-speed equipment for ingot casting, hot-rolling, cold-rolling and finishing. A portion of the can end stock is coated at North America’s Warren, Ohio facility, in addition to Logan’s on-site coating assets. Together with Tri-Arrows, we operate Logan as a production cooperative, with each party supplying its own primary metal inputs for conversion at the facility. The converted product is then returned to the supplying party at cost. Logan does not own any of the primary metal inputs or any of the converted products. Most of the fixed assets at Logan are directly owned by us and Tri-Arrows in varying ownership percentages or solely by each party.durations.
Along with our recycling center in Oswego, New York, we own two other fully dedicated recycling facilities in North America, located in Berea, Kentucky and Greensboro, Georgia. Each offers a modern, cost-efficient process to recycle UBCs and other aluminum scrap into sheet ingot to supply our hot mills in Logan and Oswego.
Europe
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| | | | |
Locations | | Plant Processes | | Major Products |
Bresso, Italy | | Finishing, painting | | Painted sheet, construction sheet |
Göttingen, Germany | | Cold rolling, finishing, painting | | Can stock, food can, lithographic, painted sheet, automotive sheet |
Latchford, United Kingdom | | Recycling | | Sheet ingot from recycled metal |
Ludenscheid, Germany | | Foil rolling, finishing, converting | | Foil, packaging |
Nachterstedt, Germany | | Cold rolling, finishing, painting, recycling, heat treatment | | Automotive sheet, can stock, industrial sheet, painted sheet, construction sheet, sheet ingot |
Neuss, Germany (A) | | Hot rolling, cold rolling, recycling | | Can stock, foilstock, feeder
stock for finishing operations
|
Ohle, Germany | | Cold rolling, finishing, converting | | Foil, packaging |
Pieve, Italy | | Continuous casting, cold rolling, finishing, recycling | | Coil for finishing operations, industrial sheet |
Sierre, Switzerland (B) | | Sheet ingot casting, hot rolling, cold rolling, finishing | | Automotive sheet, industrial sheet |
Crick, United Kingdom (C) | | Finishing | | Automotive sheet |
| |
(A) | Operated as a 50/50 joint venture between us and Hydro Aluminium Deutschland GmbH (Hydro). This joint venture is known as "Alunorf". |
| |
(B) | Operated under a long-term lease arrangement with a third party lessor. |
| |
(C) | In fiscal year 2016, we moved operations from the Wednesbury, U.K. facility to a facility in Crick, U.K. |
Aluminium Norf GmbH (Alunorf) in Germany, a 50/50 production-sharing joint venture between us and Hydro, is a large scale, modern manufacturing hub, located in Neuss, Germany, for several of our operations in Europe, and is the largest aluminum rolling mill and remelting operation in the world. Together with Hydro, we operate Alunorf as a production cooperative, with each party supplying its own primary metal inputs for transformation at the facility. The transformed product is then transferred back to the supplying party on a pre-determined cost-plus basis. Alunorf supplies hot coil for further processing through cold rolling to some of our other plants, including Göttingen and Nachterstedt in Germany and provides foilstock to our plants in Ohle and Lüdenscheid in Germany. The Ohle and Lüdenscheid cold mill and finishing lines produce products for a number of end use applications, such as flexible tubes and bare, container, and converter foil.
Our Göttingen plant has a cold mill and paint line as well as finishing capability for can, food, and automotive sheet. Our Nachterstedt plant cold rolls and finishes automotive, can, industrial, and architectural sheet. In October 2014, we opened the world’s largest recycling center at our Nachterstedt, Germany site. It is a fully integrated recycling facility, capable of recycling a wide variety of scrap. The Pieve plant, located near Milan, Italy, produces continuous cast coil that is cold rolled into paintstock and sent to the Bresso, Italy plant for painting and finishing.
The Sierre rolling mill and remelt operation in Switzerland, along with the Nachterstedt and Göttingen plants in Germany, combine to make Novelis Europe’s leading producer of automotive sheet in terms of shipments.
We lease a facility in Crick, U.K., that houses a small finishing operation for automotive products.
Asia
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| | | | |
Locations | | Plant Processes | | Major Products |
Binh Doung, Vietnam | | Recycling | | Recycled material |
Bukit Raja, Malaysia(A) | | Continuous casting, cold rolling, coating | | Construction sheet, industrial sheet, heavy and light gauge foils |
Changzhou, China | | Heat treatment | | Automotive sheet |
Ulsan, South Korea | | Sheet ingot casting, hot rolling, cold rolling, recycling, finishing | | Can stock, construction sheet, industrial sheet, electronics, automotive sheet for finishing operations, foilstock, and recycled material |
Yeongju, South Korea | | Sheet ingot casting, hot rolling, cold rolling, recycling, finishing | | Can stock, construction sheet, industrial sheet, electronics, foilstock and recycled material |
| |
(A) | Ownership of the Bukit Raja plant corresponds to our 59% equity interest in Aluminium Company of Malaysia Berhad, a publicly traded company that operates in Bukit Raja, Selangor, Malaysia. |
In addition to its rolling operations, Novelis Asia operates recycling furnaces at both its Ulsan and Yeongju facilities in South Korea for the conversion of customer and third-party recycled aluminum. We also have an aluminum automotive sheet finishing plant in Changzhou, China. In addition, we have a facility in Binh Duong, Vietnam, which handles the collection and processing of UBCs.
South America
Novelis South America operates two aluminum rolled product facilities. This includes one facility with recycling operations. These facilities manufacture a broad range of can sheet, industrial sheet and light gauge products. The main markets are beverage and food can, specialty, industrial, foil and other packaging and transportation end-use applications. Beverage can represents the largest end-use application in terms of shipment volume.
Financial Information About Geographic Areas
Certain financial information about geographic areas is contained in Note 20 — Segment, Geographical Area, Major Customer and Major Supplier Information to our accompanying audited consolidated financial statements.
Our Customers
We focus significant efforts on developing and maintaining close working relationships with our customers and end-users. Our major customers include:
|
| | |
| Beverage and Food Cans | | Automotive |
| Anheuser-Busch InBev | | BMW Group |
| Ardagh Group | | Daimler Group |
| Ball Corporation | | Fiat Chrysler Automobiles N.V. |
| Can-Pack S.A. | | Ford Motor Company |
| Crown Holdings Inc., formerly Crown Cork & Seal Company | | General Motors LLC |
| Pepsico | | Hyundai Motors Corporation |
| Various bottlers of the Coca-Cola System | | Jaguar Land Rover Limited |
| | NIO |
| Construction, Industrial and Other | | Volkswagen Group |
| Agfa Graphics | | |
| Aluflexpack | | Electronics |
| Amcor | | LG International Corporation |
| Facchini S.A. | | Samsung Electronics Co., Ltd. |
| Feron | | |
| Klöckner Metals | | |
Lotte Aluminum Co. Ltd.
| | |
| Prefa | | |
Reynolds Consumer Products LLC
| | |
Ryerson Inc.
| | |
| ThyssenKrupp | | |
Our single largest end-use product is beverage can sheet. We sell can sheet directly to beverage makers and bottlers as well as to can fabricators that sell the cans they produce to bottlers. In certain cases, we operate under umbrella agreements with beverage makers and bottlers under which they direct their can fabricators to source their requirements for beverage can body, end and tab stock from us.
Additional information related to our top customers is contained in Note 20 — Segment, Geographical Area, Major Customer and Major Supplier Information to our accompanying audited consolidated financial statements.
Distribution and Backlog
We have two principal distribution channels for the end-use markets in which we operate: direct sales to our customers and sales to distributors. |
| | | | | | | | | |
| | | Year Ended March 31, |
| | | 2018 | | 2017 | | 2016 |
| Direct sales as a percentage of total “Net sales” | | 97 | % | | 94 | % | | 95 | % |
| Distributor sales as a percentage of total “Net sales” | | 3 | % | | 6 | % | | 5 | % |
Direct Sales
We supply various end-use markets all over the world through a direct sales force operating from individual facilities or sales offices, as well as from regional sales offices. The direct sales channel typically serves very large, sophisticated fabricators and original equipment manufacturers. Longstanding relationships are maintained with leading companies in industries using aluminum rolled products. Supply contracts for large global customers generally range from one to five years in length and historically there has been a high degree of renewal business with these customers. Given the customized nature of products and in some cases, large order sizes, switching costs are significant, thus adding to the overall consistency of the customer base.
We also use third party agents or traders in some regions to complement our own sales force. These agents provide service to our customers in countries where we do not have local expertise.
Distributors
We also sell our products through third party aluminum distributors. Customers of distributors are widely dispersed, and sales through this channel are highly fragmented. Distributors sell mostly commodity or less specialized products into many end-use markets in small quantities, including the architectural and industrial markets. We collaborate with our distributors to develop new end-use products and improve the supply chain and order efficiencies.
Backlog
We believe order backlog is not a material aspect of our business.
Research and Development
The table below summarizes our “Research and development expenses”, which include mini-scale production lines equipped with hot mills, can lines and continuous casters (in millions).
|
| | | | | | | | | | | | |
| | | Year Ended March 31, |
| | | 2018 | | 2017 | | 2016 |
| Research and development expenses | | $ | 64 |
| | $ | 58 |
| | $ | 54 |
|
We conduct research and development activities in order to meet current and future customer requirements, improve our products and reduce our conversion costs. We have a global research and technology center in Kennesaw, Georgia, which offers state of the art research and development capabilities to help Novelis meet the global long-term demand for aluminum used for the automotive, beverage can and specialty markets.
Our Employees
The table below summarizes our approximate number of employees by region, including our proportionate share of those employed by less than wholly owned affiliates.
|
| | | | | | | | | | | | | | | |
| Employees | | North America (A) | | Europe | | Asia | | South America | | Total |
| March 31, 2018 | | 3,400 |
| | 4,770 |
| | 1,400 |
| | 1,570 |
| | 11,140 |
|
| March 31, 2017 | | 3,310 |
| | 4,880 |
| | 1,670 |
| | 1,590 |
| | 11,450 |
|
_________________________
| |
| (A) | Includes employees within our Corporate headquarters located in Atlanta, Georgia. |
We consider our employee relations to be satisfactory. A substantial portion of our employees are represented by labor unions and their employment conditions are governed by collective bargaining agreements. Collective bargaining agreements are negotiated on a site, regional or national level, and are of varying durations.
Intellectual Property
We actively review intellectual property arising from our operations and our research and development activities and, when appropriate, we apply for patents in appropriate jurisdictions. We currently hold patents and patent applications on approximately 237 different items of intellectual property. While these patents and patent applications are important to our business on an aggregate basis, no single patent or patent application is deemed to be material to our business.
We have applied for, or received registrations for, the “Novelis” word trademark and the Novelis logo trademark in approximately 50 countries where we have significant sales or operations. Novelis uses the Aditya Birla logo under license from Aditya Birla Management Corporation Private Limited.
We have also registered the word “Novelis” and several derivations thereof as domain names in numerous top level domains around the world to protect our presence on the world wide web.
Environment, Health and Safety
We own and operate numerous manufacturing and other facilities in various countries around the world. Our operations are subject to environmental laws and regulations from various jurisdictions, which govern, among other things, air emissions, wastewater discharges, the handling, storage and disposal of hazardous substances and wastes, the remediation of contaminated sites, post-mining reclamation and restoration of natural resources, and employee health and safety. Future
environmental regulations may impose stricter compliance requirements on the industries in which we operate. Additional equipment or process changes at some of our facilities may be needed to meet future requirements. The cost of meeting these requirements may be significant. Failure to comply with such laws and regulations could subject us to administrative, civil or criminal penalties, obligations to pay damages or other costs, and injunctions and other orders, including orders to cease operations.
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 our liability arising from the usage, storage, treatment or disposal of hazardous substances and wastes at a number of sites 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. Many of these jurisdictions have laws that 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. In addition, we are, from time to time, subject to environmental reviews and investigations by relevant governmental authorities.
We have established procedures for regularly evaluating environmental loss contingencies, including those arising from 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 also believe we have made reasonable estimates for the costs that are reasonably possible for these environmental loss contingencies. Accordingly, we have established liabilities based on our estimates for the currently anticipated costs that are deemed probable associated with these environmental matters. Management has determined that the currently anticipated costs associated with these environmental matters will not, individually or in the aggregate, materially impair our operations or materially adversely affect our financial condition.
Available Information
We are a voluntary filer and not subject to the reporting and information requirements of the Securities Exchange Act of 1934, as amended (Exchange Act). However, we file periodic reports and other information with the Securities and Exchange Commission (SEC). We make these filings available on our website free of charge, the URL of which is http://www.novelis.com, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. The SEC maintains a website (http://www.sec.gov) that contains our annual, quarterly and current reports and other information we file electronically with the SEC. You can read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Information on our website does not constitute part of this Annual Report on Form 10-K.
Item 1A.Risk Factors
In addition to the factors discussed elsewhere in this report, you should consider the following factors, which could materially affect our business, financial condition or results of operations in the future. The following factors, among others, could cause our actual results to differ from those projected in any forward looking statements we make.
Competitive and Strategic Risks
Certain of our customers are significant to our revenues, and we could be adversely affected by changes in the business or financial condition of these significant customers or by the loss of their business.
Our ten largest customers accounted for approximately 65%, 63%, and 60% of our total “Net sales” for the year ended March 31, 2018, 2017 and 2016, respectively. A significant downturn in the business or financial condition of our significant customers could materially adversely affect our results of operations and cash flows. In addition, some of our customer contracts are subject to renewal, renegotiation or re-pricing at periodic intervals or upon changes in competitive supply conditions. Our failure to successfully renew, renegotiate or re-price such agreements could result in a reduction or loss in customer purchase volume or revenue. Additionally, in the event of further consolidation among our customers, our customers may be able to use increased leverage in negotiating prices and other contract terms. Consolidation in our customer base may also lead to reduced demand for our products or cancellations of sales orders, which could adversely affect our results of operations and cash flows.
We also factor and forfait trade receivables from time to time to manage working capital. Any deterioration of the financial condition or downgrade of the credit rating of certain of our customers may make it more difficult or costly for us to engage in these activities, which could negatively impact our cash flows and liquidity.
We face significant price and other forms of competition from other aluminum rolled products producers and producers of other materials
The markets in which we operate are highly competitive. We compete primarily on the basis of our value proposition, including price, product quality, ability to meet customers' specifications, range of products offered, lead times, technical support and customer service. Some of our competitors may benefit from more efficient technologies, lower raw material and energy costs and may be able to sustain longer periods of price competition. Any increase in competition resulting from new market entrants or increases in production capacity by our competitors could cause us to lose market share or lose a large customer, or force us to reduce prices to remain competitive.
Further, aluminum competes with other materials, such as steel, plastics, composite materials and glass for various applications, including packaging, automotive, architectural, industrial, and consumer durables end-use markets. Our customers may choose materials other than aluminum to achieve desired attributes for their products. For example, customers in the automotive industry seeking to reduce vehicle weight may increase their use of high-strength steel and other materials rather than aluminum for certain applications.
We may not realize the anticipated benefits of acquisitions, divestitures, joint ventures or other strategic investments.
As part of our strategy for growth, we have in the past and may in the future pursue acquisitions, divestitures, joint ventures or other strategic investments, which may not be completed or, if completed, may not produce the benefits we anticipate. There are numerous risks commonly encountered in strategic transactions, including the risk that management’s time and energy may be diverted, disrupting our existing businesses; risks associated with managing joint ownership structures with shared decision making authority; difficulty retaining key employees of an acquired business; difficulties due to limited prior experience in any new markets we may enter; risks that we may not be able to complete a transaction that has been announced, effectively integrate businesses acquired or generate benefits we anticipated.
The United States Environmental Protection Agency announced, in April 2018, completion of its midterm evaluation process for greenhouse gas emission standards and its determination that the standards should be rolled back. A reduction in fuel efficiency standards could impact our customers’ choice of aluminum to achieve vehicle light weighting objectives to meet fuel economy standards. In addition, although certain automotive companies have increased their use of aluminum in recent years, there is no assurance that our automotive customers will not turn to steel or other materials in the future, due to the price of aluminum or other factors.
Operational Risks
If we are unable to obtain sufficient quantities of primary aluminum, recycled aluminum, sheet ingot and other raw materials used in the production of our products, our ability to produce and deliver products or to manufacture products using the desired mix of metal inputs could be adversely affected.
The supply risks relating to our metal inputs vary by input type. For example, we produce sheet ingot internally and source the remainder of our requirements from multiple third parties in various jurisdictions, usually under contracts having a duration of at least one year. If our suppliers are unable to deliver sufficient quantities of aluminum on a timely basis, our production could be disrupted and our net sales, profitability and cash flows could be adversely affected. Although aluminum is traded on the world markets, developing alternative suppliers of sheet ingot could be time consuming and expensive.
Our operations consume energy and our profitability and cash flows may decline if energy costs were to rise, or if our energy supplies were interrupted.
We consume substantial amounts of energy in our rolling and casting operations. The factors affecting our energy costs and supply reliability tend to be specific to each of our facilities. A number of factors could materially affect our energy position adversely including:
increases in costs of natural gas;
increases in costs of supplied electricity;
increases in fuel oil related to transportation;
interruptions in energy supply due to equipment failure or other causes; and
the inability to extend energy supply contracts upon expiration on economical terms.
If energy costs were to rise, or if energy supplies or supply arrangements were disrupted, our profitability and cash flows could decline.
A majority of our facilities are staffed by a unionized workforce, and union disputes and other employee relations issues could materially adversely affect our financial results.
A substantial portion of our employees are represented by labor unions under collective bargaining agreements with varying durations and expiration dates. 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.
Loss of our key management and other personnel, or an inability to attract and retain such management and other personnel, could adversely impact our business.
We employ all of our senior executive officers and other highly-skilled key employees on an at-will basis, and their employment can be terminated by us or them at any time, for any reason and without notice, subject, in certain cases, to severance payment obligations. Competition for qualified employees among companies that rely heavily on engineering and technology is intense, and if our highly skilled key employees leave us, we may be unable to promptly attract and retain qualified replacement personnel, which could result in our inability to improve manufacturing operations, conduct research activities successfully, develop marketable products and compete effectively for growth in key markets.
We could be adversely affected by unplanned disruptions at our operating facilities.
We have in recent periods experienced production interruptions at our plants due to the breakdown of equipment, fires, weather events and other causes. We may experience such disruptions in the future due to similar uncontrollable events. Because many of our customers are, to varying degrees, dependent on planned deliveries from our plants, any customers that have to reschedule their own production due to our missed deliveries could pursue claims against us and reduce their future business with us. We may incur costs to correct any of these problems, in addition to facing claims from customers. Further, our reputation among actual and potential customers may be harmed, resulting in loss of business. While we maintain insurance policies covering, among other things, physical damage, business interruptions and product liability, these policies may not cover all of our losses.
Our business has been and will continue to be exposed to various economic and political risks associated with our global operations.
Due to the global reach of our business, we are subject to financial, political, economic and other business risks in connection with doing business abroad. Operating in different regions and countries exposes us to a number of risks, including political and economic instability that may disrupt economic activity; changes in international trade regulation, including duties and tariffs; and differences in labor conditions.
Our financial condition and results of operations depend significantly on worldwide economic conditions. During the past fiscal year, economic conditions strengthened in all of the geographic regions in which we operate. However, future adverse developments in the US and global economy, including higher interest rates and higher levels of unemployment, could adversely affect demand in the end-use markets we serve. In addition, uncertainty about current or future global economic conditions poses a risk because our customers may postpone purchases in response to negative financial news and tighter credit.
We face risks relating to certain joint ventures, subsidiaries and assets that we do not entirely control.
Some of our activities are, and will in the future be, conducted through entities that we do not entirely control or wholly-own. These entities include our Alunorf, Germany, Ulsan, Korea and Logan, Kentucky joint ventures and our Sierre, Switzerland facility. Under the governing documents of some these businesses, we share decision making authority and operational control which may result in conflicts over management over these businesses. In addition, because we do not exercise control over the business practices of our joint venture partners, we could be subject to reputational damage or other consequences of improper conduct by our joint venture partners or their inability to fulfill their obligations under the joint venture.
Security breaches and other disruptions to our information technology networks and systems could interfere with our operations, and could compromise the confidentiality of our proprietary information.
We rely upon information technology networks and systems, some of which are managed by third parties, to process, transmit and store electronic information, and to manage or support a variety of business and manufacturing processes and activities. Additionally, we collect and store sensitive data, including intellectual property, proprietary business information, as well as personally identifiable information of our employees, in data centers and on information technology networks. These activities are subject to various laws and regulations in the United States and abroad regarding privacy and data security. These laws and regulations are evolving. For example, in April 2016, the European Union approved a new data protection regulation known as the General Data Protection Regulation, which is due to become effective in May 2018.
We have implemented systems and processes, and we continue to invest in solutions, intended to secure our information technology systems, prevent unauthorized access to or loss of sensitive data, ensure business continuity and comply with applicable laws. Despite these measures, our information technology networks and systems may be vulnerable to damage, disruptions or shutdowns due to attacks by hackers or breaches due to errors or malfeasance by employees, contractors and others who have access to our networks and systems, or other disruptions during the process of upgrading or replacing computer software or hardware, power outages, computer viruses, telecommunication or utility failures or natural disasters or other catastrophic events. The occurrence of any of these events could compromise our networks and the information stored there could be accessed, publicly disclosed, lost or stolen. Any such access, disclosure or other loss of information could result in legal claims or proceedings, liability or regulatory penalties under laws protecting the privacy of personal information, disrupt operations and reduce the competitive advantage we hope to derive from our investment in new or proprietary business initiatives.
Financial Risks
Our results and short term liquidity can be negatively impacted by timing differences between the prices we pay under purchase contracts and metal prices we charge our customers.
Our purchase and sales contracts for primary aluminum are based on the LME price plus a regional market premium, which is a surcharge in addition to the LME price. There are typically timing differences between the pricing periods for purchases and sales where purchase prices we pay tend to be fixed and paid earlier than sales prices we charge our customers. This creates a price exposure we call “metal price lag.” We use derivative instruments to manage the timing differences related to LME associated with metal price lag. The majority of our premium exposure hedging occurs in North America, however, exposure here is not fully hedged. In our Europe and Asia regions, the derivative market for local market premiums is not robust or efficient enough for us to offset the impacts of LMP price movements beyond a small volume. The
timing difference associated with metal price lag could positively or negatively impact our operating results and short term liquidity position.
A deterioration of our financial condition or a downgrade of our ratings by a credit rating agency could limit our ability or increase our costs to enter into hedging and financing transactions, and our business relationships and financial condition could be adversely affected.
A deterioration of our financial condition or a downgrade of our credit ratings for any reason could increase our borrowing costs, limit our access to the capital or credit markets or liquidity facilities, adversely affect our ability to obtain new financing on favorable terms or at all, result in more restrictive covenants for future indebtedness incurrences and have an adverse effect on our business relationships with customers, suppliers and hedging counterparties. We enter into various forms of hedging activities against currency, interest rate, energy and metal price fluctuations. Financial strength and credit ratings are important to the availability and terms of these hedging activities. As a result, any deterioration of our financial condition or downgrade of our credit ratings may make it more difficult or costly for us to engage in these activities in the future.
Adverse changes in currency exchange rates could negatively affect our financial results or cash flows and the competitiveness of our aluminum rolled products relative to other materials.
We are exposed to the effects of changes in the exchange rates of the U.S. dollar, the Euro, the British pound, the Brazilian real, the Korean won, the Swiss franc and other currencies. We have implemented a hedging policy that attempts to manage currency exchange rate risks to an acceptable level based on management's judgment of the appropriate trade-off between risk, opportunity and cost; however, this hedging policy may not successfully or completely eliminate the effects of currency exchange rate fluctuations which could have a material adverse effect on our financial results and cash flows.
We prepare our consolidated financial statements in U.S. dollars, but a portion of our earnings and expenditures are denominated in other currencies, primarily the Euro, the Korean won and the Brazilian real. Changes in exchange rates will result in increases or decreases in our operating results and may also affect the book value of our assets located outside the U.S.
Our results of operations, cash flows and liquidity could be adversely affected if we were unable to transact in derivative instruments or if counterparties to our derivative instruments fail to honor their agreements.
We use various derivative instruments to manage the risks arising from fluctuations in aluminum prices, exchange rates, energy prices and interest rates. If for any reason we were unable to transact in derivative instruments to manage these risks, our results of operations, cash flows and liquidity could be adversely affected. In addition, we may be exposed to losses in the future if the counterparties to our derivative instruments fail to honor their agreements. In particular, deterioration in the financial condition of our counterparties and any resulting failure to pay amounts owed to us or to perform on obligations or services owed to us could have a negative effect on our business and financial condition. Further, if major financial institutions consolidate and are forced to operate under more restrictive capital constraints and regulations, there could be less liquidity in the derivative markets, which could have a negative effect on our ability to hedge and transact with creditworthy counterparties.
We could be required to make unexpected contributions to our defined benefit pension plans as a result of adverse changes in interest rates and the capital markets.
Most of our pension obligations relate to funded defined benefit pension plans for our employees in the U.S., the U.K. Switzerland, and Canada, unfunded pension benefits in Germany and lump sum indemnities payable to our employees in France, Italy and Korea upon retirement or termination. Our pension plan assets consist primarily of funds invested in listed stocks and bonds. Our estimates of liabilities and expenses for pensions and other postretirement benefits incorporate a number of assumptions, including expected long-term rates of return on plan assets and interest rates used to discount future benefits. Our results of operations, liquidity or shareholder's (deficit) equity in a particular period could be adversely affected by capital market returns that are less than their assumed long-term rate of return or a decline of the rate used to discount future benefits. These factors or others may require us to make unexpected cash contributions to the pension plans in the future, preventing the use of such cash for other purposes.
Our goodwill, other intangible assets and other long-lived assets could become impaired, which could require us to take non-cash charges against earnings.
We assess, at least annually and potentially more frequently, whether the value of our goodwill has been impaired. We assess the recoverability of finite-lived other intangible assets and other long-lived assets whenever events or changes in circumstances indicate we may not be able to recover the asset's carrying amount. Any impairment of goodwill, other intangible assets, or long-lived assets as a result of such analysis would result in a non-cash charge against earnings, which could materially adversely affect our reported results of operations. A significant and sustained decline in our future cash flows, a significant adverse change in the economic environment or slower growth rates could result in the need to perform additional impairment analysis in future periods.
Additional tax expense, tax liabilities or tax compliance costs could adversely impact our profitability.
We are subject to income taxation in many jurisdictions. Judgment is required in determining our worldwide income tax provision and accordingly there are many transactions and computations for which our final income tax determination is uncertain. We are routinely audited by income tax authorities in many tax jurisdictions. Although we believe the recorded tax estimates are reasonable, the ultimate outcome from any audit (or related litigation) could be materially different from amounts reflected in our income tax provisions and accruals. Future settlements of income tax audits may have a material effect on earnings between the period of initial recognition of tax estimates in the financial statements and the point of ultimate tax audit settlement. Additionally, it is possible that future income tax legislation in any jurisdiction to which we are subject may be enacted that could have a material impact on our worldwide income tax provision beginning with the period that such legislation becomes effective. For example, the U.S. Tax Cuts and Jobs Act of 2017, which was enacted in the United States on December 22, 2017, reduces the U.S. corporate statutory tax rate, eliminates or limits tax deductions for several expenses that previously were deductible, imposes a mandatory deemed repatriation tax on undistributed historic earnings of foreign subsidiaries, requires a minimum tax on earnings generated by foreign subsidiaries and permits a tax-free repatriation of foreign earnings through a dividends received deduction. We performed a preliminary assessment of the impact of the new regulation on Novelis, and as discussed further in the Management Discussion and Analysis and the Company’s financial statement, we will continue to evaluate the overall impact of the Act on our effective tax rate and balance sheet in light of future regulations and interpretive guidance from tax authorities and our own additional analysis.
The covenants in our senior secured credit facilities and the indentures governing our Senior Notes impose operating and financial restrictions on us.
Our senior secured credit facilities and the indentures governing our Senior Notes impose certain operating and financial restrictions on us. These restrictions limit our ability and the ability of our restricted subsidiaries, among other things, to:
incur additional debt and provide additional guarantees;
pay dividends and make other restricted payments, including certain investments;
create or permit certain liens;
make certain asset sales;
use the proceeds from the sales of assets and subsidiary stock;
create or permit restrictions on the ability of our restricted subsidiaries to pay dividends or make other distributions to us;
engage in certain transactions with affiliates;
enter into sale and leaseback transactions; and
consolidate, merge or transfer all or substantially all of our assets or the assets of our restricted subsidiaries.
See Note 10 — Debt for additional discussion.
Other Legal and Regulatory Risks
Our global operations are subject to changes in laws and government regulations that may adversely affect our business and operations.
Compliance with U.S. and foreign laws and regulations, such as import and export requirements, embargoes and trade sanctions laws, anti-corruption laws, tax laws, foreign exchange controls and cash repatriation restrictions and data privacy regulations, increases our costs of doing business outside the U.S.
Global uncertainty about the direction of U.S. trade policy and the rising threat of changes in tariffs and trade barriers
in countries where we do business could cause our customers to delay or reduce spending on our products. In March 2018, the U.S. government formalized new tariffs on imported aluminum and steel following an investigation conducted by the U.S. Department of Commerce under Section 232 of the Trade Expansion Act of 1962. Higher costs of aluminum to US industries resulting from the tariffs may increase costs to our customers and could result in reduced demand in the end-use markets we serve, including automotive and beverage cans. Also, other countries may retaliate against the US by imposing tariffs on American exports which could reduce demand for our customers’ products outside the U.S. The current U.S. administration has also indicated its intention to withdraw from or substantially modify various international trade agreements, including the North American Free Trade Agreement. Depending on the nature of these changes, our business could be adversely impacted.
On April 6, 2018, United Company Rusal Plc (Rusal) and multiple other Russian entities and individuals were added to the list of Specially Designated Nationals and Blocked Persons maintained by the Office of Foreign Assets Control of the U.S. Department of the Treasury. According to U.S. government estimates, Rusal is responsible for seven percent of global aluminum production. Immediately prior to imposition of the sanctions, Novelis purchased Rusal-produced metal for some of its regional operations primarily through intermediaries and intermittently from Rusal directly on a spot-sale basis. In response to the sanctions, Novelis is seeking alternate sources of supply to eliminate its reliance on aluminum produced by Rusal following the imposition of sanctions. The impact of sanctions against Rusal has broad implications for the global aluminum market, including tighter supplies and increased prices. As a result of these market changes, Novelis may experience production disruptions for some of its customers. Although we expect these impacts to be limited, we cannot predict with certainty the severity or duration of supply disruptions resulting from the Russia sanctions.
We are subject to a broad range of environmental, health and safety laws and regulations, and we may be exposed to substantial environmental, health and safety costs and liabilities.
We are 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 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, the remediation of environmental contamination, post-mining reclamation and working conditions for our employees. 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 party locations and past activities.
Further, increased concern over climate change has led to new and proposed legislative and regulatory initiatives, such as cap- and-trade systems and additional limits on emissions of greenhouse gases. Additional new regulation could directly and indirectly affect our customers and suppliers (through an increase in the cost of production or their ability to produce satisfactory products) or our business (through an impact on our inventory availability, cost of sales, operations or demand for the products we sell). Any increased costs of these energy sources because of new laws could be passed along to us and our customers and suppliers, which could also have a negative impact on our profitability.
We may be exposed to significant legal proceedings or investigations.
From time to time, we are involved in, or the subject of, disputes, proceedings and investigations with respect to a variety of matters, including environmental, health and safety, product liability, employee, tax, personal injury, contractual and other matters as well as other disputes and proceedings that arise in the ordinary course of business. Any claims against us or any investigations involving us, whether meritorious or not, could be costly to defend or comply with and could divert management's attention as well as operational resources. Any such dispute, litigation or investigation, whether currently pending or threatened in the future, may have a material adverse effect on our financial results and cash flows. We generally maintain insurance against many product liability risks, but there can be no assurance that this coverage will be adequate for any liabilities ultimately incurred. In addition, there is no assurance that insurance will continue to be available on terms acceptable to us.
Item 1B.Unresolved Staff Comments
None.
Item 2.Properties
Our global headquarters are located in Atlanta, Georgia. Our global research and technology center is located in Kennesaw, Georgia, which contains state-of-the-art research and development capabilities to help us better partner and innovate with our customers. Our global casting engineering and technology center is located in Spokane, Washington. Our regional headquarters are located in the following cities: North America - Atlanta, Georgia; Europe - Küsnacht, Switzerland; Asia - Seoul, South Korea; and South America - Sao Paulo, Brazil. We also have a research facility in Spokane, Washington specializing in molten metal processing.
The total number of operating facilities within our operating segments during all or part of the year ended March 31, 2018 is shown in the table below, including operating facilities we jointly own and operate with third parties.
|
| | | | | | |
| | | Total Operating Facilities | | Facilities with Recycling Operations |
| North America | | 8 |
| | 3 |
|
| Europe | | 10 |
| | 4 |
|
| Asia | | 4 |
| | 3 |
|
| South America | | 2 |
| | 1 |
|
| Total | | 24 |
| | 11 |
|
The following tables provide information, by operating segment, about the plant locations, processes and major end-use markets/applications for the aluminum rolled products, recycling and primary metal facilities we operated during all or part of the year ended March 31, 2018.
North America
|
| | | | |
| Locations | | Plant Processes | | Major Products |
| Berea, Kentucky | | Recycling, sheet ingot casting | | Sheet ingot from recycled metal |
| Fairmont, West Virginia | | Cold rolling, finishing | | Container, HVAC and auto fin material |
| Greensboro, Georgia | | Recycling, sheet ingot casting | | Sheet ingot from recycled metal |
| Kingston, Ontario | | Cold rolling, finishing | | Automotive sheet, construction sheet, industrial sheet |
| Russellville, Kentucky (A) | | Hot rolling, cold rolling, finishing, casting | | Can stock, industrial sheet |
| Oswego, New York | | Sheet ingot casting, hot rolling, cold rolling, recycling, brazing, finishing, heat treatment | | Can stock, automotive sheet, construction sheet, industrial sheet, semi-finished coil |
| Terre Haute, Indiana | | Cold rolling, finishing | | Container and industrial material |
| Warren, Ohio | | Coating | | Can stock coating |
_________________________
| |
| (A) | Our Logan facility, located in Russellville, KY, is a processing joint venture between us and Tri-Arrows Aluminum Inc. (Tri-Arrows). We own 40% of the outstanding common shares of Logan. |
Europe
|
| | | | |
| Locations | | Plant Processes | | Major Products |
| Bresso, Italy | | Finishing, painting | | Painted sheet, construction sheet |
| Göttingen, Germany | | Cold rolling, finishing, painting | | Can stock, food can, painted sheet |
| Latchford, United Kingdom | | Recycling | | Sheet ingot from recycled metal |
| Ludenscheid, Germany | | Foil rolling, finishing, converting | | Foil, packaging |
| Nachterstedt, Germany | | Cold rolling, finishing, painting, recycling, heat treatment | | Automotive sheet, can stock, industrial sheet, painted sheet, construction sheet, sheet ingot |
| Neuss, Germany (A) | | Hot rolling, cold rolling, recycling | | Can stock, foilstock, feeder stock for finishing operations |
| Ohle, Germany | | Cold rolling, finishing, converting | | Foil, packaging |
| Pieve, Italy | | Continuous casting, cold rolling, finishing, recycling | | Coil for finishing operations, industrial sheet |
| Sierre, Switzerland (B) | | Sheet ingot casting, hot rolling, cold rolling, finishing | | Automotive sheet, industrial sheet |
| Crick, United Kingdom | | Finishing | | Automotive sheet |
_________________________
| |
| (A) | Aluminium Norf GmbH (Alunorf), located in Neuss, Germany, is operated as a 50/50 joint venture between us and Hydro Aluminium Deutschland GmbH (Hydro). This joint venture is known as "Alunorf". Together, with Hydro, we operate Alunorf as a production cooperative, with each party supplying its own primary metal inputs for transformation at the facility. See Note 8 — Investment in and Advances to Non-Consolidated Affiliates and Related Party Transactions for further information about this affiliate. |
| |
| (B) | In fiscal year ended March 31, 2018, Novelis agreed to acquire operating facilities and manufacturing assets at its Sierre, Switzerland plant that have historically been leased. A service company will be jointly owned and operated by the parties and Novelis will acquire from Constellium N.V. (Constellium) a 50% interest in the service company. |
Asia
|
| | | | |
| Locations | | Plant Processes | | Major Products |
| Binh Doung, Vietnam (A) | | Recycling | | Recycled material |
| Changzhou, China | | Heat treatment | | Automotive sheet |
| Ulsan, South Korea (B) | | Sheet ingot casting, hot rolling, cold rolling, recycling, finishing | | Can stock, construction sheet, industrial sheet, electronics, automotive sheet for finishing operations, foilstock, and recycled material |
| Yeongju, South Korea | | Sheet ingot casting, hot rolling, cold rolling, recycling, finishing | | Can stock, construction sheet, industrial sheet, electronics, foilstock and recycled material |
_________________________
| |
| (A) | We ceased operations at our Binh Doung plant in fiscal 2018. |
| |
| (B) | Operated as a joint venture between Novelis Korea Ltd. (Novelis Korea) and Kobe Steel Ltd. (Kobe) in which interests are shared 50.1% and 49.9%, respectively. Ulsan Aluminum, Ltd. (UAL) is the name of the joint venture that was created. See Note 8 — Investment in and Advances to Non-Consolidated Affiliates and Related Party Transactions for further information about this affiliate. |
South America
|
| | | | |
| Locations | | Plant Processes | | Major Products |
| Pindamonhangaba, Brazil | | Sheet ingot casting, hot rolling, cold rolling, recycling, finishing, coating | | Can stock, construction sheet, industrial sheet, foilstock, sheet ingot |
| Santo Andre, Brazil | | Foil rolling, finishing | | Foil |
Our Pinda rolling and recycling facility in Brazil has an integrated process including sheet ingot casting, hot rolling, cold rolling, coating, finishing, and recycling operations. A coating line also produces painted products, including can end stock. Pinda supplies foilstock to our Santo Andre foil plant, which produces converter, household and container foil, among others.
Pinda is the largest aluminum rolling and recycling facility in South America in terms of shipments and is the only facility in South America capable of producing can body and end stock. Pinda recycles primarily UBCs, and is engaged in tolling recycled metal for our customers.
We also own certain hydroelectric power assets that supplied electricity for our primary aluminum smelting operations, which were closed in fiscal 2015. These assets are currently held for sale.
Item 3. Legal Proceedings
We are a party to litigation incidental to our business from time to time. For additional information regarding litigation to which we are a party, see Note 2019 — Commitments and Contingencies to our accompanying audited consolidated financial statements, which are incorporated by reference into this item.
Item 4. Mine Safety Disclosures
Not applicable.
PART II
Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
There is no established public trading market for the Company’s common stock. All of the common shares of Novelis are owned directly by AV Metals Inc. and indirectly by Hindalco Industries Limited. None of the equity securities of the Company are authorized for issuance under any equity compensation plan.
Dividends or returns of capital are at the discretion of the board of directors and will depend on, among other things, our financial resources, cash flows generated by our business, our cash requirements, restrictions under and covenant compliance under the instruments governing our indebtedness, being in compliance with the appropriate indentures and covenants under the instruments that govern our indebtedness that would allow us to legally pay dividends or return capital and other relevant factors.
In March 2014, we declared a return of capital to our shareholder, AV Metals Inc., in the amount of $250 million, which we subsequently paid on April 30, 2014.
Item 6. Selected Financial Data
The selected consolidated financial data should be read in conjunction with our consolidated financial statements for the respective periods and the related notes included elsewhere in this Form 10-K.
All of our common shares were indirectly held by Hindalco; thus, earnings per share data are not reported. Amounts in the tables below are in millions.
| | | | | Year Ended March 31, | | March 31, |
| | | 2016 | | 2015 | | 2014 | | 2013 | | 2012 | | 2018 | | 2017 | | 2016 | | 2015 | | 2014 |
| Net sales | | $ | 9,872 |
| | $ | 11,147 |
| | $ | 9,767 |
| | $ | 9,812 |
| | $ | 11,063 |
| | $ | 11,462 |
| | $ | 9,591 |
| | $ | 9,872 |
| | $ | 11,147 |
| | $ | 9,767 |
|
| Net (loss) income attributable to our common shareholder | | $ | (38 | ) | | $ | 148 |
| | $ | 104 |
| | $ | 202 |
| | $ | 63 |
| |
| Net income (loss) attributable to our common shareholder | | | $ | 635 |
| | $ | 45 |
| | $ | (38 | ) | | $ | 148 |
| | $ | 104 |
|
| Return of capital (A) | | $ | — |
| | $ | — |
| | $ | 250 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 250 |
|
| | | | | March 31, | | March 31, |
| | | 2016 | | 2015 | | 2014 | | 2013 | | 2012 | | 2018 | | 2017 | | 2016 | | 2015 | | 2014 |
Total assets | | $ | 8,310 |
| | $ | 9,102 |
| | $ | 9,114 |
| | $ | 8,522 |
| | $ | 8,021 |
| | $ | 9,503 |
| | $ | 8,373 |
| | $ | 8,280 |
| | $ | 9,102 |
| | $ | 9,114 |
|
| Long-term debt (including current portion) | | $ | 4,498 |
| | $ | 4,457 |
| | $ | 4,451 |
| | $ | 4,464 |
| | $ | 4,344 |
| | $ | 4,457 |
| | $ | 4,558 |
| | $ | 4,468 |
| | $ | 4,457 |
| | $ | 4,451 |
|
| Short-term borrowings | | $ | 579 |
| | $ | 846 |
| | $ | 723 |
| | $ | 468 |
| | $ | 18 |
| | $ | 49 |
| | $ | 294 |
| | $ | 579 |
| | $ | 846 |
| | $ | 723 |
|
| Cash and cash equivalents | | $ | 556 |
| | $ | 628 |
| | $ | 509 |
| | $ | 301 |
| | $ | 317 |
| | $ | 920 |
| | $ | 594 |
| | $ | 556 |
| | $ | 628 |
| | $ | 509 |
|
| Total (deficit) equity | | $ | (59 | ) | | $ | (70 | ) | | $ | 268 |
| | $ | 239 |
| | $ | 123 |
| |
| Total equity (deficit) | | | $ | 823 |
| | $ | (77 | ) | | $ | (59 | ) | | $ | (70 | ) | | $ | 268 |
|
_________________________
| |
| (A) | In March 2014, we declared a return of capital to our shareholder in the amount of $250 million, which we subsequently paid on April 30, 2014. |
| |
| (B) | Refer to Note 1 — Business and Summary of Significant Accounting Policies for further information in regards to revisions made to the years ended March 31, 2017 and 2016 consolidated balance sheet, consolidated statement of cash flows and footnote disclosures. |
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
OVERVIEW AND REFERENCES
Novelis is the world's leading aluminum rolled products producer based on shipment volume in fiscal 2016.2018. We produce aluminum sheet and light gauge products for use in the packaging market, which includes beverage and food can and foil products, as well as for use in the automotive, transportation, electronics, architectural and industrial product markets. We are also the world's largest recycler of aluminum and have recycling operations in many of our plants to recycle both post-consumer aluminum and post-industrial aluminum. As of March 31, 20162018, we had manufacturing operations in eleventen countries on four continents, which include 2524 operating plants, and recycling operations in eleven of these plants. In addition to aluminum rolled products plants, our South American operations have historically included primary aluminum smelting and power generation facilities. In fiscal 2015, Novelis ceased operations at our remaining smelting facilities in South America and sold the majority of the power generation operations which supported those facilities. We are the only company of our size and scope focused solely on the aluminum rolled products markets and capable of local supply of technologically sophisticated products in all of our geographic regions, but with the global footprint to service global customers.
The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those discussed below and elsewhere in this Annual Report, particularly in “Special Note Regarding Forward-Looking Statements and Market Data” and “Risk Factors.”
HIGHLIGHTS
HIGHLIGHTSWe reported "Net income attributable to our common shareholder" of $635 million for the fiscal year ended March 31, 2018, compared to $45 million for the fiscal year ended March 31, 2017. The increase is primarily due to higher segment income as a result of the factors discussed below, and a pre-tax gain of $318 million, partially offset by tax expense of $77 million, related to the sale of shares in Ulsan Aluminum Ltd. (UAL), a new wholly owned subsidiary formed by Novelis Korea in the second quarter of year ended March 31, 2018,
We reported "Segment income" of $791$1,215 million for the year ended March 31, 2016, compared to $902$1,085 million in the prior year. The $111 million decreaseincrease is primarily due to significant unfavorable metal lag of $178 million caused by volatility in local market premiums, $172 million of which occurred in the current year compared to favorable metal price lag of $6 million in the prior year. The favorable impacts of increased flat rolled productsto; higher can and automotive shipments and a strategic mix shift to automotive products were partially offset by lower recycling benefits due to lower aluminum prices local market premiums, general inflation, and higher costs associated with the start-up of new capacity. "Segment income" increased on a quarter over quarter basis during fiscal 2016. Global economic uncertainty, foreign currency volatility and uncertainty in commodity markets, while not impacting the efficiency of our operations, impacted our financial results and likely will continue to have an impact in the near term.
Quarterly shipments of flat rolled products increased to 788 kt, setting a new quarterly shipment record, compared to 758 kt in the fourth quarter of fiscal 2015. Shipments of flat rolled products increased to 3,123 kt in fiscal 2016, setting a new annual shipments record, compared to 3,050 kt in fiscal 2015. The record shipment levels areas a result of our recent expansion investmentsstrong demand and incremental manufacturing productivity gains globally as we increase oursolid global operational performance, diligent operating cost management, a continued focus on operational excellence. Global automotive shipments increased by 23%asset efficiency and 47% compared toprioritizing optimization of the three and twelve months ended March 31, 2015, respectively. As we continue to focus on optimizing our product portfolio,portfolio. In addition, the increase in automotiveis due to favorable foreign currency impact and beverage can sheet shipments more than offset the decline in specialty shipments compared to the three and twelve months ended March 31, 2015, respectively.
We have made significant investments in our automotive sheet finishing operations as the automotive industry is using more aluminum to improve vehicle performance and fuel efficiency by reducing vehicle weight. The two automotive sheet finishing lines in our Oswego, New York facility are operating at full capacity, and our automotive finishing line in Changzhou, China continues to ramp up production in line with demand, which is contributing to our record global automotive shipment levels. By the endlower metal input costs. As a result of the fiscal year, we commissioned a third automotive finishing line at our Oswego, New York facility and a second automotive finishing line at our Nachterstedt, Germany facility.
We reported "Net loss" of $38 million for the year ended March 31, 2016, compared to "Net income" of $148 million for the year ended March 31, 2015. Netthese factors, net cash provided by operating activities was $541$586 million for the year endedand free cash flow was $406 million.
We have reduced our net debt leverage ratio (net debt/segment income) to 3.0x at March 31, 2016, a decrease of $63 million from2018 as compared to 3.9x in the prior comparable period, primarily dueyear. This reduction in net leverage combined with strong financial results has provided us with the financial flexibility to lower "Segment income", partially offset by a favorable net change in working capital. Capital expenditures related toseek strategic expansion projects declined as our larger projects have either recently commissioned or areinvestments, particularly in the commissioning phase. Our global capital expenditures forgrowing automotive segment. During the year ended March 31, 2016 were $370 million comparedfourth quarter of fiscal 2018, we announced plans to $518 millionexpand our production footprint in prior year.North America with an investment in automotive finishing capacity in Guthrie, Kentucky. We also agreed to acquire operating facilities and manufacturing assets at our Sierre, Switzerland plant, that have historically been leased.
BUSINESS AND INDUSTRY CLIMATE
TheEconomic growth and material substitution continue to drive increasing global demand for aluminum and rolled products. Global can sheet overcapacity, increased competition from Chinese suppliers of flat rolled aluminum products, and customer consolidation are also adding downward pricing pressures in the can sheet market.
Meanwhile, the demand for aluminum in the automotive industry continues to grow, rapidly.which drove the investments we made in our automotive sheet finishing capacity in North America, Europe and Asia. This demand has been primarily driven by the benefits that result from using lighter weight materials in the vehicles, as companies respond to government regulations, which are driving improved emissions and better fuel economy; while also maintaining or improving vehicle handling, braking,safety and safety. We expect the automotive aluminum market to grow significantly through the end of the decade, which is driving the investments we have made in our automotive sheet finishing capacity in North America, Europe and Asia.
While economic growth and material substitution continues to drive increasing global demand for aluminum beverage cans, consumer demand for carbonated soft drinks in North America has declined and continued asset capacity increases along with increased imports are creating excess capacity in the can sheet market in the region. Slower economic growth and uncertainty in China and increased competition from Chinese suppliers of flat rolled aluminum products has put downward pressure on conversion premiums, primarily in can and specialty products.
Base aluminum prices experienced a downward trend throughout most of fiscal 2016. Local market premiums declined sharply during the first six months of fiscal 2016 but stabilized during the second half of fiscal 2016. For the year ended March 31, 2016, the average LME cash price paid during the period and average local market premiums have decreased significantly compared to the prices during the year ended March 31, 2015. These price declines are contractually passed through to the majority of our customers, although recognition in net selling prices precedes the recognition of metal price movements in our cost of goods sold. Although we use derivatives contracts to minimize the price lag associated with LME base aluminum prices, we do not use derivative contracts for local market premiums, as there are not adequate cost effective hedges in the market.performance.
Key Sales and Shipment Trends
| | (in millions, except shipments which are in kt) | | | | Three Months Ended | | Year Ended | | Three Months Ended | | Year Ended | | Three Months Ended | | Year Ended | | Three Months Ended | | Year Ended |
| | | Jun 30,
2014 | | Sept 30, 2014 | | Dec 31,
2014 | | Mar 31,
2015 | | Mar 31,
2015 | | Jun 30,
2015 | | Sept 30, 2015 | | Dec 31,
2015 | | Mar 31,
2016 | | Mar 31,
2016 | | Jun 30,
2016 | | Sept 30, 2016 | | Dec 31,
2016 | | Mar 31,
2017 | | Mar 31,
2017 | | Jun 30,
2017 | | Sept 30, 2017 | | Dec 31,
2017 | | Mar 31,
2018 | | Mar 31,
2018 |
| Net sales | | $ | 2,680 |
| | $ | 2,831 |
| | $ | 2,847 |
| | $ | 2,789 |
| | $ | 11,147 |
| | $ | 2,634 |
| | $ | 2,482 |
| | $ | 2,354 |
| | $ | 2,402 |
| | $ | 9,872 |
| | $ | 2,296 |
| | $ | 2,361 |
| | $ | 2,313 |
| | $ | 2,621 |
| | $ | 9,591 |
| | $ | 2,669 |
| | $ | 2,794 |
| | $ | 2,933 |
| | $ | 3,066 |
| | $ | 11,462 |
|
| Percentage increase (decrease) in net sales versus comparable previous year period | | 12 | % | | 17 | % | | 18 | % | | 9 | % | | 14 | % | | (2 | )% | | (12 | )% | | (17 | )% | | (14 | )% | | (11 | )% | | (13 | )% | | (5 | )% | | (2 | )% | | 9 | % | | (3 | )% | | 16 | % | | 18 | % | | 27 | % | | 17 | % | | 20 | % |
| Rolled product shipments: | Rolled product shipments: | | | | | | | | | | | | | | | | | | | Rolled product shipments: | | | | | | | | | | | | | | | | | | |
| North America | | 249 |
| | 260 |
| | 255 |
| | 243 |
| | 1,007 |
| | 261 |
| | 269 |
| | 253 |
| | 249 |
| | 1,032 |
| | 242 |
| | 252 |
| | 247 |
| | 269 |
| | 1,010 |
| | 273 |
| | 274 |
| | 269 |
| | 273 |
| | 1,089 |
|
| Europe | | 246 |
| | 234 |
| | 218 |
| | 240 |
| | 938 |
| | 252 |
| | 250 |
| | 232 |
| | 244 |
| | 978 |
| | 246 |
| | 236 |
| | 226 |
| | 235 |
| | 943 |
| | 235 |
| | 237 |
| | 222 |
| | 236 |
| | 930 |
|
| Asia | | 188 |
| | 186 |
| | 198 |
| | 196 |
| | 768 |
| | 193 |
| | 187 |
| | 193 |
| | 187 |
| | 760 |
| | 178 |
| | 176 |
| | 162 |
| | 174 |
| | 690 |
| | 180 |
| | 180 |
| | 177 |
| | 174 |
| | 711 |
|
| South America | | 114 |
| | 116 |
| | 129 |
| | 131 |
| | 490 |
| | 107 |
| | 117 |
| | 132 |
| | 134 |
| | 490 |
| | 103 |
| | 121 |
| | 125 |
| | 125 |
| | 474 |
| | 110 |
| | 131 |
| | 146 |
| | 136 |
| | 523 |
|
| Eliminations | | (27 | ) | | (31 | ) | | (43 | ) | | (52 | ) | | (153 | ) | | (45 | ) | | (35 | ) | | (31 | ) | | (26 | ) | | (137 | ) | | (14 | ) | | (12 | ) | | (10 | ) | | (14 | ) | | (50 | ) | | (13 | ) | | (20 | ) | | (18 | ) | | (14 | ) | | (65 | ) |
| Total | | 770 |
| | 765 |
| | 757 |
| | 758 |
| | 3,050 |
| | 768 |
| | 788 |
| | 779 |
| | 788 |
| | 3,123 |
| | 755 |
| | 773 |
| | 750 |
| | 789 |
| | 3,067 |
| | 785 |
| | 802 |
| | 796 |
| | 805 |
| | 3,188 |
|
| | | | | | | | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | |
|
|
The following summarizes the percentage increase (decrease) in rolled product shipments versus the comparable previous year period: | | North America | | 5 | % | | 9 | % | | 9 | % | | (2 | )% | | 5 | % | | 5 | % | | 3 | % | | (1 | )% | | 2 | % | | 2 | % | | (7 | )% | | (6 | )% | | (2 | )% | | 8 | % | | (2 | )% | | 13 | % | | 9 | % | | 9 | % | | 1 | % | | 8 | % |
| Europe | | 6 | % | | 4 | % | | 3 | % | | (1 | )% | | 3 | % | | 2 | % | | 7 | % | | 6 | % | | 2 | % | | 4 | % | | (2 | )% | | (6 | )% | | (3 | )% | | (4 | )% | | (4 | )% | | (4 | )% | | — | % | | (2 | )% | | — | % | | (1 | )% |
| Asia | | 16 | % | | 19 | % | | 20 | % | | 25 | % | | 20 | % | | 3 | % | | 1 | % | | (3 | )% | | (5 | )% | | (1 | )% | | (8 | )% | | (6 | )% | | (16 | )% | | (7 | )% | | (9 | )% | | 1 | % | | 2 | % | | 9 | % | | — | % | | 3 | % |
| South America | | 24 | % | | 7 | % | | 5 | % | | 6 | % | | 10 | % | | (6 | )% | | 1 | % | | 2 | % | | 2 | % | | — | % | | (4 | )% | | 3 | % | | (5 | )% | | (7 | )% | | (3 | )% | | 7 | % | | 8 | % | | 17 | % | | 9 | % | | 10 | % |
| Total | | 9 | % | | 7 | % | | 5 | % | | 1 | % | | 5 | % | | — | % | | 3 | % | | 3 | % | | 4 | % | | 2 | % | | (2 | )% | | (2 | )% | | (4 | )% | | — | % | | (2 | )% | | 4 | % | | 4 | % | | 6 | % | | 2 | % | | 4 | % |
Business Model and Key Concepts
Conversion Business Model
A significant amount of our business is conducted under a conversion model, which allows us to pass through increases or decreases in the price of aluminum to our customers. Nearly all of our flat-rolled products have a price structure with three components: (i) a base aluminum price quoted off the LME; (ii) a local market premium; and (iii) a “conversion premium” to produce the rolled product which reflects, among other factors, the competitive market conditions for that product. Base aluminum prices are typically driven by macroeconomic factors and global supply and demand offor aluminum. The local market premiums tend to vary based on the supply and demand for metal in a particular region and associated transportation costs.
In North America, Europe and South America, we pass through local market premiums to our customers which are recorded through "Net sales." In Asia we purchase our metal inputs based on the LME and incur a local market premium; however, many of our competitors in this region price their metal off the Shanghai Futures Exchange, which does not include a local market premium, making it difficult for us to fully pass through this component of our metal input cost to some of our customers.
LME Base Aluminum PricesSouth America
Novelis South America operates two aluminum rolled product facilities. This includes one facility with recycling operations. These facilities manufacture a broad range of can sheet, industrial sheet and Local Market Premiumslight gauge products. The main markets are beverage and food can, specialty, industrial, foil and other packaging and transportation end-use applications. Beverage can represents the largest end-use application in terms of shipment volume.
Financial Information About Geographic Areas
Certain financial information about geographic areas is contained in Note 20 — Segment, Geographical Area, Major Customer and Major Supplier Information to our accompanying audited consolidated financial statements.
Our Customers
We focus significant efforts on developing and maintaining close working relationships with our customers and end-users. Our major customers include:
|
| | |
| Beverage and Food Cans | | Automotive |
| Anheuser-Busch InBev | | BMW Group |
| Ardagh Group | | Daimler Group |
| Ball Corporation | | Fiat Chrysler Automobiles N.V. |
| Can-Pack S.A. | | Ford Motor Company |
| Crown Holdings Inc., formerly Crown Cork & Seal Company | | General Motors LLC |
| Pepsico | | Hyundai Motors Corporation |
| Various bottlers of the Coca-Cola System | | Jaguar Land Rover Limited |
| | NIO |
| Construction, Industrial and Other | | Volkswagen Group |
| Agfa Graphics | | |
| Aluflexpack | | Electronics |
| Amcor | | LG International Corporation |
| Facchini S.A. | | Samsung Electronics Co., Ltd. |
| Feron | | |
| Klöckner Metals | | |
Lotte Aluminum Co. Ltd.
| | |
| Prefa | | |
Reynolds Consumer Products LLC
| | |
Ryerson Inc.
| | |
| ThyssenKrupp | | |
Our single largest end-use product is beverage can sheet. We sell can sheet directly to beverage makers and bottlers as well as to can fabricators that sell the cans they produce to bottlers. In certain cases, we operate under umbrella agreements with beverage makers and bottlers under which they direct their can fabricators to source their requirements for beverage can body, end and tab stock from us.
Additional information related to our top customers is contained in Note 20 — Segment, Geographical Area, Major Customer and Major Supplier Information to our accompanying audited consolidated financial statements.
Distribution and Backlog
We have two principal distribution channels for the end-use markets in which we operate: direct sales to our customers and sales to distributors. |
| | | | | | | | | |
| | | Year Ended March 31, |
| | | 2018 | | 2017 | | 2016 |
| Direct sales as a percentage of total “Net sales” | | 97 | % | | 94 | % | | 95 | % |
| Distributor sales as a percentage of total “Net sales” | | 3 | % | | 6 | % | | 5 | % |
Direct Sales
We supply various end-use markets all over the world through a direct sales force operating from individual facilities or sales offices, as well as from regional sales offices. The average (baseddirect sales channel typically serves very large, sophisticated fabricators and original equipment manufacturers. Longstanding relationships are maintained with leading companies in industries using aluminum rolled products. Supply contracts for large global customers generally range from one to five years in length and historically there has been a high degree of renewal business with these customers. Given the customized nature of products and in some cases, large order sizes, switching costs are significant, thus adding to the overall consistency of the customer base.
We also use third party agents or traders in some regions to complement our own sales force. These agents provide service to our customers in countries where we do not have local expertise.
Distributors
We also sell our products through third party aluminum distributors. Customers of distributors are widely dispersed, and sales through this channel are highly fragmented. Distributors sell mostly commodity or less specialized products into many end-use markets in small quantities, including the architectural and industrial markets. We collaborate with our distributors to develop new end-use products and improve the supply chain and order efficiencies.
Backlog
We believe order backlog is not a material aspect of our business.
Research and Development
The table below summarizes our “Research and development expenses”, which include mini-scale production lines equipped with hot mills, can lines and continuous casters (in millions).
|
| | | | | | | | | | | | |
| | | Year Ended March 31, |
| | | 2018 | | 2017 | | 2016 |
| Research and development expenses | | $ | 64 |
| | $ | 58 |
| | $ | 54 |
|
We conduct research and development activities in order to meet current and future customer requirements, improve our products and reduce our conversion costs. We have a global research and technology center in Kennesaw, Georgia, which offers state of the art research and development capabilities to help Novelis meet the global long-term demand for aluminum used for the automotive, beverage can and specialty markets.
Our Employees
The table below summarizes our approximate number of employees by region, including our proportionate share of those employed by less than wholly owned affiliates.
|
| | | | | | | | | | | | | | | |
| Employees | | North America (A) | | Europe | | Asia | | South America | | Total |
| March 31, 2018 | | 3,400 |
| | 4,770 |
| | 1,400 |
| | 1,570 |
| | 11,140 |
|
| March 31, 2017 | | 3,310 |
| | 4,880 |
| | 1,670 |
| | 1,590 |
| | 11,450 |
|
_________________________
| |
| (A) | Includes employees within our Corporate headquarters located in Atlanta, Georgia. |
We consider our employee relations to be satisfactory. A substantial portion of our employees are represented by labor unions and their employment conditions are governed by collective bargaining agreements. Collective bargaining agreements are negotiated on a site, regional or national level, and are of varying durations.
Intellectual Property
We actively review intellectual property arising from our operations and our research and development activities and, when appropriate, we apply for patents in appropriate jurisdictions. We currently hold patents and patent applications on approximately 237 different items of intellectual property. While these patents and patent applications are important to our business on an aggregate basis, no single patent or patent application is deemed to be material to our business.
We have applied for, or received registrations for, the “Novelis” word trademark and the Novelis logo trademark in approximately 50 countries where we have significant sales or operations. Novelis uses the Aditya Birla logo under license from Aditya Birla Management Corporation Private Limited.
We have also registered the word “Novelis” and several derivations thereof as domain names in numerous top level domains around the world to protect our presence on the simple averageworld wide web.
Environment, Health and Safety
We own and operate numerous manufacturing and other facilities in various countries around the world. Our operations are subject to environmental laws and regulations from various jurisdictions, which govern, among other things, air emissions, wastewater discharges, the handling, storage and disposal of hazardous substances and wastes, the remediation of contaminated sites, post-mining reclamation and restoration of natural resources, and employee health and safety. Future
environmental regulations may impose stricter compliance requirements on the industries in which we operate. Additional equipment or process changes at some of our facilities may be needed to meet future requirements. The cost of meeting these requirements may be significant. Failure to comply with such laws and regulations could subject us to administrative, civil or criminal penalties, obligations to pay damages or other costs, and injunctions and other orders, including orders to cease operations.
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 our liability arising from the usage, storage, treatment or disposal of hazardous substances and wastes at a number of sites in the United States, as well as similar proceedings under the laws and regulations of the monthly averages)other jurisdictions in which we have operations, including Brazil and closing pricescertain countries in the European Union. Many of these jurisdictions have laws that impose joint and several liability, without regard to fault or the legality of the original conduct, for aluminum setthe costs of environmental remediation, natural resource damages, third party claims, and other expenses. In addition, we are, from time to time, subject to environmental reviews and investigations by relevant governmental authorities.
We have established procedures for regularly evaluating environmental loss contingencies, including those arising from 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 also believe we have made reasonable estimates for the costs that are reasonably possible for these environmental loss contingencies. Accordingly, we have established liabilities based on our estimates for the currently anticipated costs that are deemed probable associated with these environmental matters. Management has determined that the currently anticipated costs associated with these environmental matters will not, individually or in the aggregate, materially impair our operations or materially adversely affect our financial condition.
Available Information
We are a voluntary filer and not subject to the reporting and information requirements of the Securities Exchange Act of 1934, as amended (Exchange Act). However, we file periodic reports and other information with the Securities and Exchange Commission (SEC). We make these filings available on our website free of charge, the URL of which is http://www.novelis.com, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. The SEC maintains a website (http://www.sec.gov) that contains our annual, quarterly and current reports and other information we file electronically with the SEC. You can read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information on the LME foroperation of the years ended March 31, 2016, 2015, and 2014 are as follows:Public Reference Room by calling the SEC at 1-800-SEC-0330. Information on our website does not constitute part of this Annual Report on Form 10-K.
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| | | | | | | | | | | | | | | | | | |
| | | | | Percent Change |
| | | Year Ended March 31, | | Year Ended March 31, 2016 versus | | Year Ended March 31, 2015 versus |
| | | 2016 | | 2015 | | 2014 | | March 31, 2015 | | March 31, 2014 |
| London Metal Exchange Prices | | | | | | | | | | |
| Aluminum (per metric tonne, and presented in U.S. dollars): |
| Closing cash price as of beginning of period | | $ | 1,789 |
| | $ | 1,731 |
| | $ | 1,882 |
| | 3 | % | | (8 | )% |
| Average cash price during period | | $ | 1,592 |
| | $ | 1,889 |
| | $ | 1,773 |
| | (16 | )% | | 7 | % |
| Closing cash price as of end of period | | $ | 1,492 |
| | $ | 1,789 |
| | $ | 1,731 |
| | (17 | )% | | 3 | % |
In addition to the factors discussed elsewhere in this report, you should consider the following factors, which could materially affect our business, financial condition or results of operations in the future. The following factors, among others, could cause our actual results to differ from those projected in any forward looking statements we make.
Historically local market premiums have been fairly stable but over the past two year have increasedCompetitive and decreased rapidly. The local market premiums in all fourStrategic Risks
Certain of our regions were significantly lowercustomers are significant to our revenues, and we could be adversely affected by changes in the business or financial condition of these significant customers or by the loss of their business.
Our ten largest customers accounted for approximately 65%, 63%, and 60% of our total “Net sales” for the year ended March 31, 2018, 2017 and 2016, compared to the year ended March 31, 2015. The weighted average local market premium was as follows:
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| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | Percent Change |
| | | Year Ended March 31, | | Year Ended
March 31, 2016
versus March 31, 2015 | | Year Ended
March 31, 2015
versus March 31, 2014 |
| | | 2016 | | 2015 | | 2014 | | |
| Weighted average Local Market Premium (per metric tonne, and presented in U.S. dollars) | | $ | 194 |
| | $ | 464 |
| | $ | 281 |
| | (58 | )% | | 65 | % |
Metal Price Lag and Related Hedging Activities
Increases or decreasesrespectively. A significant downturn in the pricebusiness or financial condition of aluminum based onour significant customers could materially adversely affect our results of operations and cash flows. In addition, some of our customer contracts are subject to renewal, renegotiation or re-pricing at periodic intervals or upon changes in competitive supply conditions. Our failure to successfully renew, renegotiate or re-price such agreements could result in a reduction or loss in customer purchase volume or revenue. Additionally, in the average LME base aluminumevent of further consolidation among our customers, our customers may be able to use increased leverage in negotiating prices and local market premiums directly impact “Netother contract terms. Consolidation in our customer base may also lead to reduced demand for our products or cancellations of sales” “Cost of goods sold (exclusive of depreciation and amortization)” and working capital. The timing of these impacts varies based on contractual arrangements with customers and metal suppliers in each region. These timing impacts are referred to as metal price lag. Metal price lag exists due to: (i) the period of time between the pricing of our purchases of metal, holding and processing the metal, and the pricing of the sale of finished inventory to our customers, and (ii) certain customer contracts containing fixed forward price commitments orders, which result in exposure to changes in metal prices for the period of time between when our sales price fixes and the sale actually occurs.
We use LME aluminum forward contracts to preserve our conversion margins and manage the timing differences associated with the LME base metal component of “Net sales,” and “Cost of goods sold (exclusive of depreciation and amortization)." These derivatives directly hedge the economic risk of future LME base metal price fluctuations to better match
the purchase price of metal with the sales price of metal. We do not use derivative contracts to offset the impacts of local market premium price movements as these contracts are not prevalent in the market. As a consequence, volatility in local market premiums can have a significant impact oncould adversely affect our results of operations and cash flows.
We electalso factor and forfait trade receivables from time to apply hedge accountingtime to better match the recognition of gains or losses on certain derivative instruments with the recognitionmanage working capital. Any deterioration of the underlying exposure being hedgedfinancial condition or downgrade of the credit rating of certain of our customers may make it more difficult or costly for us to engage in these activities, which could negatively impact our cash flows and liquidity.
We face significant price and other forms of competition from other aluminum rolled products producers and producers of other materials
The markets in which we operate are highly competitive. We compete primarily on the basis of our value proposition, including price, product quality, ability to meet customers' specifications, range of products offered, lead times, technical support and customer service. Some of our competitors may benefit from more efficient technologies, lower raw material and energy costs and may be able to sustain longer periods of price competition. Any increase in competition resulting from new market entrants or increases in production capacity by our competitors could cause us to lose market share or lose a large customer, or force us to reduce prices to remain competitive.
Further, aluminum competes with other materials, such as steel, plastics, composite materials and glass for various applications, including packaging, automotive, architectural, industrial, and consumer durables end-use markets. Our customers may choose materials other than aluminum to achieve desired attributes for their products. For example, customers in the statementautomotive industry seeking to reduce vehicle weight may increase their use of high-strength steel and other materials rather than aluminum for certain applications.
We may not realize the anticipated benefits of acquisitions, divestitures, joint ventures or other strategic investments.
As part of our strategy for growth, we have in the past and may in the future pursue acquisitions, divestitures, joint ventures or other strategic investments, which may not be completed or, if completed, may not produce the benefits we anticipate. There are numerous risks commonly encountered in strategic transactions, including the risk that management’s time and energy may be diverted, disrupting our existing businesses; risks associated with managing joint ownership structures with shared decision making authority; difficulty retaining key employees of an acquired business; difficulties due to limited prior experience in any new markets we may enter; risks that we may not be able to complete a transaction that has been announced, effectively integrate businesses acquired or generate benefits we anticipated.
The United States Environmental Protection Agency announced, in April 2018, completion of its midterm evaluation process for greenhouse gas emission standards and its determination that the standards should be rolled back. A reduction in fuel efficiency standards could impact our customers’ choice of aluminum to achieve vehicle light weighting objectives to meet fuel economy standards. In addition, although certain automotive companies have increased their use of aluminum in recent years, there is no assurance that our automotive customers will not turn to steel or other materials in the future, due to the price of aluminum or other factors.
Operational Risks
If we are unable to obtain sufficient quantities of primary aluminum, recycled aluminum, sheet ingot and other raw materials used in the production of our products, our ability to produce and deliver products or to manufacture products using the desired mix of metal inputs could be adversely affected.
The supply risks relating to our metal inputs vary by input type. For example, we produce sheet ingot internally and source the remainder of our requirements from multiple third parties in various jurisdictions, usually under contracts having a duration of at least one year. If our suppliers are unable to deliver sufficient quantities of aluminum on a timely basis, our production could be disrupted and our net sales, profitability and cash flows could be adversely affected. Although aluminum is traded on the world markets, developing alternative suppliers of sheet ingot could be time consuming and expensive.
Our operations consume energy and our profitability and cash flows may decline if energy costs were to rise, or if our energy supplies were interrupted.
We consume substantial amounts of energy in our rolling and casting operations. The factors affecting our energy costs and supply reliability tend to be specific to each of our facilities. A number of factors could materially affect our energy position adversely including:
increases in costs of natural gas;
increases in costs of supplied electricity;
increases in fuel oil related to transportation;
interruptions in energy supply due to equipment failure or other causes; and
the inability to extend energy supply contracts upon expiration on economical terms.
If energy costs were to rise, or if energy supplies or supply arrangements were disrupted, our profitability and cash flows could decline.
A majority of our facilities are staffed by a unionized workforce, and union disputes and other employee relations issues could materially adversely affect our financial results.
A substantial portion of our employees are represented by labor unions under collective bargaining agreements with varying durations and expiration dates. 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.
Loss of our key management and other personnel, or an inability to attract and retain such management and other personnel, could adversely impact our business.
We employ all of our senior executive officers and other highly-skilled key employees on an at-will basis, and their employment can be terminated by us or them at any time, for any reason and without notice, subject, in certain cases, to severance payment obligations. Competition for qualified employees among companies that rely heavily on engineering and technology is intense, and if our highly skilled key employees leave us, we may be unable to promptly attract and retain qualified replacement personnel, which could result in our inability to improve manufacturing operations, conduct research activities successfully, develop marketable products and compete effectively for growth in key markets.
We could be adversely affected by unplanned disruptions at our operating facilities.
We have in recent periods experienced production interruptions at our plants due to the breakdown of equipment, fires, weather events and other causes. We may experience such disruptions in the future due to similar uncontrollable events. Because many of our customers are, to varying degrees, dependent on planned deliveries from our plants, any customers that have to reschedule their own production due to our missed deliveries could pursue claims against us and reduce their future business with us. We may incur costs to correct any of these problems, in addition to facing claims from customers. Further, our reputation among actual and potential customers may be harmed, resulting in loss of business. While we maintain insurance policies covering, among other things, physical damage, business interruptions and product liability, these policies may not cover all of our losses.
Our business has been and will continue to be exposed to various economic and political risks associated with our global operations.
Due to the global reach of our business, we are subject to financial, political, economic and other business risks in connection with doing business abroad. Operating in different regions and countries exposes us to a number of risks, including political and economic instability that may disrupt economic activity; changes in international trade regulation, including duties and tariffs; and differences in labor conditions.
Our financial condition and results of operations depend significantly on worldwide economic conditions. During the past fiscal year, economic conditions strengthened in all of the geographic regions in which we operate. However, future adverse developments in the US and global economy, including higher interest rates and higher levels of unemployment, could adversely affect demand in the end-use markets we serve. In addition, uncertainty about current or future global economic conditions poses a risk because our customers may postpone purchases in response to negative financial news and tighter credit.
We face risks relating to certain joint ventures, subsidiaries and assets that we do not entirely control.
Some of our activities are, and will in the future be, conducted through entities that we do not entirely control or wholly-own. These entities include our Alunorf, Germany, Ulsan, Korea and Logan, Kentucky joint ventures and our Sierre, Switzerland facility. Under the governing documents of some these businesses, we share decision making authority and operational control which may result in conflicts over management over these businesses. In addition, because we do not exercise control over the business practices of our joint venture partners, we could be subject to reputational damage or other consequences of improper conduct by our joint venture partners or their inability to fulfill their obligations under the joint venture.
Security breaches and other disruptions to our information technology networks and systems could interfere with our operations, and could compromise the confidentiality of our proprietary information.
We rely upon information technology networks and systems, some of which are managed by third parties, to process, transmit and store electronic information, and to manage or support a variety of business and manufacturing processes and activities. Additionally, we collect and store sensitive data, including intellectual property, proprietary business information, as well as personally identifiable information of our employees, in data centers and on information technology networks. These activities are subject to various laws and regulations in the United States and abroad regarding privacy and data security. These laws and regulations are evolving. For undesignated metal derivatives,example, in April 2016, the European Union approved a new data protection regulation known as the General Data Protection Regulation, which is due to become effective in May 2018.
We have implemented systems and processes, and we continue to invest in solutions, intended to secure our information technology systems, prevent unauthorized access to or loss of sensitive data, ensure business continuity and comply with applicable laws. Despite these measures, our information technology networks and systems may be vulnerable to damage, disruptions or shutdowns due to attacks by hackers or breaches due to errors or malfeasance by employees, contractors and others who have access to our networks and systems, or other disruptions during the process of upgrading or replacing computer software or hardware, power outages, computer viruses, telecommunication or utility failures or natural disasters or other catastrophic events. The occurrence of any of these events could compromise our networks and the information stored there arecould be accessed, publicly disclosed, lost or stolen. Any such access, disclosure or other loss of information could result in legal claims or proceedings, liability or regulatory penalties under laws protecting the privacy of personal information, disrupt operations and reduce the competitive advantage we hope to derive from our investment in new or proprietary business initiatives.
Financial Risks
Our results and short term liquidity can be negatively impacted by timing differences between the recognition of unrealized gains or lossesprices we pay under purchase contracts and metal prices we charge our customers.
Our purchase and sales contracts for primary aluminum are based on the derivativesLME price plus a regional market premium, which is a surcharge in addition to the LME price. There are typically timing differences between the pricing periods for purchases and sales where purchase prices we pay tend to be fixed and paid earlier than sales prices we charge our customers. This creates a price exposure we call “metal price lag.” We use derivative instruments to manage the recognitiontiming differences related to LME associated with metal price lag. The majority of our premium exposure hedging occurs in North America, however, exposure here is not fully hedged. In our Europe and Asia regions, the underlying exposure inderivative market for local market premiums is not robust or efficient enough for us to offset the statementimpacts of operations.LMP price movements beyond a small volume. The recognition of unrealized gains and losses on undesignated metal derivative positions typically precedes inventory cost recognition, customer delivery and revenue recognition. The
timing difference between the recognition of unrealized gains and losses on undesignated metal derivatives and cost or revenue recognition impacts “Income before income taxes” and “Net income.” Gains and losses on metal derivative contracts are not recognized in “Segment income” until realized.
See Segment Review below for the impact ofassociated with metal price lag on each of our segments.
Foreign Currency and Related Hedging Activities
We operate a global business and conduct business in various currencies around the world. We have exposure to foreign currency risk as fluctuations in foreign exchange ratescould positively or negatively impact our operating results as we translateand short term liquidity position.
A deterioration of our financial condition or a downgrade of our ratings by a credit rating agency could limit our ability or increase our costs to enter into hedging and financing transactions, and our business relationships and financial condition could be adversely affected.
A deterioration of our financial condition or a downgrade of our credit ratings for any reason could increase our borrowing costs, limit our access to the operatingcapital or credit markets or liquidity facilities, adversely affect our ability to obtain new financing on favorable terms or at all, result in more restrictive covenants for future indebtedness incurrences and have an adverse effect on our business relationships with customers, suppliers and hedging counterparties. We enter into various forms of hedging activities against currency, interest rate, energy and metal price fluctuations. Financial strength and credit ratings are important to the availability and terms of these hedging activities. As a result, any deterioration of our financial condition or downgrade of our credit ratings may make it more difficult or costly for us to engage in these activities in the future.
Adverse changes in currency exchange rates could negatively affect our financial results from various functional currencies intoor cash flows and the competitiveness of our U.S. dollar reporting currency ataluminum rolled products relative to other materials.
We are exposed to the current average rates. We also record foreign exchange remeasurement gains and losses when business transactions are denominatedeffects of changes in currencies other than the functional currency of that operation. Global economic uncertainty is contributing to higher levels of volatility among the currency pairs in which we conduct business. The following table presents the exchange rates as of the end of each period and the average of the month-end exchange rates for the years ended March 31, 2016, 2015, and 2014:
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| | | | | | | | | | | | | | | | | | |
| | | Exchange Rate as of March 31, | | Average Exchange Rate Year Ended March 31, |
| | | 2016 | | 2015 | | 2014 | | 2016 | | 2015 | | 2014 |
| U.S. dollar per Euro | | 1.139 |
| | 1.075 |
| | 1.378 |
| | 1.102 |
| | 1.256 |
| | 1.344 |
|
| Brazilian real per U.S. dollar | | 3.559 |
| | 3.208 |
| | 2.263 |
| | 3.624 |
| | 2.504 |
| | 2.261 |
|
| South Korean won per U.S. dollar | | 1,154 |
| | 1,105 |
| | 1,069 |
| | 1,158 |
| | 1,059 |
| | 1,090 |
|
| Canadian dollar per U.S. dollar | | 1.298 |
| | 1.267 |
| | 1.104 |
| | 1.312 |
| | 1.147 |
| | 1.058 |
|
| Swiss franc per Euro | | 1.094 |
| | 1.045 |
| | 1.218 |
| | 1.076 |
| | 1.170 |
| | 1.227 |
|
In both South Korea and Europe, operations are recorded in their local currency and translated into the U.S. dollar, reporting currency. When comparing fiscal 2016 operating results with fiscal 2015, in Europe and South Korea, the stronger U.S. dollar resulted in unfavorable foreign exchange translation.
In Brazil and Canada,Euro, the U.S. dollar is the functional currency due to predominantly U.S. dollar selling prices while our manufacturing costs are predominately denominated inBritish pound, the Brazilian real, and the Canadian dollar. The stronger U.S. dollar compared to the Brazilian real and the Canadian dollar resulted in a favorable remeasurement of local currency operating costs and liabilities into the U.S. dollar in fiscal 2016 compared to fiscal 2015.
In January 2015, the Swiss National Bank discontinued its policy to support a minimum exchange rate between the Euro and the Swiss franc. Following this announcement, the Swiss franc rapidly appreciated in value. This adversely impacted our Swiss operations, where operating costs are incurred primarily inKorean won, the Swiss franc and other currencies. We have implemented a largehedging policy that attempts to manage currency exchange rate risks to an acceptable level based on management's judgment of the appropriate trade-off between risk, opportunity and cost; however, this hedging policy may not successfully or completely eliminate the effects of currency exchange rate fluctuations which could have a material adverse effect on our financial results and cash flows.
We prepare our consolidated financial statements in U.S. dollars, but a portion of revenuesour earnings and expenditures are denominated in other currencies, primarily the Euro.Euro, the Korean won and the Brazilian real. Changes in exchange rates will result in increases or decreases in our operating results and may also affect the book value of our assets located outside the U.S.
Our results of operations, cash flows and liquidity could be adversely affected if we were unable to transact in derivative instruments or if counterparties to our derivative instruments fail to honor their agreements.
We use various derivative instruments to manage the risks arising from fluctuations in aluminum prices, exchange rates, energy prices and interest rates. If for any reason we were unable to transact in derivative instruments to manage these risks, our results of operations, cash flows and liquidity could be adversely affected. In addition, we may be exposed to losses in the future if the counterparties to our derivative instruments fail to honor their agreements. In particular, deterioration in the financial condition of our counterparties and any resulting failure to pay amounts owed to us or to perform on obligations or services owed to us could have a negative effect on our business and financial condition. Further, if major financial institutions consolidate and are forced to operate under more restrictive capital constraints and regulations, there could be less liquidity in the derivative markets, which could have a negative effect on our ability to hedge and transact with creditworthy counterparties.
We could be required to make unexpected contributions to our defined benefit pension plans as a result of adverse changes in interest rates and the capital markets.
Most of our pension obligations relate to funded defined benefit pension plans for our employees in the U.S., the U.K. Switzerland, and Canada, unfunded pension benefits in Germany and lump sum indemnities payable to our employees in France, Italy and Korea upon retirement or termination. Our pension plan assets consist primarily of funds invested in listed stocks and bonds. Our estimates of liabilities and expenses for pensions and other postretirement benefits incorporate a number of assumptions, including expected long-term rates of return on plan assets and interest rates used to discount future benefits. Our results of operations, liquidity or shareholder's (deficit) equity in a particular period could be adversely affected by capital market returns that are less than their assumed long-term rate of return or a decline of the rate used to discount future benefits. These factors or others may require us to make unexpected cash contributions to the pension plans in the future, preventing the use of such cash for other purposes.
Our goodwill, other intangible assets and other long-lived assets could become impaired, which could require us to take non-cash charges against earnings.
We assess, at least annually and potentially more frequently, whether the value of our goodwill has been impaired. We assess the recoverability of finite-lived other intangible assets and other long-lived assets whenever events or changes in circumstances indicate we may not be able to recover the asset's carrying amount. Any impairment of goodwill, other intangible assets, or long-lived assets as a result of such analysis would result in a non-cash charge against earnings, which could materially adversely affect our reported results of operations. A significant and sustained decline in our future cash flows, a significant adverse change in the economic environment or slower growth rates could result in the need to perform additional impairment analysis in future periods.
Additional tax expense, tax liabilities or tax compliance costs could adversely impact our profitability.
We are subject to income taxation in many jurisdictions. Judgment is required in determining our worldwide income tax provision and accordingly there are many transactions and computations for which our final income tax determination is uncertain. We are routinely audited by income tax authorities in many tax jurisdictions. Although we believe the recorded tax estimates are reasonable, the ultimate outcome from any audit (or related litigation) could be materially different from amounts reflected in our income tax provisions and accruals. Future settlements of income tax audits may have a material effect on earnings between the period of initial recognition of tax estimates in the financial statements and the point of ultimate tax audit settlement. Additionally, it is possible that future income tax legislation in any jurisdiction to which we are subject may be enacted that could have a material impact on our worldwide income tax provision beginning with the period that such legislation becomes effective. For example, the U.S. Tax Cuts and Jobs Act of 2017, which was enacted in the United States on December 22, 2017, reduces the U.S. corporate statutory tax rate, eliminates or limits tax deductions for several expenses that previously were deductible, imposes a mandatory deemed repatriation tax on undistributed historic earnings of foreign subsidiaries, requires a minimum tax on earnings generated by foreign subsidiaries and permits a tax-free repatriation of foreign earnings through a dividends received deduction. We performed a preliminary assessment of the impact of the new regulation on Novelis, and as discussed further in the Management Discussion and Analysis and the Company’s financial statement, we will continue to evaluate the overall impact of the Act on our effective tax rate and balance sheet in light of future regulations and interpretive guidance from tax authorities and our own additional analysis.
The covenants in our senior secured credit facilities and the indentures governing our Senior Notes impose operating and financial restrictions on us.
Our senior secured credit facilities and the indentures governing our Senior Notes impose certain operating and financial restrictions on us. These restrictions limit our ability and the ability of our restricted subsidiaries, among other things, to:
incur additional debt and provide additional guarantees;
pay dividends and make other restricted payments, including certain investments;
create or permit certain liens;
make certain asset sales;
use the proceeds from the sales of assets and subsidiary stock;
create or permit restrictions on the ability of our restricted subsidiaries to pay dividends or make other distributions to us;
engage in certain transactions with affiliates;
enter into sale and leaseback transactions; and
consolidate, merge or transfer all or substantially all of our assets or the assets of our restricted subsidiaries.
See Note 10 — Debt for additional discussion.
Other Legal and Regulatory Risks
Our global operations are subject to changes in laws and government regulations that may adversely affect our business and operations.
Compliance with U.S. and foreign laws and regulations, such as import and export requirements, embargoes and trade sanctions laws, anti-corruption laws, tax laws, foreign exchange forward contractscontrols and cross-currency swapscash repatriation restrictions and data privacy regulations, increases our costs of doing business outside the U.S.
Global uncertainty about the direction of U.S. trade policy and the rising threat of changes in tariffs and trade barriers
in countries where we do business could cause our customers to managedelay or reduce spending on our exposure arisingproducts. In March 2018, the U.S. government formalized new tariffs on imported aluminum and steel following an investigation conducted by the U.S. Department of Commerce under Section 232 of the Trade Expansion Act of 1962. Higher costs of aluminum to US industries resulting from recorded assetsthe tariffs may increase costs to our customers and liabilities, firm commitments,could result in reduced demand in the end-use markets we serve, including automotive and forecasted cash flows denominated in currenciesbeverage cans. Also, other thancountries may retaliate against the functional currencyUS by imposing tariffs on American exports which could reduce demand for our customers’ products outside the U.S. The current U.S. administration has also indicated its intention to withdraw from or substantially modify various international trade agreements, including the North American Free Trade Agreement. Depending on the nature of certainthese changes, our business could be adversely impacted.
On April 6, 2018, United Company Rusal Plc (Rusal) and multiple other Russian entities and individuals were added to the list of Specially Designated Nationals and Blocked Persons maintained by the Office of Foreign Assets Control of the U.S. Department of the Treasury. According to U.S. government estimates, Rusal is responsible for seven percent of global aluminum production. Immediately prior to imposition of the sanctions, Novelis purchased Rusal-produced metal for some of its regional operations which include capital expendituresprimarily through intermediaries and net investment in foreign subsidiaries.intermittently from Rusal directly on a spot-sale basis. In response to the sanctions, Novelis is seeking alternate sources of supply to eliminate its reliance on aluminum produced by Rusal following the imposition of sanctions. The impact of foreign exchange remeasurement, netsanctions against Rusal has broad implications for the global aluminum market, including tighter supplies and increased prices. As a result of related hedges, was a net gainthese market changes, Novelis may experience production disruptions for some of $2 million in fiscal 2016 and a net lossits customers. Although we expect these impacts to be limited, we cannot predict with certainty the severity or duration of $27 million in fiscal 2015. For the year ended March 31, 2016, the balance sheet remeasurement hedging gains and losses partially offset the foreign currency exchange remeasurement gains and losses arisingsupply disruptions resulting from the non-functional currency denominated assetsRussia sanctions.
We are subject to a broad range of environmental, health and liabilities being remeasuredsafety laws and regulations, and we may be exposed to the functional currencysubstantial environmental, health and safety costs and liabilities.
We are subject to a broad range of certain operations. The increased volatilityenvironmental, health and safety laws and regulations in the daily Brazilian real, Swiss Francjurisdictions in which we operate. These laws and Euro exchange rates versusregulations impose stringent environmental, health and safety protection standards and permitting requirements regarding, among other things, air emissions, wastewater storage, treatment and discharges, the U.S. dollar resulteduse and handling of hazardous or toxic materials, waste disposal practices, the remediation of environmental contamination, post-mining reclamation and working conditions for our employees. 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 party locations and past activities.
Further, increased concern over climate change has led to new and proposed legislative and regulatory initiatives, such as cap- and-trade systems and additional limits on emissions of greenhouse gases. Additional new regulation could directly and indirectly affect our customers and suppliers (through an increase in the cost of production or their ability to produce satisfactory products) or our business (through an impact on our inventory availability, cost of sales, operations or demand for the products we sell). Any increased costs of these energy sources because of new laws could be passed along to us and our customers and suppliers, which could also have a portionnegative impact on our profitability.
We may be exposed to significant legal proceedings or investigations.
From time to time, we are involved in, or the subject of, disputes, proceedings and investigations with respect to a variety of matters, including environmental, health and safety, product liability, employee, tax, personal injury, contractual and other matters as well as other disputes and proceedings that arise in the balance sheet remeasurement gainsordinary course of business. Any claims against us or any investigations involving us, whether meritorious or not, could be costly to defend or comply with and losses not being fully offset bycould divert management's attention as well as operational resources. Any such dispute, litigation or investigation, whether currently pending or threatened in the foreign currency exchange hedges. In South America, foreign currency remeasurement gainsfuture, may have a material adverse effect on the Brazilian real denominated liabilities being remeasured to the U.S. dollar were partially offset by foreign currency exchange hedging losses. In Europe, foreign currency exchange remeasurement gains were partially offset by foreign currency exchange hedging losses. For other foreign currency hedging programs, the unrealized gains or losses on other undesignated derivativesour financial results and cash flows. We generally maintain insurance against many product liability risks, but there can be no assurance that this coverage will be recognized in the statement of operations prioradequate for any liabilities ultimately incurred. In addition, there is no assurance that insurance will continue to the hedged transaction. Unrealized gains and losses from undesignated foreign currency derivatives was not significant in either period.be available on terms acceptable to us.
See Segment Review below for the impact of foreign currency on each of our segments.
Results
Item 1B.Unresolved Staff Comments
None.
Item 2.Properties
Our global headquarters are located in Atlanta, Georgia. Our global research and technology center is located in Kennesaw, Georgia, which contains state-of-the-art research and development capabilities to help us better partner and innovate with our customers. Our global casting engineering and technology center is located in Spokane, Washington. Our regional headquarters are located in the following cities: North America - Atlanta, Georgia; Europe - Küsnacht, Switzerland; Asia - Seoul, South Korea; and South America - Sao Paulo, Brazil. We also have a research facility in Spokane, Washington specializing in molten metal processing.
The total number of Operations
Year Ended March 31, 2016 Compared with the Year Ended March 31, 2015
"Net sales" were $9.9 billion, a decreaseoperating facilities within our operating segments during all or part of 11% driven by a 16% decrease in average base aluminum prices, and a 58% decrease in local market premiums. This decline in base aluminum prices more than offset a 73 kt increase in flat rolled products shipments to a record level for a fiscal year of 3,123 kt, and a favorable impact from our strategic shift to higher conversion premium products.
“Cost of goods sold (exclusive of depreciation and amortization)” was $8.7 billion, a decrease of 11% due to lower weighted average metal costs, partially offset by an increase in flat rolled products shipments and higher costs related to our strategic expansion projects. Total metal input costs included in "Cost of goods sold (exclusive of depreciation and amortization)” decreased $1.1 billion.
“Income before income taxes” for the year ended March 31, 2016 was $8 million2018 compared to is shown in the table below, including operating facilities we jointly own and operate with third parties.
|
| | | | | | |
| | | Total Operating Facilities | | Facilities with Recycling Operations |
| North America | | 8 |
| | 3 |
|
| Europe | | 10 |
| | 4 |
|
| Asia | | 4 |
| | 3 |
|
| South America | | 2 |
| | 1 |
|
| Total | | 24 |
| | 11 |
|
$162 million inThe following tables provide information, by operating segment, about the plant locations, processes and major end-use markets/applications for the aluminum rolled products, recycling and primary metal facilities we operated during all or part of the year ended March 31, 2015. In addition to the factors noted above, the following items affected “Income before income taxes:”2018.
Sharp declines in local market premiums in the current period compared to prior year, which we are unable to hedge economically, resulted in significant unfavorable metal price lag of $178 million.
"Selling, general and administrative expenses" decreased $20 million primarily due to tighter cost control in the current year and lower long-term incentive plan costs;North America
“Restructuring and impairment, net” of $48 million for the year ended March 31, 2016, includes $21 million of charges related to the impairment of certain capitalized software assets, $14 million of severance and other charges related to restructuring actions at our global headquarters and $10 million of severance and other charges across our regions. Additionally, there were $3 million of impairment charges related to certain non-core assets in North America, South America, and Asia. In the prior year, we incurred $37 million, primarily related to $28 million of charges related to ceasing operations of the Ouro Preto smelter in South America, $7 million of severance, contract termination and other restructuring charges in North America, Europe and South America related to past restructuring actions, and $2 million of impairment charges related to certain non-core assets in North America. (See Note 2 - Restructuring and impairment to our accompanying consolidated financial statements for further details on restructuring activities);
"Gain on assets held for sale, net" for the year ended March 31, 2015 includes $23 million from the sale of our share of the joint venture of the Consorcio Candonga joint venture in Brazil, $7 million from the sale of our consumer foil operations in North America and $6 million from property and mining rights sales in South America partially offset by a $14 million loss on the sale of certain hydroelectric assets in South America; |
| | | | |
| Locations | | Plant Processes | | Major Products |
| Berea, Kentucky | | Recycling, sheet ingot casting | | Sheet ingot from recycled metal |
| Fairmont, West Virginia | | Cold rolling, finishing | | Container, HVAC and auto fin material |
| Greensboro, Georgia | | Recycling, sheet ingot casting | | Sheet ingot from recycled metal |
| Kingston, Ontario | | Cold rolling, finishing | | Automotive sheet, construction sheet, industrial sheet |
| Russellville, Kentucky (A) | | Hot rolling, cold rolling, finishing, casting | | Can stock, industrial sheet |
| Oswego, New York | | Sheet ingot casting, hot rolling, cold rolling, recycling, brazing, finishing, heat treatment | | Can stock, automotive sheet, construction sheet, industrial sheet, semi-finished coil |
| Terre Haute, Indiana | | Cold rolling, finishing | | Container and industrial material |
| Warren, Ohio | | Coating | | Can stock coating |
"Loss on extinguishment of debt" includes a $13 million loss on the partial extinguishment of our Term Loan Facility, which was amended during the first quarter of fiscal 2016; and_________________________
Foreign currency remeasurement losses primarily due to volatility in European currency markets that resulted in a $27 million loss in fiscal 2015.
For the year ended March 31, 2016, we recognized $46 million of tax expense as a result of the net impact of statutory tax expense, losses in jurisdictions where we believe it is more likely than not that we will not be able to utilize those losses, and the net impact of foreign exchange movement. For the year ended March 31, 2015, we recognized $14 million in tax expense primarily due to losses in jurisdictions where we believe it is more likely than not that we will not be able to utilize those losses, partially offset by favorable foreign exchange movement.
We reported “Net loss attributable to our common shareholder” of $38 million for the year ended March 31, 2016 as compared to “Net income attributable to our common shareholder” of $148 million for the year ended March 31, 2015, primarily as a result of the factors discussed above.
| |
| (A) | Our Logan facility, located in Russellville, KY, is a processing joint venture between us and Tri-Arrows Aluminum Inc. (Tri-Arrows). We own 40% of the outstanding common shares of Logan. |
Segment Review
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 regions and are organized under four operating segments: North America, Europe Asia and South America.
We measure the profitability and financial performance of our operating segments based on “Segment income.” We define “Segment income” as earnings before (a) “depreciation and amortization”; (b) “interest expense and amortization of debt issuance costs”; (c) “interest income”; (d) unrealized gains (losses) on changes in fair value of derivative instruments, net, except for foreign currency remeasurement hedging activities, which are included in segment income; (e) impairment of goodwill; (f) gain or loss on extinguishment of debt; (g) noncontrolling interests’ share; (h) adjustments to reconcile our proportional share of “Segment income” from non-consolidated affiliates to income as determined on the equity method of accounting; (i) “restructuring and impairment, net”; (j) gains or losses on disposals of property, plant and equipment and businesses, net; (k) other costs, net; (l) litigation settlement, net of insurance recoveries; (m) sale transaction fees; (n) provision or benefit for taxes on income (loss) and (o) cumulative effect of accounting changes, net of tax. The financial information for our segments includes the results of our affiliates on a proportionately consolidated basis, which is consistent with the way we manage our business segments. See Note 8 — Consolidation and Note 9 — Investment in and Advances to Non-Consolidated Affiliates and Related Party Transactions for further information about these affiliates. Our presentation of “Segment income” on a consolidated basis is a non-GAAP financial measure. See “Non-GAAP Financial Measures” below for additional discussion about our use of "Total Segment income.”
The tables below show selected segment financial information (in millions, except shipments which are in kt). For additional financial information related to our operating segments, see Note 21 — Segment, Geographical Area, Major Customer and Major Supplier Information. In order to reconcile the financial information for the segments shown in the tables below to the relevant U.S. GAAP-based measures, "Eliminations and other" must adjust for proportional consolidation of each line item, and eliminate intersegment shipments (in kt) and intersegment "Net sales."
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| Selected Operating Results Year Ended March 31, 2016 | | North America | | Europe | | Asia | | South America | | Eliminations and other | | Total |
| Net sales | | $ | 3,266 |
| | $ | 3,223 |
| | $ | 1,992 |
| | $ | 1,575 |
| | $ | (184 | ) | | $ | 9,872 |
|
| Shipments | | | | | | | | | | | | |
| Rolled products - third party | | 1,031 |
| | 918 |
| | 718 |
| | 456 |
| | — |
| | 3,123 |
|
| Rolled products - intersegment | | 1 |
| | 60 |
| | 42 |
| | 34 |
| | (137 | ) | | — |
|
| Total rolled products | | 1,032 |
| | 978 |
| | 760 |
| | 490 |
| | (137 | ) | | 3,123 |
|
| Non-rolled products | | 17 |
| | 98 |
| | 10 |
| | 79 |
| | (2 | ) | | 202 |
|
| Total shipments | | 1,049 |
| | 1,076 |
| | 770 |
| | 569 |
| | (139 | ) | | 3,325 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| Selected Operating Results Year Ended March 31, 2015 | | North America | | Europe | | Asia | | South America | | Eliminations and other | | Total |
| Net sales | | $ | 3,483 |
| | $ | 3,783 |
| | $ | 2,340 |
| | $ | 1,850 |
| | $ | (309 | ) | | $ | 11,147 |
|
| Shipments | | | | | | | | | | | | |
| Rolled products - third party | | 1,002 |
| | 889 |
| | 701 |
| | 458 |
| | — |
| | 3,050 |
|
| Rolled products - intersegment | | 5 |
| | 49 |
| | 67 |
| | 32 |
| | (153 | ) | | — |
|
| Total rolled products | | 1,007 |
| | 938 |
| | 768 |
| | 490 |
| | (153 | ) | | 3,050 |
|
| Non-rolled products | | 23 |
| | 215 |
| | 2 |
| | 93 |
| | (9 | ) | | 324 |
|
| Total shipments | | 1,030 |
| | 1,153 |
| | 770 |
| | 583 |
| | (162 | ) | | 3,374 |
|
|
| | | | |
| Locations | | Plant Processes | | Major Products |
| Bresso, Italy | | Finishing, painting | | Painted sheet, construction sheet |
| Göttingen, Germany | | Cold rolling, finishing, painting | | Can stock, food can, painted sheet |
| Latchford, United Kingdom | | Recycling | | Sheet ingot from recycled metal |
| Ludenscheid, Germany | | Foil rolling, finishing, converting | | Foil, packaging |
| Nachterstedt, Germany | | Cold rolling, finishing, painting, recycling, heat treatment | | Automotive sheet, can stock, industrial sheet, painted sheet, construction sheet, sheet ingot |
| Neuss, Germany (A) | | Hot rolling, cold rolling, recycling | | Can stock, foilstock, feeder stock for finishing operations |
| Ohle, Germany | | Cold rolling, finishing, converting | | Foil, packaging |
| Pieve, Italy | | Continuous casting, cold rolling, finishing, recycling | | Coil for finishing operations, industrial sheet |
| Sierre, Switzerland (B) | | Sheet ingot casting, hot rolling, cold rolling, finishing | | Automotive sheet, industrial sheet |
| Crick, United Kingdom | | Finishing | | Automotive sheet |
The following table reconciles changes in “Segment income” for the year ended March 31, 2015 to the year ended March 31, 2016 (in millions).
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| Changes in Segment income | | North
America (A) | | Europe | | Asia | | South
America | | Eliminations (B) | | Total |
| Segment income - Year Ended March 31, 2015 | | $ | 273 |
| | $ | 250 |
| | $ | 141 |
| | $ | 240 |
| | $ | (2 | ) | | $ | 902 |
|
| Volume | | 21 |
| | 47 |
| | (5 | ) | | — |
| | 2 |
| | 65 |
|
| Conversion premium and product mix | | 74 |
| | 19 |
| | 9 |
| | 25 |
| | (17 | ) | | 110 |
|
| Conversion costs (C) | | (13 | ) | | (111 | ) | | 22 |
| | (24 | ) | | 17 |
| | (109 | ) |
| Metal price lag | | (79 | ) | | (77 | ) | | (21 | ) | | (1 | ) | | — |
| | (178 | ) |
| Foreign exchange | | 1 |
| | (32 | ) | | (11 | ) | | 64 |
| | — |
| | 22 |
|
| Primary operations | | — |
| | — |
| | — |
| | (14 | ) | | — |
| | (14 | ) |
| Selling, general & administrative and research & development costs (D) | | (14 | ) | | 11 |
| | — |
| | (5 | ) | | — |
| | (8 | ) |
| Other changes | | (5 | ) | | 9 |
| | — |
| | (3 | ) | | — |
| | 1 |
|
| Segment income - Year Ended March 31, 2016 | | $ | 258 |
| | $ | 116 |
| | $ | 135 |
| | $ | 282 |
| | $ | — |
| | $ | 791 |
|
_________________________
| |
| (A) | IncludedAluminium Norf GmbH (Alunorf), located in Neuss, Germany, is operated as a 50/50 joint venture between us and Hydro Aluminium Deutschland GmbH (Hydro). This joint venture is known as "Alunorf". Together, with Hydro, we operate Alunorf as a production cooperative, with each party supplying its own primary metal inputs for transformation at the North America "Segment income"facility. See Note 8 — Investment in and Advances to Non-Consolidated Affiliates and Related Party Transactions for the year ended March 31, 2016 were the operating results of our consumer foil operations in North America that we sold on June 30, 2014. The change to "Segment income" attributable to these operations for the year ended March 31, 2016 compared to the prior year was unfavorable by $1 million. The following table reconciles changes in “Segment income” for the year ended March 31, 2015 to the year ended March 31, 2016 (in millions), with the impact of the consumer foil operations separately identified.further information about this affiliate. |
|
| | | | | | | | |
| Changes in Segment income | | North America | | Total |
| Segment income - Year Ended March 31, 2015 | | $ | 273 |
| | $ | 902 |
|
| Volume | | 25 |
| | 69 |
|
| Conversion premium and product mix | | 84 |
| | 120 |
|
| Conversion costs | | (24 | ) | | (120 | ) |
| Metal price lag | | (79 | ) | | (178 | ) |
| Foreign exchange | | 1 |
| | 22 |
|
| Primary metal production | | — |
| | (14 | ) |
| Selling, general & administrative and research & development costs | | (16 | ) | | (10 | ) |
| Other changes | | (5 | ) | | 1 |
|
| Net impact of North America consumer foil operations sold in fiscal 2015 | | (1 | ) | | (1 | ) |
| Segment income - Year Ended March 31, 2016 | | $ | 258 |
| | $ | 791 |
|
| |
| (B) | The recognition of "Segment income"In fiscal year ended March 31, 2018, Novelis agreed to acquire operating facilities and manufacturing assets at its Sierre, Switzerland plant that have historically been leased. A service company will be jointly owned and operated by the parties and Novelis will acquire from Constellium N.V. (Constellium) a region on an intersegment shipment could occur50% interest in a period prior to the recognition of "Segment income" on a consolidated basis, depending on the timing of when the inventory is sold to the third party customer. The "Eliminations" column adjusts regional "Segment income"service company. |
Asia
|
| | | | |
| Locations | | Plant Processes | | Major Products |
| Binh Doung, Vietnam (A) | | Recycling | | Recycled material |
| Changzhou, China | | Heat treatment | | Automotive sheet |
| Ulsan, South Korea (B) | | Sheet ingot casting, hot rolling, cold rolling, recycling, finishing | | Can stock, construction sheet, industrial sheet, electronics, automotive sheet for intersegment shipments that occurfinishing operations, foilstock, and recycled material |
| Yeongju, South Korea | | Sheet ingot casting, hot rolling, cold rolling, recycling, finishing | | Can stock, construction sheet, industrial sheet, electronics, foilstock and recycled material |
_________________________
| |
| (A) | We ceased operations at our Binh Doung plant in a period prior to recognition of "Segment income" on a consolidated basis. The "Eliminations" column also reflects adjustments for changes in regional volume, conversion premium and product mix, and conversion costs related to intersegment shipments for consolidation.fiscal 2018. |
| |
(C)(B) | Conversion costs include expenses incurredOperated as a joint venture between Novelis Korea Ltd. (Novelis Korea) and Kobe Steel Ltd. (Kobe) in production such as directwhich interests are shared 50.1% and indirect labor, energy, freight, scrap usage, alloys49.9%, respectively. Ulsan Aluminum, Ltd. (UAL) is the name of the joint venture that was created. See Note 8 — Investment in and hardeners, coatings, alumina, melt loss,Advances to Non-Consolidated Affiliates and Related Party Transactions for further information about this affiliate. |
South America
|
| | | | |
| Locations | | Plant Processes | | Major Products |
| Pindamonhangaba, Brazil | | Sheet ingot casting, hot rolling, cold rolling, recycling, finishing, coating | | Can stock, construction sheet, industrial sheet, foilstock, sheet ingot |
| Santo Andre, Brazil | | Foil rolling, finishing | | Foil |
Item 3.Legal Proceedings
We are a party to litigation incidental to our business from time to time. For additional information regarding litigation to which we are a party, see Note 19 — Commitments and Contingencies to our accompanying audited consolidated financial statements, which are incorporated by reference into this item.
Item 4.Mine Safety Disclosures
Not applicable.
PART II
Item 5.Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
There is no established public trading market for the Company’s common stock. All of the common shares of Novelis are owned directly by AV Metals Inc. and indirectly by Hindalco Industries Limited. None of the equity securities of the Company are authorized for issuance under any equity compensation plan.
Dividends or returns of capital are at the discretion of the board of directors and will depend on, among other things, our financial resources, cash flows generated by our business, our cash requirements, restrictions under and covenant compliance under the instruments governing our indebtedness, being in compliance with the appropriate indentures and covenants under the instruments that govern our indebtedness that would allow us to legally pay dividends or return capital and other relevant factors.
Item 6.Selected Financial Data
The selected consolidated financial data should be read in conjunction with our consolidated financial statements for the respective periods and the related notes included elsewhere in this Form 10-K.
All of our common shares were indirectly held by Hindalco; thus, earnings per share data are not reported. Amounts in the tables below are in millions.
|
| | | | | | | | | | | | | | | | | | | | |
| | | March 31, |
| | | 2018 | | 2017 | | 2016 | | 2015 | | 2014 |
| Net sales | | $ | 11,462 |
| | $ | 9,591 |
| | $ | 9,872 |
| | $ | 11,147 |
| | $ | 9,767 |
|
| Net income (loss) attributable to our common shareholder | | $ | 635 |
| | $ | 45 |
| | $ | (38 | ) | | $ | 148 |
| | $ | 104 |
|
| Return of capital (A) | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 250 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| | | March 31, |
| | | 2018 | | 2017 | | 2016 | | 2015 | | 2014 |
| Total assets (B) | | $ | 9,503 |
| | $ | 8,373 |
| | $ | 8,280 |
| | $ | 9,102 |
| | $ | 9,114 |
|
| Long-term debt (including current portion) | | $ | 4,457 |
| | $ | 4,558 |
| | $ | 4,468 |
| | $ | 4,457 |
| | $ | 4,451 |
|
| Short-term borrowings | | $ | 49 |
| | $ | 294 |
| | $ | 579 |
| | $ | 846 |
| | $ | 723 |
|
| Cash and cash equivalents | | $ | 920 |
| | $ | 594 |
| | $ | 556 |
| | $ | 628 |
| | $ | 509 |
|
| Total equity (deficit) | | $ | 823 |
| | $ | (77 | ) | | $ | (59 | ) | | $ | (70 | ) | | $ | 268 |
|
_________________________
| |
| (A) | In March 2014, we declared a return of capital to our shareholder in the benefitamount of utilizing scrap and other metal costs. Fluctuations in this component reflect cost efficiencies (inefficiencies) during the period as well as cost (inflation) deflation.$250 million, which we subsequently paid on April 30, 2014. |
| |
(D)(B) | Selling, general & administrative costsRefer to Note 1 — Business and research & development costs include costs incurred directly by each segmentSummary of Significant Accounting Policies for further information in regards to revisions made to the years ended March 31, 2017 and all corporate related costs, which are allocated to each2016 consolidated balance sheet, consolidated statement of our segments.cash flows and footnote disclosures. |
Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations
North AmericaOVERVIEW AND REFERENCES
“Net sales” decreased $217Novelis is the world's leading aluminum rolled products producer based on shipment volume in fiscal 2018. We produce aluminum sheet and light gauge products for use in the packaging market, which includes beverage and food can and foil products, as well as for use in the automotive, transportation, electronics, architectural and industrial product markets. We are also the world's largest recycler of aluminum and have recycling operations in many of our plants to recycle both post-consumer aluminum and post-industrial aluminum. As of March 31, 2018, we had manufacturing operations in ten countries on four continents, which include 24 operating plants, and recycling operations in eleven of these plants.
The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those discussed below and elsewhere in this Annual Report, particularly in “Special Note Regarding Forward-Looking Statements and Market Data” and “Risk Factors.”
HIGHLIGHTS
We reported "Net income attributable to our common shareholder" of $635 million or 6%, reflecting lower average base aluminum prices, lower local market premiumsfor the fiscal year ended March 31, 2018, compared to $45 million for the fiscal year ended March 31, 2017. The increase is primarily due to higher segment income as a result of the factors discussed below, and a decrease in can and specialty shipments,pre-tax gain of $318 million, partially offset by tax expense of $77 million, related to the sale of shares in Ulsan Aluminum Ltd. (UAL), a new wholly owned subsidiary formed by Novelis Korea in the second quarter of year ended March 31, 2018,
We reported "Segment income" of $1,215 million compared to $1,085 million in the prior year. The increase is primarily due to; higher can and automotive shipments.shipments as a result of strong demand and solid global operational performance, diligent operating cost management, a continued focus on asset efficiency and prioritizing optimization of the product portfolio. In addition, the increase is due to favorable foreign currency impact and lower metal input costs. As a result of these factors, net cash provided by operating activities was $586 million and free cash flow was $406 million.
We have reduced our continued ramp-up of our new automotive linesnet debt leverage ratio (net debt/segment income) to 3.0x at March 31, 2018 as compared to 3.9x in the region and commissioning of our thirdprior year. This reduction in net leverage combined with strong financial results has provided us with the financial flexibility to seek strategic investments, particularly in the growing automotive line duringsegment. During the fourth quarter of fiscal 2016, along2018, we announced plans to expand our production footprint in North America with higheran investment in automotive finishing capacity in Guthrie, Kentucky. We also agreed to acquire operating facilities and manufacturing assets at our Sierre, Switzerland plant, that have historically been leased.
BUSINESS AND INDUSTRY CLIMATE
Economic growth and material substitution continue to drive increasing global demand for aluminum and rolled products. Global can sheet overcapacity, increased competition from Chinese suppliers of flat rolled aluminum products, and customer consolidation are also adding downward pricing pressures in the can sheet market.
Meanwhile, the demand for aluminum in the automotive sector,industry continues to grow, which drove the investments we expectmade in our automotive sheet finishing capacity in North America, Europe and Asia. This demand has been primarily driven by the benefits that result from using lighter weight materials in the vehicles, as companies respond to see positive year over year automotive shipment growth during the next fiscal year.government regulations, which are driving improved emissions and better fuel economy; while also maintaining or improving vehicle safety and performance.
“Segment income” was $258 million, a decrease of 5%, reflectingKey Sales and Shipment Trends
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in millions, except shipments which are in kt) |
| | | Three Months Ended | | Year Ended | | Three Months Ended | | Year Ended |
| | | Jun 30,
2016 | | Sept 30, 2016 | | Dec 31,
2016 | | Mar 31,
2017 | | Mar 31,
2017 | | Jun 30,
2017 | | Sept 30, 2017 | | Dec 31,
2017 | | Mar 31,
2018 | | Mar 31,
2018 |
| Net sales | | $ | 2,296 |
| | $ | 2,361 |
| | $ | 2,313 |
| | $ | 2,621 |
| | $ | 9,591 |
| | $ | 2,669 |
| | $ | 2,794 |
| | $ | 2,933 |
| | $ | 3,066 |
| | $ | 11,462 |
|
| Percentage increase (decrease) in net sales versus comparable previous year period | | (13 | )% | | (5 | )% | | (2 | )% | | 9 | % | | (3 | )% | | 16 | % | | 18 | % | | 27 | % | | 17 | % | | 20 | % |
| Rolled product shipments: | | | | | | | | | | | | | | | | | | |
| North America | | 242 |
| | 252 |
| | 247 |
| | 269 |
| | 1,010 |
| | 273 |
| | 274 |
| | 269 |
| | 273 |
| | 1,089 |
|
| Europe | | 246 |
| | 236 |
| | 226 |
| | 235 |
| | 943 |
| | 235 |
| | 237 |
| | 222 |
| | 236 |
| | 930 |
|
| Asia | | 178 |
| | 176 |
| | 162 |
| | 174 |
| | 690 |
| | 180 |
| | 180 |
| | 177 |
| | 174 |
| | 711 |
|
| South America | | 103 |
| | 121 |
| | 125 |
| | 125 |
| | 474 |
| | 110 |
| | 131 |
| | 146 |
| | 136 |
| | 523 |
|
| Eliminations | | (14 | ) | | (12 | ) | | (10 | ) | | (14 | ) | | (50 | ) | | (13 | ) | | (20 | ) | | (18 | ) | | (14 | ) | | (65 | ) |
| Total | | 755 |
| | 773 |
| | 750 |
| | 789 |
| | 3,067 |
| | 785 |
| | 802 |
| | 796 |
| | 805 |
| | 3,188 |
|
| | | | | | | | | | | | | | | | | | | | |
|
|
| The following summarizes the percentage increase (decrease) in rolled product shipments versus the comparable previous year period: |
| North America | | (7 | )% | | (6 | )% | | (2 | )% | | 8 | % | | (2 | )% | | 13 | % | | 9 | % | | 9 | % | | 1 | % | | 8 | % |
| Europe | | (2 | )% | | (6 | )% | | (3 | )% | | (4 | )% | | (4 | )% | | (4 | )% | | — | % | | (2 | )% | | — | % | | (1 | )% |
| Asia | | (8 | )% | | (6 | )% | | (16 | )% | | (7 | )% | | (9 | )% | | 1 | % | | 2 | % | | 9 | % | | — | % | | 3 | % |
| South America | | (4 | )% | | 3 | % | | (5 | )% | | (7 | )% | | (3 | )% | | 7 | % | | 8 | % | | 17 | % | | 9 | % | | 10 | % |
| Total | | (2 | )% | | (2 | )% | | (4 | )% | | — | % | | (2 | )% | | 4 | % | | 4 | % | | 6 | % | | 2 | % | | 4 | % |
Business Model and Key Concepts
Conversion Business Model
A significant unfavorable metal price lag of $79 million, higher fixed, variable, and selling, general, and administrative costs associated with the commissioning and supportamount of our new automotive capacity. Partially offsetting these wasbusiness is conducted under a significant increaseconversion model, which allows us to pass through increases or decreases in automotive shipments, which then doubled, as a resultthe price of aluminum to our customers. Nearly all of our strategic product portfolio shift to higher premiumflat-rolled products and higher conversion premiums from the related product mix shift. Fiscal 2016 was also favorably impacted by strong production whereas in December 2014 we experienced an unscheduled outage at the hot mill in the Logan Aluminum joint venture facility that significantly reduced "Segment income" during the fourth quarter of fiscal 2015.
Europe
“Net sales” decreased $560 million, or 15%, reflecting lower averagehave a price structure with three components: (i) a base aluminum price quoted off the LME; (ii) a local market premium; and (iii) a “conversion premium” to produce the rolled product which reflects, among other factors, the competitive market conditions for that product. Base aluminum prices lowerare typically driven by macroeconomic factors and global supply and demand for aluminum. The local market premiums tend to vary based on the supply and demand for metal in a decrease in specialtyparticular region and non-flat rolled products shipments, partially offset by higher canassociated transportation costs.
In North America, Europe and automotive shipments. Shipments in fiscal 2016 were at record levels. AsSouth America, we pass through local market premiums to our customers which are recorded through "Net sales." In Asia we purchase our metal inputs based on the LME and incur a result of the commissioninglocal market premium; however, many of our second automotive line Nachterstedt, Germany duringcompetitors in this region price their metal off the fourth quarter of fiscal 2016, along with higher demand in the automotive sector, we expect to see positive year over year automotive shipment growth during the next fiscal year.
“Segment income” was $116 million,Shanghai Futures Exchange, which does not include a decrease of 54%, reflecting significant unfavorable metal price lag of $77 million, unfavorable changes in foreign currency rates, and higher fixed costs associated with increased employment costs, and the ramp-up of our new recycling facility in Nachterstedt, Germany, as well as less favorable metal input costs. Partially offsetting these was favorable higher conversion premiums from the related product mix shift. Fiscal 2016 was also favorably impacted by strong production whereas in fiscal 2015 we experienced an unscheduled outage in a hot mill motor at one of our facilities in Europe leading to reduced "Segment income."
Asia
“Net sales” decreased $348 million, or 15%, reflecting lower average aluminum prices and lower shipments of our specialties products due to increased competition, partially offset by higher can and automotive shipments. The increase in our can volumes was driven by shipments to customers in the Middle East. Intersegment shipments of specialty products declined which was partially offset by an increase of intersegment shipments of automotive products to Novelis Europe and Novelis North America. A portion of the increase in demand for our automotive products was driven by customers in China.
“Segment income” was $135 million, a decrease of 4%, reflecting unfavorable metal price lag of $21 million, an unfavorable impact from changes in foreign currency rates, partially offset by lower metal input costs associated with a decrease in the local market premium, which is a cost we incur and are unablemaking it difficult for us to fully pass alongthrough this component of our metal input cost to some of our customers, and a favorable shift in product mix towards automotive that more than offset some can and specialty pricing pressures. We continue to experience pricing pressures and competition within the region.customers.
South America
“Net sales” decreased $275 million, or 15%, reflecting lower average aluminum prices as well as lower specialty and non-flat rolled products shipments, partially offset by higher can shipments. Shipments in fiscal 2016 were at record levels. Despite slowing economic conditions and political unrest in Brazil, can shipments were strong; however, shipments of specialty products decreased.
“Segment income” was $282 million, an increase of 18%, reflecting favorable foreign currency changes, customer price adjustments resulting from inflation, and improved product mix shift towards can as demand continues to increase, partially offset by higher utility and employment costs, and an impact related to the closure of our smelting operations in fiscal 2015.
Reconciliation of segment results to “Net (loss) income attributable to our common shareholder”
Costs such as depreciation and amortization, interest expense and unrealized gains (losses) on changes in the fair value of derivatives (except for derivatives used to manage our foreign currency remeasurement activities) are not utilized by our chief operating decision maker in evaluating segment performance. The table below reconciles income from reportable segments to “Net (loss) income attributable to our common shareholder” for the years ended March 31, 2016 and 2015 (in millions).
|
| | | | | | | |
| | Year ended March 31, |
| | 2016 | | 2015 |
| North America | $ | 258 |
| | $ | 273 |
|
| Europe | 116 |
| | 250 |
|
| Asia | 135 |
| | 141 |
|
| South America | 282 |
| | 240 |
|
| Intersegment eliminations | — |
| | (2 | ) |
| Total Segment income | 791 |
| | 902 |
|
| Depreciation and amortization | (353 | ) | | (352 | ) |
| Interest expense and amortization of debt issuance costs | (327 | ) | | (326 | ) |
| Adjustment to eliminate proportional consolidation | (30 | ) | | (33 | ) |
| Unrealized losses on change in fair value of derivative instruments, net | (4 | ) | | — |
|
| Realized losses gains on derivative instruments not included in segment income | (1 | ) | | (6 | ) |
| Restructuring and impairment, net | (48 | ) | | (37 | ) |
| Gain on assets held for sale | — |
| | 22 |
|
| Loss on extinguishment of debt | (13 | ) | | — |
|
| Loss on sale of fixed assets | (4 | ) | | (5 | ) |
| Other costs, net | (3 | ) | | (3 | ) |
| Income before income taxes | 8 |
| | 162 |
|
| Income tax provision | 46 |
| | 14 |
|
| Net (loss) income | (38 | ) | | 148 |
|
| Net income attributable to noncontrolling interests | — |
| | — |
|
| Net (loss) income attributable to our common shareholder | $ | (38 | ) | | $ | 148 |
|
“Adjustment to eliminate proportional consolidation” relates to depreciation and amortization and income taxes at our Aluminium Norf GmbH (Alunorf) joint venture. Income taxes and depreciation and amortization related to our equity method investments are reflected in the carrying value of the investment and not in our consolidated “Income tax provision" or "Depreciation and amortization."
“Realized (losses) gains on derivative instruments not included in segment income” represents realized gains on foreign currency derivatives related to asset sales, capital expenditures and net investment.
"Other costs, net" related primarily to losses on certain indirect tax expenses in Brazil, partially offset by interest income.
Year Ended March 31, 2015 Compared with the Year Ended March 31, 2014
"Net sales" were $11.1 billion, which is higher compared to the prior year. Factors impacting "Net sales" include higher average base aluminum prices, higher local market premiums, an increase in shipments of our can and automotive products, and higher non-FRP shipments, partially offset by the sale of our North American consumer foil operations in the first quarter of the current year.
“Cost of goods sold (exclusive of depreciation and amortization)” was $9.8 billion, which is also higher compared to the prior year. Factors impacting "Cost of goods sold (exclusive of depreciation and amortization)" include higher average base aluminum prices, higher average local market premiums, an increase in shipments, higher costs related to our strategic expansion projects, cost reductions due to an amendment we made to a non-union retiree medical plan in the prior year, partially offset by higher recycled metal benefits, and the sale of our North American consumer foil operations in the first quarter of fiscal 2015. Total metal input costs included in "Cost of goods sold (exclusive of depreciation and amortization)” increased $1.5 billion.
“Income before income taxes” for the year ended March 31, 2015 was $162 million, which compared to $115 million reported in the year ended March 31, 2014. In addition to the factors noted above, the following items affected “Income before income taxes:”
"Selling, general and administrative expenses" decreased $34 million primarily due to tighter cost control in the current year and an amendment made to our long term incentive plan last year, which resulted in higher benefit costs in the prior year;
“Depreciation and amortization” increased by $18 million due to the recent commissioning of some of our global expansion projects, partially offset by accelerated depreciation on certain non-core assets in the prior year;
“Restructuring and impairment, net” of $37 million for the year ended March 31, 2015, includes $28 million of charges related to ceasing operations of the Ouro Preto smelter in South America, $7 million of severance, contract termination and other restructuring charges in North America, Europe and South America related to past restructuring actions, and $2 million of impairment charges related to certain non-core assets in North America. In the prior year, we incurred $75 million, primarily related to restructuring actions in South America, Europe, and North America and impairment charges in South America. (See Note 2 - Restructuring and impairment to our accompanying consolidated financial statements for further details on restructuring activities);
"Gain on assets held for sale, net" of $22 million for the year ended March 31, 2015, includes $23 million from the sale of our share of the joint venture of the Consorcio Candonga, $7 million from the sale of our consumer foil operations in North America and $6 million from property and mining rights sales in South America. These gains were offset by a $14 million loss on the sale of certain hydroelectric assets in South America. The $6 million gain for the year ended March 31, 2014 relates to the disposal of three foil rolling and packaging operations in Europe;
"Interest expense and amortization of debt issuance costs" increased $22 million due to higher outstanding debt balances;
A $19 million gain on business interruption recovery claims for the year ended March 31, 2015 was partially comprised of an insurance settlement which resulted in a gain of $6 million related to an electrical short circuit impacting a hot mill motor at one of our facilities in our Europe segment in the second quarter of 2015. Additionally, the Logan Aluminum joint venture facility in North America stopped operations in the fourth quarter of fiscal 2015 for approximately three weeks due to an unexpected failure of a motor, and the partial insurance settlement resulted in a gain of $13 million. The insurance settlement gains partially offset the lost shipments we incurred from these issues; and
Unrealized gains on changes in fair value of undesignated derivatives other than foreign currency remeasurement were immaterial for the year ended March 31, 2015 as compared to $10 million of losses in the same period in the prior year, which is reported as "Other expense (income), net."
Our effective tax rate for the year ended March 31, 2015 was 8%, compared to 9% for the year ended March 31, 2014. The effective tax rate in these periods was primarily driven by favorable movement in foreign currency rates on translation and remeasurement of deferred income taxes.
We reported “Net income attributable to our common shareholder” of $148 million for the year ended March 31, 2015 as compared to $104 million for the year ended March 31, 2014, primarily as a result of the factors discussed above.
Segment Review
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 regions and are organized under four operating segments: North America, Europe, Asia and South America.
We measure the profitability and financial performance of our operating segments based on “Segment income.” We define “Segment income” as earnings before (a) “depreciation and amortization”; (b) “interest expense and amortization of debt issuance costs”; (c) “interest income”; (d) unrealized gains (losses) on changes in fair value of derivative instruments, net, except for foreign currency remeasurement hedging activities, which are included in segment income; (e) impairment of goodwill; (f) gain or loss on extinguishment of debt; (g) noncontrolling interests’ share; (h) adjustments to reconcile our proportional share of “Segment income” from non-consolidated affiliates to income as determined on the equity method of accounting; (i) “restructuring and impairment, net”; (j) gains or losses on disposals of property, plant and equipment and businesses, net; (k) other costs, net; (l) litigation settlement, net of insurance recoveries; (m) sale transaction fees; (n) provision or benefit for taxes on income (loss) and (o) cumulative effect of accounting changes, net of tax. The financial information for our segments includes the results of our affiliates on a proportionately consolidated basis, which is consistent with the way we manage our business segments. See Note 8 — Consolidation and Note 9 — Investment in and Advances to Non-Consolidated Affiliates and Related Party Transactions for further information about these affiliates. Our presentation of “Segment income” on a consolidated basis is a non-GAAP financial measure. See “Non-GAAP Financial Measures” below for additional discussion about our use of "Total Segment income.”
The tables below show selected segment financial information (in millions, except shipments which are in kt). For additional financial information related to our operating segments, see Note 21 — Segment, Geographical Area, Major Customer and Major Supplier Information. In order to reconcile the financial information for the segments shown in the tables below to the relevant U.S. GAAP-based measures, "Eliminations and other" must adjust for proportional consolidation of each line item, and eliminate intersegment shipments (in kt) and intersegment "Net sales."
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| Selected Operating Results Year Ended March 31, 2015 | | North America | | Europe | | Asia | | South America | | Eliminations and other | | Total |
| Net sales | | $ | 3,483 |
| | $ | 3,783 |
| | $ | 2,340 |
| | $ | 1,850 |
| | $ | (309 | ) | | $ | 11,147 |
|
| Shipments | | | | | | | | | | | | |
| Rolled products - third party | | 1,002 |
| | 889 |
| | 701 |
| | 458 |
| | — |
| | 3,050 |
|
| Rolled products - intersegment | | 5 |
| | 49 |
| | 67 |
| | 32 |
| | (153 | ) | | — |
|
| Total Rolled Products | | 1,007 |
| | 938 |
| | 768 |
| | 490 |
| | (153 | ) | | 3,050 |
|
| Non-rolled products | | 23 |
| | 215 |
| | 2 |
| | 93 |
| | (9 | ) | | 324 |
|
| Total shipments | | 1,030 |
| | 1,153 |
| | 770 |
| | 583 |
| | (162 | ) | | 3,374 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| Selected Operating Results Year Ended March 31, 2014 | | North America | | Europe | | Asia | | South America | | Eliminations and other | | Total |
| Net sales | | $ | 3,050 |
| | $ | 3,280 |
| | $ | 1,876 |
| | $ | 1,588 |
| | $ | (27 | ) | | $ | 9,767 |
|
| Shipments | | | | | | | | | | | | |
| Rolled products - third party | | 956 |
| | 877 |
| | 630 |
| | 432 |
| | — |
| | 2,895 |
|
| Rolled products - intersegment | | 2 |
| | 34 |
| | 10 |
| | 15 |
| | (61 | ) | | — |
|
| Total Rolled Products | | 958 |
| | 911 |
| | 640 |
| | 447 |
| | (61 | ) | | 2,895 |
|
| Non-rolled products | | 36 |
| | 66 |
| | — |
| | 87 |
| | (23 | ) | | 166 |
|
| Total shipments | | 994 |
| | 977 |
| | 640 |
| | 534 |
| | (84 | ) | | 3,061 |
|
The following table reconciles changes in “Segment income” for the year ended March 31, 2014 to the year ended March 31, 2015 (in millions).
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| Changes in Segment income | | North
America (A) | | Europe | | Asia | | South
America | | Eliminations (B) | | Total |
| Segment income - Year Ended March 31, 2014 | | $ | 229 |
| | $ | 265 |
| | $ | 160 |
| | $ | 231 |
| | $ | — |
| | $ | 885 |
|
| Volume | | 45 |
| | 25 |
| | 92 |
| | 44 |
| | (73 | ) | | 133 |
|
| Conversion premium and product mix | | 14 |
| | 26 |
| | (33 | ) | | (14 | ) | | 30 |
| | 23 |
|
| Conversion costs (C) | | (30 | ) | | (35 | ) | | (82 | ) | | (37 | ) | | 41 |
| | (143 | ) |
| Metal price lag | | (14 | ) | | (10 | ) | | 12 |
| | — |
| | — |
| | (12 | ) |
| Foreign exchange | | — |
| | (37 | ) | | 4 |
| | 15 |
| | — |
| | (18 | ) |
| Primary operations | | — |
| | — |
| | — |
| | (2 | ) | | — |
| | (2 | ) |
| Selling, general & administrative and research & development costs (D) | | 16 |
| | 20 |
| | (4 | ) | | (10 | ) | | — |
| | 22 |
|
| Other changes | | 13 |
| | (4 | ) | | (8 | ) | | 13 |
| | — |
| | 14 |
|
| Segment income - Year Ended March 31, 2015 | | $ | 273 |
| | $ | 250 |
| | $ | 141 |
| | $ | 240 |
| | $ | (2 | ) | | $ | 902 |
|
| |
(A) | Included in the North America "Segment income" for the year ended March 31, 2015 were the operating results of our consumer foil operations in North America that we sold on June 30, 2014. The change to "Segment income" attributable to these operations for the year ended March 31, 2015 compared to the prior year was unfavorable by $6 million. The following table reconciles changes in “Segment income” for the year ended March 31, 2014 to the year ended March 31, 2015 (in millions), with the impact of the consumer foil operations separately identified. |
|
| | | | | | | | |
| Changes in Segment income | | North America | | Total |
| Segment income - Year Ended March 31, 2014 | | $ | 229 |
| | $ | 885 |
|
| Volume | | 56 |
| | 144 |
|
| Conversion premium and product mix | | 60 |
| | 69 |
|
| Conversion costs | | (74 | ) | | (187 | ) |
| Metal price lag | | (14 | ) | | (12 | ) |
| Foreign exchange | | — |
| | (18 | ) |
| Primary metal production | | — |
| | (2 | ) |
| Selling, general & administrative and research & development costs | | 9 |
| | 15 |
|
| Other changes | | 13 |
| | 14 |
|
| Net impact of North America consumer foil operations sold in fiscal 2015 | | (6 | ) | | (6 | ) |
| Segment income - Year Ended March 31, 2015 | | $ | 273 |
| | $ | 902 |
|
| |
(B) | The recognition of "Segment income" by a region on an intersegment shipment could occur in a period prior to the recognition of "Segment income" on a consolidated basis, depending on the timing of when the inventory is sold to the third party customer. The "Eliminations" column adjusts regional "Segment income" for intersegment shipments that occur in a period prior to recognition of "Segment income" on a consolidated basis. The "Eliminations" column also reflects adjustments for changes in regional volume, conversion premium and product mix, and conversion costs related to intersegment shipments for consolidation. |
| |
(C) | Conversion costs include expenses incurred in production such as direct and indirect labor, energy, freight, scrap usage, alloys and hardeners, coatings, alumina, melt loss, the benefit of utilizing scrap and other metal costs. Fluctuations in this component reflect cost efficiencies (inefficiencies) during the period as well as cost (inflation) deflation. |
| |
(D) | Selling, general & administrative costs and research & development costs include costs incurred directly by each segment and all corporate related costs, which are allocated to each of our segments. Certain changes were made to our long-term incentive plan in fiscal 2014, which resulted in higher benefit costs in that period. These costs were allocated to each segment. |
North America
“Net sales” increased $433 million, or 14%, reflecting higher average base aluminum prices, higher local market premiums, and higher industrial and automotive shipments, partially offset by lower can shipments which were impacted by a three week unscheduled outage at our Logan facility. We expect shipments of our automotive products to continue to increase in the upcoming year, as a result of a customer's production of an aluminum intensive vehicle.
“Segment income” was $273 million, an increase of 19%, reflecting higher shipment levels as discussed above, higher conversion premiums for our automotive products, and improved cost containment of general and administrative expenses, partially offset by higher conversion costs, unfavorable metal price lag, and lower conversion premiums of our can products. Excluding the impact of our North American foil business, which was sold in June 2014, conversion premiums and conversion costs increased during the period. Conversion premiums increased due to improved conversion premiums in our automotive products. Conversion costs increased due to higher freight costs, higher costs associated with the commissioning of our automotive lines, higher repairs and maintenance costs, and higher market premiums on the procurement of metal.
In December 2014, there was an outage at the hot mill in the Logan Aluminum joint venture facility ("Logan facility") in North America due to an unexpected failure of a motor. A repaired motor was installed and operations at the hot mill resumed within approximately three weeks, at which time we began the process of ramping up to full capacity. The business disruption resulting from this unscheduled outage significantly reduced "Segment income" during the fourth quarter of fiscal 2015 in spite of a partial insurance settlement gain we realized during the quarter.
We have commissioned two automotive sheet finishing lines at our Oswego, New York facility. These two lines will result in approximately 240 kt of additional automotive finishing capacity annually when operating at full capacity. A third automotive finishing line is under construction in our Oswego, New York facility. This third automotive finishing line is expected to become operational at the end of calendar year 2015 and will add an additional 120 kt of finishing capacity. We have also invested in a new recycling line at our Oswego, New York facility for the automotive business.
Europe
“Net sales” increased $503 million, or 15%, due to higher average base aluminum prices, higher local market premiums and higher shipments of can, automotive and non-rolled products, partially offset by a decline in shipments of industrial products. Higher shipments of our can products were largely driven by a customer's recent conversion from steel to aluminum in one of its plants. We continue to experience an increase in demand and shipments of our automotive products. Our non-rolled product shipments increased compared to prior year driven by scrap sales to third party sheet ingot tollers in advance of our new recycling facility in Nachterstedt, Germany becoming fully commissioned.
“Segment income” was $250 million, a decrease of 6%, reflecting unfavorable changes in foreign currency rates, net of realized gains and losses on hedging, increased conversion costs, and unfavorable metal price lag, partially offset by higher shipment levels discussed above, improved conversion premiums, and lower general and administrative costs. Conversion costs were unfavorable due to higher wages, a higher cost base related to the commissioning of our recycling plant in Nachterstedt, Germany, higher freight costs, and higher repairs and maintenance, partially offset by an increase in the benefits from the utilization of recycled metal. Our conversion premiums were favorable due to an improved product portfolio mix. General and administrative costs were favorable due to lower costs as a result of our restructuring activities to optimize our business in Europe in the prior year.
During the second quarter of fiscal 2015, there was an outage caused by an electrical short circuit in a hot mill motor at one of our facilities in Europe. The business disruption resulting from this outage reduced "Segment income" during the year in spite of an insurance settlement gain we realized in the fourth quarter.
In June 2014, we began the commissioning of our fully integrated recycling facility at our Nachterstedt, Germany plant, which will have an annual capacity of approximately 400 kt when operating at full capacity. We are in the process of constructing a second automotive finishing line in our Nachterstedt, Germany facility, which will add an additional 120 kt of finishing capacity. The second line is expected to become operational at the end of calendar year 2015.
Asia
“Net sales” increased $464 million, or 25%, reflecting higher average aluminum prices and higher shipments of our can and automotive products. The increase in our can volumes was driven by shipments to customers in the Middle East. We also increased intersegment shipments of automotive products to Novelis Europe and industrial products to Novelis North America. A portion of the increase in demand for our automotive products was driven by customers in China.
“Segment income” was $141 million, a decrease of 12%, reflecting higher conversion costs and lower conversion premiums, partially offset by higher shipment levels discussed above, favorable impacts of foreign exchange, favorable metal price lag, and a positive impact from certain operating efficiencies gained during the year associated with higher production. Many of our competitors in China price their metal off the Shanghai Futures Exchange, which does not have a local market premium. The purchase price for our metal inputs is based on the LME and results in us paying a local market premium, which we are unable to fully pass along to some of our customers. The local market premium was significantly higher during fiscal 2015 as compared with historical levels. Although prices moderated somewhat during the fourth quarter, this increased our conversion costs because we were not able to pass these higher market premiums through to some of our customers. Other factors resulting in higher conversion costs include an increase in labor costs, higher energy rates, higher maintenance costs, higher freight, and unfavorable metal mix, partially offset by an increase in the benefits from the utilization of recycled metal. Conversion premiums were unfavorable due to competitive pressures from FRP suppliers in China with the renewal of certain beverage can product customer contracts and a higher mix of intersegment shipments.
In fiscal 2015, we began the commissioning of our new automotive sheet finishing plant at our Changzhou, China plant, which will have an annual capacity of approximately 120 kt when operating at full capacity.
South America
Novelis South America operates two aluminum rolled product facilities. This includes one facility with recycling operations. These facilities manufacture a broad range of can sheet, industrial sheet and light gauge products. The main markets are beverage and food can, specialty, industrial, foil and other packaging and transportation end-use applications. Beverage can represents the largest end-use application in terms of shipment volume.
Financial Information About Geographic Areas
Certain financial information about geographic areas is contained in Note 20 — Segment, Geographical Area, Major Customer and Major Supplier Information to our accompanying audited consolidated financial statements.
Our Customers
We focus significant efforts on developing and maintaining close working relationships with our customers and end-users. Our major customers include:
|
| | |
| Beverage and Food Cans | | Automotive |
| Anheuser-Busch InBev | | BMW Group |
| Ardagh Group | | Daimler Group |
| Ball Corporation | | Fiat Chrysler Automobiles N.V. |
| Can-Pack S.A. | | Ford Motor Company |
| Crown Holdings Inc., formerly Crown Cork & Seal Company | | General Motors LLC |
| Pepsico | | Hyundai Motors Corporation |
| Various bottlers of the Coca-Cola System | | Jaguar Land Rover Limited |
| | NIO |
| Construction, Industrial and Other | | Volkswagen Group |
| Agfa Graphics | | |
| Aluflexpack | | Electronics |
| Amcor | | LG International Corporation |
| Facchini S.A. | | Samsung Electronics Co., Ltd. |
| Feron | | |
| Klöckner Metals | | |
Lotte Aluminum Co. Ltd.
| | |
| Prefa | | |
Reynolds Consumer Products LLC
| | |
Ryerson Inc.
| | |
| ThyssenKrupp | | |
Our single largest end-use product is beverage can sheet. We sell can sheet directly to beverage makers and bottlers as well as to can fabricators that sell the cans they produce to bottlers. In certain cases, we operate under umbrella agreements with beverage makers and bottlers under which they direct their can fabricators to source their requirements for beverage can body, end and tab stock from us.
Additional information related to our top customers is contained in Note 20 — Segment, Geographical Area, Major Customer and Major Supplier Information to our accompanying audited consolidated financial statements.
Distribution and Backlog
We have two principal distribution channels for the end-use markets in which we operate: direct sales to our customers and sales to distributors. |
| | | | | | | | | |
| | | Year Ended March 31, |
| | | 2018 | | 2017 | | 2016 |
| Direct sales as a percentage of total “Net sales” | | 97 | % | | 94 | % | | 95 | % |
| Distributor sales as a percentage of total “Net sales” | | 3 | % | | 6 | % | | 5 | % |
Direct Sales
We supply various end-use markets all over the world through a direct sales force operating from individual facilities or sales offices, as well as from regional sales offices. The direct sales channel typically serves very large, sophisticated fabricators and original equipment manufacturers. Longstanding relationships are maintained with leading companies in industries using aluminum rolled products. Supply contracts for large global customers generally range from one to five years in length and historically there has been a high degree of renewal business with these customers. Given the customized nature of products and in some cases, large order sizes, switching costs are significant, thus adding to the overall consistency of the customer base.
We also use third party agents or traders in some regions to complement our own sales force. These agents provide service to our customers in countries where we do not have local expertise.
Distributors
We also sell our products through third party aluminum distributors. Customers of distributors are widely dispersed, and sales through this channel are highly fragmented. Distributors sell mostly commodity or less specialized products into many end-use markets in small quantities, including the architectural and industrial markets. We collaborate with our distributors to develop new end-use products and improve the supply chain and order efficiencies.
Backlog
We believe order backlog is not a material aspect of our business.
Research and Development
The table below summarizes our “Research and development expenses”, which include mini-scale production lines equipped with hot mills, can lines and continuous casters (in millions).
|
| | | | | | | | | | | | |
| | | Year Ended March 31, |
| | | 2018 | | 2017 | | 2016 |
| Research and development expenses | | $ | 64 |
| | $ | 58 |
| | $ | 54 |
|
We conduct research and development activities in order to meet current and future customer requirements, improve our products and reduce our conversion costs. We have a global research and technology center in Kennesaw, Georgia, which offers state of the art research and development capabilities to help Novelis meet the global long-term demand for aluminum used for the automotive, beverage can and specialty markets.
Our Employees
The table below summarizes our approximate number of employees by region, including our proportionate share of those employed by less than wholly owned affiliates.
|
| | | | | | | | | | | | | | | |
| Employees | | North America (A) | | Europe | | Asia | | South America | | Total |
| March 31, 2018 | | 3,400 |
| | 4,770 |
| | 1,400 |
| | 1,570 |
| | 11,140 |
|
| March 31, 2017 | | 3,310 |
| | 4,880 |
| | 1,670 |
| | 1,590 |
| | 11,450 |
|
_________________________
| |
| (A) | Includes employees within our Corporate headquarters located in Atlanta, Georgia. |
We consider our employee relations to be satisfactory. A substantial portion of our employees are represented by labor unions and their employment conditions are governed by collective bargaining agreements. Collective bargaining agreements are negotiated on a site, regional or national level, and are of varying durations.
Intellectual Property
We actively review intellectual property arising from our operations and our research and development activities and, when appropriate, we apply for patents in appropriate jurisdictions. We currently hold patents and patent applications on approximately 237 different items of intellectual property. While these patents and patent applications are important to our business on an aggregate basis, no single patent or patent application is deemed to be material to our business.
We have applied for, or received registrations for, the “Novelis” word trademark and the Novelis logo trademark in approximately 50 countries where we have significant sales or operations. Novelis uses the Aditya Birla logo under license from Aditya Birla Management Corporation Private Limited.
We have also registered the word “Novelis” and several derivations thereof as domain names in numerous top level domains around the world to protect our presence on the world wide web.
Environment, Health and Safety
We own and operate numerous manufacturing and other facilities in various countries around the world. Our operations are subject to environmental laws and regulations from various jurisdictions, which govern, among other things, air emissions, wastewater discharges, the handling, storage and disposal of hazardous substances and wastes, the remediation of contaminated sites, post-mining reclamation and restoration of natural resources, and employee health and safety. Future
environmental regulations may impose stricter compliance requirements on the industries in which we operate. Additional equipment or process changes at some of our facilities may be needed to meet future requirements. The cost of meeting these requirements may be significant. Failure to comply with such laws and regulations could subject us to administrative, civil or criminal penalties, obligations to pay damages or other costs, and injunctions and other orders, including orders to cease operations.
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 our liability arising from the usage, storage, treatment or disposal of hazardous substances and wastes at a number of sites 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. Many of these jurisdictions have laws that 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. In addition, we are, from time to time, subject to environmental reviews and investigations by relevant governmental authorities.
We have established procedures for regularly evaluating environmental loss contingencies, including those arising from 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 also believe we have made reasonable estimates for the costs that are reasonably possible for these environmental loss contingencies. Accordingly, we have established liabilities based on our estimates for the currently anticipated costs that are deemed probable associated with these environmental matters. Management has determined that the currently anticipated costs associated with these environmental matters will not, individually or in the aggregate, materially impair our operations or materially adversely affect our financial condition.
Available Information
We are a voluntary filer and not subject to the reporting and information requirements of the Securities Exchange Act of 1934, as amended (Exchange Act). However, we file periodic reports and other information with the Securities and Exchange Commission (SEC). We make these filings available on our website free of charge, the URL of which is http://www.novelis.com, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. The SEC maintains a website (http://www.sec.gov) that contains our annual, quarterly and current reports and other information we file electronically with the SEC. You can read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Information on our website does not constitute part of this Annual Report on Form 10-K.
Item 1A.Risk Factors
In addition to the factors discussed elsewhere in this report, you should consider the following factors, which could materially affect our business, financial condition or results of operations in the future. The following factors, among others, could cause our actual results to differ from those projected in any forward looking statements we make.
Competitive and Strategic Risks
Certain of our customers are significant to our revenues, and we could be adversely affected by changes in the business or financial condition of these significant customers or by the loss of their business.
Our ten largest customers accounted for approximately 65%, 63%, and 60% of our total “Net sales” for the year ended March 31, 2018, 2017 and 2016, respectively. A significant downturn in the business or financial condition of our significant customers could materially adversely affect our results of operations and cash flows. In addition, some of our customer contracts are subject to renewal, renegotiation or re-pricing at periodic intervals or upon changes in competitive supply conditions. Our failure to successfully renew, renegotiate or re-price such agreements could result in a reduction or loss in customer purchase volume or revenue. Additionally, in the event of further consolidation among our customers, our customers may be able to use increased leverage in negotiating prices and other contract terms. Consolidation in our customer base may also lead to reduced demand for our products or cancellations of sales orders, which could adversely affect our results of operations and cash flows.
We also factor and forfait trade receivables from time to time to manage working capital. Any deterioration of the financial condition or downgrade of the credit rating of certain of our customers may make it more difficult or costly for us to engage in these activities, which could negatively impact our cash flows and liquidity.
We face significant price and other forms of competition from other aluminum rolled products producers and producers of other materials
The markets in which we operate are highly competitive. We compete primarily on the basis of our value proposition, including price, product quality, ability to meet customers' specifications, range of products offered, lead times, technical support and customer service. Some of our competitors may benefit from more efficient technologies, lower raw material and energy costs and may be able to sustain longer periods of price competition. Any increase in competition resulting from new market entrants or increases in production capacity by our competitors could cause us to lose market share or lose a large customer, or force us to reduce prices to remain competitive.
Further, aluminum competes with other materials, such as steel, plastics, composite materials and glass for various applications, including packaging, automotive, architectural, industrial, and consumer durables end-use markets. Our customers may choose materials other than aluminum to achieve desired attributes for their products. For example, customers in the automotive industry seeking to reduce vehicle weight may increase their use of high-strength steel and other materials rather than aluminum for certain applications.
We may not realize the anticipated benefits of acquisitions, divestitures, joint ventures or other strategic investments.
As part of our strategy for growth, we have in the past and may in the future pursue acquisitions, divestitures, joint ventures or other strategic investments, which may not be completed or, if completed, may not produce the benefits we anticipate. There are numerous risks commonly encountered in strategic transactions, including the risk that management’s time and energy may be diverted, disrupting our existing businesses; risks associated with managing joint ownership structures with shared decision making authority; difficulty retaining key employees of an acquired business; difficulties due to limited prior experience in any new markets we may enter; risks that we may not be able to complete a transaction that has been announced, effectively integrate businesses acquired or generate benefits we anticipated.
The United States Environmental Protection Agency announced, in April 2018, completion of its midterm evaluation process for greenhouse gas emission standards and its determination that the standards should be rolled back. A reduction in fuel efficiency standards could impact our customers’ choice of aluminum to achieve vehicle light weighting objectives to meet fuel economy standards. In addition, although certain automotive companies have increased their use of aluminum in recent years, there is no assurance that our automotive customers will not turn to steel or other materials in the future, due to the price of aluminum or other factors.
Operational Risks
If we are unable to obtain sufficient quantities of primary aluminum, recycled aluminum, sheet ingot and other raw materials used in the production of our products, our ability to produce and deliver products or to manufacture products using the desired mix of metal inputs could be adversely affected.
The supply risks relating to our metal inputs vary by input type. For example, we produce sheet ingot internally and source the remainder of our requirements from multiple third parties in various jurisdictions, usually under contracts having a duration of at least one year. If our suppliers are unable to deliver sufficient quantities of aluminum on a timely basis, our production could be disrupted and our net sales, profitability and cash flows could be adversely affected. Although aluminum is traded on the world markets, developing alternative suppliers of sheet ingot could be time consuming and expensive.
Our operations consume energy and our profitability and cash flows may decline if energy costs were to rise, or if our energy supplies were interrupted.
We consume substantial amounts of energy in our rolling and casting operations. The factors affecting our energy costs and supply reliability tend to be specific to each of our facilities. A number of factors could materially affect our energy position adversely including:
increases in costs of natural gas;
increases in costs of supplied electricity;
increases in fuel oil related to transportation;
interruptions in energy supply due to equipment failure or other causes; and
the inability to extend energy supply contracts upon expiration on economical terms.
If energy costs were to rise, or if energy supplies or supply arrangements were disrupted, our profitability and cash flows could decline.
A majority of our facilities are staffed by a unionized workforce, and union disputes and other employee relations issues could materially adversely affect our financial results.
A substantial portion of our employees are represented by labor unions under collective bargaining agreements with varying durations and expiration dates. 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.
Loss of our key management and other personnel, or an inability to attract and retain such management and other personnel, could adversely impact our business.
We employ all of our senior executive officers and other highly-skilled key employees on an at-will basis, and their employment can be terminated by us or them at any time, for any reason and without notice, subject, in certain cases, to severance payment obligations. Competition for qualified employees among companies that rely heavily on engineering and technology is intense, and if our highly skilled key employees leave us, we may be unable to promptly attract and retain qualified replacement personnel, which could result in our inability to improve manufacturing operations, conduct research activities successfully, develop marketable products and compete effectively for growth in key markets.
We could be adversely affected by unplanned disruptions at our operating facilities.
We have in recent periods experienced production interruptions at our plants due to the breakdown of equipment, fires, weather events and other causes. We may experience such disruptions in the future due to similar uncontrollable events. Because many of our customers are, to varying degrees, dependent on planned deliveries from our plants, any customers that have to reschedule their own production due to our missed deliveries could pursue claims against us and reduce their future business with us. We may incur costs to correct any of these problems, in addition to facing claims from customers. Further, our reputation among actual and potential customers may be harmed, resulting in loss of business. While we maintain insurance policies covering, among other things, physical damage, business interruptions and product liability, these policies may not cover all of our losses.
Our business has been and will continue to be exposed to various economic and political risks associated with our global operations.
Due to the global reach of our business, we are subject to financial, political, economic and other business risks in connection with doing business abroad. Operating in different regions and countries exposes us to a number of risks, including political and economic instability that may disrupt economic activity; changes in international trade regulation, including duties and tariffs; and differences in labor conditions.
Our financial condition and results of operations depend significantly on worldwide economic conditions. During the past fiscal year, economic conditions strengthened in all of the geographic regions in which we operate. However, future adverse developments in the US and global economy, including higher interest rates and higher levels of unemployment, could adversely affect demand in the end-use markets we serve. In addition, uncertainty about current or future global economic conditions poses a risk because our customers may postpone purchases in response to negative financial news and tighter credit.
We face risks relating to certain joint ventures, subsidiaries and assets that we do not entirely control.
Some of our activities are, and will in the future be, conducted through entities that we do not entirely control or wholly-own. These entities include our Alunorf, Germany, Ulsan, Korea and Logan, Kentucky joint ventures and our Sierre, Switzerland facility. Under the governing documents of some these businesses, we share decision making authority and operational control which may result in conflicts over management over these businesses. In addition, because we do not exercise control over the business practices of our joint venture partners, we could be subject to reputational damage or other consequences of improper conduct by our joint venture partners or their inability to fulfill their obligations under the joint venture.
Security breaches and other disruptions to our information technology networks and systems could interfere with our operations, and could compromise the confidentiality of our proprietary information.
We rely upon information technology networks and systems, some of which are managed by third parties, to process, transmit and store electronic information, and to manage or support a variety of business and manufacturing processes and activities. Additionally, we collect and store sensitive data, including intellectual property, proprietary business information, as well as personally identifiable information of our employees, in data centers and on information technology networks. These activities are subject to various laws and regulations in the United States and abroad regarding privacy and data security. These laws and regulations are evolving. For example, in April 2016, the European Union approved a new data protection regulation known as the General Data Protection Regulation, which is due to become effective in May 2018.
We have implemented systems and processes, and we continue to invest in solutions, intended to secure our information technology systems, prevent unauthorized access to or loss of sensitive data, ensure business continuity and comply with applicable laws. Despite these measures, our information technology networks and systems may be vulnerable to damage, disruptions or shutdowns due to attacks by hackers or breaches due to errors or malfeasance by employees, contractors and others who have access to our networks and systems, or other disruptions during the process of upgrading or replacing computer software or hardware, power outages, computer viruses, telecommunication or utility failures or natural disasters or other catastrophic events. The occurrence of any of these events could compromise our networks and the information stored there could be accessed, publicly disclosed, lost or stolen. Any such access, disclosure or other loss of information could result in legal claims or proceedings, liability or regulatory penalties under laws protecting the privacy of personal information, disrupt operations and reduce the competitive advantage we hope to derive from our investment in new or proprietary business initiatives.
Financial Risks
Our results and short term liquidity can be negatively impacted by timing differences between the prices we pay under purchase contracts and metal prices we charge our customers.
Our purchase and sales contracts for primary aluminum are based on the LME price plus a regional market premium, which is a surcharge in addition to the LME price. There are typically timing differences between the pricing periods for purchases and sales where purchase prices we pay tend to be fixed and paid earlier than sales prices we charge our customers. This creates a price exposure we call “metal price lag.” We use derivative instruments to manage the timing differences related to LME associated with metal price lag. The majority of our premium exposure hedging occurs in North America, however, exposure here is not fully hedged. In our Europe and Asia regions, the derivative market for local market premiums is not robust or efficient enough for us to offset the impacts of LMP price movements beyond a small volume. The
timing difference associated with metal price lag could positively or negatively impact our operating results and short term liquidity position.
A deterioration of our financial condition or a downgrade of our ratings by a credit rating agency could limit our ability or increase our costs to enter into hedging and financing transactions, and our business relationships and financial condition could be adversely affected.
A deterioration of our financial condition or a downgrade of our credit ratings for any reason could increase our borrowing costs, limit our access to the capital or credit markets or liquidity facilities, adversely affect our ability to obtain new financing on favorable terms or at all, result in more restrictive covenants for future indebtedness incurrences and have an adverse effect on our business relationships with customers, suppliers and hedging counterparties. We enter into various forms of hedging activities against currency, interest rate, energy and metal price fluctuations. Financial strength and credit ratings are important to the availability and terms of these hedging activities. As a result, any deterioration of our financial condition or downgrade of our credit ratings may make it more difficult or costly for us to engage in these activities in the future.
Adverse changes in currency exchange rates could negatively affect our financial results or cash flows and the competitiveness of our aluminum rolled products relative to other materials.
We are exposed to the effects of changes in the exchange rates of the U.S. dollar, the Euro, the British pound, the Brazilian real, the Korean won, the Swiss franc and other currencies. We have implemented a hedging policy that attempts to manage currency exchange rate risks to an acceptable level based on management's judgment of the appropriate trade-off between risk, opportunity and cost; however, this hedging policy may not successfully or completely eliminate the effects of currency exchange rate fluctuations which could have a material adverse effect on our financial results and cash flows.
We prepare our consolidated financial statements in U.S. dollars, but a portion of our earnings and expenditures are denominated in other currencies, primarily the Euro, the Korean won and the Brazilian real. Changes in exchange rates will result in increases or decreases in our operating results and may also affect the book value of our assets located outside the U.S.
Our results of operations, cash flows and liquidity could be adversely affected if we were unable to transact in derivative instruments or if counterparties to our derivative instruments fail to honor their agreements.
We use various derivative instruments to manage the risks arising from fluctuations in aluminum prices, exchange rates, energy prices and interest rates. If for any reason we were unable to transact in derivative instruments to manage these risks, our results of operations, cash flows and liquidity could be adversely affected. In addition, we may be exposed to losses in the future if the counterparties to our derivative instruments fail to honor their agreements. In particular, deterioration in the financial condition of our counterparties and any resulting failure to pay amounts owed to us or to perform on obligations or services owed to us could have a negative effect on our business and financial condition. Further, if major financial institutions consolidate and are forced to operate under more restrictive capital constraints and regulations, there could be less liquidity in the derivative markets, which could have a negative effect on our ability to hedge and transact with creditworthy counterparties.
We could be required to make unexpected contributions to our defined benefit pension plans as a result of adverse changes in interest rates and the capital markets.
Most of our pension obligations relate to funded defined benefit pension plans for our employees in the U.S., the U.K. Switzerland, and Canada, unfunded pension benefits in Germany and lump sum indemnities payable to our employees in France, Italy and Korea upon retirement or termination. Our pension plan assets consist primarily of funds invested in listed stocks and bonds. Our estimates of liabilities and expenses for pensions and other postretirement benefits incorporate a number of assumptions, including expected long-term rates of return on plan assets and interest rates used to discount future benefits. Our results of operations, liquidity or shareholder's (deficit) equity in a particular period could be adversely affected by capital market returns that are less than their assumed long-term rate of return or a decline of the rate used to discount future benefits. These factors or others may require us to make unexpected cash contributions to the pension plans in the future, preventing the use of such cash for other purposes.
Our goodwill, other intangible assets and other long-lived assets could become impaired, which could require us to take non-cash charges against earnings.
We assess, at least annually and potentially more frequently, whether the value of our goodwill has been impaired. We assess the recoverability of finite-lived other intangible assets and other long-lived assets whenever events or changes in circumstances indicate we may not be able to recover the asset's carrying amount. Any impairment of goodwill, other intangible assets, or long-lived assets as a result of such analysis would result in a non-cash charge against earnings, which could materially adversely affect our reported results of operations. A significant and sustained decline in our future cash flows, a significant adverse change in the economic environment or slower growth rates could result in the need to perform additional impairment analysis in future periods.
Additional tax expense, tax liabilities or tax compliance costs could adversely impact our profitability.
We are subject to income taxation in many jurisdictions. Judgment is required in determining our worldwide income tax provision and accordingly there are many transactions and computations for which our final income tax determination is uncertain. We are routinely audited by income tax authorities in many tax jurisdictions. Although we believe the recorded tax estimates are reasonable, the ultimate outcome from any audit (or related litigation) could be materially different from amounts reflected in our income tax provisions and accruals. Future settlements of income tax audits may have a material effect on earnings between the period of initial recognition of tax estimates in the financial statements and the point of ultimate tax audit settlement. Additionally, it is possible that future income tax legislation in any jurisdiction to which we are subject may be enacted that could have a material impact on our worldwide income tax provision beginning with the period that such legislation becomes effective. For example, the U.S. Tax Cuts and Jobs Act of 2017, which was enacted in the United States on December 22, 2017, reduces the U.S. corporate statutory tax rate, eliminates or limits tax deductions for several expenses that previously were deductible, imposes a mandatory deemed repatriation tax on undistributed historic earnings of foreign subsidiaries, requires a minimum tax on earnings generated by foreign subsidiaries and permits a tax-free repatriation of foreign earnings through a dividends received deduction. We performed a preliminary assessment of the impact of the new regulation on Novelis, and as discussed further in the Management Discussion and Analysis and the Company’s financial statement, we will continue to evaluate the overall impact of the Act on our effective tax rate and balance sheet in light of future regulations and interpretive guidance from tax authorities and our own additional analysis.
The covenants in our senior secured credit facilities and the indentures governing our Senior Notes impose operating and financial restrictions on us.
Our senior secured credit facilities and the indentures governing our Senior Notes impose certain operating and financial restrictions on us. These restrictions limit our ability and the ability of our restricted subsidiaries, among other things, to:
incur additional debt and provide additional guarantees;
pay dividends and make other restricted payments, including certain investments;
create or permit certain liens;
make certain asset sales;
use the proceeds from the sales of assets and subsidiary stock;
create or permit restrictions on the ability of our restricted subsidiaries to pay dividends or make other distributions to us;
engage in certain transactions with affiliates;
enter into sale and leaseback transactions; and
consolidate, merge or transfer all or substantially all of our assets or the assets of our restricted subsidiaries.
See Note 10 — Debt for additional discussion.
Other Legal and Regulatory Risks
Our global operations are subject to changes in laws and government regulations that may adversely affect our business and operations.
Compliance with U.S. and foreign laws and regulations, such as import and export requirements, embargoes and trade sanctions laws, anti-corruption laws, tax laws, foreign exchange controls and cash repatriation restrictions and data privacy regulations, increases our costs of doing business outside the U.S.
Global uncertainty about the direction of U.S. trade policy and the rising threat of changes in tariffs and trade barriers
in countries where we do business could cause our customers to delay or reduce spending on our products. In March 2018, the U.S. government formalized new tariffs on imported aluminum and steel following an investigation conducted by the U.S. Department of Commerce under Section 232 of the Trade Expansion Act of 1962. Higher costs of aluminum to US industries resulting from the tariffs may increase costs to our customers and could result in reduced demand in the end-use markets we serve, including automotive and beverage cans. Also, other countries may retaliate against the US by imposing tariffs on American exports which could reduce demand for our customers’ products outside the U.S. The current U.S. administration has also indicated its intention to withdraw from or substantially modify various international trade agreements, including the North American Free Trade Agreement. Depending on the nature of these changes, our business could be adversely impacted.
On April 6, 2018, United Company Rusal Plc (Rusal) and multiple other Russian entities and individuals were added to the list of Specially Designated Nationals and Blocked Persons maintained by the Office of Foreign Assets Control of the U.S. Department of the Treasury. According to U.S. government estimates, Rusal is responsible for seven percent of global aluminum production. Immediately prior to imposition of the sanctions, Novelis purchased Rusal-produced metal for some of its regional operations primarily through intermediaries and intermittently from Rusal directly on a spot-sale basis. In response to the sanctions, Novelis is seeking alternate sources of supply to eliminate its reliance on aluminum produced by Rusal following the imposition of sanctions. The impact of sanctions against Rusal has broad implications for the global aluminum market, including tighter supplies and increased prices. As a result of these market changes, Novelis may experience production disruptions for some of its customers. Although we expect these impacts to be limited, we cannot predict with certainty the severity or duration of supply disruptions resulting from the Russia sanctions.
We are subject to a broad range of environmental, health and safety laws and regulations, and we may be exposed to substantial environmental, health and safety costs and liabilities.
We are 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 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, the remediation of environmental contamination, post-mining reclamation and working conditions for our employees. 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 party locations and past activities.
Further, increased concern over climate change has led to new and proposed legislative and regulatory initiatives, such as cap- and-trade systems and additional limits on emissions of greenhouse gases. Additional new regulation could directly and indirectly affect our customers and suppliers (through an increase in the cost of production or their ability to produce satisfactory products) or our business (through an impact on our inventory availability, cost of sales, operations or demand for the products we sell). Any increased costs of these energy sources because of new laws could be passed along to us and our customers and suppliers, which could also have a negative impact on our profitability.
We may be exposed to significant legal proceedings or investigations.
From time to time, we are involved in, or the subject of, disputes, proceedings and investigations with respect to a variety of matters, including environmental, health and safety, product liability, employee, tax, personal injury, contractual and other matters as well as other disputes and proceedings that arise in the ordinary course of business. Any claims against us or any investigations involving us, whether meritorious or not, could be costly to defend or comply with and could divert management's attention as well as operational resources. Any such dispute, litigation or investigation, whether currently pending or threatened in the future, may have a material adverse effect on our financial results and cash flows. We generally maintain insurance against many product liability risks, but there can be no assurance that this coverage will be adequate for any liabilities ultimately incurred. In addition, there is no assurance that insurance will continue to be available on terms acceptable to us.
Item 1B.Unresolved Staff Comments
None.
Item 2.Properties
Our global headquarters are located in Atlanta, Georgia. Our global research and technology center is located in Kennesaw, Georgia, which contains state-of-the-art research and development capabilities to help us better partner and innovate with our customers. Our global casting engineering and technology center is located in Spokane, Washington. Our regional headquarters are located in the following cities: North America - Atlanta, Georgia; Europe - Küsnacht, Switzerland; Asia - Seoul, South Korea; and South America - Sao Paulo, Brazil. We also have a research facility in Spokane, Washington specializing in molten metal processing.
The total number of operating facilities within our operating segments during all or part of the year ended March 31, 2018 is shown in the table below, including operating facilities we jointly own and operate with third parties.
|
| | | | | | |
| | | Total Operating Facilities | | Facilities with Recycling Operations |
| North America | | 8 |
| | 3 |
|
| Europe | | 10 |
| | 4 |
|
| Asia | | 4 |
| | 3 |
|
| South America | | 2 |
| | 1 |
|
| Total | | 24 |
| | 11 |
|
The following tables provide information, by operating segment, about the plant locations, processes and major end-use markets/applications for the aluminum rolled products, recycling and primary metal facilities we operated during all or part of the year ended March 31, 2018.
North America
|
| | | | |
| Locations | | Plant Processes | | Major Products |
| Berea, Kentucky | | Recycling, sheet ingot casting | | Sheet ingot from recycled metal |
| Fairmont, West Virginia | | Cold rolling, finishing | | Container, HVAC and auto fin material |
| Greensboro, Georgia | | Recycling, sheet ingot casting | | Sheet ingot from recycled metal |
| Kingston, Ontario | | Cold rolling, finishing | | Automotive sheet, construction sheet, industrial sheet |
| Russellville, Kentucky (A) | | Hot rolling, cold rolling, finishing, casting | | Can stock, industrial sheet |
| Oswego, New York | | Sheet ingot casting, hot rolling, cold rolling, recycling, brazing, finishing, heat treatment | | Can stock, automotive sheet, construction sheet, industrial sheet, semi-finished coil |
| Terre Haute, Indiana | | Cold rolling, finishing | | Container and industrial material |
| Warren, Ohio | | Coating | | Can stock coating |
_________________________
| |
| (A) | Our Logan facility, located in Russellville, KY, is a processing joint venture between us and Tri-Arrows Aluminum Inc. (Tri-Arrows). We own 40% of the outstanding common shares of Logan. |
Europe
|
| | | | |
| Locations | | Plant Processes | | Major Products |
| Bresso, Italy | | Finishing, painting | | Painted sheet, construction sheet |
| Göttingen, Germany | | Cold rolling, finishing, painting | | Can stock, food can, painted sheet |
| Latchford, United Kingdom | | Recycling | | Sheet ingot from recycled metal |
| Ludenscheid, Germany | | Foil rolling, finishing, converting | | Foil, packaging |
| Nachterstedt, Germany | | Cold rolling, finishing, painting, recycling, heat treatment | | Automotive sheet, can stock, industrial sheet, painted sheet, construction sheet, sheet ingot |
| Neuss, Germany (A) | | Hot rolling, cold rolling, recycling | | Can stock, foilstock, feeder stock for finishing operations |
| Ohle, Germany | | Cold rolling, finishing, converting | | Foil, packaging |
| Pieve, Italy | | Continuous casting, cold rolling, finishing, recycling | | Coil for finishing operations, industrial sheet |
| Sierre, Switzerland (B) | | Sheet ingot casting, hot rolling, cold rolling, finishing | | Automotive sheet, industrial sheet |
| Crick, United Kingdom | | Finishing | | Automotive sheet |
_________________________
| |
| (A) | Aluminium Norf GmbH (Alunorf), located in Neuss, Germany, is operated as a 50/50 joint venture between us and Hydro Aluminium Deutschland GmbH (Hydro). This joint venture is known as "Alunorf". Together, with Hydro, we operate Alunorf as a production cooperative, with each party supplying its own primary metal inputs for transformation at the facility. See Note 8 — Investment in and Advances to Non-Consolidated Affiliates and Related Party Transactions for further information about this affiliate. |
| |
| (B) | In fiscal year ended March 31, 2018, Novelis agreed to acquire operating facilities and manufacturing assets at its Sierre, Switzerland plant that have historically been leased. A service company will be jointly owned and operated by the parties and Novelis will acquire from Constellium N.V. (Constellium) a 50% interest in the service company. |
Asia
|
| | | | |
| Locations | | Plant Processes | | Major Products |
| Binh Doung, Vietnam (A) | | Recycling | | Recycled material |
| Changzhou, China | | Heat treatment | | Automotive sheet |
| Ulsan, South Korea (B) | | Sheet ingot casting, hot rolling, cold rolling, recycling, finishing | | Can stock, construction sheet, industrial sheet, electronics, automotive sheet for finishing operations, foilstock, and recycled material |
| Yeongju, South Korea | | Sheet ingot casting, hot rolling, cold rolling, recycling, finishing | | Can stock, construction sheet, industrial sheet, electronics, foilstock and recycled material |
_________________________
| |
| (A) | We ceased operations at our Binh Doung plant in fiscal 2018. |
| |
| (B) | Operated as a joint venture between Novelis Korea Ltd. (Novelis Korea) and Kobe Steel Ltd. (Kobe) in which interests are shared 50.1% and 49.9%, respectively. Ulsan Aluminum, Ltd. (UAL) is the name of the joint venture that was created. See Note 8 — Investment in and Advances to Non-Consolidated Affiliates and Related Party Transactions for further information about this affiliate. |
South America
|
| | | | |
| Locations | | Plant Processes | | Major Products |
| Pindamonhangaba, Brazil | | Sheet ingot casting, hot rolling, cold rolling, recycling, finishing, coating | | Can stock, construction sheet, industrial sheet, foilstock, sheet ingot |
| Santo Andre, Brazil | | Foil rolling, finishing | | Foil |
Item 3.Legal Proceedings
We are a party to litigation incidental to our business from time to time. For additional information regarding litigation to which we are a party, see Note 19 — Commitments and Contingencies to our accompanying audited consolidated financial statements, which are incorporated by reference into this item.
Item 4.Mine Safety Disclosures
Not applicable.
PART II
Item 5.Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
There is no established public trading market for the Company’s common stock. All of the common shares of Novelis are owned directly by AV Metals Inc. and indirectly by Hindalco Industries Limited. None of the equity securities of the Company are authorized for issuance under any equity compensation plan.
Dividends or returns of capital are at the discretion of the board of directors and will depend on, among other things, our financial resources, cash flows generated by our business, our cash requirements, restrictions under and covenant compliance under the instruments governing our indebtedness, being in compliance with the appropriate indentures and covenants under the instruments that govern our indebtedness that would allow us to legally pay dividends or return capital and other relevant factors.
Item 6.Selected Financial Data
The selected consolidated financial data should be read in conjunction with our consolidated financial statements for the respective periods and the related notes included elsewhere in this Form 10-K.
All of our common shares were indirectly held by Hindalco; thus, earnings per share data are not reported. Amounts in the tables below are in millions.
|
| | | | | | | | | | | | | | | | | | | | |
| | | March 31, |
| | | 2018 | | 2017 | | 2016 | | 2015 | | 2014 |
| Net sales | | $ | 11,462 |
| | $ | 9,591 |
| | $ | 9,872 |
| | $ | 11,147 |
| | $ | 9,767 |
|
| Net income (loss) attributable to our common shareholder | | $ | 635 |
| | $ | 45 |
| | $ | (38 | ) | | $ | 148 |
| | $ | 104 |
|
| Return of capital (A) | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 250 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| | | March 31, |
| | | 2018 | | 2017 | | 2016 | | 2015 | | 2014 |
| Total assets (B) | | $ | 9,503 |
| | $ | 8,373 |
| | $ | 8,280 |
| | $ | 9,102 |
| | $ | 9,114 |
|
| Long-term debt (including current portion) | | $ | 4,457 |
| | $ | 4,558 |
| | $ | 4,468 |
| | $ | 4,457 |
| | $ | 4,451 |
|
| Short-term borrowings | | $ | 49 |
| | $ | 294 |
| | $ | 579 |
| | $ | 846 |
| | $ | 723 |
|
| Cash and cash equivalents | | $ | 920 |
| | $ | 594 |
| | $ | 556 |
| | $ | 628 |
| | $ | 509 |
|
| Total equity (deficit) | | $ | 823 |
| | $ | (77 | ) | | $ | (59 | ) | | $ | (70 | ) | | $ | 268 |
|
_________________________
| |
| (A) | In March 2014, we declared a return of capital to our shareholder in the amount of $250 million, which we subsequently paid on April 30, 2014. |
| |
| (B) | Refer to Note 1 — Business and Summary of Significant Accounting Policies for further information in regards to revisions made to the years ended March 31, 2017 and 2016 consolidated balance sheet, consolidated statement of cash flows and footnote disclosures. |
Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations
OVERVIEW AND REFERENCES
Novelis is the world's leading aluminum rolled products producer based on shipment volume in fiscal 2018. We produce aluminum sheet and light gauge products for use in the packaging market, which includes beverage and food can and foil products, as well as for use in the automotive, transportation, electronics, architectural and industrial product markets. We are also the world's largest recycler of aluminum and have recycling operations in many of our plants to recycle both post-consumer aluminum and post-industrial aluminum. As of March 31, 2018, we had manufacturing operations in ten countries on four continents, which include 24 operating plants, and recycling operations in eleven of these plants.
The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those discussed below and elsewhere in this Annual Report, particularly in “Special Note Regarding Forward-Looking Statements and Market Data” and “Risk Factors.”
HIGHLIGHTS
We reported "Net income attributable to our common shareholder" of $635 million for the fiscal year ended March 31, 2018, compared to $45 million for the fiscal year ended March 31, 2017. The increase is primarily due to higher segment income as a result of the factors discussed below, and a pre-tax gain of $318 million, partially offset by tax expense of $77 million, related to the sale of shares in Ulsan Aluminum Ltd. (UAL), a new wholly owned subsidiary formed by Novelis Korea in the second quarter of year ended March 31, 2018,
We reported "Segment income" of $1,215 million compared to $1,085 million in the prior year. The increase is primarily due to; higher can and automotive shipments as a result of strong demand and solid global operational performance, diligent operating cost management, a continued focus on asset efficiency and prioritizing optimization of the product portfolio. In addition, the increase is due to favorable foreign currency impact and lower metal input costs. As a result of these factors, net cash provided by operating activities was $586 million and free cash flow was $406 million.
We have reduced our net debt leverage ratio (net debt/segment income) to 3.0x at March 31, 2018 as compared to 3.9x in the prior year. This reduction in net leverage combined with strong financial results has provided us with the financial flexibility to seek strategic investments, particularly in the growing automotive segment. During the fourth quarter of fiscal 2018, we announced plans to expand our production footprint in North America with an investment in automotive finishing capacity in Guthrie, Kentucky. We also agreed to acquire operating facilities and manufacturing assets at our Sierre, Switzerland plant, that have historically been leased.
BUSINESS AND INDUSTRY CLIMATE
Economic growth and material substitution continue to drive increasing global demand for aluminum and rolled products. Global can sheet overcapacity, increased competition from Chinese suppliers of flat rolled aluminum products, and customer consolidation are also adding downward pricing pressures in the can sheet market.
Meanwhile, the demand for aluminum in the automotive industry continues to grow, which drove the investments we made in our automotive sheet finishing capacity in North America, Europe and Asia. This demand has been primarily driven by the benefits that result from using lighter weight materials in the vehicles, as companies respond to government regulations, which are driving improved emissions and better fuel economy; while also maintaining or improving vehicle safety and performance.
Key Sales and Shipment Trends
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in millions, except shipments which are in kt) |
| | | Three Months Ended | | Year Ended | | Three Months Ended | | Year Ended |
| | | Jun 30,
2016 | | Sept 30, 2016 | | Dec 31,
2016 | | Mar 31,
2017 | | Mar 31,
2017 | | Jun 30,
2017 | | Sept 30, 2017 | | Dec 31,
2017 | | Mar 31,
2018 | | Mar 31,
2018 |
| Net sales | | $ | 2,296 |
| | $ | 2,361 |
| | $ | 2,313 |
| | $ | 2,621 |
| | $ | 9,591 |
| | $ | 2,669 |
| | $ | 2,794 |
| | $ | 2,933 |
| | $ | 3,066 |
| | $ | 11,462 |
|
| Percentage increase (decrease) in net sales versus comparable previous year period | | (13 | )% | | (5 | )% | | (2 | )% | | 9 | % | | (3 | )% | | 16 | % | | 18 | % | | 27 | % | | 17 | % | | 20 | % |
| Rolled product shipments: | | | | | | | | | | | | | | | | | | |
| North America | | 242 |
| | 252 |
| | 247 |
| | 269 |
| | 1,010 |
| | 273 |
| | 274 |
| | 269 |
| | 273 |
| | 1,089 |
|
| Europe | | 246 |
| | 236 |
| | 226 |
| | 235 |
| | 943 |
| | 235 |
| | 237 |
| | 222 |
| | 236 |
| | 930 |
|
| Asia | | 178 |
| | 176 |
| | 162 |
| | 174 |
| | 690 |
| | 180 |
| | 180 |
| | 177 |
| | 174 |
| | 711 |
|
| South America | | 103 |
| | 121 |
| | 125 |
| | 125 |
| | 474 |
| | 110 |
| | 131 |
| | 146 |
| | 136 |
| | 523 |
|
| Eliminations | | (14 | ) | | (12 | ) | | (10 | ) | | (14 | ) | | (50 | ) | | (13 | ) | | (20 | ) | | (18 | ) | | (14 | ) | | (65 | ) |
| Total | | 755 |
| | 773 |
| | 750 |
| | 789 |
| | 3,067 |
| | 785 |
| | 802 |
| | 796 |
| | 805 |
| | 3,188 |
|
| | | | | | | | | | | | | | | | | | | | |
|
|
| The following summarizes the percentage increase (decrease) in rolled product shipments versus the comparable previous year period: |
| North America | | (7 | )% | | (6 | )% | | (2 | )% | | 8 | % | | (2 | )% | | 13 | % | | 9 | % | | 9 | % | | 1 | % | | 8 | % |
| Europe | | (2 | )% | | (6 | )% | | (3 | )% | | (4 | )% | | (4 | )% | | (4 | )% | | — | % | | (2 | )% | | — | % | | (1 | )% |
| Asia | | (8 | )% | | (6 | )% | | (16 | )% | | (7 | )% | | (9 | )% | | 1 | % | | 2 | % | | 9 | % | | — | % | | 3 | % |
| South America | | (4 | )% | | 3 | % | | (5 | )% | | (7 | )% | | (3 | )% | | 7 | % | | 8 | % | | 17 | % | | 9 | % | | 10 | % |
| Total | | (2 | )% | | (2 | )% | | (4 | )% | | — | % | | (2 | )% | | 4 | % | | 4 | % | | 6 | % | | 2 | % | | 4 | % |
Business Model and Key Concepts
Conversion Business Model
A significant amount of our business is conducted under a conversion model, which allows us to pass through increases or decreases in the price of aluminum to our customers. Nearly all of our flat-rolled products have a price structure with three components: (i) a base aluminum price quoted off the LME; (ii) a local market premium; and (iii) a “conversion premium” to produce the rolled product which reflects, among other factors, the competitive market conditions for that product. Base aluminum prices are typically driven by macroeconomic factors and global supply and demand for aluminum. The local market premiums tend to vary based on the supply and demand for metal in a particular region and associated transportation costs.
In North America, Europe and South America, we pass through local market premiums to our customers which are recorded through "Net sales." In Asia we purchase our metal inputs based on the LME and incur a local market premium; however, many of our competitors in this region price their metal off the Shanghai Futures Exchange, which does not include a local market premium, making it difficult for us to fully pass through this component of our metal input cost to some of our customers.
LME Base Aluminum Prices and Local Market Premiums
The average (based on the simple average of the monthly averages) and closing prices for aluminum set on the LME for the years ended March 31, 2018, 2017, and 2016 are as follows: |
| | | | | | | | | | | | | | | | | | |
| | | | | Percent Change |
| | | Year Ended March 31, | | Year Ended March 31, 2018 versus March 31, 2017 | | Year Ended March 31, 2017 versus March 31, 2016 |
| | | 2018 | | 2017 | | 2016 | | |
| London Metal Exchange Prices | | | | | | | | | | |
| Aluminum (per metric tonne, and presented in U.S. dollars): |
| Closing cash price as of beginning of period | | $ | 1,947 |
| | $ | 1,492 |
| | $ | 1,789 |
| | 30 | % | | (17 | )% |
| Average cash price during period | | $ | 2,045 |
| | $ | 1,688 |
| | $ | 1,592 |
| | 21 | % | | 6 | % |
| Closing cash price as of end of period | | $ | 1,997 |
| | $ | 1,947 |
| | $ | 1,492 |
| | 3 | % | | 30 | % |
For the year ended March 31, 2018, there has been less volatility in local market premium price movements. Although there have been significant percentage changes year over year, the decreased volatility did not have a significant impact on metal price lag. The weighted average local market premium was as follows:
|
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | Percent Change |
| | | Year Ended March 31, | | Year Ended
March 31, 2018
versus March 31, 2017 | | Year Ended
March 31, 2017
versus March 31, 2016 |
| | | 2018 | | 2017 | | 2016 | | |
| Weighted average local market premium (per metric tonne, and presented in U.S. dollars) | | $ | 192 |
| | $ | 151 |
| | $ | 194 |
| | 27 | % | | (22 | )% |
Metal Price Lag and Related Hedging Activities
Increases or decreases in the price of aluminum based on the average LME base aluminum prices and local market premiums directly impact “Net sales,” “Cost of goods sold (exclusive of depreciation and amortization)” and working capital. The timing of these impacts varies based on contractual arrangements with customers and metal suppliers in each region. These timing impacts are referred to as metal price lag. Metal price lag exists due to: (i) the period of time between the pricing of our purchases of metal, holding and processing the metal, and the pricing of the sale of finished inventory to our customers, and (ii) certain customer contracts containing fixed forward price commitments which result in exposure to changes in metal prices for the period of time between when our sales price fixes and the sale actually occurs.
We use LME aluminum forward contracts to preserve our conversion margins and manage the timing differences associated with the LME base metal component of “Net sales,” and “Cost of goods sold (exclusive of depreciation and amortization)." These derivatives directly hedge the economic risk of future LME base metal price fluctuations to better match the purchase price of metal with the sales price of metal. The majority of our local market premium hedging occurs in North America; however, exposure here is not fully hedged. In our Europe and Asia regions, the derivative market for local market premiums is not robust or efficient enough for us to offset the impacts of LMP price movements beyond a small volume. As a consequence, volatility in local market premiums can have a significant impact on our results of operations and cash flows.
We elect to apply hedge accounting to better match the recognition of gains or losses on certain derivative instruments with the recognition of the underlying exposure being hedged in the statement of operations. For undesignated metal derivatives, there are timing differences between the recognition of unrealized gains or losses on the derivatives and the recognition of the underlying exposure in the statement of operations. The recognition of unrealized gains and losses on undesignated metal derivative positions typically precedes inventory cost recognition, customer delivery and revenue recognition. The timing difference between the recognition of unrealized gains and losses on undesignated metal derivatives and cost or revenue recognition impacts “Income before income taxes” and “Net income.” Gains and losses on metal derivative contracts are not recognized in “Segment income” until realized.
See Segment Review below for the impact of metal price lag on each of our segments.
Foreign Currency and Related Hedging Activities
We operate a global business and conduct business in various currencies around the world. We have exposure to foreign currency risk as fluctuations in foreign exchange rates impact our operating results as we translate the operating results from various functional currencies into our U.S. dollar reporting currency at the current average rates. We also record foreign exchange remeasurement gains and losses when business transactions are denominated in currencies other than the functional currency of that operation. Global economic uncertainty is contributing to higher levels of volatility among the currency pairs in which we conduct business. The following table presents the exchange rates as of the end of each period and the average of the month-end exchange rates for the years ended March 31, 2018, 2017, and 2016:
|
| | | | | | | | | | | | | | | | | | |
| | | Exchange Rate as of Year Ended March 31, | | Average Exchange Rate Year Ended March 31, |
| | | 2018 | | 2017 | | 2016 | | 2018 | | 2017 | | 2016 |
| U.S. dollar per Euro | | 1.230 |
| | 1.068 |
| | 1.139 |
| | 1.180 |
| | 1.098 |
| | 1.102 |
|
| Brazilian real per U.S. dollar | | 3.324 |
| | 3.168 |
| | 3.559 |
| | 3.231 |
| | 3.290 |
| | 3.624 |
|
| South Korean won per U.S. dollar | | 1,067 |
| | 1,116 |
| | 1,154 |
| | 1,106 |
| | 1,148 |
| | 1,158 |
|
| Canadian dollar per U.S. dollar | | 1.289 |
| | 1.329 |
| | 1.298 |
| | 1.283 |
| | 1.314 |
| | 1.312 |
|
| Swiss franc per Euro | | 1.178 |
| | 1.069 |
| | 1.094 |
| | 1.139 |
| | 1.084 |
| | 1.076 |
|
Exchange rate movements have an impact on our operating results. In Europe, where we have predominantly local currency selling prices and operating costs, we benefit as the Euro strengthens, but are adversely affected as the Euro weakens. In South Korea, where we have local currency operating costs and U.S. dollar denominated selling prices for exports, we benefit as the won weakens but are adversely affected as the won strengthens. In Brazil, where we have predominately U.S. dollar selling prices and local currency manufacturing costs, we benefit as the real weakens, but are adversely affected as the real strengthens.
We use foreign exchange forward contracts and cross-currency swaps to manage our exposure arising from recorded assets and liabilities, firm commitments, and forecasted cash flows denominated in currencies other than the functional currency of certain operations, which include capital expenditures and net investment in foreign subsidiaries. The impact of foreign exchange remeasurement, net of related hedges, was a net loss of $1 million in fiscal 2018, a net gain of $5 million in fiscal 2017, and a net gain of $2 million in fiscal 2016. The movement of currency exchange rates during fiscal 2018, fiscal 2017 and fiscal 2016 resulted in $4 million of net unrealized losses, $8 million of net unrealized gains, and $8 million of net unrealized losses, respectively, on undesignated foreign currency derivatives.
See Segment Review below for the impact of foreign currency on each of our segments.
Results of Operations
Year Ended March 31, 2018 Compared with the Year Ended March 31, 2017
"Net Sales" were $11,462 million, an increase of 20%, driven by a 30% increase in average base aluminum prices, a 4% increase in flat rolled product shipments, and a 27% increase in local market premiums.
“Cost of goods sold (exclusive of depreciation and amortization)” was $9,719 million, an increase of 21%, primarily due to an increase in flat rolled product shipments and higher average aluminum prices. Total metal input costs included in "Cost of goods sold (exclusive of depreciation and amortization)” increased $1,521 million.
"Income before income taxes" for the year ended March 31, 2018 was $855 million, compared to $197 million for the year ended March 31, 2017. In addition to the factors noted above, the following items affected "Income before income taxes:"
An increase in "Selling, general and administrative expenses" of $68 million primarily related to an increase in the fair value of Long Term Incentive Plan (LTIP) awards, increases in factoring expense and professional fees;
A decline in interest expense of $39 million due to the refinancing of the 2017 Notes, 2020 Notes and Term Loan at lower interest rates;
"Loss on extinguishment of debt" in the prior year of $134 million related to the extinguishment of the 2017 Notes, 2020 Notes and Term Loan;
A gain on sale of a business of $318 million, related to the sale of shares of UAL to Kobe and the deconsolidation of the remaining assets to form the equity method investment in September 2017. This gain was compared to a loss of $27 million in the prior fiscal year, which was recognized on the sale of our interest in Aluminium Company of Malaysia Berhad (ALCOM);
"Restructuring and impairment, net" of $34 million primarily related to restructuring actions in Europe, compared to $10 million of restructuring expenses in the prior fiscal year, related to severance and other charges across our regions; and
Increased stability in the current year local market premiums, resulted in a $4 million metal price lag gain, compared to a $31 million metal price lag loss during the prior fiscal year.
We recognized $233 million of tax expense for the year ended March 31, 2018, which resulted in an effective tax rate of 27%. This rate is due to a $77 million expense on the sale of a business, tax losses in jurisdictions where we believe it more likely than not that we will not be able to utilize those losses and therefore have a valuation allowance recorded, offset by a non-cash income tax benefit of $19 million for the remeasurement of deferred tax assets and liabilities in accordance with the Tax Cuts and Jobs Act. We recognized $151 million of tax expense for the year ended March 31, 2017, primarily due to tax losses in jurisdictions where we believe it to be more likely than not that we will not be able to utilize those losses and therefore have a valuation allowance recorded and the net impact of foreign exchange translation and remeasurement of deferred income taxes, offset by dividends not subject to tax.
We reported “Net income attributable to our common shareholder” of $635 million for the current year, compared to “Net loss attributable to our common shareholder” of $45 million for the prior year, primarily as a result of the factors discussed above.
Segment Review
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 regions and are organized under four operating segments: North America, Europe, Asia and South America.
In order to reconcile the financial information for the segments shown in the tables below to the relevant U.S. GAAP-based measures, "Eliminations and other" adjust for proportional consolidation of each line item, and eliminate intersegment shipments (in kt) and intersegment "Net sales." The tables below show selected segment financial information (in millions, except shipments which are in kt).
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| Selected Operating Results Year Ended March 31, 2018 | | North America | | Europe | | Asia | | South America | | Eliminations and other | | Total |
| Net sales | | $ | 3,951 |
| | $ | 3,447 |
| | $ | 2,110 |
| | $ | 1,931 |
| | $ | 23 |
| | $ | 11,462 |
|
| Shipments | | | | | | | | | | | | |
| Rolled products - third party | | 1,083 |
| | 914 |
| | 696 |
| | 495 |
| | — |
| | 3,188 |
|
| Rolled products - intersegment | | 6 |
| | 16 |
| | 15 |
| | 28 |
| | (65 | ) | | — |
|
| Total rolled products | | 1,089 |
| | 930 |
| | 711 |
| | 523 |
| | (65 | ) | | 3,188 |
|
| Non-rolled products | | 1 |
| | 8 |
| | 8 |
| | 130 |
| | (2 | ) | | 145 |
|
| Total shipments | | 1,090 |
| | 938 |
| | 719 |
| | 653 |
| | (67 | ) | | 3,333 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| Selected Operating Results Year Ended March 31, 2017 | | North America | | Europe | | Asia | | South America | | Eliminations and other | | Total |
| Net sales | | $ | 3,228 |
| | $ | 2,968 |
| | $ | 1,791 |
| | $ | 1,510 |
| | $ | 94 |
| | $ | 9,591 |
|
| Shipments | | | | | | | | | | | | |
| Rolled products - third party | | 1,009 |
| | 927 |
| | 682 |
| | 449 |
| | — |
| | 3,067 |
|
| Rolled products - intersegment | | 1 |
| | 16 |
| | 8 |
| | 25 |
| | (50 | ) | | — |
|
| Total rolled products | | 1,010 |
| | 943 |
| | 690 |
| | 474 |
| | (50 | ) | | 3,067 |
|
| Non-rolled products | | 4 |
| | 8 |
| | 9 |
| | 88 |
| | — |
| | 109 |
|
| Total shipments | | 1,014 |
| | 951 |
| | 699 |
| | 562 |
| | (50 | ) | | 3,176 |
|
The following table reconciles changes in “Segment income” for the year ended March 31, 2017 to the year ended March 31, 2018 (in millions).
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| Changes in Segment income | | North
America | | Europe | | Asia | | South
America | | Eliminations (A) | | Total |
| Segment income - Year Ended March 31, 2017 (B) | | $ | 380 |
| | $ | 208 |
| | $ | 163 |
| | $ | 337 |
| | $ | (3 | ) | | $ | 1,085 |
|
| Volume | | 84 |
| | (15 | ) | | 24 |
| | 59 |
| | (13 | ) | | 139 |
|
| Conversion premium and product mix | | 10 |
| | 9 |
| | (22 | ) | | (45 | ) | | 9 |
| | (39 | ) |
| Conversion costs | | 22 |
| | 6 |
| | 9 |
| | 24 |
| | 4 |
| | 65 |
|
| Foreign exchange | | 1 |
| | 25 |
| | 1 |
| | (12 | ) | | — |
| | 15 |
|
| Selling, general & administrative and research & development costs (C) | | (28 | ) | | (12 | ) | | (2 | ) | | (25 | ) | | (5 | ) | | (72 | ) |
| Other changes (D) | | 5 |
| | (2 | ) | | (6 | ) | | 25 |
| | — |
| | 22 |
|
| Segment income - Year Ended March 31, 2018 | | $ | 474 |
| | $ | 219 |
| | $ | 167 |
| | $ | 363 |
| | $ | (8 | ) | | $ | 1,215 |
|
_________________________
| |
| (A) | The recognition of "Segment income" by a region on an intersegment shipment could occur in a period prior to the recognition of "Segment income" on a consolidated basis, depending on the timing of when the inventory is sold to the |
third party customer. The "Eliminations" column adjusts regional "Segment income" for intersegment shipments that occur in a period prior to recognition of "Segment income" on a consolidated basis. The "Eliminations" column also reflects adjustments for changes in regional volume, conversion premium and product mix, and conversion costs related to intersegment shipments for consolidation.
| |
| (B) | Effective in the first quarter of fiscal 2018, management removed the impact of metal price lag from "Segment income" in order to enhance the visibility of the underlying operating performance of the Company. This change does not impact our consolidated financial statements. Segment information for prior periods presented has been updated to reflect this change. |
| |
| (C) | Selling, general & administrative costs and research & development costs include costs incurred directly by each segment and all corporate related costs. |
| |
| (D) | This line includes items such as State of Espirito Santo grants an indirect tax incentive (ICMS) for companies who fulfill certain requirements. According to this incentive, the Company can recognize a presumed ICMS credit, thus reducing the amounts due to the State. The mentioned incentive is recorded in our consolidated results of operations. |
North America
“Net sales” increased $723 million, or 22%, primarily due to higher average aluminum prices and higher can and automotive shipments.
“Segment income” was $474 million, an increase of 25%, primarily due to favorable operating and metal costs as well as higher automotive and can volumes, higher pricing and favorable product mix as a result of automotive growth. These positive factors were partially offset by unfavorable selling, general and administrative costs.
Europe
“Net sales” increased $479 million, or 16%, primarily due to higher average aluminum prices and higher automotive shipments; partially offset by lower can and specialty shipments.
“Segment income” was $219 million, an increase of 5%, primarily due to favorable product mix as a result of our portfolio optimization efforts, favorable currency impact, higher automotive volumes and favorable cost absorption. These positive factors were partially offset by lower can and specialties volumes, and higher selling, general and administrative costs.
Asia
“Net sales” increased $319 million, or 18%, due to higher average aluminum prices and higher can and automotive shipments; partially offset by lower specialty shipments.
“Segment income” was $167 million, a increase of 2%, primarily due to higher automotive and can shipments and favorable operating and metal costs, partially offset by lower can pricing and product mix.
South America
“Net sales” increased $262$421 million, or 16%28%, driven bydue to higher average aluminum prices and higher shipments of ourspecialties and can products, partially offset by lower shipments of our industrial products. Shipments of our can products were higher compared to prior year due to an increase in can consumption in the region. The increase in demand associated with the FIFA World Cup in Brazil in June 2014 contributed to an increase in shipments as compared to prior year.shipments.
“Segment income” was $240$363 million, an increase of 4%8%, primarily due to higher can and specialties volumes discussed above,and favorable foreign currency,operating and metal costs. These positive factors were partially offset by unfavorable price and product mix and higher conversion costs and lower conversion premiums. Conversion costs were unfavorable in fiscal 2015 due to production issues related to the start up of certain expansion projects, higher headcount, higher market premiums on the procurement of metal, higher freight and an increase in repairs and maintenance costs. Energy sales positively impacted our results during the year ended March 31, 2015, partially offset by sales of alumina in the comparable period. The decline in conversion premiums was primarily related to changes in customer mix. Other changes impacting "Segment income" include higherselling, general and administrative costs.
In December 2014, we finalized the sale of our share of the joint venture of the Consorcio Candonga. The sale of the majority of our other hydroelectric power generation operations was completed in February 2015. Additionally, in December 2014, we ceased operations at our last primary aluminum smelter in Ouro Preto, Brazil. Our new can end stock coating line and recycling facility in Pindamonhangaba, Brazil (Pinda), both of which began the commissioning process in early 2014, continue to ramp up production.
Reconciliation of segment results to “Net"Net income attributable to our common shareholder”shareholder" to segment income
Costs such as depreciation and amortization, interest expense and unrealized gains (losses)(gains) losses on changes in the fair value of derivatives (except for derivatives used to manage our foreign currency remeasurement activities) are not utilized by our chief operating decision maker in evaluating segment performance. The table below reconciles "Net income attributable to our common shareholder" to income from reportable segments for the year ended March 31, 2018 and 2017 (in millions).
|
| | | | | | | | |
| | | Year Ended March 31, |
| | | 2018 | | 2017 |
| Net income attributable to our common shareholder | | $ | 635 |
| | $ | 45 |
|
| Noncontrolling interests | | (13 | ) | | 1 |
|
| Income tax provision | | 233 |
| | 151 |
|
| Depreciation and amortization | | 354 |
| | 360 |
|
| Interest expense and amortization of debt issuance costs | | 255 |
| | 294 |
|
| Adjustment to reconcile proportional consolidation | | 51 |
| | 28 |
|
| Unrealized gains on change in fair value of derivative instruments, net | | (20 | ) | | (5 | ) |
| Realized gains on derivative instruments not included in segment income | | — |
| | (5 | ) |
| Gain on assets held for sale | | — |
| | (2 | ) |
| Loss on extinguishment of debt | | — |
| | 134 |
|
| Restructuring and impairment, net | | 34 |
| | 10 |
|
| Loss on sale of fixed assets | | 7 |
| | 6 |
|
| (Gain) loss on sale of a business (A) | | (318 | ) | | 27 |
|
| Metal price lag (B) | | (4 | ) | | 31 |
|
| Other, net | | 1 |
| | 10 |
|
| Total of reportable segments | | $ | 1,215 |
| | $ | 1,085 |
|
_________________________
| |
| (A) | In September 2017, Novelis Korea Ltd., a subsidiary of Novelis Inc., sold a portion of its shares in Ulsan Aluminum, Ltd. (UAL) for $314 million, which resulted in a gain on sale of investments. For additional information related to the transaction, see Note 8 — Investment in and Advances to Non-Consolidated Affiliates and Related Party Transactions. |
| |
| (B) | Effective in the first quarter of fiscal 2018, management removed the impact of metal price lag from Segment Income in order to enhance the visibility of the underlying operating performance of the Company. The impact of metal price lag is now reported as a separate line item in this reconciliation. This change does not impact our consolidated financial statements. Segment Income for prior periods presented has been updated to reflect this change. For additional information related to metal price lag, see Note 14 — Financial Instruments and Commodity Contracts. |
Results of Operations
Year Ended March 31, 2017 Compared with the Year Ended March 31, 2016
"Net sales" were $9.6 billion, a decrease of 3% driven by a 2% decrease in flat rolled product shipments and a 22% decrease in local market premiums, partially offset by a 6% increase in average base aluminum prices and a favorable impact from our strategic shift to higher conversion premium products.
“Cost of goods sold (exclusive of depreciation and amortization)” was $8.0 billion, a decrease of 9%, due to lower flat rolled product shipments and cost improvements which contributed to lower average metal costs. Total metal input costs included in "Cost of goods sold (exclusive of depreciation and amortization)” decreased $638 million.
“Income before income taxes” for the year ended March 31, 2017 was $197 million compared to $8 million in the year ended March 31, 2016. In addition to the factors noted above, the following items affected “Income before income taxes:”
Increased stability in the current year local market premiums, resulted in a $31 million metal price lag loss during the year ended March 31, 2017 compared to a $172 million metal price lag loss during the year ended March 31, 2016;
“Restructuring and impairment, net” of $10 million for the year ended March 31, 2017, includes $5 million of severance charges and $3 million of other charges across our regions. Additionally, there were $2 million of impairment charges related to assets in North America. In the prior year, we incurred $48 million, which related to $21 million of charges related to capitalized software impairments, $14 million of severance and other charges related to restructuring actions at our global headquarters, $10 million of severance and other charges across our regions and $3 million of other impairment;
A decline in interest expense of $33 million primarily resulting from the refinancing of the 2017 Notes, 2020 Notes and Term Loan, due to lower interest rates;
"Loss on extinguishment of debt" in the current year of $134 million relates to the extinguishment of the 2017 Notes, 2020 Notes and Term Loan. In the prior year, the loss related to an amendment leading to a partial extinguishment of the Term Loan;
A loss of $27 million was recognized on the sale of our interest in Aluminium Company of Malaysia Berhad, which was reported in "Other (income) expense, net"; and
A gain of $10 million was recognized related to the settlement of a business interruption recovery claim due to an outage at the hotmill in the Logan facility in North America for the year ended March 31, 2016. There was no such gain recorded in the current year.
We recognized $151 million of tax expense for the year ended March 31, 2017, due to the results of operations at statutory tax rates, as well as due to tax losses in jurisdictions where we believe it is more likely than not that we will not be able to utilize those losses and therefore have a valuation allowance recorded and tax rate differences on foreign earnings, offset by dividends not subject to tax. We recognized $46 million of tax expense for the year ended March 31, 2016, primarily due to the results of operations at statutory tax rates, tax losses in jurisdictions where we believe it to be more likely than not that we will not be able to utilize those losses and therefore have a valuation allowance recorded and the net impact of foreign exchange translation and remeasurement of deferred income taxes, offset by dividends not subject to tax.
We reported “Net income attributable to our common shareholder” of $45 million for the yearsyear ended March 31, 20152017 as compared to “Net loss attributable to our common shareholder” of $38 million for the year ended March 31, 2016, primarily as a result of the factors discussed above.
Segment Review
The tables below show selected segment financial information (in millions, except shipments which are in kt). For additional financial information related to our operating segments, see Note 20 — Segment, Geographical Area, Major Customer and 2014Major Supplier Information. In order to reconcile the financial information for the segments shown in the tables below to the relevant U.S. GAAP-based measures, "Eliminations and other" must adjust for proportional consolidation of each line item, and eliminate intersegment shipments (in kt) and intersegment "Net sales."
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| Selected Operating Results Year Ended March 31, 2017 | | North America | | Europe | | Asia | | South America | | Eliminations and other | | Total |
| Net sales | | $ | 3,228 |
| | $ | 2,968 |
| | $ | 1,791 |
| | $ | 1,510 |
| | $ | 94 |
| | $ | 9,591 |
|
| Shipments | | | | | | | | | | | | |
| Rolled products - third party | | 1,009 |
| | 927 |
| | 682 |
| | 449 |
| | — |
| | 3,067 |
|
| Rolled products - intersegment | | 1 |
| | 16 |
| | 8 |
| | 25 |
| | (50 | ) | | — |
|
| Total rolled products | | 1,010 |
| | 943 |
| | 690 |
| | 474 |
| | (50 | ) | | 3,067 |
|
| Non-rolled products | | 4 |
| | 8 |
| | 9 |
| | 88 |
| | — |
| | 109 |
|
| Total shipments | | 1,014 |
| | 951 |
| | 699 |
| | 562 |
| | (50 | ) | | 3,176 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| Selected Operating Results Year Ended March 31, 2016 | | North America | | Europe | | Asia | | South America | | Eliminations and other | | Total |
| Net sales | | $ | 3,266 |
| | $ | 3,223 |
| | $ | 1,992 |
| | $ | 1,575 |
| | $ | (184 | ) | | $ | 9,872 |
|
| Shipments | | | | | | | | | | | | |
| Rolled products - third party | | 1,031 |
| | 918 |
| | 718 |
| | 456 |
| | — |
| | 3,123 |
|
| Rolled products - intersegment | | 1 |
| | 60 |
| | 42 |
| | 34 |
| | (137 | ) | | — |
|
| Total rolled products | | 1,032 |
| | 978 |
| | 760 |
| | 490 |
| | (137 | ) | | 3,123 |
|
| Non-rolled products | | 17 |
| | 98 |
| | 10 |
| | 79 |
| | (2 | ) | | 202 |
|
| Total shipments | | 1,049 |
| | 1,076 |
| | 770 |
| | 569 |
| | (139 | ) | | 3,325 |
|
The following table reconciles changes in “Segment income” for the year ended March 31, 2016 to the year ended March 31, 2017 (in millions).
|
| | | | | | | |
| | Year ended March 31, |
| | 2015 | | 2014 |
| North America | $ | 273 |
| | $ | 229 |
|
| Europe | 250 |
| | 265 |
|
| Asia | 141 |
| | 160 |
|
| South America | 240 |
| | 231 |
|
| Intersegment eliminations | (2 | ) | | — |
|
| Total Segment income | 902 |
| | 885 |
|
| Depreciation and amortization | (352 | ) | | (334 | ) |
| Interest expense and amortization of debt issuance costs | (326 | ) | | (304 | ) |
| Adjustment to eliminate proportional consolidation | (33 | ) | | (40 | ) |
| Unrealized losses on change in fair value of derivative instruments, net | — |
| | (10 | ) |
| Realized (losses) gains on derivative instruments not included in segment income | (6 | ) | | 5 |
|
| Restructuring and impairment, net | (37 | ) | | (75 | ) |
| Gain on assets held for sale | 22 |
| | 6 |
|
| Loss on sale of fixed assets | (5 | ) | | (9 | ) |
| Other costs, net | (3 | ) | | (9 | ) |
| Income before income taxes | 162 |
| | 115 |
|
| Income tax provision | 14 |
| | 11 |
|
| Net income | 148 |
| | 104 |
|
| Net income attributable to noncontrolling interests | — |
| | — |
|
| Net income attributable to our common shareholder | $ | 148 |
| | $ | 104 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| Changes in Segment income | | North
America | | Europe | | Asia | | South
America | | Eliminations (A) | | Total |
| Segment income - Year Ended March 31, 2016 (B) | | $ | 338 |
| | $ | 203 |
| | $ | 142 |
| | $ | 280 |
| | $ | — |
| | $ | 963 |
|
| Volume | | (22 | ) | | (34 | ) | | (36 | ) | | (18 | ) | | 74 |
| | (36 | ) |
| Conversion premium and product mix | | (2 | ) | | 12 |
| | (10 | ) | | 18 |
| | — |
| | 18 |
|
| Conversion costs | | 84 |
| | 40 |
| | 52 |
| | 11 |
| | (75 | ) | | 112 |
|
| Foreign exchange | | (4 | ) | | 4 |
| | 11 |
| | 52 |
| | — |
| | 63 |
|
| Primary operations | | — |
| | — |
| | — |
| | (1 | ) | | — |
| | (1 | ) |
| Selling, general & administrative and research & development costs (C) | | (5 | ) | | (11 | ) | | — |
| | (7 | ) | | (2 | ) | | (25 | ) |
| Other changes | | (9 | ) | | (6 | ) | | 4 |
| | 2 |
| | — |
| | (9 | ) |
| Segment income - Year Ended March 31, 2017 | | $ | 380 |
| | $ | 208 |
| | $ | 163 |
| | $ | 337 |
| | $ | (3 | ) | | $ | 1,085 |
|
_________________________
| |
| (A) | The recognition of "Segment income" by a region on an intersegment shipment could occur in a period prior to the recognition of "Segment income" on a consolidated basis, depending on the timing of when the inventory is sold to the |
third party customer. The "Eliminations" column adjusts regional "Segment income" for intersegment shipments that occur in a period prior to recognition of "Segment income" on a consolidated basis. The "Eliminations" column also reflects adjustments for changes in regional volume, conversion premium and product mix, and conversion costs related to intersegment shipments for consolidation.
| |
| (B) | Effective in the first quarter of fiscal 2018, management removed the impact of metal price lag from Segment Income in order to enhance the visibility of the underlying operating performance of the Company. This change does not impact our consolidated financial statements. Segment information for prior periods presented has been updated to reflect this change. |
| |
| (C) | Selling, general & administrative costs and research & development costs include costs incurred directly by each segment and all corporate related costs. |
North America
“Net sales” decreased $38 million, or 1%, primarily due to lower can shipments partially offset by higher automotive shipments and higher average aluminum prices as we continue to adjust our product mix.
“Segment income” was $384 million, an increase of 49%, due to strong operational performance resulting from lower metal input and conversion costs, favorable metal price lag due to reduced local market premium volatility, operational efficiencies and higher automotive shipments. These positive factors were partially offset by lower volumes associated with can and specialties shipments and higher fixed costs related to the commissioning of our third automotive line.
"Depreciation and amortization” increased by $18Europe
“Net sales” decreased $255 million, or 8%, primarily due to lower can and specialties shipments, partially offset by higher automotive shipments and higher average aluminum prices.
“Segment income” was $180 million, an increase of 55%, primarily related to lower metal input costs resulting from increased production and usage of internally manufactured sheet ingot from our new recycling facility in Nachterstedt, Germany and favorable product mix as a result of our portfolio optimization efforts. These benefits were partially offset by reduced can and specialty volumes.
Asia
“Net sales” decreased $201 million, or 10%, due to lower can shipments, lower can pricing, partially offset by higher average aluminum prices.
“Segment income” was $153 million, an increase of 13%, primarily due to lower metal input costs associated with increased usage of internally manufactured sheet ingot, a decrease in the recent commissioning oflocal market premium which is a cost we incur and are
unable to fully pass along to some of our expansion projects,customers, favorable product mix within can and automotive, and foreign currency exchange rates. These factors were partially offset by accelerated depreciation in the prior year on certain non-core assets.lower can shipments and can pricing.
South America
“AdjustmentNet sales” decreased $65 million, or 4%, due to eliminate proportional consolidation” relateslower can shipments partially offset by favorable pricing conditions.
“Segment income” was $340 million, an increase of 21%, primarily due to foreign currency benefits, favorable can pricing, lower metal input costs, and operational efficiencies, which were partially offset by lower can shipments.
Reconciliation of "Net income (loss) attributable to our common shareholder" to segment income
Costs such as depreciation and amortization, interest expense and unrealized (gains) losses on changes in the fair value of derivatives (except for derivatives used to manage our foreign currency remeasurement activities) are not utilized by our chief operating decision maker in evaluating segment performance. The table below reconciles "Net income taxes at our Aluminium Norf GmbH (Alunorf) joint venture. Income taxes relatedattributable to our equity method investments are reflected incommon shareholder" to income from reportable segments for the carrying value of the investmentyear ended March 31, 2017 and not in our consolidated “Income tax provision.”2016 (in millions)
“Realized (losses) gains on derivative instruments not included in segment income” represents realized gains on foreign currency derivatives related to asset sales, capital expenditures and net investment."Other costs, net" related primarily to losses on certain indirect tax expenses in Brazil, partially offset by interest income. |
| | | | | | | | |
| | | Year Ended March 31, |
| | | 2017 | | 2016 |
| Net income (loss) attributable to our common shareholder | | $ | 45 |
| | $ | (38 | ) |
| Noncontrolling interests | | 1 |
| | — |
|
| Income tax provision | | 151 |
| | 46 |
|
| Depreciation and amortization | | 360 |
| | 353 |
|
| Interest expense and amortization of debt issuance costs | | 294 |
| | 327 |
|
| Adjustment to reconcile proportional consolidation | | 28 |
| | 30 |
|
| Unrealized (gains) losses on change in fair value of derivative instruments, net | | (5 | ) | | 4 |
|
| Realized (gains) losses on derivative instruments not included in segment income | | (5 | ) | | 1 |
|
| Gain on assets held for sale | | (2 | ) | | — |
|
| Loss on extinguishment of debt | | 134 |
| | 13 |
|
| Restructuring and impairment, net | | 10 |
| | 48 |
|
| Loss on sale of fixed assets | | 6 |
| | 4 |
|
| Loss on sale of a business | | 27 |
| | — |
|
| Metal price lag (A) | | 31 |
| | 172 |
|
| Other, net | | 10 |
| | 3 |
|
| Total of reportable segments | | $ | 1,085 |
| | $ | 963 |
|
_________________________
| |
| (A) | Effective in the first quarter of fiscal 2018, management removed the impact of metal price lag from Segment Income in order to enhance the visibility of the underlying operating performance of the Company. The impact of metal price lag is now reported as a separate line item in this reconciliation. This change does not impact our consolidated financial statements. Segment Income for prior periods presented has been updated to reflect this change. For additional information related to metal price lag, see Note 14 — Financial Instruments and Commodity Contracts. |
Liquidity and Capital Resources
Since 2011, we have invested heavily in strategically expanding rolling capacity, recycling operations and automotive finishing capabilities. Several of our expansion projects are ramping up operations, and the remaining major strategic projects have begun commissioning which, when operational, will generate additional operating cash flows. Our significant investments in the business were funded through cash flows generated by our operations and a combination of local financing and our senior secured credit facilities. Most of our recent strategic expansion projects are operating close to full capacity and are generating additional operating cash flow. We expect to be able to fund capital expenditures,our continued expansions, service our debt obligations, and provide sufficient liquidity to operate our business through one or more of the following: the generation of operating cash flows; our existing debt facilities, including refinancing; and new debt issuances, as necessary.
Our Term Loan Facility was refinanced
During the fourth quarter of fiscal 2018, we agreed to acquire operating facilities and manufacturing assets from Constellium N.V. (Constellium), that have historically been leased, for approximately €200 million at our Sierre, Switzerland plant. In addition, we announced plans to expand our production footprint in the U.S. with an investment in automotive finishing capacity in Guthrie, Kentucky. We plan to complete these strategic transactions to further solidify our market leading position in automotive aluminum sheet.
Non-Guarantor Information
As of March 31, 2018, the Company’s subsidiaries that are not guarantors represented the following approximate percentages of (a) net sales, (b) Adjusted EBITDA (segment income), and (c) total assets of the Company, on June 2, 2015a consolidated basis (including intercompany balances):
|
| | |
| Item Description | Ratio |
| Consolidated net sales represented by net sales to third parties by non-guarantor subsidiaries (for the year ended March 31, 2018) | 22 | % |
| Consolidated Adjusted EBITDA represented by the non-guarantor subsidiaries (for the year ended March 31, 2018) | 15 | % |
| Consolidated assets are owned by non-guarantor subsidiaries (as of March 31, 2018) | 18 | % |
In addition, for the years ended March 31, 2018 and extended to June 2, 2022. Additionally, we entered into a new Subordinated Lien Revolver on June 10, 2015.March 31, 2017, the Company’s subsidiaries that are not guarantors had net sales of $3 billion and $2.2 billion, respectively, and, as of March 31, 2018, those subsidiaries had assets of $2.3 billion and debt and other liabilities of $1.5 billion (including inter-company balances).
Available Liquidity
Our available liquidity as of March 31, 20162018 and 20152017 is as follows (in millions):
| | | | March 31, | March 31, |
| | 2016 | | 2015 | 2018 | | 2017 |
| Cash and cash equivalents | $ | 556 |
| | $ | 628 |
| $ | 920 |
| | $ | 594 |
|
| Availability under committed credit facilities | 640 |
| | 510 |
| 998 |
| | 701 |
|
| Total liquidity | $ | 1,196 |
| | $ | 1,138 |
| |
| Total available liquidity | | $ | 1,918 |
| | $ | 1,295 |
|
We reportedThe increase in total available liquidity of $1,196 million as of March 31, 2016, which represents an increase compared to $1,138 million reported as of March 31, 2015. The increase is primarily attributable to new committed credit facilities$263 million in proceeds from the sale of $274 million, positive free cash flow of $160 million, and other increases of $1 million; partially offset by a decreaseshares in UAL, an increase in the ABL borrowing base of $314 million, net principal payments under our debt instruments of $48$161 million, and debt issuance costspositive free cash flow of $15$406 million. AsThese increases were partially offset by net payments on short-term and long-term borrowings of March 31, 2016,$208 million, a reduction in availability of credit facilities of $41 million, and other changes of $42 million. See Note 10 — Debt for more details about our availability under committed under credit facilities of $640 million was comprised of $236 million under our Korea, China, and Middle East loan facilities, $204 million under our ABL Revolver and $200 million under our new Subordinated Lien Revolver.facilities.
The “Cash and cash equivalents” balance above includes cash held in foreign countries in which we operate. As of March 31, 2016,2018, we held approximately $2$6 million of "Cash and cash equivalents" in Canada, in which we are incorporated, with the rest held in other countries in which we operate. As of March 31, 2016,2018, we held $209$299 million of cash in jurisdictions for which we have asserted that earnings are permanently reinvested and we plan to continue to fund operations and local expansions with cash held in those jurisdictions. Our significant future uses of cash include servicing our debt obligations domestically, which we plan to fund with cash flows from operating activities and, if necessary, by repatriating cash from jurisdictions for which we have not asserted that earnings are indefinitely reinvested. Cash held outside of Canada is free from significant restrictions that would prevent the cash from being accessed to meet the Company's liquidity needs including, if necessary, to fund operations
and service debt obligations in Canada. Upon the repatriation of any earnings to Canada, in the form of dividends or otherwise, we could be subject to Canadian income taxes (subject to adjustment for foreign taxes paid and the utilization of the large cumulative net operating losses we have in Canada) and withholding taxes payable to the various foreign jurisdictions. As of March 31, 2016,2018, we do not believe adverse tax consequences exist that restrict our use of “Cash or cash equivalents” in a material manner.manner,
Free Cash Flow
We define “Free cash flow” (which is a non-GAAP measure) as: (a) “net cash provided by (used in) operating activities,” (b) plus "net cash provided by (used in) investing activities” and (c) less “net proceeds from salesRefer to "Non-GAAP Financial Measures" for our definition of assets, net of transaction fees and hedging.” Management believes “Free cash flow” is relevant to investors as it provides a measure of the cash generated internally that is available for debt service and other value creation opportunities. However, “Free cash flow” does not necessarily represent cash available for discretionary activities, as certain debt service obligations must be funded out of “Free cash flow.” Our method of calculating “Free cash flow” may not be consistent with that of other companies.Free Cash Flow.
The following table shows the “Free cash flow” for the year ended March 31, 2016, 20152018, 2017 and 2014,2016, the change between periods, as well as the ending balances of cash and cash equivalents (in millions).
| | | | | | | Change | | | | Change |
| | | Year Ended March 31, | | 2016
versus | | 2015
versus | | Year Ended March 31, | | 2018 versus | | 2017 versus |
| | | 2016 | | 2015 | | 2014 | | 2015 | | 2014 | | 2018 | | 2017 | | 2016 | | 2017 | | 2016 |
| Net cash provided by operating activities | | $ | 541 |
| | $ | 604 |
| | $ | 702 |
| | $ | (63 | ) | | $ | (98 | ) | | $ | 586 |
| | $ | 575 |
| | $ | 541 |
| | $ | 11 |
| | $ | 34 |
|
| Net cash used in investing activities | | (378 | ) | | (416 | ) | | (702 | ) | | 38 |
| | 286 |
| |
| Less: Proceeds from sales of assets, net of transactions fees and hedging | | (3 | ) | | (117 | ) | | (16 | ) | | 114 |
| | (101 | ) | |
| Net cash provided by (used in) investing activities | | | 83 |
| | (212 | ) | | (378 | ) | | 295 |
| | 166 |
|
| Less: Proceeds from sales of assets and business, net of transactions fees, cash income taxes and hedging (A) | | | (263 | ) | | (2 | ) | | (3 | ) | | (261 | ) | | 1 |
|
| Free cash flow | | $ | 160 |
| | $ | 71 |
| | $ | (16 | ) | | $ | 89 |
| | $ | 87 |
| | $ | 406 |
| | $ | 361 |
| | $ | 160 |
| | $ | 45 |
| | $ | 201 |
|
| Ending cash and cash equivalents | | $ | 556 |
| | $ | 628 |
| | $ | 509 |
| | $ | (72 | ) | | $ | 119 |
| | $ | 920 |
| | $ | 594 |
| | $ | 556 |
| | $ | 326 |
| | $ | 38 |
|
“Free cash flow” was $160 million in fiscal 2016, an increase of $89 million as compared to fiscal 2015. "Free cash flow" was positive $71 million in fiscal 2015, an increase of $87 million as compared to fiscal 2014. The changes in “Free cash flow” are described in greater detail below._________________________
| |
| (A) | This line item includes the proceeds from the sale of shares in Ulsan Aluminum Ltd., to Kobe Steel Ltd. during the year ended March 31, 2018 in the amount of $314 million, net of $42 million and $11 million, in cash taxes and transaction fees paid, respectively. This line item also includes "Outflows from the sale of a business, net of transaction fees" which is comprised of cash of $13 million held by ALCOM, which was a consolidated entity sold during fiscal 2017. |
Operating Activities
Net cash provided by operating activities was $541 million for the year ended March 31, 2016, which compares unfavorably to $604 million in the year ended March 31, 2015. The decreaseincrease in net cash provided by operating activities was primarily related to lowerhigher "Segment income", driven by significant unfavorablefavorable impacts from metal price lag partially offset by a favorable change in working capital.and lower metal input costs. The following summarizes changes in working capital accounts (in millions).
| | | | | | Change | | | Change |
| | Year Ended March 31, | | 2016
versus | | 2015
versus | Year Ended March 31, | | 2018 versus | | 2017 versus |
| | 2016 | | 2015 | | 2014 | | 2015 | | 2014 | 2018 | | 2017 | | 2016 | | 2017 | | 2016 |
| Net cash provided by (used in) operating activities due to changes in working capital: | | | | | | | | | | |
| Net cash (used in) provided by operating activities due to changes in working capital: | | | | | | | | | | |
| Accounts receivable | $ | 336 |
| | $ | (54 | ) | | $ | 106 |
| | $ | 390 |
| | $ | (160 | ) | $ | (402 | ) | | $ | (154 | ) | | $ | 336 |
| | $ | (248 | ) | | $ | (490 | ) |
| Inventories | 268 |
| | (390 | ) | | 17 |
| | 658 |
| | (407 | ) | (151 | ) | | (193 | ) | | 268 |
| | 42 |
| | (461 | ) |
| Accounts payable | (327 | ) | | 578 |
| | 159 |
| | (905 | ) | | 419 |
| 336 |
| | 253 |
| | (327 | ) | | 83 |
| | 580 |
|
| Other current assets and liabilities | (5 | ) | | 39 |
| | 32 |
| | (44 | ) | | 7 |
| 16 |
| | 17 |
| | (5 | ) | | (1 | ) | | 22 |
|
| Net change in working capital | $ | 272 |
| | $ | 173 |
| | $ | 314 |
| | $ | 99 |
| | $ | (141 | ) | $ | (201 | ) | | $ | (77 | ) | | $ | 272 |
| | $ | (124 | ) | | $ | (349 | ) |
Year Ended March 31, 2018
"Accounts receivable, net" increased due to the timing of cash collections on certain customer and related party receivables balances coupled with a 20% increase in sales and increased average metal prices. As of March 31, 2018, we had factored, without recourse, certain trade receivable aggregating $918 million, which had a favorable impact to net cash provided by operating activities of $239 million for the year ended March 31, 2018. We determine the need to factor our receivables based on local cash needs including the need to fund our investments, as well as attempting to balance the timing of cash flows of trade payables and receivables and optimize our cost of financing. The higher quantities of inventory on hand at March 31, 2018 are the result of recent capacity expansions as well as longer supply chains to support the automotive sector. We experienced an increase in "Accounts payable" due to higher base aluminum prices and higher local market premiums.
Year Ended March 31, 2017
"Accounts receivable, net" increased due to the timing of cash collections on certain customer receivables balances offset by 3% lower sales and higher factoring balances. As of March 31, 2017 and 2016, we had factored, without recourse, certain trade receivable aggregating $679 million and $626 million, respectively, which had a favorable impact to net cash provided by operating activities of $53 million for the year ended March 31, 2017. We determine the need to factor our receivables based on local cash needs including the need to fund our strategic investments, as well as attempting to balance the timing of cash flows of trade payables and receivables. "Inventories" were higher due to higher quantities on hand partially offset by lower average metal costs. The higher quantities of inventory on hand at March 31, 2017 is the result of recent capacity expansions as well as longer supply chains to support the automotive sector and expand our scrap procurement network. As of March 31, 2017, we had sold certain inventories to third parties and have agreed to repurchase the same or similar inventory back from the third parties subsequent to March 31, 2017. Our estimated repurchase obligation for this inventory as of March 31, 2017 is $12 million, based on market prices as of this date. We sell and repurchase inventory with third parties in an attempt to better manage inventory levels and to better match the purchasing of inventory with the demand for our products. We experienced an increase in "Accounts payable" primarily due to the timing of payments to vendors. Included in cash flows from operating activities for the year ended March 31, 2017 were $288 million of interest payments, $128 million of cash paid for income taxes, $13 million of payments on restructuring programs, and $66 million of contributions to our pension plans. As of March 31, 2017, we had $24 million of outstanding restructuring liabilities, of which $16 million we estimate will result in cash outflows within the next twelve months.
Year Ended March 31, 2016
We experienced a decrease in "Accounts receivable, net" due to lower base aluminum prices and local market premiums compared to the end of the fourth quarter of prior year, and the timing of cash collections on certain customer receivables balances; partially offset by higher shipments and higher factoring of accounts receivable. As of March 31, 2016 and 2015, we had factored, without recourse, certain trade receivable aggregating $626 million and $591 million, respectively which had a favorable impact to net cash provided by operating activities of $35 million for the year ended March 31, 2016. We determine the need to factor our receivables based on local cash needs including the need to fund our strategic investments, as well as attempting to balance the timing of cash flows of trade payables and receivables. "Inventories" were lower due to lower base aluminum prices and local market premiums when compared to the fourth quarter of fiscal 2015. As of March 31, 2016, we had sold certain inventories to third parties and have agreed to repurchase the same or similar inventory back from the third parties subsequent to March 31, 2016. Our estimated repurchase obligation for this inventory as of March 31, 2016 is $22 million, based on market prices as of this date. We sell and repurchase inventory with third parties in an attempt to better manage inventory levels and to better match the purchasing of inventory with the demand for our products. We experienced a decrease in "Accounts payable" due to lower base aluminum prices and lower local market premiums when compared to the end of the fourth quarter of fiscal 2015, partially offset by the timing of payments on vendor payables outstanding as of March 31, 2016 and obtaining longer payment terms with certain vendors.
Included in cash flows from operating activities for the year ended March 31, 2016 were $308 million of interest payments, $123 million of cash paid for income taxes, $22 million of payments on restructuring programs, and $64 million of contributions to our pension plans. As of March 31, 2016, we had $27 million of outstanding restructuring liabilities, of which $23 million we estimate will result in cash outflows within the next twelve months.
Year Ended March 31, 2015
We experienced an increase in "Accounts receivable, net" due to an increase in shipments, as well as higher base aluminum prices and local market premiums compared to the end of the fourth quarter of fiscal 2014, partially offset by higher factoring of accounts receivable. As of March 31, 2015 and March 31, 2014, we had factored, without recourse, certain trade receivable aggregating $591 million and $245 million, respectively, which had a favorable impact to net cash provided by operating activities of $346 million for the year ended March 31, 2015. "Inventories" were higher due to an increase in quantities on hand, as well as higher base aluminum prices and local market premiums when compared to the fourth quarter of fiscal 2014. The higher quantities of inventory on hand at March 31, 2015 is the result of capacity expansions, as well as longer supply chains to support the automotive sector and expand our scrap procurement network. As of March 31, 2015, we had sold certain inventories to third parties and have agreed to repurchase the same or similar inventory back from the third parties subsequent to March 31, 2015. Our estimated repurchase obligation for this inventory as of March 31, 2015 is $218 million, based on market prices as of this date. We experienced an increase in "Accounts payable" due to higher purchases of inventory, higher base aluminum prices and higher local market premiums when compared to the end of the fourth quarter of fiscal 2014, the timing of payments on vendor payables outstanding as of March 31, 2015, and obtaining longer payment terms with certain vendors.
Included in cash flows from operating activities for the year ended March 31, 2015 were $303 million of interest payments, $131 million of cash paid for income taxes, $32 million of payments on restructuring programs, and $59 million of contributions to our pension plans.
Year Ended March 31, 2014
During the year ended March 31, 2014, net cash provided by our working capital was $314 million, which is the result of various working capital actions we made in the year. "Accounts receivable, net" declined due to an increase in our factored accounts receivable and an 8% reduction in aluminum prices, partially offset by higher shipments. As of March 31, 2014 and March 31, 2013, we had factored, without recourse, certain trade receivables aggregating $245 million and $124 million, respectively, which increased net cash provided by operating activities by $121 million for the year ended March 31, 2014. "Inventories" declined due to lower average aluminum prices, partially offset by higher quantities on hand. The higher quantities of inventory on hand at March 31, 2014 is the result of additional capacity from our expansions that we commissioned in fiscal 2014. As of March 31, 2014, we had sold certain inventories to third parties and agreed to repurchase the same or similar inventory back from third parties subsequent to March 31 2014. Our estimated repurchase obligation for this inventory as of March 31, 2014 was approximately $74 million, based on market prices at the time of repurchase. "Accounts payable" increased due to the timing of payments on vendor payables outstanding as of March 31, 2014, obtaining longer payment terms with certain vendors, and an increase in the quantities of inventory purchases, partially offset by lower average aluminum prices.
Included in cash flows provided by operating activities during the year ended March 31, 2014 were $278 million of interest payments, $120 million of cash payments for income taxes, $34 million of payments on our restructuring programs, and $64 million of contributions to our pension plans.
Hedging Activities
We use derivative contracts to manage risk as well as liquidity. Under our terms of credit with counterparties to our derivative contracts, we do not have any material margin call exposure. No material amounts have been posted by Novelis nor do we hold any material amounts of margin posted by our counterparties. We settle derivative contracts in advance of billing on the underlying physical inventory and collecting payment from our customers, which temporarily impacts our liquidity position. The lag between derivative settlement and customer collection typically ranges from 30 to 90 days. Based on our outstanding derivative instruments and their respective valuations as of the year ended March 31, 2016, we estimate there will be a net cash outflow of $11 million on the instruments that will settle in the three months ended June 30, 2016.
More details on our operating activities can be found above in “Results of operations for the Year Endedyear ended March 31, 20162018 compared with the Year Endedyear ended March 31, 2015.2017."
Investing Activities
The following table presents information regarding our “Net cash used inprovided by (used in) investing activities” (in millions).
| | | | | | | Change | | | | Change |
| | | Year Ended March 31, | | 2016
versus | | 2015
versus | | Year Ended March 31, | | 2018 versus | | 2017 versus |
| | | 2016 | | 2015 | | 2014 | | 2015 | | 2014 | | 2018 | | 2017 | | 2016 | | 2017 | | 2016 |
| Capital expenditures | | $ | (370 | ) | | $ | (518 | ) | | $ | (717 | ) | | $ | 148 |
| | $ | 199 |
| | $ | (226 | ) | | $ | (224 | ) | | $ | (370 | ) | | $ | (2 | ) | | $ | 146 |
|
| (Outflows) proceeds from settlement of other undesignated derivative instruments, net | | (9 | ) | | 5 |
| | 15 |
| | (14 | ) | | (10 | ) | | (23 | ) | | 8 |
| | (9 | ) | | (31 | ) | | 17 |
|
| Proceeds from sales of assets, third party, net of transaction fees and hedging | | 3 |
| | 117 |
| | 8 |
| | (114 | ) | | 109 |
| | 2 |
| | 4 |
| | 3 |
| | (2 | ) | | 1 |
|
| Proceeds from the sale of assets, related party, net of transaction fees | | — |
| | — |
| | 8 |
| | — |
| | (8 | ) | |
| Outflows from investment in and advances to non-consolidated affiliates, net | | (2 | ) | | (20 | ) | | (16 | ) | | 18 |
| | (4 | ) | |
| Net cash used in investing activities | | $ | (378 | ) | | $ | (416 | ) | | $ | (702 | ) | | $ | 38 |
| | $ | 286 |
| |
| Proceeds (outflows) from the sale of a business | | | 314 |
| | (2 | ) | | — |
| | 316 |
| | (2 | ) |
| Proceeds (outflows) from investment in and advances to non-consolidated affiliates, net | | | 16 |
| | 2 |
| | (2 | ) | | 14 |
| | 4 |
|
| Net cash provided by (used in) investing activities | | | $ | 83 |
| | $ | (212 | ) | | $ | (378 | ) | | $ | 295 |
| | $ | 166 |
|
We had $370 million of cash outflows for "Capital expenditures" forFor the yearyears ended March 31, 2016, compared2018 and 2017, our "Capital expenditures" were primarily attributable to $518 million for the year ended March 31, 2015non-routine maintenance of existing property, plant and $717 million for the year ended March 31, 2014.equipment and strategic investments in automotive assets. For the year ended March 31, 2016, our "Capital expenditures" were primarily attributable to our automotive sheet finishing expansions in the U.S. and Germany. For the year ended March 31, 2015, our "Capital expenditures" were primarily attributable to our automotive sheet finishing expansions in the U.S., China and Germany, our recycling expansion in Germany, and expenditures related to our ERP implementation. For the year ended March 31, 2014, our "Capital expenditures" were primarily attributable to our rolling expansions in South Korea, our automotive sheet finishing plants in the U.S. and China, our recycling expansions in Germany and Brazil, and expenditures related to our ERP implementation.
As of March 31, 2016, we had $53 million of outstanding accounts payable and accrued liabilities related to capital expenditures in which the cash outflows will occur subsequent to March 31, 2016.
The settlement"Proceeds (outflows) from the sale of undesignated derivative instruments resulted in cash outflowa business, net of $9 milliontransaction fees" for the year ended March 31, 2016,2018 was primarily due to the sale of shares in Ulsan Aluminum Ltd. and cash proceeds of $5 million and $15 million for the years ended 2015 and 2014, respectively. The variance in these cash flows related primarily to changes in average aluminum prices and foreign currency rates which impact gains or losses we realize on the settlement of derivatives.
The net proceeds from asset sales for the year ended March 31, 2016 were $3 million which primarily related2017, was due to theour sale of fixed assets at the Ouro Preto smelter in South America. During the year ended March 31, 2015 net proceeds from the sale of assets were $29 million related to the sale of our consumer foil operations in North America and $63 million for the sale of our share of the joint venture of the Consorcio Candonga in Brazil, net of related gains on currency derivatives and transaction fees, and proceeds of $17 million from the sale of the majority of our hydroelectric power generation operations in South America. In addition, we received proceeds of $8 million from the land and mining rights sale in South America. The proceeds from asset sales in the year ended March 31, 2014 related primarily to the sale of our bauxite mining rights and certain alumina assets and related liabilities in South America to our parent company, Hindalco. Additionally, during fiscal 2014 we also sold certain assets, namely land in South America, to a third party and received cash proceeds of $8 million.ALCOM.
Financing Activities
The following table presents information regarding our “Net cash (used in) provided byused in financing activities” (in millions).
| | | | | | | Change | | | | Change |
| | | Year Ended March 31, | | 2016
versus | | 2015
versus | | Year Ended March 31, | | 2018 versus | | 2017 versus |
| | | 2016 | | 2015 | | 2014 | | 2015 | | 2014 | | 2018 | | 2017 | | 2016 | | 2017 | | 2016 |
| Proceeds from issuance of long-term and short-term borrowings | | $ | 174 |
| | $ | 362 |
| | $ | 169 |
| | $ | (188 | ) | | $ | 193 |
| | $ | — |
| | $ | 4,572 |
| | $ | 174 |
| | $ | (4,572 | ) | | $ | 4,398 |
|
| Principal payments of long-term and short-term borrowings | | (216 | ) | | (324 | ) | | (164 | ) | | 108 |
| | (160 | ) | | (174 | ) | | (4,477 | ) | | (216 | ) | | 4,303 |
| | (4,261 | ) |
| Revolving credit facilities and other, net | | (187 | ) | | 160 |
| | 208 |
| | (347 | ) | | (48 | ) | | (211 | ) | | (229 | ) | | (187 | ) | | 18 |
| | (42 | ) |
| Return of capital to our common shareholder | | — |
| | (250 | ) | | — |
| | 250 |
| | (250 | ) | |
| Dividends, noncontrolling interest | | (1 | ) | | (1 | ) | | — |
| | — |
| | (1 | ) | | — |
| | — |
| | (1 | ) | | — |
| | 1 |
|
| Debt issuance costs | | (15 | ) | | (3 | ) | | (8 | ) | | (12 | ) | | 5 |
| | (5 | ) | | (191 | ) | | (15 | ) | | 186 |
| | (176 | ) |
| Net cash (used in) provided by financing activities | | $ | (245 | ) | | $ | (56 | ) | | $ | 205 |
| | $ | (189 | ) | | $ | (261 | ) | |
| Net cash used in financing activities | | | $ | (390 | ) | | $ | (325 | ) | | $ | (245 | ) | | $ | (65 | ) | | $ | (80 | ) |
Year Ended March 31, 2018
During the year ended March 31, 2018, there were no issuances of long or short-term borrowings. We made principal repayments of $50 million on short-term loans in Brazil, $18 million on our Term Loan Facility, $97 million in Korean long-term debt, $8 million on capital leases and $1 million in other principal repayments. The net cash repayments from our credit facilities balance is related to payments of $185 million on our ABL Revolver and $26 million on our China credit facility.
Year Ended March 31, 2017
During the year ended March 31, 2017, we received proceeds of $4.5 billion related to the refinancing of the Term Loan, 2017 and 2020 Notes as well as issuances of new loans in Brazil and Vietnam, and other locations of $81 million, $40 million, and $2 million, respectively. Additionally, we made principal repayments of $1.8 billion on our Term Loan Facility related to the refinancing, $1.1 billion and $1.4 billion on our 2017 and 2020 Notes, respectively, $108 million on short-term loans in Brazil, $49 million on Vietnam principal repayments, $17 million in Korean loan repayments, $10 million on capital leases, and $5 million in other principal repayments. The change in our credit facilities balance is related to net incremental repayments of $196 million on our ABL Revolver partially offset by net proceeds of $16 million in our China credit facilities. As of March 31, 2017, our short-term borrowings were $294 million consisting of $184 million of loans under our ABL Revolver, $50 million in Novelis Brazil loans, $59 million in Novelis China loans, and $1 million in other short-term borrowings. The weighted average interest rate on our total short-term borrowings was 2.92% as of March 31, 2017. As of March 31, 2017, $20 million of the ABL Revolver was utilized for letters of credit, reducing our availability under that facility.
During the year ended March 31, 2017, we incurred costs of $191 million related to the refinancing of our Term Loan and Senior Notes facilities.
Year Ended March 31, 2016
During the year ended March 31, 2016, we received proceeds of $60 million related to the refinancing of the Term Loan as well as issuances of new loans in Brazil, Korea, Vietnam, and other locations of $45 million, $39 million.million, $28 million and $2 million, respectively. We made principal repayments of $134 million on short-term loans in Brazil, $30 million on Vietnam principal repayments, $14 million on our Term Loan Facility, $9 million on capital leases, $26 million on long-term loans in Korea and $3 million in other principal repayments. The change in our credit facilities balance is related to net incremental repayments of $227 million on our ABL Revolver partially offset by an increase in other borrowings of $40 million.
As of March 31, 2016, our short-term borrowings were $579 million consisting of $394 million of loans under our ABL Revolver, $77 million in Novelis Brazil loans, $38 million in Novelis Korea bank loans, $12 million in Novelis Middle East and Africa loans, $9 million in Novelis Vietnam loans, $46 million in Novelis China loans, and $3 million in other short-term borrowings. The weighted average interest rate on our total short-term borrowings was 2.84% as of March 31, 2016. As of March 31, 2016, $12 million of the ABL Revolver was utilized for letters of credit, reducing our availability under that facility. In June 2015, we amended and extended our Term Loan by entering into a $1.8 billion seven-year secured term loan credit facility. Additionally, in June 2015, we entered into a new Subordinated Lien Revolver, which is a $200 million 15-month secured revolving facility.
During the year ended March 31, 2016, we incurred costs of $15 million related to the refinancing of our Term Loan facility.
Year Ended March 31, 2015
During the year ended March 31, 2015, we received proceeds related to the issuance of new short-term loans in Brazil, Korea, Vietnam, and other locations of $315 million, $27 million, $19 million, and $1 million, respectively. We made principal repayments of $253 million on short-term loans in Brazil, $30 million on Vietnam principal repayments, $18 million on our Term Loan Facility, $9 million on capital leases, $7 million on long-term loans in Korea and $7 million in other principal repayments. The change in our credit facilities balance is related to net incremental borrowings of $124 million on our ABL Revolver and a net increase of $29 million on our Korea facilities, and an increase in other borrowings of $7 million. On April 30, 2014, we made a return of capital payment to our direct shareholder, AV Metals Inc., in the amount of $250 million.
Year Ended March 31, 2014
During the year ended March 31, 2014, we received proceeds of $147 million related to the issuance of new short-term loans in Brazil and $22 million related to the issuance of new short-term loans in Vietnam. We made principal repayments of $133 million on short-term loans in Brazil, $18 million on our Term Loan Facility, $4 million on long-term loans in Brazil, $7 million on capital leases and $2 million on other principal repayments. In May 2013, we amended and extended our former ABL Facility by entering into a $1 billion, five-year, Senior Secured Asset-Backed Revolving Credit Facility (ABL Revolver). We received net proceeds of an additional $206 million under our amended ABL Revolver and $2 million of other short-term loans. We paid $8 million in debt issuance fees in the year ended March 31, 2014 related to amendment and extension of the ABL Revolver.
OFF-BALANCE SHEET ARRANGEMENTS
In accordance with SEC rules, the following qualify as off-balance sheet arrangements:
any obligation under certain derivative instruments;
any obligation under certain guarantees or contracts;
a retained or contingent interest in assets transferred to an unconsolidated entity or similar entity or similar arrangement that serves as credit, liquidity or market risk support to that entity for such assets; and
any obligation under a material variable interest held by the registrant in an unconsolidated entity that provides financing, liquidity, market risk or credit risk support to the registrant, or engages in leasing, hedging or research and development services with the registrant.
The following discussion addresses the applicable off-balance sheet items for our Company.
Derivative Instruments
See Note 1514 — Financial Instruments and Commodity Contracts to our accompanying audited consolidated financial statements for a full description of derivative instruments.
Guarantees of Indebtedness
We have issued guarantees on behalf of certain of our subsidiaries. The indebtedness guaranteed is for trade accounts payable to third parties. Some of the guarantees have annual terms while others have no expiration and have termination notice requirements. Neither we nor any of our subsidiaries holds any assets of any third parties as collateral to offset the potential settlement of these guarantees. Since we consolidate wholly-owned and majority-owned subsidiaries in our consolidated financial statements, all liabilities associated with trade payables and short-term debt facilities for these entities are already included in our consolidated balance sheets.
We have guaranteed the indebtednessSee Note 8 — Investment in and Advances to Non-Consolidated Affiliates and Related Party Transactions for a credit facility and loandetails on behalf of Alunorf. The guarantee is limited to 50% of the outstanding debt, not to exceed 6 million euros. As of March 31, 2016, there were no amounts outstanding under our guarantee with Alunorf. We have also guaranteed the payment of early retirement benefits on behalf of Alunorf. As of March 31, 2016, this guarantee totaled $2 million.
Other Arrangementsindebtedness to Alunorf, our non-consolidated affiliate.
Factoring of Trade Receivables
We factor and forfait trade receivables (collectively, we refer to these as "factoring" programs) based on local cash needs, as well as attempting to balance the timingSee Note 3 — Accounts Receivable for a summary of cash flowsdisclosures of trade payables and receivables, fund strategic investments, and fund other business needs. Factored invoices are not included in our consolidated balance sheets when we do not retain afactored financial or legal interest. If a financial or legal interest is retained, we classify these factorings as secured borrowings.
Summary of Disclosures of Factored Financial Amounts
The following tables summarize our factoring amounts (in millions).
|
| | | | | | | | | | | | |
| | | Year Ended March 31, |
| | | 2016 | | 2015 | | 2014 |
| Receivables factored | | $ | 3,314 |
| | $ | 1,796 |
| | $ | 1,081 |
|
| Factoring expense | | $ | 19 |
| | $ | 10 |
| | $ | 5 |
|
|
| | | | | | | | |
| | | March 31, |
| | | 2016 | | 2015 |
| Factored receivables outstanding | | $ | 626 |
| | $ | 591 |
|
amounts.
Other
As part of our ongoing business, we do not participate in transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as special purpose entities (SPEs), which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As of March 31, 20162018 and 2015,2017, we were not involved in any unconsolidated SPE transactions.
CONTRACTUAL OBLIGATIONS
We have future obligations under various contracts relating to debt and interest payments, capital and operating leases, long-term purchase obligations, and postretirement benefit plans. The following table presents our estimated future payments under contractual obligations that exist as of March 31, 20162018, based on undiscounted amounts (in millions). The future cash flow commitments we may have related to derivative contracts are excluded from our contractual obligations table as these are fair value measurements determined at an interim date within the contractual term of the arrangement and, accordingly, do not represent the ultimate contractual obligation (which could ultimately become a receivable). As a result, the timing and amount of the ultimate future cash flows related to our derivative contracts, including the $92$114 million of derivative liabilities recorded on our balance sheet as of March 31, 20162018, are uncertain. SeeIn addition, stock compensation is excluded from the Liquidity section of Management's Discussiontable below as these are fair value measurements determined at an interim date and Analysis foris not considered a discussion of potential future cash flows from derivatives in the first quarter of fiscal 2017.contractual obligation. Furthermore, due to the difficulty in determining the timing of settlements, the table excludes $34$44 million of uncertain tax positions. See Note 1918 — Income Taxes to our accompanying audited consolidated financial statements.
| | | | | Less Than 1 Year | | 1-3 Years | | 3-5 Years | | More Than 5 Years | | Total | | Less Than 1 Year | | 1-3 Years | | 3-5 Years | | More Than 5 Years | | Total |
| Debt (A) | | $ | 615 |
| | $ | 1,313 |
| | $ | 1,439 |
| | $ | 1,696 |
| | $ | 5,063 |
| | $ | 163 |
| | $ | 39 |
| | $ | 1,723 |
| | $ | 2,650 |
| | $ | 4,575 |
|
| Interest on long-term debt (B) | | 286 |
| | 450 |
| | 346 |
| | 79 |
| | 1,161 |
| | 206 |
| | 411 |
| | 369 |
| | 469 |
| | 1,455 |
|
| Capital leases (C) | | 11 |
| | 16 |
| | 5 |
| | — |
| | 32 |
| | 7 |
| | 5 |
| | — |
| | — |
| | 12 |
|
| Operating leases (D) | | 30 |
| | 36 |
| | 28 |
| | 39 |
| | 133 |
| | 31 |
| | 42 |
| | 25 |
| | 25 |
| | 123 |
|
| Purchase obligations (E) | | 3,220 |
| | 1,968 |
| | 812 |
| | 95 |
| | 6,095 |
| | 2,774 |
| | 1,917 |
| | 673 |
| | 96 |
| | 5,460 |
|
| Unfunded pension plan benefits (F) | | 13 |
| | 21 |
| | 22 |
| | 58 |
| | 114 |
| | 19 |
| | 34 |
| | 35 |
| | 104 |
| | 192 |
|
| Other post-employment benefits (F) | | 9 |
| | 14 |
| | 15 |
| | 50 |
| | 88 |
| | 6 |
| | 16 |
| | 19 |
| | 59 |
| | 100 |
|
| Funded pension plans (F) | | 59 |
| | 130 |
| | 167 |
| | 408 |
| | 764 |
| | 62 |
| | 142 |
| | 157 |
| | 464 |
| | 825 |
|
| Total | | $ | 4,243 |
| | $ | 3,948 |
| | $ | 2,834 |
| | $ | 2,425 |
| | $ | 13,450 |
| | $ | 3,268 |
| | $ | 2,606 |
| | $ | 3,001 |
| | $ | 3,867 |
| | $ | 12,742 |
|
_________________________
| |
| (A) | Includes only principal payments on our Senior Notes, term loans, revolving credit facilities and notes payable to banks and others. These amounts exclude payments under capital lease obligations. |
| |
| (B) | Interest on our fixed rate debt is estimated using the stated interest rate. Interest on our variable-rate debt is estimated using the rate in effect as of March 31, 20162018. Actual future interest payments may differ from these amounts based on changes in floating interest rates or other factors or events. These amounts include an estimate for unused commitment fees. Excluded from these amounts are interest related to capital lease obligations, the amortization of debt issuance and other costs related to indebtedness. |
| |
| (C) | Includes both principal and interest components of future minimum capital lease payments. Excluded from these amounts are insurance, taxes and maintenance associated with the property. |
| |
| (D) | Includes the minimum lease payments for non-cancelable leases for property and equipment used in our operations. We do not have any operating leases with contingent rents. Excluded from these amounts are insurance, taxes and maintenance associated with the properties and equipment. |
| |
| (E) | Includes agreements to purchase goods (including raw materials, inventory repurchase obligations, and capital expenditures) and services that are enforceable and legally binding on us, and that specify all significant terms. Some of our raw material purchase contracts have minimum annual volume requirements. In these cases, we estimate our future purchase obligations using annual minimum volumes and costs per unit that are in effect as of March 31, 20162018. Due to volatility in the cost of our raw materials, actual amounts paid in the future may differ from these amounts. Excluded from these amounts are the impact of any derivative instruments and any early contract termination fees, such as those typically present in energy contracts. |
| |
| (F) | Obligations for postretirement benefit plans are estimated based on actuarial estimates using benefit assumptions for, among other factors, discount rates, rates of compensation increases and health care cost trends. Payments for unfunded pension plan benefits and other post-employment benefits are estimated through 2025.2026. For funded pension plans, estimating the requirements beyond fiscal 20162018 is not practical, as it depends on the performance of the plans’ investments, among other factors. |
RETURN OF CAPITAL
Payments to our shareholder are at the discretion of the board of directors and will depend on, among other things, our financial resources, cash flows generated by our business, our cash requirements, restrictions under the instruments governing our indebtedness, being in compliance with the appropriate indentures and covenants under the instruments that govern our indebtedness and other relevant factors.
In March 2014, we declared a return of capital to our direct shareholder, AV Metals Inc., in the amount of $250 million, which we subsequently paid on April 30, 2014.
ENVIRONMENT, HEALTH AND SAFETY
We strive to be a leader in environment, health and safety (EHS). standards. Our EHS system is aligned with ISO 14001, an international environmental management standard, and OHSAS 18001, an international occupational health and safety management standard. As of March 31, 20162018 and March 31, 2015, 24 and2017, 23 of our established manufacturing facilities worldwide were OHSAS 18001 certified. An additional facility became ISO 14001 certified and OHSAS 18001 certified, respectively, and all have dedicated quality improvement management systems.as of March 31, 2018, bringing our total to 24.
Our expenditures for environmental protection (including estimated and probable environmental remediation costs as well as general environmental protection costs at our facilities) and the betterment of working conditions in our facilities were $18$16 million in fiscal 2016,2018, of which $10$11 million was expensed and $8$5 million capitalized. We expect these expenditures will be approximately $16$20 million in fiscal 2017,2019, of which we estimate $9$11 million will be expensed and $7$9 million capitalized. Generally, expenses for environmental protection are recorded in “Cost of goods sold (exclusive of depreciation and
amortization).” However, significant remediation costs that are not associated with on-going operations are recorded in "Restructuring and impairment, net."
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of our results of operations, liquidity and capital resources are based on our consolidated financial statements which have been prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP). In connection with the preparation of our consolidated financial statements, we are required to make assumptions and estimates about future events, and apply judgments that affect the reported amounts of assets, liabilities, revenue, expenses, and the related disclosures. We base our assumptions, estimates and judgments on historical experience, current trends and other factors we believe to be relevant at the time we prepare our consolidated financial statements. On a regular basis, we review the accounting policies, assumptions, estimates and judgments to ensure that our consolidated financial statements are presented fairly and in accordance with U.S. GAAP. However, because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such differences could be material.
Our significant accounting policies are discussed in Note 1 — Business and Summary of Significant Accounting Policies to our accompanying consolidated financial statements. We believe the following accounting policies are the most critical to aid in fully understanding and evaluating our reported financial results, as they require management to make difficult, subjective or complex judgments, and to make estimates about the effect of matters that are inherently uncertain. Although management believes that the estimates and judgments discussed herein are reasonable, actual results could differ, which could result in gains or losses that could be material. We have reviewed these critical accounting policies and related disclosures with the Audit Committee of our board of directors.
Derivative Financial Instruments
We hold derivatives for risk management purposes and not for trading. We use derivatives to mitigate uncertainty and volatility caused by underlying exposures to aluminum prices, foreign exchange rates, interest rates, and energy prices. The fair values of all derivative instruments are recognized as assets or liabilities at the balance sheet date and are reported gross.
The majority of our derivative contracts are valued using industry-standard models that use observable market inputs as their basis, such as time value, forward interest rates, volatility factors, and current (spot) and forward market prices for
foreign exchange rates. See Note 15 -14 — Financial Instruments and Commodity Contracts and Note 17 -16 — Fair Value Measurements to our accompanying consolidated audited financial statements for discussion on fair value of derivative instruments.
We may be exposed to losses in the future if the counterparties to our derivative contracts fail to perform. We are satisfied that the risk of such non-performance is remote due to our monitoring of credit exposures. Additionally, we enter into master netting agreements with contractual provisions that allow for netting of counterparty positions in case of default, and we do not face credit contingent provisions that would result in the posting of collateral.
For derivatives designated as fair value hedges, we assess hedge effectiveness by formally evaluating the high correlation of changes in the fair value of the hedged item and the derivative hedging instrument. The changes in the fair values of the underlying hedged items are reported in other current and noncurrent assets and liabilities in the consolidated balance sheets. Changes in the fair values of these derivatives and underlying hedged items generally offset and the effective portion is recorded in "Net sales" consistent with the underlying hedged item and the net ineffectiveness is recorded in "Other (income) expense, net."
For derivatives designated as cash flow hedges or net investment hedges, we assess hedge effectiveness by formally evaluating the high correlation of the expected future cash flows of the hedged item and the derivative hedging instrument. The effective portion of gain or loss on the derivative is included in Other Comprehensive Income (Loss) and reclassified to earnings in the period in which earnings are impacted by the hedged items or in the period that the transaction becomes probable of not occurring. Gains or losses representing reclassifications of OCI to earnings are recognized in the line item most reflective of the underlying risk exposure. We exclude the time value component of foreign currency and aluminum price risk hedges when measuring and assessing ineffectiveness to align our accounting policy with risk management objectives when it is necessary. If at any time during the life of a cash flow hedge relationship we determine that the relationship is no longer effective, the derivative will no longer be designated as a cash flow hedge and future gains or losses on the derivative will be recognized in “Other (income) expense, net."
For all derivatives designated inas hedging relationships, gains or losses representing hedge ineffectiveness or amounts excluded from effectiveness testing are recognized in “Other (income) expense, net” in our current period earnings. If no hedging relationship is designated, gains or losses are recognized in “Other (income) expense, net” in our current period earnings.
Consistent with the cash flows from the underlying risk exposure, we classify cash settlement amounts associated with designated derivatives as part of either operating or investing activities in the consolidated statements of cash flows. If no hedging relationship is designated, we classify cash settlement amounts as part of investing activities in the consolidated statement of cash flows.
Impairment of Goodwill
Goodwill represents the excess of the purchase price over the fair value of the identifiable net assets of acquired companies. As a result of Hindalco's indirect purchase of Novelis, we estimated fair value of the identifiable net assets using a number of factors, including the application of multiples and discounted cash flow estimates. The carrying value of goodwill for each of our reporting units, which is tested for impairment annually, is as follows (in millions):
| | | | As of March 31, 2016 | As of March 31, 2018 |
| North America | $ | 285 |
| $ | 285 |
|
| Europe | 181 |
| 181 |
|
| South America | 141 |
| 141 |
|
| | $ | 607 |
| $ | 607 |
|
Goodwill is not amortized; instead, it is tested for impairment annually or more frequently if indicators of impairment exist. On an ongoing basis, absent any impairment indicators, we perform our goodwill impairment testing as of the last day of February of each fiscal year. We do not aggregate components of operating segments to arrive at our reporting units, and as such our reporting units are the same as our operating segments.
The accounting guidance provides an entity the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the estimated fair value of a reporting unit is less than its carrying amount. If an entity elects to perform a qualitative assessment and determines that an impairment is more likely than not, the entity is then required to perform the existing two-step quantitative impairment test, otherwise no further analysis is required. An entity also may elect not to perform the qualitative assessment and, instead,
proceed directly to the two-step quantitative impairment test. The ultimate outcome of the goodwill impairment review for a reporting unit should be the same whether an entity chooses to perform the qualitative assessment or proceeds directly to the two-step quantitative impairment test.
For our fiscal year 20162018 test, we elected to perform the two-step quantitative impairment test, where step one compares the fair value of each reporting unit to its carrying amount, and if step one indicates that the carrying value of a reporting unit exceeds the fair value, step two is performed to measure the amount of impairment, if any. For purposes of our step one analysis, our estimate of fair value for each reporting unit as of the testing date, is based on discounted cash flows (thea weighted average of the value indication from income approach). When available and as appropriate, we use quoted market prices/relationships (the market approach) to corroborate the estimated fair value.approach. The approach to determining fair value for all reporting units is consistent given the similarity of our operations in each region.
Under the income approach, the fair value of each reporting unit is based on the present value of estimated future cash flows. The income approach is dependent on a number of significant management assumptions including markets and market share, sales volumes and prices, costs to produce, capital spending, working capital changes and the discount rate. We estimate future cash flows for each of our reporting units based on our projections for the respective reporting unit. These projected cash flows are discounted to the present value using a weighted average cost of capital (discount rate). The discount rate is commensurate with the risk inherent in the projected cash flows and reflects the rate of return required by an investor in the current economic conditions. For our annual impairment test, we used a discount rate of 9% for all reporting units. An increase or decrease of 0.5% in the discount rate would have impacted the estimated fair value of each reporting unit by approximately $125-$75-$475275 million, depending on the relative size of the reporting unit. Additionally, an increase or decrease of 0.5% in the terminal year growth rate assumption would have impacted the estimated fair value of each reporting unit by approximately $50-$200 million, depending on the relative size of the reporting unit. The projections are based on both past performance and the expectations of future performance and assumptions used in our current operating plan. We use specific revenue growth assumptions for each reporting unit based on history and economic conditions, and the terminal year revenue growth assumptions waswere approximately 2.0%.
Under the market approach, the fair value of each reporting unit is determined based upon comparisons to public companies engaged in similar businesses.
As a result of our annual goodwill impairment test for the year ended March 31, 2016,2018, no goodwill impairment was identified. The fair values of the reporting units exceeded their respective carrying amounts as of the last day of February in fiscal 20162018 by 124%159% for North America, by 106%50% for Europe and by 158%163% for South America.
Equity Investments
We invest in certain joint ventures and consortiums. 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. We exercise judgment to determine which investments should be accounted for using the equity method and which investments should be consolidated.
As a result of Hindalco's indirect purchase of Novelis, investments in and advances to equity method affiliates were adjusted to reflect fair value as of May 16, 2007. We review these investments for impairment whenever certain indicators are present suggesting that the carrying value of an investment is not recoverable. This analysis requires a significant amount of judgment to identify events or circumstances indicating that an investment may be impaired. Once an impairment indicator is identified, we must determine if an impairment exists, and if so, whether the impairment is other than temporary, in which case the investment would be written down to its estimated fair value.
Impairment of Long Lived Assets and Other Intangible Assets
We assess the recoverability of long-lived assets and finite-lived intangible assets whenever events or changes in circumstances indicate that we may not be able to recover the asset's carrying amount. Such events or circumstances include, but are not limited to, a significant decrease in the fair value of the underlying business or a change in utilization of property and equipment.
We group assets to test for impairment at the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities. These levels are dependent upon an asset's usage, which may be on an individual asset level or aggregated at a higher level including a region-wide grouping. The metal flow and management of supply within our regions creates an interdependency of the plants within a region on one another to generate cash flows. Accordingly, under normal operating conditions, our assets are grouped on a region-wide basis for impairment testing. Any expected change in usage, retirement, disposal or sale of an individual asset or group of assets below the region level which
would generate a separate cash flow stream outside of normal operations could result in grouping assets below the region level for impairment testing.
When evaluating long-lived assets and finite-lived intangible assets for potential impairment, we first compare the carrying value of the asset to the asset's estimated future net cash flows (undiscounted and without interest charges). If the estimated future net cash flows are less than the carrying value of the asset, we calculate and recognize an impairment loss. If we recognize an impairment loss, the carrying amount of the asset is adjusted to fair value based on the discounted estimated future net cash flows and will be its new cost basis. For a depreciable long-lived asset, the new cost basis will be depreciated over the remaining useful life of that asset. For an amortizable intangible asset, the new cost basis will be amortized over the remaining useful life of the asset.
Our impairment loss calculations require management to apply judgments in estimating future cash flows to determine asset fair values, including forecasting useful lives of the assets and selecting the discount rate that represents the risk inherent in future cash flows. Impairment charges are recorded in "Restructuring and impairment, net" in our consolidated statement of operations. ForSee Note 2 — Restructuring and Impairment for details on asset impairments for the yearyears ended March 31, 2016, we recorded impairment charges of $3 million of certain non core assets in North America, South America,2018, 2017, and Asia. Additionally, we recorded restructuring charges during the the year ended March 31, 2016 of $21 million related to the impairment of capitalized software intangible assets. For the year ended March 31, 2015, we recorded impairment charges on long-lived assets and intangible assets of $2 million of certain non core assets in North America. For the year ended March 31, 2014, we recorded impairment charges on long-lived assets and intangible assets of $24 million which included $17 million related to certain non-core assets in Brazil, $5 million on certain capitalized software assets and $2 million on other assets in North America.
Our other intangible assets of $523 million and $584 million as of March 31, 2016 and March 31, 2015, respectively, consisted of trade names, technology and software, customer relationships and favorable energy and supply contracts and are amortized over an original period of 3 to 20 years. As of March 31, 2016, we do not have any other intangible assets with indefinite useful lives, other than Goodwill.2016.
If actual results are not consistent with our assumptions and judgments used in estimating future cash flows and asset fair values, we may be exposed to additional impairment losses that could be material to our results of operations.
Pension and Other Postretirement Plans
We account for our pensions and other postretirement benefits in accordance with ASC 715, Compensation — Retirement Benefits (ASC 715). Liabilities and expense for pension plans and other postretirement benefits are determined using actuarial methodologies and incorporate significant assumptions, including the rate used to discount the future estimated liability, the long-term rate of return on plan assets, and several assumptions related to the employee workforce (compensation increases, health care cost trend rates, expected service period, retirement age, and mortality). These assumptions bear the risk of change as they require significant judgment and they have inherent uncertainties that management may not be able to control.
The actuarial models use an attribution approach that generally spreads the financial impact of changes to the plan and actuarial assumptions over the average remaining service lives of the employees in the plan. The principle underlying the required attribution approach is that employees render service over their average remaining service lives on a relatively smooth basis and, therefore, the accounting for benefits earned under the pension or non-pension postretirement benefits plans should follow the same relatively smooth pattern. Changes in the liability due to changes in actuarial assumptions such as discount rate, rate of compensation increases and mortality, as well as annual deviations between what was assumed and what was experienced by the plan are treated as actuarial gains or losses. The gains and losses are initially recorded to "Other comprehensive income (loss)" and are subsequently amortized over periods of 15 years or less, which represent the group's average future service life of the employees or the group's average life expectancy.
The most significant assumption used to calculate pension and other postretirement obligations is the discount rate used to determine the present value of benefits. The discount rate is based on spot rate yield curves and individual bond matching models for pension and other postretirement plans in Canada, the United States, United Kingdom, and other Euro zone countries, and on published long-term high quality corporate bond indices in other countries with adjustments made to the index rates based on the duration of the plans' obligations for each country, at the end of each fiscal year. This bond matching approach matches the bond yields with the year-to-year cash flow projections from the actuarial valuation to determine a discount rate that more accurately reflects the timing of the expected payments. The weighted average discount rate used to determine the pension benefit obligation was 3.3%3.1%, 3.1%3.2%, and 4.0%3.3%, and other postretirement benefit obligation was 4.0%, 3.6%4.1% and 4.1%4.0% as of March 31, 2016, 2015,2018, 2017, and 2014,2016, respectively. The weighted average discount rate used to determine the net periodic benefit cost is the rate used to determine the benefit obligation at the end of the previous fiscal year.
As of March 31, 2016,2018, an increase in the discount rate of 0.5%, assuming inflation remains unchanged, would result in a decrease of $144$152 million in the pension and other postretirement obligations and in a pre-tax decrease of $13$14 million in the net periodic benefit cost in the following year. A decrease in the discount rate of 0.5% as of March 31, 2016,2018, assuming inflation remains unchanged, would result in an increase of $160$172 million in the pension and other postretirement obligations and in a pre-tax increase of $15$17 million in the net periodic benefit cost in the following year.
The long term expected return on plan assets is based upon historical experience, expected future performance as well as current and projected investment portfolio diversification. The weighted average expected return on plan assets was 5.2% for 2018, 5.4% for 2017, and 5.6% for 2016, 6.1% for 2015, and 6.3% for 2014.2016. The expected return on assets is a long-term assumption whose accuracy can only be measured over a long period based on past experience. A variation in the expected return on assets of 0.5% as of March 31, 20162018 would result in a pre-tax variation of approximately $6 million in the net periodic benefit cost in the following year.
Income Taxes
We account for income taxes using the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. In addition, deferred tax assets are also recorded with respect to net operating losses and other tax attribute carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. Valuation allowances are established when realization of the benefit of deferred tax assets is not deemed to be more likely than not. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
We considered all available evidence, both positive and negative, in determining the appropriate amount of the valuation allowance against our deferred tax assets as of March 31, 2016.2018. In evaluating the need for a valuation allowance, we consider all potential sources of taxable income, including income available in carryback periods, future reversals of taxable temporary differences, projections of taxable income, and income from tax planning strategies, as well as any other available and relevant information. Positive evidence includes factors such as a history of profitable operations, projections of future profitability within the carryforward period and potential income from prudent and feasible tax planning strategies. Negative evidence includes items such as cumulative losses, projections of future losses, and carryforward periods that are not long enough to allow for the utilization of the deferred tax asset based on existing projections of income. In certain jurisdictions, deferred tax assets related to loss carryforwards and other temporary differences exist without a valuation allowance where in our judgment the weight of the positive evidence more than offsets the negative evidence.
Upon changes in facts and circumstances, we may conclude that certain deferred tax assets for which no valuation allowance is currently recorded may not be realizable in future periods, resulting in a charge to income. Existing valuation allowances are re-examined under the same standards of positive and negative evidence. If it is determined that it is more likely than not that a deferred tax asset will be realized, the appropriate amount of the valuation allowance, if any, is released, in the period this determination is made.
As of March 31, 2016,2018, the Company concluded that valuation allowances totaling $613$727 million were required against its deferred tax assets comprised of the following:
$468541 million of the valuation allowance relates to loss carryforwards in Canada and certain foreign jurisdictions, $41$68 million relates to New York tax credit carryforwards, and $47$51 million relates to tax credit carryforwards in Canada.
$5767 million of the valuation allowance relates to other deferred tax assets originating from temporary differences in Canada and certain foreign jurisdictions.
In determining these amounts, the Company considered the reversal of existing temporary differences as a source of taxable income. The ultimate realization of the remaining deferred tax assets is contingent on the Company's ability to generate future taxable income within the carryforward period and within the period in which the temporary differences become deductible. Due to the history of negative earnings in these jurisdictions and future projections of losses, the Company believes it is more likely than not the deferred tax assets will not be realized prior to expiration.
Through March 31, 2016,2018, the Company recognized deferred tax assets related to loss carryforwards and other temporary items of approximately $564$415 million. The Company determined that existing taxable temporary differences will reverse within the same period and jurisdiction, and are of the same character as the deductible temporary items generating sufficient taxable income to support realization of $381$261 million of these deferred tax assets. Realization of the remaining $182$153 million of deferred tax assets is dependent on our ability to earn pretax income aggregating approximately $665$574 million in those jurisdictions to realize those deferred tax assets. The realization of our deferred tax assets is not dependent on tax planning strategies.
By their nature, tax laws are often subject to interpretation. Further complicating matters is that in those cases where a tax position is open to interpretation, differences of opinion can result in differing conclusions as to the amount of tax benefits to be recognized under ASC 740, Income Taxes. We utilize a two-step approach for evaluating tax positions. Recognition (Step 1) occurs when we conclude that a tax position, based solely on its technical merits, is more likely than not to be sustained upon examination. Measurement (Step 2) is only addressed if Step 1 has been satisfied. Under Step 2, we measure the tax benefit as the largest amount of benefit, determined on a cumulative probability basis that is more likely than not to be realized upon ultimate settlement. Consequently, the level of evidence and documentation necessary to support a position prior to being given recognition and measurement within the financial statements is a matter of judgment that depends on all available evidence.
On December 22, 2017, U.S. tax legislation known as the U.S. Tax Cuts and Jobs Act of 2017 (the “Act”) was enacted. For corporations, the Act amends existing U.S. Internal Revenue Code by reducing the corporate income tax rate and modifying several business deduction and international tax provisions. Specifically, the corporate income tax rate was reduced from 35% to 21%. Other significant changes potentially impacting Novelis include the following: (i) net interest expense deduction is limited to the sum of net business interest expense in excess of 30% of adjusted taxable income; (ii) repeal of the deduction for income attributable to domestic production activities; (iii) corporations exceeding certain thresholds will be subject to a Base Erosion Anti-Abuse Tax (BEAT), a minimum tax based on taxable income adjusted for certain payments made to foreign related parties; (iv) 100% expensing for investments made in qualified new and used property placed in service after September 27, 2017 and before January 1, 2023; and (v) net operating losses arising in taxable years after December 31, 2017 are limited to 80% of taxable income and have an indefinite carryforward period, but no carryback period.
Assessment of Loss Contingencies
We have legal and other contingencies, including environmental liabilities, which could result in significant losses upon the ultimate resolution of such contingencies. Environmental liabilities that are not legal asset retirement obligations are accrued on an undiscounted basis when it is probable that a liability exists for past events.
We have provided for losses in situations where we have concluded that it is probable that a loss has been or will be incurred and the amount of the loss is reasonably estimable. A significant amount of judgment is involved in determining whether a loss is probable and reasonably estimable due to the uncertainty involved in determining the likelihood of future events and estimating the financial statement impact of such events. If further developments or resolution of a contingent matter are not consistent with our assumptions and judgments, we may need to recognize a significant charge in a future period related to an existing contingency.
RECENTLY ISSUED ACCOUNTING STANDARDS
See Note 1 — Business and Summary of Significant Accounting Policies to our accompanying audited consolidated financial statements for a full description of recent accounting pronouncements including the respective expected dates of adoption and expected effects on results of operations and financial condition.
NON-GAAP FINANCIAL MEASURES
Total “Segment income” presents the sum of the results of our four operating segments on a consolidated basis. We believe that total “Segment income” is an operating performance measure that measures operating results unaffected by differences in capital structures, capital investment cycles and ages of related assets among otherwise comparable companies. In reviewing our corporate operating results, we also believe it is important to review the aggregate consolidated performance of all of our segments on the same basis we review the performance of each of our regions and to draw comparisons between periods based on the same measure of consolidated performance.
Management believes investors’ understanding of our performance is enhanced by including this non-GAAP financial measure as a reasonable basis for comparing our ongoing results of operations. Many investors are interested in understanding the performance of our business by comparing our results from ongoing operations from one period to the next and would ordinarily add back items that are not part of normal day-to-day operations of our business. By providing total “Segment income,” together with reconciliations, we believe we are enhancing investors’ understanding of our business and our results of operations, as well as assisting investors in evaluating how well we are executing strategic initiatives.
However, total “Segment income” is not a measurement of financial performance under U.S. GAAP, and our total “Segment income” may not be comparable to similarly titled measures of other companies. Total “Segment income” has important limitations as an analytical tool and should not be considered in isolation or as a substitute for analysis of our results as reported under U.S. GAAP. For example, total “Segment income”:
does not reflect the company’s cash expenditures or requirements for capital expenditures or capital commitments;
does not reflect changes in, or cash requirements for, the company’s working capital needs; and
does not reflect any costs related to the current or future replacement of assets being depreciated and amortized.
We also use total “Segment income”:
as a measure of operating performance to assist us in comparing our operating performance on a consistent basis because it removes the impact of items not directly resulting from our core operations;
for planning purposes, including the preparation of our internal annual operating budgets and financial projections;
to evaluate the performance and effectiveness of our operational strategies; and
as a basis to calculate incentive compensation payments for our key employees.
Total “Segment income” is equivalent to our Adjusted EBITDA, which we refer to in our earnings announcements and other external presentations to analysts and investors.
"“Free cash flow"flow” consists of: (a) net“net cash provided by (used in) operating activities;activities,” (b) plus net"net cash provided by (used in) investing activitiesactivities” and (c) less proceeds“proceeds from sales of assets, net of transaction fees, cash income taxes and hedging.” Management believes "Free“Free cash flow"flow” is relevant to investors as it provides a measure of the cash generated internally that is available for debt service and other value creation opportunities. However, "Free“Free cash flow" is not a measurement of financial performance or liquidity under U.S. GAAP andflow” does not necessarily represent cash available for discretionary activities, as certain debt service obligations must be funded out of "Free“Free cash flow." In addition, the Company's” Our method of calculating "Free“Free cash flow"flow” may not be consistent with that of other companies.
Effective in the second quarter of fiscal 2018, management clarified the definition of “Free cash flow” (a non-GAAP
measure) to reduce "Proceeds on the sale of assets, net of transaction fees and hedging" by cash income taxes to further enable
users of the financial statements to understand cash generated internally by the Company. This change does not impact the consolidated financial statements or significantly impact prior periods.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to certain market risks as part of our ongoing business operations, including risks from changes in commodity prices (primarily LME aluminum prices and natural gas), local market premiums, electricity rates, foreign currency exchange rates and interest rates that could impact our results of operations and financial condition. We manage our exposure to these and other market risks through regular operating and financing activities and derivative financial instruments. We use derivative financial instruments as risk management tools only, and not for speculative purposes.
By their nature, all derivative financial instruments involve risk, including the credit risk of non-performance by counterparties. All derivative contracts are executed with counterparties that, in our judgment, are creditworthy. Our maximum potential loss may exceed the amount recognized in the accompanying March 31, 20162018 consolidated balance sheet.
The decision of whether and when to execute derivative instruments, along with the duration of the instrument, can vary from period to period depending on market conditions and the relative costs of the instruments. The duration is linked to the timing of the underlying exposure, with the connection between the two being regularly monitored.
The market risks we are exposed to as part of our ongoing business operations are materially consistent with our risk exposures in the prior year, as we have not entered into any new material hedging programs.
Commodity Price Risks
We have commodity price risk with respect to purchases of certain raw materials including aluminum, electricity, natural gas and transport fuel.
Aluminum
A significant amount of our business is conducted under a conversion model, which allows us to pass through increases or decreases in the price of aluminum to our customers. Nearly all of our flat-rolled products have a price structure with three components: (i) a base aluminum price quoted off the LME; (ii) a local market premium; and (iii) a “conversion premium” to produce the rolled product which reflects, among other factors, the competitive market conditions for that product. Base aluminum prices are typically driven by macroeconomic factors and global supply and demand offor aluminum. The local market premiums tend to vary based on the supply and demand for metal in a particular region and associated transportation costs.
Increases or decreases in the average price of aluminum based on the LME directly impact “Net sales,” “Cost of goods sold (exclusive of depreciation and amortization)” and working capital. The timing of these impacts varies based on contractual arrangements with customers and metal suppliers in each region. These timing impacts are referred to as metal price lag. Metal price lag exists due to: (i) certain customer contracts containing fixed forward price commitments which result in exposure to changes in metal prices for the period of time between when our sales price fixes and the sale actually occurs, and (ii) the period of time between the pricing of our purchases of metal, holding and processing the metal, and the pricing of the sale of finished inventory to our customers.
We use derivative instruments to preserve our conversion margins and manage the timing differences associated with metal price lag related to base aluminum price. We use over-the-counter derivatives indexed to the London Metals Exchange (LME) (referred to as our "aluminum derivative contracts") to reduce our exposure to fluctuating metal prices associated with the period of time between the pricing of our purchases of inventory and the pricing of the sale of that inventory to our customers. We also purchase forward LME aluminum contracts simultaneous with our sales contracts with customers that contain fixed metal prices. These LME aluminum forward contracts directly hedge the economic risk of future metal price fluctuations to better match the purchase price of metal with the sales price of metal.
Sensitivities
The following table presents the estimated potential effect on the fair values of these derivative instruments as of March 31, 2016,2018, given a 10% increase in prices ($ in millions).
|
| | | | | | |
| | Change in
Price | | Change in
Fair Value |
| LME aluminum | 10 | % | | $ | (57 | ) |
|
| | | | | | |
| | Change in
Price | | Change in
Fair Value |
| LME aluminum | 10 | % | | $ | (91 | ) |
Energy
We use several sources of energy in the manufacturing and delivery of our aluminum rolled products. For the year ended March 31, 2016,2018, natural gas and electricity represented approximately 98% of our energy consumption by cost. We also use fuel oil and transport fuel. The majority of energy usage occurs at our casting centers and during the hot rolling of aluminum. Prior to the smelter facilities in South America ceasing operations, our smelter operations also required a significant amount of energy. Our cold rolling facilities require relatively less energy.
We purchase our natural gas and diesel fuel on the open market, subjecting us to market price fluctuations. We seek to stabilize our future exposure to natural gas and diesel fuel prices through the use of forward purchase contracts.
A portion of our electricity requirements are purchased pursuant to long-term contracts in the local regions in which we operate. A number of our facilities are located in regions with regulated prices, which affords relatively stable costs. In North America, we have entered into an electricity swapsswap to fix a portion of the cost of our electricity requirements.
Fluctuating energy costs worldwide, due to the changes in supply and demand, and international and geopolitical events, expose us to earnings volatility as changes in such costs cannot be immediately recovered under existing contracts and sales agreements, and may only be mitigated in future periods under future pricing arrangements.
Sensitivities
The following table presents the estimated potential effect on the fair values of these derivative instruments as of March 31, 20162018, given a 10% decline in spot prices for energy contracts ($ in millions).
| | | | | Change in Price | | Change in Fair Value | | Change in Price | | Change in Fair Value |
| Electricity | | (10 | )% | | $ | (6 | ) | | (10 | )% | | $ | (4 | ) |
| Natural Gas | | (10 | )% | | (1 | ) | | (10 | )% | | (5 | ) |
| Diesel Fuel | | (10 | )% | | $ | (1 | ) | | (10 | )% | | $ | (1 | ) |
Foreign Currency Exchange Risks
Exchange rate movements, particularly the Euro, the Swiss franc, the Brazilian real and the Korean won against the U.S. dollar, have an impact on our operating results. In Europe, where we have predominantly local currency selling prices and operating costs, we benefit as the Euro strengthens, but are adversely affected as the Euro weakens. In January 2015, the Swiss National Bank discontinued its policy to support a minimum exchange rate between the Euro and the Swiss franc. Following this announcement, the Swiss franc rapidly appreciated in value. This adversely impactedFor our Swiss operations, where operating costs are incurred primarily in the Swiss franc and a large portion of revenues are denominated in the Euro.Euro, we benefit as the Franc weakens but are adversely affected as the Franc strengthens. In South Korea, where we have local currency operating costs and U.S. dollar denominated selling prices for exports, we benefit as the wonWon weakens but are adversely affected as the wonWon strengthens. In Brazil, where we have predominately U.S. dollar selling prices and local currency manufacturing costs, we benefit as the realReal weakens, but are adversely affected as the realReal strengthens.
It is our policy to minimize exposures from non-functional currency denominated transactions within each of our operating segments. We use foreign exchange forward contracts, options and cross-currency swaps to manage exposure arising from recorded assets and liabilities, firm commitments, and forecasted cash flows denominated in currencies other than the functional currency of certain operations, which include forecasted net sales, forecasted purchase commitments, capital expenditures and net investment in foreign subsidiaries. Our most significant non-U.S. dollar functional currency operations have the Euro and the Korean won as their functional currencies, respectively. Our Brazilian operations are U.S. dollar functional.
We also face translation risks related to the changes in foreign currency exchange rates which are generally not hedged. Amounts invested in these foreign operations are translated into U.S. dollars at the exchange rates in effect at the balance sheet date. TheAny resulting translation adjustments are recorded as a component of "Accumulated other comprehensive income/loss" in the Shareholder's equity/deficit section of the accompanying condensedour consolidated balance sheets. Net sales and expenses at these non-U.S. dollar functional currency entities are translated into varying amounts of U.S. dollars depending upon whether the U.S. dollar weakens or strengthens against other currencies. Therefore, changes in exchange rates may either positively or negatively affect our net sales and expenses as expressed in U.S. dollars.
Any negative impact of currency movements on the currency contracts we have entered into to hedge foreign currency commitments to purchase or sell goods and services would be offset by an approximately equal and opposite favorable exchange impact on the commitments being hedged. For a discussion of accounting policies and other information relating to
currency contracts, see Note 1 -— Business and Summary of Significant Accounting Policies and Note 15 -14 — Financial Instruments and Commodity Contracts to our accompanying condensed consolidated financial statements.
Sensitivities
The following table presents the estimated potential effect on the fair values of these derivative instruments as of March 31, 2016,2018, given a 10% change in rates ($ in millions).
| | | | | Change in Exchange Rate | | Change in Fair Value | | Change in Exchange Rate | | Change in Fair Value |
| Currency measured against the U.S. dollar | | | | | | | | |
| Brazilian real | | (10 | )% | | $ | (12 | ) | | (10 | )% | | $ | (17 | ) |
| Euro | | 10 | % | | (50 | ) | | 10 | % | | (46 | ) |
| Korean won | | (10 | )% | | (40 | ) | | (10 | )% | | (32 | ) |
| Canadian dollar | | (10 | )% | | (5 | ) | | (10 | )% | | (4 | ) |
| British pound | | (10 | )% | | (14 | ) | | (10 | )% | | (20 | ) |
| Swiss franc | | (10 | )% | | (30 | ) | | (10 | )% | | (46 | ) |
| Chinese yuan | | 10 | % | | (7 | ) | | 10 | % | | (9 | ) |
| Malaysian ringgit | | (10 | )% | | (1 | ) | |
Interest Rate Risks
We use interest rate swaps to manage our exposure to changes in benchmark interest rates which impact our variable-rate debt.
OurIn September 2017, we amended our Term Loan Facility is a floating rate obligation with a floor feature.Facility. Our interest rate paid is a spread of 3.25%1.85% plus the higher of LIBOR or 75 basis points (0.75% floor)(2.31%). As of March 31, 2016, this floor feature was in effect, which resulted in an2018, the effective interest rate of 4.00%was 4.16%. Due to the floor feature of the Term Loan Facility asAs of March 31, 2016,2018, a 10100 basis point increase or decrease in LIBOR interest rates would have had noan $18 million impact on our annual pre-tax income. To be above the Term Loan Facility floor, future interest rates would have to increase by 13 basis points (bp).
From time to time, we have used interest rate swaps to manage our debt cost. As of March 31, 2016,2018, there were no USD LIBOR based interest rate swaps outstanding.
In Korea, we periodically enter into interest rate swaps to fix the interest rate on various floating rate debt in order to manage our exposure to changes in the 3M-CD interest rate. See Note 15-14 — Financial Instruments and Commodity Contracts for further information on the amounts outstanding as of March 31, 2016.
Sensitivities
The following table presents the estimated potential effect on2018. As of March 31, 2018, the fair values of these derivative instruments as of March 31, 2016, given a 100 bps decreasederivatives are insensitive to moderate changes in the benchmark interest rate ($ in millions).rate.
|
| | | | | | | |
| | Change in Rate | | | Change in Fair Value |
| Interest Rate Contracts | | | | |
| Asia – KRW-CD-3200 | (100 | ) | bps | | $ | (2 | ) |
Item 8. Financial Statements and Supplementary Data
TABLE OF CONTENTS
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| Management’s Report on Internal Control over Financial Reporting | |
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Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act, as amended. The Company’s internal control over financial reporting is a process designed to provide reasonable assurance as toregarding the reliability of the Company’s financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP.generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that:
Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company;
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP,generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and
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.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, 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.
Management has assessed the effectiveness of the Company’s internal control over financial reporting as of March 31, 20162018. In making this assessment, management used the criteria established by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in “Internal Control — Integrated Framework (2013).” Based on its assessment, management has concluded that, as of March 31, 20162018, the Company’s internal control over financial reporting was effective based on those criteria.
The effectiveness of the Company’s internal control over financial reporting as of March 31, 20162018 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein.
/s/ Steven Fisher
Steven Fisher
President and Chief Executive Officer
May 10, 20168, 2018
/s/ Steven E. PohlDevinder Ahuja
Steven E. PohlDevinder Ahuja
InterimSenior Vice President and Chief Financial Officer
May 10, 20168, 2018
Report of Independent Registered Public Accounting Firm
To theBoard of Directors and Shareholder of Novelis Inc.:
Opinions on the Financial Statements and Internal Control over Financial Reporting
In our opinion,We have audited the accompanying consolidated balance sheets of Novelis Inc. and its subsidiaries as of March 31, 2018 and 2017, and the related consolidated statements of operations, comprehensive income, (loss), shareholder'sshareholder’s (deficit) equity, and cash flows, for each of the three years in the period ended March 31, 2018, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of March 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Novelis Inc. and its subsidiaries atthe Company as of March 31, 20162018 and March 31, 2015,2017, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 20162018 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained in all material respects, effective internal control over financial reporting as of March 31, 2016,2018, based on criteria established in Internal Control - Integrated Framework(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). COSO.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on thesethe Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our integrated audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB and in accordance with standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the consolidated financial statements, assessingstatements. Our audits also included evaluating the accounting principles used and significant estimates made by management, andas well as evaluating the overall presentation of the consolidated financial statement presentation.statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it classifies deferred tax assetsDefinition and liabilities on the consolidated balance sheet asLimitations of March 31, 2016.Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) 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 financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, 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.
/s/PricewaterhouseCoopers LLP
Atlanta, Georgia
May 10, 20168, 2018
We have served as the Company’s auditor since2006.
Novelis Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions)
| | | | | Year Ended March 31, | | Year Ended March 31, |
| | | 2016 | | 2015 | | 2014 | | 2018 | | 2017 | | 2016 |
| Net sales | | $ | 9,872 |
| | $ | 11,147 |
| | $ | 9,767 |
| | $ | 11,462 |
| | $ | 9,591 |
| | $ | 9,872 |
|
| Cost of goods sold (exclusive of depreciation and amortization) | | 8,727 |
| | 9,793 |
| | 8,468 |
| | 9,719 |
| | 8,016 |
| | 8,727 |
|
| Selling, general and administrative expenses | | 407 |
| | 427 |
| | 461 |
| | 489 |
| | 421 |
| | 407 |
|
| Depreciation and amortization | | 353 |
| | 352 |
| | 334 |
| | 354 |
| | 360 |
| | 353 |
|
| Interest expense and amortization of debt issuance costs | | 327 |
| | 326 |
| | 304 |
| | 255 |
| | 294 |
| | 327 |
|
| Research and development expenses | | 54 |
| | 50 |
| | 45 |
| | 64 |
| | 58 |
| | 54 |
|
| Gain on assets held for sale | | — |
| | (22 | ) | | (6 | ) | | — |
| | (2 | ) | | — |
|
| (Gain) loss on sale of a business, net | | | (318 | ) | | 27 |
| | — |
|
| Loss on extinguishment of debt | | 13 |
| | — |
| | — |
| | — |
| | 134 |
| | 13 |
|
| Restructuring and impairment, net | | 48 |
| | 37 |
| | 75 |
| | 34 |
| | 10 |
| | 48 |
|
| Equity in net loss of non-consolidated affiliates | | 3 |
| | 5 |
| | 12 |
| | 1 |
| | 8 |
| | 3 |
|
| Other (income) expense, net | | (68 | ) | | 17 |
| | (41 | ) | |
| Other expense (income), net | | | 9 |
| | 68 |
| | (68 | ) |
| | | 9,864 |
| | 10,985 |
| | 9,652 |
| | 10,607 |
| | 9,394 |
| | 9,864 |
|
| Income before income taxes | | 8 |
| | 162 |
| | 115 |
| | 855 |
| | 197 |
| | 8 |
|
| Income tax provision | | 46 |
| | 14 |
| | 11 |
| | 233 |
| | 151 |
| | 46 |
|
| Net (loss) income | | (38 | ) | | 148 |
| | 104 |
| |
| Net income attributable to noncontrolling interests | | — |
| | — |
| | — |
| |
| Net (loss) income attributable to our common shareholder | | $ | (38 | ) | | $ | 148 |
| | $ | 104 |
| |
| Net income (loss) | | | 622 |
| | 46 |
| | (38 | ) |
| Net (loss) income attributable to noncontrolling interests | | | (13 | ) | | 1 |
| | — |
|
| Net income (loss) attributable to our common shareholder | | | $ | 635 |
| | $ | 45 |
| | $ | (38 | ) |
See accompanying notes to the consolidated financial statements.
Novelis Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In millions)
|
| | | | | | | | | | | | |
| | | Year Ended March 31, |
| | | 2016 | | 2015 | | 2014 |
| Net (loss) income | | $ | (38 | ) | | $ | 148 |
| | $ | 104 |
|
| Other comprehensive income (loss): | | | | | | |
| Currency translation adjustment | | 17 |
| | (304 | ) | | 120 |
|
| Change in fair value of effective portion of hedges, net | | 60 |
| | (44 | ) | | (21 | ) |
| Change in pension and other benefits, net | | (33 | ) | | (209 | ) | | 120 |
|
| Other comprehensive income (loss) before income tax effect | | 44 |
| | (557 | ) | | 219 |
|
| Income tax (benefit) provision related to items of other comprehensive income (loss) | | (6 | ) | | (72 | ) | | 44 |
|
| Other comprehensive income (loss), net of tax | | 50 |
| | (485 | ) | | 175 |
|
| Comprehensive income (loss) | | $ | 12 |
| | $ | (337 | ) | | $ | 279 |
|
| Less: Comprehensive loss attributable to noncontrolling interest, net of tax | | (11 | ) | | (15 | ) | | (2 | ) |
| Comprehensive income (loss) attributable to our common shareholder | | $ | 23 |
| | $ | (322 | ) | | $ | 281 |
|
|
| | | | | | | | | | | | |
| | | Year Ended March 31, |
| | | 2018 | | 2017 | | 2016 |
| Net income (loss) | | $ | 622 |
| | $ | 46 |
| | $ | (38 | ) |
| Other comprehensive income (loss): | | | | | | |
| Currency translation adjustment | | 191 |
| | (59 | ) | | 17 |
|
| Net change in fair value of effective portion of hedges, net | | 109 |
| | (57 | ) | | 60 |
|
| Net change in pension and other benefits, net | | 12 |
| | 74 |
| | (33 | ) |
| Other comprehensive income (loss) before income tax effect | | 312 |
| | (42 | ) | | 44 |
|
| Income tax provision (benefit) related to items of other comprehensive income | | 34 |
| | — |
| | (6 | ) |
| | | 278 |
| | (42 | ) | | 50 |
|
| Comprehensive income | | $ | 900 |
| | $ | 4 |
| | $ | 12 |
|
| Less: Comprehensive (loss) income attributable to noncontrolling interest, net of tax | | (19 | ) | | 4 |
| | (11 | ) |
| Comprehensive income attributable to our common shareholder | | $ | 919 |
| | $ | — |
| | $ | 23 |
|
See accompanying notes to the consolidated financial statements.
Novelis Inc.
CONSOLIDATED BALANCE SHEETS
(In millions, except number of shares)
| | | (In millions, except number of shares) | | March 31, | |
| | | | March 31, |
| | | 2016 | | 2015 | | 2018 | | 2017 |
| ASSETS | | | | | | | | |
| Current assets | | | | | | | | |
| Cash and cash equivalents | | $ | 556 |
| | $ | 628 |
| | $ | 920 |
| | $ | 594 |
|
| Accounts receivable, net | | | | | | | | |
| — third parties (net of uncollectible accounts of $3 as of March 31, 2016 and 2015) | | 956 |
| | 1,289 |
| |
| — third parties (net of uncollectible accounts of $7 as of March 31, 2018 and $6 as of March 31, 2017) | | | 1,353 |
| | 1,067 |
|
| — related parties | | 59 |
| | 53 |
| | 242 |
| | 60 |
|
| Inventories | | 1,180 |
| | 1,431 |
| | 1,560 |
| | 1,333 |
|
| Prepaid expenses and other current assets | | 127 |
| | 112 |
| | 125 |
| | 137 |
|
| Fair value of derivative instruments | | 88 |
| | 77 |
| | 159 |
| | 113 |
|
| Deferred income tax assets | | — |
| | 79 |
| |
| Assets held for sale | | 5 |
| | 6 |
| | 5 |
| | 3 |
|
| Total current assets | | 2,971 |
| | 3,675 |
| | 4,364 |
| | 3,307 |
|
| Property, plant and equipment, net | | 3,506 |
| | 3,542 |
| | 3,110 |
| | 3,357 |
|
| Goodwill | | 607 |
| | 607 |
| | 607 |
| | 607 |
|
| Intangible assets, net | | 523 |
| | 584 |
| | 410 |
| | 457 |
|
| Investment in and advances to non–consolidated affiliate | | 488 |
| | 447 |
| | 849 |
| | 451 |
|
| Deferred income tax assets | | 87 |
| | 95 |
| | 63 |
| | 85 |
|
| Other long–term assets | | | | | | | | |
| — third parties | | 112 |
| | 137 |
| | 97 |
| | 94 |
|
| — related parties | | 16 |
| | 15 |
| | 3 |
| | 15 |
|
| Total assets | | $ | 8,310 |
| | $ | 9,102 |
| | $ | 9,503 |
| | $ | 8,373 |
|
| LIABILITIES AND SHAREHOLDER’S DEFICIT | | | | | |
| LIABILITIES AND SHAREHOLDER’S EQUITY (DEFICIT) | | | | | |
| Current liabilities | | | | | | | | |
| Current portion of long–term debt | | $ | 47 |
| | $ | 108 |
| | $ | 121 |
| | $ | 121 |
|
| Short–term borrowings | | 579 |
| | 846 |
| | 49 |
| | 294 |
|
| Accounts payable | | | | | | | | |
| — third parties | | 1,506 |
| | 1,854 |
| | 2,051 |
| | 1,722 |
|
| — related parties | | 48 |
| | 44 |
| | 205 |
| | 51 |
|
| Fair value of derivative instruments | | 85 |
| | 149 |
| | 106 |
| | 151 |
|
Accrued expenses and other current liabilities
| | 569 |
| | 572 |
| | 591 |
| | 578 |
|
| Deferred income tax liabilities | | — |
| | 20 |
| |
| Total current liabilities | | 2,834 |
| | 3,593 |
| | 3,123 |
| | 2,917 |
|
| Long–term debt, net of current portion | | 4,451 |
| | 4,349 |
| | 4,336 |
| | 4,437 |
|
| Deferred income tax liabilities | | 89 |
| | 261 |
| | 164 |
| | 99 |
|
| Accrued postretirement benefits | | 820 |
| | 748 |
| | 825 |
| | 799 |
|
| Other long–term liabilities | | 175 |
| | 221 |
| | 232 |
| | 198 |
|
| Total liabilities | | 8,369 |
| | 9,172 |
| | 8,680 |
| | 8,450 |
|
| Commitments and contingencies | |
|
| |
|
| |
|
| |
|
|
| Shareholder’s deficit | | | | | |
| Common stock, no par value; unlimited number of shares authorized; 1,000 shares issued and outstanding as of March 31, 2016 and 2015 | | — |
| | — |
| |
| Shareholder’s equity (deficit) | | | | | |
| Common stock, no par value; unlimited number of shares authorized; 1,000 shares issued and outstanding as of March 31, 2018 and 2017 | | | — |
| | — |
|
| Additional paid–in capital | | 1,404 |
| | 1,404 |
| | 1,404 |
| | 1,404 |
|
| Accumulated deficit | | (963 | ) | | (925 | ) | | (283 | ) | | (918 | ) |
| Accumulated other comprehensive loss | | (500 | ) | | (561 | ) | | (261 | ) | | (545 | ) |
| Total deficit of our common shareholder | | (59 | ) | | (82 | ) | |
| Total equity (deficit) of our common shareholder | | | 860 |
| | (59 | ) |
| Noncontrolling interests | | — |
| | 12 |
| | (37 | ) | | (18 | ) |
| Total deficit | | (59 | ) | | (70 | ) | |
| Total liabilities and deficit | | $ | 8,310 |
| | $ | 9,102 |
| |
| Total equity (deficit) | | | 823 |
| | (77 | ) |
| Total liabilities and equity (deficit) | | | $ | 9,503 |
| | $ | 8,373 |
|
See accompanying notes to the consolidated financial statements.
Novelis Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
| | | | | Year Ended March 31, | | Year Ended
March 31, |
| | | 2016 | | 2015 | | 2014 | | 2018 | | 2017 | | 2016 |
| OPERATING ACTIVITIES | | | | | | | | | | | | |
| Net (loss) income | | $ | (38 | ) | | $ | 148 |
| | $ | 104 |
| |
| Net income (loss) | | | $ | 622 |
|
| $ | 46 |
| | $ | (38 | ) |
| Adjustments to determine net cash provided by operating activities: | | | | | | | |
|
|
|
|
| | |
| Depreciation and amortization | | 353 |
| | 352 |
| | 334 |
| | 354 |
|
| 360 |
| | 353 |
|
| (Gain) loss on unrealized derivatives and other realized derivatives in investing activities, net | | (27 | ) | | 39 |
| | (3 | ) | |
| Loss (gain) on unrealized derivatives and other realized derivatives in investing activities, net | | | 15 |
|
| (15 | ) | | (27 | ) |
| Gain on assets held for sale | | — |
| | (22 | ) | | (6 | ) | | — |
|
| (2 | ) | | — |
|
| (Gain) loss on sale of business | | 27,000,000 |
| (318 | ) | | 27 |
| | — |
|
| Loss on sale of assets | | 4 |
| | 5 |
| | 9 |
| | 7 |
|
| 6 |
| | 4 |
|
| Impairment charges | | 25 |
| | 7 |
| | 24 |
| | 15 |
|
| 2 |
| | 25 |
|
| Loss on extinguishment of debt | | 13 |
| | — |
| | — |
| | — |
|
| 134 |
| | 13 |
|
| Deferred income taxes | | (93 | ) | | (88 | ) | | (129 | ) | | 53 |
|
| 6 |
| | (93 | ) |
| Amortization of fair value adjustments, net | | 11 |
| | 10 |
| | 12 |
| | — |
|
| 7 |
| | 11 |
|
| Equity in net loss of non-consolidated affiliates | | 3 |
| | 5 |
| | 12 |
| | 1 |
|
| 8 |
| | 3 |
|
| Gain on foreign exchange remeasurement of debt | | (2 | ) | | (5 | ) | | (2 | ) | |
| (Gain) loss on foreign exchange remeasurement of debt | | | (2 | ) |
| 2 |
| | (2 | ) |
| Amortization of debt issuance costs and carrying value adjustments | | 19 |
| | 25 |
| | 26 |
| | 19 |
|
| 22 |
| | 19 |
|
| Other, net | | — |
| | 1 |
| | (4 | ) | | 1 |
|
| 3 |
| | — |
|
| Changes in assets and liabilities including assets and liabilities held for sale (net of effects from divestitures): | | | | | | | |
|
|
|
|
| | |
| Accounts receivable | | 336 |
| | (54 | ) | | 106 |
| | (402 | ) |
| (154 | ) | | 336 |
|
| Inventories | | 268 |
| | (390 | ) | | 17 |
| | (151 | ) |
| (193 | ) | | 268 |
|
| Accounts payable | | (327 | ) | | 578 |
| | 159 |
| | 336 |
|
| 253 |
| | (327 | ) |
| Other current assets | | (12 | ) | | (27 | ) | | — |
| | 21 |
|
| (17 | ) | | (12 | ) |
| Other current liabilities | | 7 |
| | 66 |
| | 32 |
| | (5 | ) |
| 34 |
| | 7 |
|
| Other noncurrent assets | | 20 |
| | 7 |
| | (9 | ) | | (5 | ) |
| (30 | ) | | 20 |
|
| Other noncurrent liabilities | | (19 | ) | | (53 | ) | | 20 |
| | 25 |
|
| 76 |
| | (19 | ) |
| Net cash provided by operating activities | | 541 |
| | 604 |
| | 702 |
| | 586 |
|
| 575 |
| | 541 |
|
| INVESTING ACTIVITIES | | | | | | | |
|
|
|
|
| | |
| Capital expenditures | | (370 | ) | | (518 | ) | | (717 | ) | | (226 | ) |
| (224 | ) | | (370 | ) |
| Proceeds from sales of assets, third party, net of transaction fees and hedging | | 3 |
| | 117 |
| | 8 |
| | 2 |
|
| 4 |
| | 3 |
|
| Proceeds from the sale of assets, related party, net of transaction fees | | — |
| | — |
| | 8 |
| |
| Outflows from investment in and advances to non-consolidated affiliates, net | | (2 | ) | | (20 | ) | | (16 | ) | |
| Proceeds (outflows) from the sale of a business | | | 314 |
| | (2 | ) | | — |
|
| Proceeds from investment in and advances to non-consolidated affiliates, net | | | 16 |
|
| 2 |
| | (2 | ) |
| (Outflows) proceeds from settlement of other undesignated derivative instruments, net | | (9 | ) | | 5 |
| | 15 |
| | (23 | ) |
| 8 |
| | (9 | ) |
| Net cash used in investing activities | | (378 | ) | | (416 | ) | | (702 | ) | |
| Net cash provided by (used in) investing activities | | | 83 |
|
| (212 | ) | | (378 | ) |
| FINANCING ACTIVITIES | | | | | | | |
|
|
|
|
| | |
| Proceeds from issuance of long-term and short-term borrowings | | 174 |
| | 362 |
| | 169 |
| | — |
|
| 4,572 |
| | 174 |
|
| Principal payments of long-term and short-term borrowings | | (216 | ) | | (324 | ) | | (164 | ) | | (174 | ) |
| (4,477 | ) | | (216 | ) |
| Revolving credit facilities and other, net | | (187 | ) | | 160 |
| | 208 |
| | (211 | ) |
| (229 | ) | | (187 | ) |
| Return of capital to our common shareholder | | — |
| | (250 | ) | | — |
| |
| Dividends, noncontrolling interest | | (1 | ) | | (1 | ) | | — |
| | — |
|
| — |
| | (1 | ) |
| Debt issuance costs | | (15 | ) | | (3 | ) | | (8 | ) | | (5 | ) |
| (191 | ) | | (15 | ) |
| Net cash (used in) provided by financing activities | | (245 | ) | | (56 | ) | | 205 |
| |
| Net (decrease) increase in cash and cash equivalents | | (82 | ) | | 132 |
| | 205 |
| |
| Net cash used in financing activities | | | (390 | ) |
| (325 | ) | | (245 | ) |
| Net increase (decrease) in cash and cash equivalents | | | 279 |
|
| 38 |
| | (82 | ) |
| Effect of exchange rate changes on cash | | 10 |
| | (13 | ) | | 3 |
| | 47 |
|
| — |
| | 10 |
|
| Cash and cash equivalents — beginning of period | | 628 |
| | 509 |
| | 301 |
| | 594 |
|
| 556 |
| | 628 |
|
| Cash and cash equivalents — end of period | | $ | 556 |
| | $ | 628 |
| | $ | 509 |
| | $ | 920 |
|
| $ | 594 |
| | $ | 556 |
|
See accompanying notes to the consolidated financial statements.
Novelis Inc.
CONSOLIDATED STATEMENTS OF SHAREHOLDER’S (DEFICIT) EQUITY
(In millions, except number of shares)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | (Deficit) Equity of our Common Shareholder | | | | |
| | | Common Stock | | | | | | | | | | |
| | | Shares | | Amount | | Additional Paid-in Capital | | Retained Earnings/ (Accumulated Deficit) | | Accumulated Other Comprehensive Income (Loss) (AOCI) | | Non- Controlling Interests | | Total (Deficit) Equity |
| Balance as of March 31, 2013 | | 1,000 |
| | $ | — |
| | $ | 1,654 |
| | $ | (1,177 | ) | | $ | (268 | ) | | $ | 30 |
| | $ | 239 |
|
| Net income attributable to our common shareholder | | — |
| | — |
| | — |
| | 104 |
| | — |
| | — |
| | 104 |
|
| Currency translation adjustment, net of tax provision of $— in AOCI | | — |
| | — |
| | — |
| | — |
| | 122 |
| | (2 | ) | | 120 |
|
| Change in fair value of effective portion of hedges, net of tax provision of $3 included in AOCI | | — |
| | — |
| | — |
| | — |
| | (18 | ) | | — |
| | (18 | ) |
| Change in pension and other benefits, net of tax benefit of $47 included in AOCI | | — |
| | — |
| | — |
| | — |
| | 73 |
| | — |
| | 73 |
|
| Return of capital | | — |
| | — |
| | (250 | ) | | — |
| | — |
| | — |
| | (250 | ) |
| Balance as of March 31, 2014 | | 1,000 |
| | — |
| | 1,404 |
| | (1,073 | ) | | (91 | ) | | 28 |
| | 268 |
|
| Net income attributable to our common shareholder | | — |
| | — |
| | — |
| | 148 |
| | — |
| | — |
| | 148 |
|
| Currency translation adjustment, net of tax provision of $ — included in AOCI | | — |
| | — |
| | — |
| | — |
| | (302 | ) | | (2 | ) | | (304 | ) |
| Change in fair value of effective portion of cash flow hedges, net of tax benefit of $1 million included in AOCI | | — |
| | — |
| | — |
| | — |
| | (43 | ) | | — |
| | (43 | ) |
| Change in pension and other benefits, net of tax benefit of $71 million included in AOCI | | — |
| | — |
| | — |
| | — |
| | (125 | ) | | (13 | ) | | (138 | ) |
| Noncontrolling interests cash dividends declared | | — |
| | — |
| | — |
| | — |
| | — |
| | (1 | ) | | (1 | ) |
| Balance as of March 31, 2015 | | 1,000 |
| | — |
| | 1,404 |
| | (925 | ) | | (561 | ) | | 12 |
| | (70 | ) |
| Net loss attributable to our common shareholder | | — |
| | — |
| | — |
| | (38 | ) | | — |
| | — |
| | (38 | ) |
| Currency translation adjustment, net of tax provision of $ - million included in AOCI | | — |
| | — |
| | — |
| | — |
| | 17 |
| | — |
| | 17 |
|
| Change in fair value of effective portion of cash flow hedges, net of tax provision of $8 million included in AOCI | | — |
| | — |
| | — |
| | — |
| | 52 |
| | — |
| | 52 |
|
| Change in pension and other benefits, net of tax benefit of $14 million included in AOCI | | — |
| | — |
| | — |
| | — |
| | (8 | ) | | (11 | ) | | (19 | ) |
| Noncontrolling interests cash dividends declared | | — |
| | — |
| | — |
| | — |
| | — |
| | (1 | ) | | (1 | ) |
| Balance as of March 31, 2016 | | 1,000 |
| | $ | — |
| | $ | 1,404 |
| | $ | (963 | ) | | $ | (500 | ) | | $ | — |
| | $ | (59 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | (Deficit) Equity of our Common Shareholder | | | | |
| | | Common Stock | | | | | | | | | | |
| | | Shares | | Amount | | Additional Paid-in Capital | | Retained Earnings/ (Accumulated Deficit) | | Accumulated Other Comprehensive Loss (AOCI) | | Non- Controlling Interests | | Total (Deficit)/ Equity |
| Balance as of March 31, 2015 | | 1,000 |
| | $ | — |
| | $ | 1,404 |
| | $ | (925 | ) | | $ | (561 | ) | | $ | 12 |
| | $ | (70 | ) |
| Net loss attributable to our common shareholder | | — |
| | — |
| | — |
| | (38 | ) | | — |
| | — |
| | (38 | ) |
| Currency translation adjustment, net of tax provision of $— included in AOCI | | — |
| | — |
| | — |
| | — |
| | 17 |
| | — |
| | 17 |
|
| Change in fair value of effective portion of hedges, net of tax provision of $8 included in AOCI | | — |
| | — |
| | — |
| | — |
| | 52 |
| | — |
| | 52 |
|
| Change in pension and other benefits, net of tax benefit of $14 included in AOCI | | — |
| | — |
| | — |
| | — |
| | (8 | ) | | (11 | ) | | (19 | ) |
| Noncontrolling interests cash dividends declared | | — |
| | — |
| | — |
| | — |
| | — |
| | (1 | ) | | (1 | ) |
| Balance as of March 31, 2016 | | 1,000 |
| | — |
| | 1,404 |
| | (963 | ) | | (500 | ) | | — |
| | (59 | ) |
| Net income attributable to our common shareholder | | — |
| | — |
| | — |
| | 45 |
| | — |
| | — |
| | 45 |
|
| Net income attributable to noncontrolling interests | | — |
| | — |
| | — |
| | — |
| | — |
| | 1 |
| | 1 |
|
| Currency translation adjustment, net of tax provision of $— included in AOCI | | — |
| | — |
| | — |
| | — |
| | (60 | ) | | 1 |
| | (59 | ) |
| Change in fair value of effective portion of cash flow hedges, net of tax provision of $22 million included in AOCI | | — |
| | — |
| | — |
| | — |
| | (35 | ) | | — |
| | (35 | ) |
| Change in pension and other benefits, net of tax benefit of $22 million included in AOCI | | — |
| | — |
| | — |
| | — |
| | 50 |
| | 2 |
| | 52 |
|
| Noncontrolling interest related to the sale of a business | | — |
| | — |
| | — |
| | — |
| | — |
| | (22 | ) | | (22 | ) |
| Balance as of March 31, 2017 | | 1,000 |
| | — |
| | 1,404 |
| | (918 | ) | | (545 | ) | | (18 | ) | | (77 | ) |
| Net income attributable to our common shareholder | | — |
| | — |
| | — |
| | 635 |
| | — |
| | — |
| | 635 |
|
| Net loss attributable to noncontrolling interests | | — |
| | — |
| | — |
| | — |
| | — |
| | (13 | ) | | (13 | ) |
Currency translation adjustment, net of tax provision of $— included in AOCI
| | — |
| | — |
| | — |
| | — |
| | 191 |
| | — |
| | 191 |
|
| Change in fair value of effective portion of cash flow hedges, net of tax provision of $32 million included in AOCI | | — |
| | — |
| | — |
| | — |
| | 77 |
| | — |
| | 77 |
|
| Change in pension and other benefits, net of tax provision of $2 million included in AOCI | | — |
| | — |
| | — |
| | — |
| | 16 |
| | (6 | ) | | 10 |
|
| Balance as of March 31, 2018 | | 1,000 |
| | $ | — |
| | $ | 1,404 |
| | $ | (283 | ) | | $ | (261 | ) | | $ | (37 | ) | | $ | 823 |
|
See accompanying notes to the consolidated financial statements.
Novelis Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
References herein to “Novelis,” the “Company,” “we,” “our,” or “us” refer to Novelis Inc. and its subsidiaries unless the context specifically indicates otherwise. References herein to “Hindalco” refer to Hindalco Industries Limited. Hindalco acquired Novelis in May 2007. All of the common shares of Novelis are owned directly by AV Metals Inc. and indirectly by Hindalco Industries Limited.
Organization and Description of Business
We produce aluminum sheet and light gauge products for use in the packaging market, which includes beverage and food can and foil products, as well as for use in the automotive, transportation, electronics, architectural and industrial product markets. We have recycling operations in many of our plants to recycle post-consumer aluminum, such as used-beverage cans and post-industrial aluminum, such as class scrap. As of March 31, 20162018, we had manufacturing operations in eleventen countries on four continents: North America, South America, Asia and Europe, through 2524 operating facilities, including recycling operations in eleven of these plants.
Consolidation Policy
Our consolidated financial statements include the assets, liabilities, revenues and expenses of all wholly-owned subsidiaries, majority-owned subsidiaries over which we exercise control and entities in which we have a controlling financial interest or are deemed to be the primary beneficiary. We eliminate all significant intercompany accounts and transactions from our consolidated financial statements.
We use the equity method to account for our investments in entities that we do not control, but where we have the ability to exercise significant influence over operating and financial policies. Consolidated “Net income (loss) income attributable to our common shareholder” includes our share of net income (loss) of these entities. The difference between consolidation and the equity method impacts certain of our financial ratios because of the presentation of the detailed line items reported in the consolidated financial statements for consolidated entities, compared to a two-line presentation of "Investment in and advances to non-consolidated affiliates" and "Equity in net lossincome (loss) of non-consolidated affiliates."
Use of Estimates and Assumptions
The preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP) requires us to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and the disclosures of contingent assets and liabilities as of the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. The principal areas of judgment relate to (1) the fair value of derivative financial instruments; (2) impairment of goodwill; (3) impairment of long lived assets and other intangible assets; (4) impairment and assessment of consolidation of equity investments; (5) actuarial assumptions related to pension and other postretirement benefit plans; (6) tax uncertainties and valuation allowances; and (7) assessment of loss contingencies, including environmental and litigation liabilities. Future events and their effects cannot be predicted with certainty, and accordingly, our accounting estimates require the exercise of judgment. The accounting estimates used in the preparation of our consolidated financial statements may change as new events occur, as more experience is acquired, as additional information is obtained and as our operating environment changes. We evaluate and update our assumptions and estimates on an ongoing basis and may employ outside experts to assist in our evaluations. Actual results could differ from the estimates we have used.
Revision of Previously Issued Financial Statements
In connection with preparing the financial statements for fiscal year 2018, we identified a footnote only disclosure misstatement of the aggregated receivables factored within previously issued Form 10-Ks for the years ended March 31, 2017 and March 31, 2016. The previously disclosed amounts for the years ended March 31, 2017 and March 31, 2016 were $5,149 million and $3,314 million, respectively, and the corrected amounts are $3,495 million and $2,816 million, respectively.
We also identified a misclassification between “Accrued expenses and other current liabilities” and the deferred income tax balances of $2 million as of March 31, 2017. As a result, there is a $2 million misclassification between deferred income tax expense and current income tax expense within Note 18 — Income Taxes as of March 31, 2017. These items impacted the "Deferred income tax" and "Other current liabilities" line items within total "Operating Activities". However, there is no impact to "Net cash provided by operating activities" within the Consolidated Statements of Cash Flows. Additionally, disclosure misclassifications between categories, decreasing "Provisions not currently deductible for tax
Novelis Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
purposes" by $41 million and increasing "Tax losses/benefits carryforward, net" by $47 million and "Valuation allowance" by $9 million, were identified within Note 18 — Income Taxes as of March 31, 2017.
As of June 30, 2017, we identified a misclassification between “Prepaid expenses and other current assets” and “Accrued expenses other current liabilities” accounts that understated these balances as of March 31, 2017 by $26 million. In addition, we identified a misclassification between “Deferred income tax assets” and “Deferred income tax liabilities” of $4 million that understated these balances as of March 31, 2017. These items impacted the "Other current assets" and "Other current liabilities" line items within total "Operating Activities". However, there is no impact to "Net cash provided by operating activities" within the Consolidated Statements of Cash Flows.
We assessed the materiality of the misstatements and concluded that these misstatements were not material to the Company’s previously issued financial statements and that amendments of previously filed reports were therefore not required. However, we elected to revise the previously reported amounts in the March 31, 2017 consolidated balance sheet, the consolidated statement of cash flows for the year ended March 31, 2017, and we have also revised the footnotes for the disclosure misstatements described above, as applicable.
Reclassification
A reclassification of a prior period amount has been made to conform to the presentation adopted for the current period. For the year ended March 31, 2017, we reclassified $27 million from "Other (income) expense, net" to "(Gain) loss on the sale of a business, net" in the consolidated statement of operations to conform with the current period presentation. This reclassification had no impact on “Income before income taxes,” “Net income (loss) attributable to our common shareholder,” the condensed consolidated balance sheets or consolidated statements of cash flows during the respective periods. Refer to Note 17 — Other (income) expense, net for further details.
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.
Novelis Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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, the remediation of environmental contamination, post-mining reclamation 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 party claims, and other expenses, without regard to the fault or the legality of the original conduct.
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 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 efforts, remediation activities and legal proceedings concerning environmental matters, including certain activities and proceedings arising under U.S. Superfund and comparable laws in other jurisdictions where we have operations.
We have established liabilities for environmental remediation where appropriate. However, the cost of addressing environmental matters (including the timing of any charges related thereto) cannot be predicted with certainty, and these liabilities 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 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 operations. In addition, the presence of environmental
Novelis Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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 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 incorporated 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.
Novelis Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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 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 which could have a material adverse effect on our financial position, results of operations and cash flows. Significant price increases may result in our customers’customers substituting other materials, such as plastic or glass, for aluminum or switching 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 and our cast house 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 adverse effect on our financial position, results of operations and cash flows.
A substantial portion of our employees are represented by labor unions under a large number of collective bargaining agreements with varying durations and expiration dates. 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 China, Brazil and South Korea, and Malaysia, and we market our products in these countries, as well as certain other countries in Asia, Africa, and the Middle East. 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 may be less developed and predictable, and the possibility of various types of adverse governmental action may be 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, changes in fiscal regimes and increased government regulation in the countries in which we operate or service
Novelis Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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.
Other risks and uncertainties
In addition, refer to Note 1714 — Financial Instruments and Commodity Contracts, Note 16 — Fair Value Measurements and Note 2019 — Commitments and Contingencies for a discussion of financial instruments and commitments and contingencies.
Revenue Recognition
We recognize sales when the revenue is realized or realizable, and has been earned. We record sales when a firm sales agreement is in place, delivery has occurred and collectability of the fixed or determinable sales price is reasonably assured.
We recognize product revenue, net of trade discounts, allowances, and estimated billing adjustments, in the reporting period in which the products are shipped and the title and risk of ownership pass to the customer. We sell most of our products under contracts based on a “conversion premium,” 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 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.
Shipping and handling amounts we bill to our customers are included in “Net sales” and the related shipping and handling costs we incur are included in “Cost of goods sold (exclusive of depreciation and amortization).”
Novelis Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Our customers can receive or earn certain incentives including, but not limited to, contract signing bonuses, cash discounts, volume based incentive programs, and support for infrastructure programs. The incentives are recorded as reductions to "Net sales,"sales" and are recognized over the minimum contractual period in which the customer is obligated to make purchases from Novelis. For incentives that must be earned, management must make estimates related to customer performance and sales volume to determine the total amounts earned and to be recorded as reductions to "Net sales." In making these estimates, management considers historical results.results and future estimates. The actual amounts may differ from these estimates.
On occasion, and in an attempt to better manage inventory levels, we sell inventory to third parties and have agreed to repurchase the same or similar inventory back from the third parties over a future period, based on market prices at the time of repurchase. For transactions in which the Company sells inventory and agrees to repurchase at a later date, we record the initial sale of the inventory on a net basis in our consolidated statement of operations through "Cost of goods sold (exclusive of depreciation and amortization)." Upon repurchase, the Company accounts for the inventory at the reacquisition price which becomes an input to our moving average inventory cost basis.
Cost of Goods Sold (Exclusive of Depreciation and Amortization)
“Cost of goods sold (exclusive of depreciation and amortization)” includes all costs associated with inventories, including the procurement of materials, the conversion of such materials into finished products, and the costs of warehousing and distributing finished goods to customers. Material procurement costs include inbound freight charges as well as purchasing, receiving, inspection and storage costs. Conversion costs include the costs of direct production inputs such as labor and energy, as well as allocated overheads from indirect production centers and plant administrative support areas. Warehousing and distribution costs include inside and outside storage costs, outbound freight charges and the costs of internal transfers.
Selling, General and Administrative Expenses
“Selling, general and administrative expenses” include selling, marketing and advertising expenses; salaries, travel and office expenses of administrative employees and contractors; legal and professional fees; software license fees; bad debt expenses; and factoring expenses.
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
Novelis Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Restructuring charges, which are recorded within “Restructuring and impairment, net," include employee severance and benefit costs, impairments of assets, and other costs associated with exit activities. We apply the provisions of ASC 420, Exit or Disposal Cost Obligations (ASC 420). and ASC 712, Compensation — Nonretirement Postemployment Benefits. Severance costs accounted for under ASC 420 and/or ASC 712 are recognized when management with the proper level of authority has committed to a restructuring plan and communicated those actions to employees. Impairment losses are based upon the estimated fair value less costs to sell, with fair value estimated based on existing market prices for similar assets. Other exit costs include environmental remediation costs and contract termination costs, primarily related to equipment and facility lease obligations. At each reporting date, we evaluate the accruals for restructuring costs to ensure the accruals are still appropriate. See Note 2 — Restructuring and Impairment for further discussion.
Cash and Cash Equivalents
“Cash and cash equivalents” includes 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.
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Accounts Receivable
Our accounts receivable are geographically dispersed. We do not obtain collateral 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-off uncollectible accounts receivable against the allowance for doubtful accounts after exhausting collection efforts. For each of the periods presented, 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. See Note 3 — Accounts Receivable for further discussion.
Derivative Instruments
We hold derivatives for risk management purposes and not for trading. We use derivatives to mitigate uncertainty and volatility caused by underlying exposures to aluminum prices, foreign exchange rates, interest rates, and energy prices. The fair values of all derivative instruments are recognized as assets or liabilities at the balance sheet date and are reported gross.
We may be exposed to losses in the future if the counterparties to our derivative contracts fail to perform. We are satisfied that the risk of such non-performance is remote due to our monitoring of credit exposures. Additionally, we enter into master netting agreements with contractual provisions that allow for netting of counterparty positions in case of default, and we do not face credit contingent provisions that would result in the posting of collateral.
Prior to the adoption of ASU 2017-12 Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities, we were required to separately measure and record ineffectiveness, which is the amount by which the hedging instrument did not offset the changes in the fair value or cash flows of hedged items. We recorded the gain or loss related to the ineffective portion of derivative instruments, if any, in “Other (income) expense, net. Pursuant to our adoption of the provisions of ASU 2017-12 in the fourth quarter of fiscal 2018, we are no longer required to separately measure and recognize hedge ineffectiveness in our current period earnings. Upon adoption of ASU 2017-12, for cash flow hedges we will recognize and defer the entire periodic change in the fair value of the hedging instrument in other comprehensive income (loss). The amounts recorded in other comprehensive income (loss) will subsequently be reclassified to earnings in the same line item impacted by the hedged item when the hedged item affects earnings.
Prior to the adoption of ASU 2017-12, we assessed and measured hedge effectiveness on our aluminum and natural gas programs based on all pricing components of the hedged item. Pursuant to the adoption of ASU 2017-12, we will apply hedge accounting to only a specific component of the hedged item for these programs simplifying the application of hedge accounting and better aligning our risk management objectives, activities and financial reporting.
For derivatives designated as cash flow hedges or net investment hedges, we assess hedge effectiveness by formally evaluating the high correlation of the expected future cash flows of the hedged item and the derivative hedging instrument. The
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effective portion of gain or loss on the derivative is included in other comprehensive income (OCI) and reclassified to earnings in the period in which earnings are impacted by the hedged items or in the period that the transaction becomes probable of not occurring. Gains or losses representing reclassifications of OCI to earnings are recognized in the line item most reflective of the underlying risk exposure. We exclude the time value component of foreign currency and aluminum price risk hedges when measuring and assessing ineffectiveness to align our accounting policy with risk management objectives when it is necessary. If at any time during the life of a cash flow hedge relationship we determine that the relationship is no longer effective, the derivative will no longer be designated as a cash flow hedge and future gains or losses on the derivative will be recognized in “Other"Other expense (income) expense, net.”, net".
For derivatives designated as fair value hedges, we assess hedge effectiveness by formally evaluating the high correlation of changes in the fair value of the hedged item and the derivative hedging instrument. The changes in the fair values of the underlying hedged items are reported in "Prepaid expenses and other current assets," "Other long-term assets", "Accrued expenses and other current liabilities," and "Other long-term liabilities" in the consolidated balance sheets. Changes in the fair values of these derivatives and underlying hedged items generally offset and the effective portion is recorded in "Net sales" consistent with the underlying hedged item and the net ineffectiveness is recorded in "Other (income) expense, net."
If no hedging relationship is designated, gains or losses are recognized in “Other"Other expense (income) expense, net”, net" in our current period earnings.
Consistent with the cash flows from the underlying risk exposure, we classify cash settlement amounts associated with designated derivatives as part of either operating or investing activities in the consolidated statements of cash flows. If no hedging relationship is designated, we classify cash settlement amounts as part of investing activities in the consolidated statement of cash flows.
The majority of our derivative contracts are valued using industry-standard models that use observable market inputs as their basis, such as time value, forward interest rates, volatility factors, and current (spot) and forward market prices for foreign exchange rates. See Note 1514 — Financial Instruments and Commodity Contracts and Note 1716 — Fair Value Measurements for additional discussion related to derivative instruments.
Inventories
We carry our inventories at the lower of their cost or marketnet realizable value, reduced for obsolete and excess inventory. We use the average cost method to determine cost. Included in inventories are stores inventories, which are carried at average cost. See Note 4 — Inventories for further discussion.
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Property, Plant and Equipment
We record land, buildings, leasehold improvements and machinery and equipment at cost. We record 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 generally 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. See Note 65 — Property, Plant and Equipment for further discussion. We assign useful lives to and depreciate major components of our property, plant and equipment.
The ranges of estimated useful lives are as follows:
|
| | |
| | | Years |
| Buildings | | 30 to 40 |
| Leasehold improvements | | 7 to 20 |
| Machinery and equipment | | 2 to 25 |
| Furniture, fixtures and equipment | | 3 to 10 |
| Equipment under capital lease obligations | | 5 to 15 |
As noted above, our machinery and equipment have useful lives of 2 to 25 years. Most of our large scale machinery, including hot mills, cold mills, continuous casting mills, furnaces and finishing mills have useful lives of 15 to 25 years. Supporting machinery and equipment, including automation and work rolls, have useful lives of 2 to 15 years.
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.
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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, after consideration of any proceeds, is included as a gain or loss in “Other"Other expense (income) expense, net”, net" or "(Gain) loss on assets held for sale" in our consolidated statements of operations.
We account for operating leases under the provisions of ASC 840, Leases. These pronouncements requireThis pronouncement requires 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.
Goodwill
We test for impairment at least annually as of the last day of February of each fiscal year, unless a triggering event occurs that would require an interim impairment assessment. We do not aggregate components of operating segments to arrive at our reporting units and, as such, our reporting units are the same as our operating segments.
In performing our goodwill impairment test, we have the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the estimated fair value of a reporting unit is less than its carrying amount. If we perform a qualitative assessment and determine that an impairment is more likely than not, then we perform the two-step quantitative impairment test, otherwise no further analysis is required. We also may elect not to perform the qualitative assessment and, instead, proceed directly to the two-step quantitative impairment test. The ultimate outcome of the goodwill impairment assessment will be the same whether we choose to perform the qualitative assessment or proceed directly to the two-step quantitative impairment test.
For the years ended March 31, 2016, 20152018, 2017 and 20142016 we elected to perform the two-step quantitative impairment test. No goodwill impairment was identified in any of the years. See Note 76 — Goodwill and Intangible Assets for further discussion.
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We use the present value of estimated future cash flows to establish the estimated fair value of our reporting units as of the testing date. 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 the market approach to corroborate the estimated fair value. If the carrying amount of a reporting unit's goodwill exceeds its estimated fair value, the second step of the impairment test is performed in order to determine the amount of impairment loss, if any. The second step compares the implied fair value of the reporting unitunit's goodwill with the carrying amount of that goodwill. If the carrying amount of the reporting unit's goodwill exceeds its implied fair value, we would recognize an impairment charge in an amount equal to that excess in our consolidated statements of 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.
Long-Lived Assets and Other Intangible Assets
We amortize the cost of intangible assets over their respective estimated useful lives to their estimated residual value. See Note 76 — Goodwill and Intangible Assets for further discussion.
We assess the recoverability of long-lived assets (excluding goodwill) and finite-lived intangible assets, 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, 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 is based on the present value of estimated future cash flows. We measure the amount of impairment of other long-lived assets and intangible assets (excluding goodwill) as the amount by which the carrying value of the asset exceeds the fair value of the asset, which is generally determined as the present value of estimated future cash flows or as the appraised value. Impairments of long-lived assets and intangible assets are included in “Restructuring and impairment, net” in the consolidated statement of operations. See Note 2 -— Restructuring and Impairment for further discussions.
Assets and Liabilities Held for Sale
We classify long-lived assets (disposal groups) to be sold as held for sale in the period in which all of the following criteria are met: management, having the authority to approve the action, commits to a plan to sell the asset (disposal group);
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the asset (disposal group) is available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such assets (disposal groups); an active program to locate a buyer and other actions required to complete the plan to sell the asset (disposal group) have been initiated; the sale of the asset (disposal group) is probable, and transfer of the asset (disposal group) is expected to qualify for recognition as a completed sale within one year, except if events or circumstances beyond our control extend the period of time required to sell the asset (disposal group) beyond one year; the asset (disposal group) is being actively marketed for sale at a price that is reasonable in relation to its current fair value; and actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.
We initially measure a long-lived asset (disposal group) that is classified as held for sale at the lower of its carrying value or fair value less any costs to sell. Any loss resulting from this measurement is recognized in the period in which the held for sale criteria are met. Conversely, gains are not recognized on the sale of a long-lived asset (disposal group) until the date of sale. We assess the fair value of a long-lived asset (disposal group) less any costs to sell each reporting period it remains classified as held for sale and report any reduction in fair value as an adjustment to the carrying value of the asset (disposal group). Upon being classified as held for sale we cease depreciation. We continue to depreciate long-lived assets to be disposed of other than by sale.
Upon determining that a long-lived asset (disposal group) meets the criteria to be classified as held for sale, we report the assets and liabilities of the disposal group if material, in the line items "Assets held for sale" and "Liabilities held for sale," respectively in our consolidated balance sheets. See Note 5 — Assets Held for Sale for further discussion.
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Investment in and Advances to Non-Consolidated Affiliates
We assess the potential for other-than-temporary impairment of our equity method investments when impairment indicators are identified. 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. See Note 98 — Investment in and Advances to Non-Consolidated Affiliates and Related Party Transactions for further discussion.
Financing Costs
We amortize financing costs and premiums, and accrete discounts, over the remaining life of the related debt using the effective interest amortization method.method, unless the impact of utilizing the straight-line method results in an immaterial difference. The expense is included in “Interest expense and amortization of debt issuance costs” in our consolidated statements of operations. We record discounts or premiumsand unamortized financing costs as a direct deduction from, or premiums as a direct addition to, the face amount of the financing. Financing costs are included in "Other long-term assets" in our consolidated balance sheets.
Fair Value of Financial Instruments
ASC 820, Fair Value Measurements and Disclosures (ASC 820), defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. ASC 820 also applies to measurements under other accounting pronouncements, such as ASC 825, Financial Instruments (ASC 825) that require or permit fair value measurements. ASC 825 requires disclosures of the fair value of financial instruments. Our financial instruments include: cash and cash equivalents; certificates of deposit; accounts receivable; accounts payable; foreign currency, energy and interest rate derivative instruments; cross-currency swaps; metal option and forward contracts; share-based compensation; 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, accounts payable and current related party notes receivable and 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 our share-based compensation liabilities, short-term borrowings and long-term debt. When quoted market prices are not available for various types of financial instruments (such as currency, energy and interest rate 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. See Note 1716 — Fair Value Measurements for further discussion.
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Pensions and Postretirement Benefits
Our pension obligations relate to funded defined benefit pension plans in the U.S., Canada, Switzerland and the U.K., unfunded pension plans in the U.S., Canada, and Germany, and unfunded lump sum indemnities in France Malaysia and Italy; and partially funded lump sum indemnities in South Korea. Our other postretirement obligations include unfunded health care and life insurance benefits provided to retired employees in Canada, the U.S. and Brazil.
We account for our pensions and other postretirement benefits in accordance with ASC 715, Compensation — Retirement Benefits (ASC 715). We recognize the funded status of our benefit plans as a net asset or liability, with an offsetting adjustment to accumulated other comprehensive income in shareholder’s (deficit) equity. The funded status is calculated as the difference between the fair value of plan assets and the benefit obligation. For the years ended March 31, 20162018 and 2015,2017, we used March 31 as the measurement date.
We use standard actuarial methods and assumptions to account for our pension and other postretirement benefit plans. Pension and postretirement benefit obligations are actuarially calculated using management’s best estimates of the rate used to discount the future estimated liability, the long-term rate of return on plan assets, and several assumptions related to the employee workforce (compensation increases, health care cost trend rates, expected service period, retirement age, and mortality). Pension and postretirement 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, curtailments, and settlements. Net actuarial gains and losses are amortized over periods of 15 years or less, which represent the group's average future service life of the employees or the group's average life expectancy. See Note 1312 — Postretirement Benefit Plans for further discussion.
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Noncontrolling Interests in Consolidated Affiliates
These financial statements reflect the application of ASC 810, Consolidations (ASC 810), which establishes accounting and reporting standards that require: (i) the ownership interest in subsidiaries held by parties other than the parent to be clearly identified and presented in the consolidated balance sheet within shareholder’s (deficit) equity, but separate from the parent’s (deficit) equity; (ii) the amount of consolidated net income attributable to the parent and the noncontrolling interest to be clearly identified and presented on the face of the consolidated statement of operations and (iii) changes in a parent’s ownership interest while the parent retains its controlling financial interest in its subsidiary to be accounted for consistently.
Our consolidated 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 noncontrolling interest for the allocable portion of income or loss and comprehensive income or loss to which the noncontrolling interest holders are entitled based upon their ownership share of the affiliate. Distributions made to the holders of noncontrolling interests are charged to the respective noncontrolling interest balance.
Losses attributable to the noncontrolling interest in an affiliate may exceed our interest in the affiliate’s equity. The excess, and any further losses attributable to the noncontrolling interest, shall be attributed to those interests. The noncontrolling interest shall continue to be attributed its share of losses even if that attribution results in a deficit noncontrolling interest balance. As of March 31, 2016 and 2015, we have no such losses.
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. Environmental liabilities are included in our consolidated balance sheets in “Accrued expenses and other current liabilities” and “Other long-term liabilities,” depending on their short- or long-term nature. Any receivables for related insurance or other third party recoveries for environmental liabilities are recorded when it is probable that a recovery will be realized and are included in our consolidated balance sheets in “Prepaid expenses and other current assets.”
Costs related to environmental matters 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. See Note 2019 — Commitments and Contingencies for further discussion.
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Litigation Contingencies
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 professional fees associated with litigation claims and assessments as incurred. See Note 2019 — Commitments and Contingencies for further discussion.
Income Taxes
We account for income taxes using the asset and liability method. This approach recognizes the amount of income 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 financial statements and income tax returns. Deferred income tax assets and liabilities are adjusted to recognize the effects of changes in tax laws or enacted tax rates. Under ASC 740 Income Taxes, (ASC 740) 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 taxable income through various sources.
We record tax benefits related to uncertain tax positions taken or expected to be taken on a tax return when such benefits meet a more than likely than not threshold. Otherwise, these tax benefits are recorded when a tax position has been effectively settled, the statute of limitation has expired or the appropriate taxing authority has completed their examination. Interest and penalties related to uncertain tax positions are recognized as part of the provision for income taxes and are accrued beginning in the period that such interest and penalties would be applicable under relevant tax law until such time that the related tax benefits are recognized. See Note 1918 — Income Taxes for further discussion.
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Share-Based Compensation
In accordance with ASC 718, Compensation — Stock Compensation (ASC 718), we recognize 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. Our share-based awards are settled in cash and are accounted for as liability based awards. As such, liabilities for awards under these plans are required to be measured at fair value at each reporting date until the date of settlement. See Note 1211 — Share-Based Compensation for further discussion.
Foreign Currency Translation
The assets and liabilities of foreign operations, whose functional currency is other than the U.S. dollar (located in Europe and Asia), are translated to U.S. dollars at the period end exchange rates and revenues and expenses are translated at average exchange rates for the period. Differences arising from this translation are included in the currency translation adjustment (CTA) component of AOCI and Noncontrolling Interest.Interest, both of which are on the balance sheet. If there is a planned or completed sale or liquidation of our ownership in a foreign operation, the relevant CTA is recognized in our consolidated statement of operations.
For all operations, the monetary items denominated in currencies other than the functional currency are remeasured at period-end exchange rates and transaction gains and losses are included in “Other (income) expense, net” in our consolidated statements of operations. Non-monetary items are remeasured at historical rates.
Recently Adopted Accounting Standards
Effective for the firstfourth quarter of fiscal 2016,2018, we early adopted Financial Accounting Standards Board (FASB) ASU No. 2013-05,2017-12, Foreign Currency MattersDerivatives and Hedging (Topic 830)815): Parent'sTargeted Improvements to Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign EntityHedging Activities.. The amendments in this update provide clarification regardingbetter align an entity’s risk management objectives, activities and financial reporting for hedging relationships through changes to both the releasedesignation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. The impact of the adoption will now allow us to (1) defer the entire change in fair value of the hedging instrument to OCI, (2) apply hedge accounting to a specific pricing component and no longer to all pricing components, for our aluminum and natural gas programs and (3) eliminate the separate measurement and reporting of hedge ineffectiveness. The updated guidance will simplify the application of hedge accounting and increase the transparency of the results of our hedging programs. We did not record a cumulative translationeffect adjustment into net income when a parent either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets within a foreign entity. Our existing accounting policy complies with this guidance; therefore, there was no impact on our financial statements.
Effective for the first quarter fiscal 2016,as we adopted FASB issued ASU No. 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. The amendment changes the criteria for determining which disposals can be presented as discontinued operations and modifies related disclosure requirements. Under the revised standard, a discontinued operation is (1) a component of an entity or group of components that has been disposed of by sale, disposed of other than by sale or is classified as held for sale that represents a strategic shift that has or will have a major effect on an entity’s operations and financial results or (2) an acquired business or nonprofit activity that is classified as held for sale on the date of the acquisition. There was no impact upon adoption; however, the accounting treatment and classification of future disposals under this new standard could differ from our previous treatment and classification of disposals.
We elected to early adopt, ASU 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes, which requires all deferred tax assetsde-designate and liabilities, along with anyre-designate existing hedge accounting relationships at the adoption date. Please refer to Note 14 — Financial Instruments and Commodity Contracts for additional disclosures related valuation allowance, be classified as noncurrent on the balance sheet. We applied the new standard prospectively to the Consolidated Balance Sheet as of March 31, 2016. The Consolidated Balance Sheet as of March 31, 2015 was not retrospectively adjusted. See Note 19 — Income Taxes for further discussion.
Recently Issued Accounting Standards
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which, when effective, will supersede the guidance in former ASC 605, Revenue Recognition. The new guidance requires entities to recognize revenue based on the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance is effective for annual periods beginning after December 15, 2016 and interim periods within that year. Early adoption is not permitted. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of Effective Date, which provides an optional one-year deferral of the effective date. In March 2016 the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross Versus Net), which amends the principal-versus-agent implementation guidance. The amendment clarifies that the principal-versus-agent evaluation should be performed for each specified good or service promised in a contract with a customer. We are currently evaluating the impact of this standard on our consolidated financial position and results of operations. standard.
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Effective for the first quarter of fiscal 2018, we early adopted FASB ASU 2016-05, Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships, which addresses a lack of guidance in existing US GAAP related to the impact of derivative contract novations on existing hedge accounting relationships under Accounting Standards Codification Topic 815, Derivatives and Hedging (ASC 815). The new guidance clarifies that a change in one of the parties (a novation) to a derivative contract that is part of an existing hedge accounting relationship under ASC 815 does not, in and of itself, require a de-designation of that hedge accounting relationship. The impact of the adoption will prospectively allow hedge accounting treatment to continue on existing hedges when a novation event occurs. There was no impact upon adoption.
Recently Issued Accounting Standards
In February 2015,2018, the FASB issued ASU No. 2015-02,2018-02, ConsolidationsIncome Statement-Reporting Comprehensive Income (Topic 810)220): AmendmentsReclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. This standard provides an option to reclassify stranded tax effects within accumulated other comprehensive income/(loss) to retained earnings due to the Consolidations Analysis, which when effective, will (i) modifyU.S. federal corporate income tax rate change in the evaluation of whether limited partnershipsU.S. Tax Cuts and similar legal entities are variable interest entities or voting interest entities, (ii) eliminate the presumption that a general partner should consolidate a limited partnership, (iii) affect the consolidation analysis of reporting entities that are involved with variable interest entities, particularly those that have fee arrangements and related party relationships, and (iv) provide a scope exception from consolidation guidance for reporting entities with interests in legal entities that are required to comply with or operate in accordance with requirements that are similar to those in Rule 2a-7 of the Investment CompanyJobs Act of 1940 for registered money market funds. The guidance2017 (the “Act”). This standard is effective for interim and annual reporting periods beginning after December 15, 20152018, and interim periods within that year. Early adoptionearly adopting is permitted. We will adoptAdditionally, the ASU requires new disclosures by all companies, whether they opt to do the reclassification or not. Management is currently evaluating the potential impact of this standardguidance on the consolidated financial statements.
In May 2017, the FASB issued ASU 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting. This update was issued to provide clarity and reduce both (1) diversity in our first quarter ending June 30, 2016. Adoptionpractice and (2) cost and complexity when applying the guidance in Topic 718, Compensation-Stock Compensation, to a change to the terms or conditions of a share-based payment award. An entity may change the terms or conditions of a share-based payment award for many different reasons, and the nature and effect of the change can vary significantly. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions. These changes became effective for Novelis on April 1, 2018. Management has determined that the adoption of this standard is not expected to have anya material impact on our consolidated financial position and results of operations.the Consolidated Financial Statements. This guidance will need to be considered if Novelis initiates a modification that is determined to be a substantive change to an outstanding stock-based award.
In April 2015,March 2017, the FASB issued ASU 2015-03,2017-07, Interest - Imputation of Interest (Subtopic 835-30): SimplifyingImproving the Presentation of Debt Issuance CostsNet Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. , which, when effective, will require that debt issuanceThis update was issued primarily to improve the presentation of net periodic pension cost and net periodic postretirement benefit cost. The new guidance requires entities to (1) disaggregate the current service cost component from the other components of net benefit cost (the “other components”) and present the other components with other current compensation costs for related to a recognized debt liability be presentedemployees within non-operating income and (2) present the other components elsewhere in the balance sheet asresults of operations and outside of income from operations if that subtotal is presented. In addition, the new guidance requires entities to disclose the results of operations line items that contain the other components if they are not presented on appropriately described separate lines. These changes became effective for Novelis on April 1, 2018 and will be applied retrospectively. Currently, all post retirement costs fall within the line item “Selling, general and administrative expenses” and "Cost of goods sold (exclusive of depreciation and amortization)" within the consolidated results of operations. These changes will result in a direct deductionchange in the presentation of non-service cost components of net periodic benefit cost on the statement of operations and providing additional disclosure. We are currently evaluating the impact of this standard.
In February 2017, the FASB issued ASU 2017-05, Other Income-Gains and Losses from the carrying amountDerecognition of that debt liability, consistent with debt discounts.Non-financial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Non-financial Assets. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this update. Theupdate include (i) clarification that non-financial assets within the scope of ASC 610-20 may include non-financial assets transferred within a legal entity to a counterparty; (ii) clarification that an entity should allocate consideration to each distinct asset by applying the guidance isin ASC 606 on allocating the transaction price to performance obligations; and (iii) a requirement for entities to derecognize a distinct non-financial asset or distinct in substance non-financial asset in a partial sale transaction when it does not have (or ceases to have) a controlling financial interest in the legal entity that holds the asset in accordance with ASC 810, and transfers control of the asset in accordance with ASC 606. These changes became effective for annual periods beginning after December 15, 2015Novelis on April 1, 2018, and interim periods within that year. In August 2015, the FASB issued ASU 2015-15, a clarifying amendment, allowing for debt issuance costs related to lines of credit being presented as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. An entity should apply the new guidance on a retrospective basis, wherein the balance sheet or each individual period presented should be adjusted to reflect the period-specific effects of applying the new guidance.those annual periods. Early adoption is permitted. We will adopt this standard in our first quarter ending June 30, 2016. Adoption of this standard will impact the presentation of deferred debt issuance costs on our consolidated financial position. We haveManagement has determined that the adoption of the standard as of March 31, 2016 wouldthese changes will not have resulted in a decrease of approximately $29 million to "Other long-term assets" and "Long-term debt, net of current portion"material impact on the accompanying consolidated Balance Sheet, and that we would continue to present debt issuance costs related to lines of credit as an asset. The future impact of the adoption on balance sheet classification may be impacted by future amortization and debt refinancing.Consolidated Financial Statements.
In May 2015,January 2017, the FASB issued ASU 2015-07,2017-04, Fair Value MeasurementIntangibles-Goodwill and Other (Topic 820)350): DisclosuresSimplifying the Test for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent), Goodwill Impairment, accounting guidance,which when effective,removes Step 2 from the goodwill impairment test. As amended, the goodwill impairment test will remove the requirement to categorize withinconsist of one step comparing the fair value hierarchy all investments for whichof a reporting unit with its carrying amount. Under the simplified model, a goodwill impairment is calculated as the difference between the carrying amount of the reporting unit and its fair value, is measured usingbut not to exceed the net asset value per share practical expedient. The guidancecarrying amount of goodwill allocated to that reporting unit. Early adoption is
Novelis Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
permitted. These changes become effective for annual periods beginning after December 15, 2015Novelis on April 1, 2020. This guidance will need to be considered each time Novelis performs an assessment of goodwill for impairment under the quantitative test. We are currently evaluating the impact of this standard and interim periods within those fiscal years. An entitywe do not expect the adoption of this standard will have an impact on the Consolidated Financial Statements.
In January 2017, the FASB issued ASU 2017-01, Clarifying the Definition of a Business (Topic 805), which provides guidance on evaluating whether transactions should applybe accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. The new guidance amends ASC 805 to provide a more robust framework to use in determining when a set of assets and activities is a business. In addition, the amendments retrospectivelyprovide more consistency in applying the guidance, reduce the costs of application, and make the definition of a business more operable. These changes became effective for Novelis on April 1, 2018. Management has determined that the adoption of this guidance will not have an impact on our Consolidated Financial Statements.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230) - Statement of Cash Flows (Topic 230): Restricted Cash. The amendments in this update apply to all periods presented.entities that have restricted cash or restricted cash equivalents and are required to present a statement of cash flows under Topic 230. The amendments in this Update require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Transfers between restricted cash and restricted cash equivalents and cash and cash equivalents will no longer be presented as cash flow activities in the statement of cash flows and for material balances of restricted cash and restricted cash equivalents an entity must disclose information regarding the nature of the restrictions. Restricted Cash be disclosed as a separate line item as a change of cash on the face of the Balance Sheet and Cash Flow Statement. These changes became effective for Novelis on April 1, 2018. Management has determined that the adoption of this guidance will not have a material impact and will result in presentational change to the face of the Consolidated Balance Sheet and Consolidated Statement of Cash Flows.
In October 2016, the FASB issued ASU 2016-16, Accounting for Income Taxes: Intra-Entity Asset Transfers of Assets
Other than Inventory. The new guidance eliminates the exception for all intra-entity sales of assets other than inventory. The
guidance will require the tax effects of intercompany transactions to be recognized currently and will likely impact reporting
entities’ effective tax rates. The changes require the current and deferred income tax consequences of the intra-entity transfer to be recorded when the transaction occurs. The exception to defer the tax consequences of inventory transactions is maintained. Early adoption is permitted. We will adopt this standard in our annual period ending March 31, 2017. AdoptionThese changes became effective for Novelis on April 1, 2018. The Company is currently evaluating the impact of this standard may impact the presentation of certain pension plan assets in our postretirement benefit plans footnote disclosure.new standard.
In July 2015,August 2016, the FASB issued ASU 2015-11,2016-15, InventoryStatement of Cash Flows (Topic 330): Simplifying230) - Classification of Certain Cash Receipts and Cash Payments. The new guidance applies to all entities that are required to present a statement of cash flows under Topic 230 and addresses eight specific cash flow items to provide clarification and reduce the Measurementdiversity in presentation of Inventory, which, when effective, will remove the requirement to measure inventory at the lower of cost or market whereas market could be replacement cost, net realizable value, or net realizable value less an approximately normal profit margin, and require an entity to measure inventory at the lower of cost and net realizable value. Net realizable value is defined as the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The guidance isthese items. These changes became effective for annual periods beginning after December 15, 2016 including interim periods within those fiscal years. This update should be applied prospectively with earlier application permitted as of the beginning of an interim or annual reporting period. We will adopt this standardNovelis on April 1, 2016,2018. As of result of the startadoption, Novelis will reclassify cash received related to beneficial interest in certain factored accounts receivables from operating activities to investing activities in the Statement of our next fiscal year. Adoption of this standardConsolidated Cash Flows. This reclassification is not expected to have anya material impact on our consolidated financial positionoperating and results of operations.investing cash flows.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which when effective, will require organizations that lease assets (e.g., through "leases") to recognize assets and liabilities for the rights and obligations created by the leases on balance sheet. A lessee will be required to recognize assets and liabilities for leases with terms that exceed twelve months. The standard will also require disclosures to help investors and financial statement users better understand the amount, timing and uncertainty of cash flows arising from leases. The disclosures include qualitative and quantitative requirements, providing additional information about the amounts recorded in the financial statements. The guidance isThese changes become effective for Novelis April 1, 2019 for the annual periods beginning after December 15, 2018, andreporting period (including interim periods within those annual periods. Early adoptiontherein). Novelis has established a cross-functional project team to lead the implementation effort. The Company is permitted. We are currently evaluating the impact of this standardthe new standard.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which, when effective, will supersede the guidance in former ASC 605, Revenue Recognition. Additional technical improvements, practical expedients, and clarifications have since been issued. The new guidance requires entities to recognize revenue based on our consolidated financial positionthe transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for these goods or services. ASU 2014-09 defines a five-step approach for recognizing revenue, which may require a company to use more judgment and results of operations. make more estimates than under the current guidance. In August 2015, the FASB deferred the effective date by one year, making these changes effective for Novelis on April 1, 2018.
Novelis Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Novelis will adopt the new guidance using the modified retrospective transition approach, reflecting the cumulative effect of initially applying the new standard to revenue recognition in the first quarter of fiscal year 2019. Through previously established project implementation and adoption teams, Novelis completed a detailed review of the terms and provisions of our customer contracts and concluded that Novelis' current revenue recognition practices are in compliance with this new guidance. Novelis is in the process of preparing the additional required disclosures.
Novelis Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
2. RESTRUCTURING AND IMPAIRMENT
“Restructuring and impairment, net” for the year ended March 31, 20162018, 2017 and 2016 was $4834 million, which included impairment charges unrelated to restructuring actions of $3$10 million, on certain fixed assets in North America, South America, and Asia. "Restructuring and impairment, net” for the year ended March 31, 2015 was $37$48 million,, which included impairment charges unrelated to restructuring actions of $2 million on certain non-core fixed assets in North America. “Restructuring and impairment, net” for the year ended March 31, 2014 was $75 million, which included impairment charges unrelated to restructuring actions of $17 million on certain non-core assets in Brazil, $5 million on certain capitalized software assets, and $2 million on other long-lived assets. respectively.
The following table summarizes our restructuring liability activity and other impairment charges (in millions).
| | | | | Total restructuring liabilities | | Other restructuring charges (A) | | Total restructuring charges | | Other impairments (B) | | Total
restructuring and impairments, net | | Total restructuring liabilities | | Other restructuring charges (A) | | Total restructuring charges | | Other impairments (B) | | Total
restructuring and impairments, net |
| Balance as of March 31, 2013 | | $ | 33 |
| | | | | | | | | |
| Fiscal 2014 Activity: | | | | | | | | | | | |
| Expenses | | 48 |
| | $ | 3 |
| | $ | 51 |
| | $ | 24 |
| | $ | 75 |
| |
| Cash payments | | (34 | ) | | | | | | | | | |
| Balance as of March 31, 2014 | | 47 |
| | | | | | | | | |
| Fiscal 2015 Activity: | | | | | | | | | | | |
| Expenses | | 30 |
| | $ | 5 |
| | $ | 35 |
| | $ | 2 |
| | $ | 37 |
| |
| Cash payments | | (32 | ) | | | | | | | | | |
| Foreign currency translation and other (C) | | (13 | ) | | | | | | | | | |
| Balance as of March 31, 2015 | | 32 |
| | | | | | | | | | $ | 32 |
| | | | | | | | |
| Fiscal 2016 Activity: | | | | | | | | | | | | | | | | | | | | |
| -Provisions | | 23 |
| | | | | | | | | | 23 |
| | | | | | | | |
| -Reversal of expense | | (2 | ) | | | | | | | | | | (2 | ) | | | | | | | | |
| Expenses, net | | 21 |
| | $ | 24 |
| | $ | 45 |
| | $ | 3 |
| | $ | 48 |
| |
| Expenses | | | 21 |
| | $ | 24 |
| | $ | 45 |
| | $ | 3 |
| | $ | 48 |
|
| Cash payments | | (22 | ) | | | | | | | | | | (22 | ) | | | | | | | | |
| Foreign currency translation and other (C) | | (4 | ) | | | | | | | | | | (4 | ) | | | | | | | | |
| Balance as of March 31, 2016 | | $ | 27 |
| | | | | | | | | | 27 |
| | | | | | | | |
| Fiscal 2017 Activity: | | | | | | | | | | | |
| Expenses | | | 8 |
| | $ | — |
| | $ | 8 |
| — |
| $ | 2 |
| | $ | 10 |
|
| Cash payments | | | (13 | ) | | | | | | | | |
| Foreign currency translation and other (C) | | | 2 |
| | | | | | | | |
| Balance as of March 31, 2017 | | | 24 |
| | | | | | | | |
| Fiscal 2018 Activity: | | | | | | | | | | | |
| Expenses | | | 19 |
| | $ | 9 |
| | $ | 28 |
| | $ | 6 |
| | $ | 34 |
|
| Cash payments | | | (7 | ) | | | | | | | | |
| Balance as of March 31, 2018 | | | $ | 36 |
| | | | | | | | |
_________________________
| |
| (A) | Other restructuring charges include period expenses that were not recorded through the restructuring liability and impairments related to a restructuring activity. |
| |
| (B) | Other impairment charges not related to a restructuring activity. |
| |
| (C) | This primarily relates to the remeasurement of Brazilian real denominated restructuring liabilities. |
As of March 31, 2016, $232018, $31 million of restructuring liabilities was classified as short-term and was included in "Accrued expenses and other current liabilities" and $4$5 million was classified as long-term and was included in "Other long-term liabilities" on our consolidated balance sheet. Additionally,. The restructuring expenses andliabilities by region are as follows: $1 million for the remaining liabilityNorth America segment related to environmental charges; $17 million for the Europe segment related primarily to severance charges; $1 million for the Asia segment related primarily to staff rationalization activities; $16 million for the South America segment related to $9 million of environmental charges and $7 million of contract termination and other exit related costs, and $1 million for the Corporate office related to severance charges.
Restructuring and impairment activities by segment are detailed below for the years ended March 31, 2018, 2017 and 2016:
North America
North America recognized $1 million in restructuring expenses for the years ended March 31, 2017 and 2016. Restructuring actions prior to April 1, 2015 totaled $39 million and was attributed to impairments of $32 million and severance and other exit related expenses of $7 million.
The North America segment recognized less than $4 million in impairment charges on intangible software assets unrelated to restructuring for the year ended March 31, 2016 was2018; $2 million which relates primarilyin impairment charges on fixed assets unrelated to staff rationalization activitiesrestructuring for the year ended March 31, 2017; and $1 million in impairment charges on assets unrelated to better align operations to current needs.restructuring for the year ended March 31, 2016.
Novelis Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
North America
The following table summarizes our restructuring activity for the North America segment by plan (in millions).
|
| | | | | | | | | | | | | | | | |
| | | Year Ended March 31, | | |
| | | 2016 | | 2015 | | 2014 | | Prior to
April 1, 2013 |
| Restructuring charges - North America | | | | | | | |
| Saguenay Plant Closure: | | | | | | | |
| | Severance | $ | — |
| | $ | — |
| | $ | — |
| | $ | 5 |
|
| | Fixed asset impairment (A) | — |
| | — |
| | — |
| | 28 |
|
| | Other exit related costs | — |
| | 1 |
| | 1 |
| | — |
|
| | Period expenses (A) | 1 |
| | — |
| | 1 |
| | 3 |
|
| | | | | | | | | |
| Relocation of R&D operations to Kennesaw, Georgia | | | | | | | |
| | Severance | — |
| | — |
| | 1 |
| | 11 |
|
| | Relocation costs | — |
| | — |
| | 1 |
| | — |
|
| | Period expenses (A) | — |
| | — |
| | 1 |
| | — |
|
| Total restructuring charges - North America | $ | 1 |
| | $ | 1 |
| | $ | 5 |
| | $ | 47 |
|
| | | | | | | | | |
| Restructuring payments - North America | | | | | | | |
| | Severance | $ | — |
| | $ | (2 | ) | | $ | (4 | ) | | |
| | Other | (1 | ) | | (1 | ) | | (2 | ) | | |
| Total restructuring payments - North America | $ | (1 | ) | | $ | (3 | ) | | $ | (6 | ) | | |
(A) These charges were not recorded through the restructuring liability.
In fiscal 2012, we closed our Saguenay Works facility in Canada and relocated our North America research and development operations to a new global research and technology facility in Kennesaw, Georgia.
Novelis Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Europe
The following table summarizes ourEurope segment recognized $25 million in restructuring activityexpenses for the year ended March 31, 2018 related to the closure of certain non-core operations. Severance and associated legal costs were $16 million for which cash settlement is primarily expected to incur in the next twelve months and $9 million is related to asset impairments. For the year ended March 31, 2017, Europe segment by plan (in millions).recognized $2 million in restructuring expenses related to corporate restructuring. For the year ended, March 31, 2016, Europe recognized $4 million of restructuring expenses. Prior to April 1, 2015, $46 million of restructuring expenses was incurred related to business optimization efforts.
Europe recognized less than $2 million in asset impairments unrelated to restructuring during the year ended March 31, 2018.
|
| | | | | | | | | | | | | | | | |
| | | Year Ended March 31, | | |
| | | 2016 | | 2015 | | 2014 | | Prior to
April 1, 2013 |
| Restructuring charges - Europe | | | | | | | |
| Business optimization | | | | | | | |
| | Severance | $ | — |
| | $ | 3 |
| | $ | 26 |
| | $ | 16 |
|
| | Pension settlement loss (A) | — |
| | — |
| | 1 |
| | — |
|
| | | | | | | | | |
| Corporate restructuring program | | | | | | | |
| | Severance | 4 |
| | — |
| | — |
| | — |
|
| Total restructuring charges - Europe | $ | 4 |
| | $ | 3 |
| | $ | 27 |
| | $ | 16 |
|
| | | | | | | | |
| Restructuring payments - Europe | | | | | | | |
| | Severance | $ | (6 | ) | | $ | (12 | ) | | $ | (18 | ) | | |
| | Other | — |
| | — |
| | (1 | ) | | |
| Total restructuring payments - Europe | $ | (6 | ) | | $ | (12 | ) | | $ | (19 | ) | | |
The Asia segment recognized $1 million and less than $1 million in impairment charges on long-lived assets unrelated to restructuring for the years ended March 31, 2018 and March 31, 2016, respectively.
(A) TheseSouth America
The South America segment recognized $3 million in restructuring expenses for the year ended March 31, 2018 related to staff rationalization activities to optimize our business. For the years ended March 31, 2017 and 2016, South America recognized $5 million and $3 million, respectively, related to the closure of a smelter facility. Restructuring actions prior to April 1, 2015 totaled $79 million and was related largely to the closure of a smelter facility along with prior restructuring programs.
South America recognized less than $2 million in impairment charges were not recorded throughon long-lived assets unrelated to restructuring for the year ended March 31, 2016.
Corporate
For the year ended March 31, 2016, Corporate recognized $35 million in restructuring liability.
The Company implementedexpenses related to a series of restructuring actions at the global headquarters office and in the Europe region which include staff rationalization activities and the shutdown of facilities to optimize our business in Europe.
As of March 31, 2016, the outstanding restructuring liability for the Europe segment was $4 million, which relates to severance charges.
Novelis Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
South America
The following table summarizes our restructuring activity for the South America segment by plan (in millions). |
| | | | | | | | | | | | | | | | |
| | | Year Ended March 31, | | |
| | | 2016 | | 2015 | | 2014 | | Prior to
April 1, 2013 |
| Restructuring charges - South America | | | | | | | |
| Ouro Preto closures | | | | | | | |
| | Severance | $ | 2 |
| | $ | 14 |
| | $ | 2 |
| | $ | 3 |
|
| | Asset impairments (A) | — |
| | 5 |
| | — |
| | 1 |
|
| | Environmental (reversal) charges | (1 | ) | | 6 |
| | 16 |
| | — |
|
| | Contract termination and other exit related costs | 2 |
| | 5 |
| | 1 |
| | 5 |
|
| | | | | | | | | |
| Other past restructuring programs | | | | | | | |
| | Severance | — |
| | — |
| | — |
| | 7 |
|
| | Asset impairments (A) | — |
| | — |
| | — |
| | 7 |
|
| | Contract termination and other exit related costs | — |
| | 1 |
| | — |
| | 6 |
|
| Total restructuring charges - South America | $ | 3 |
| | $ | 31 |
| | $ | 19 |
| | $ | 29 |
|
| | | | | | | | | |
| Restructuring payments - South America | | | | | | | |
| | Severance | $ | (2 | ) | | $ | (12 | ) | | $ | (4 | ) | | |
| | Other | (3 | ) | | (4 | ) | | (4 | ) | | |
| Total restructuring payments - South America | $ | (5 | ) | | $ | (16 | ) | | $ | (8 | ) | | |
(A) These charges were not recorded through the restructuring liability.
We ceased operations at the smelter in Ouro Preto, Brazil, in December 2014. This decision was made in an effort to further align our global sustainability strategy, as we work towards our goal of having higher recycled content in our products. Certain charges associated with this closure are reflected within the "Ouro Preto closures" section above, along with our closure of a pot line in Ouro Preto, Brazil, in fiscal 2013. Additionally, in March 2016, we made a decision to sell properties in Ouro Preto smelter facility in South America with a net book value of $1 million as of March 31, 2016, which were classified as "Assets held for sale" in our consolidated balance sheet.
As of March 31, 2016, the outstanding restructuring liability for the South America segment was $19 million and relates to $12 million of environmental charges, $7 million of contract termination and other exit related costs.
For additional information on environmental charges see Note 20 – Commitments and Contingencies.
Novelis Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Corporate
The following table summarizes our restructuring activity for the Corporate segment by plan (in millions). |
| | | | | | | | | | | | | | | | |
| | | | | | | | | |
| | | Year Ended March 31 | | |
| | | 2016 | | 2015 | | 2014 | | Prior to
April 1, 2013 |
| Restructuring charges - Corporate | | | | | | | |
| | Severance | $ | 12 |
| | $ | — |
| | $ | — |
| | $ | — |
|
| | Asset impairments (A) | 21 |
| | — |
| | — |
| | — |
|
| | Period expenses (A) | 2 |
| | — |
| | — |
| | — |
|
| Total restructuring charges - Corporate | 35 |
| | — |
| | — |
| | — |
|
| | | | | | | | | |
| Restructuring payments - Corporate | | | | | | | |
| | Severance | (10 | ) | | — |
| | — |
| | |
| Total restructuring payments - Corporate | $ | (10 | ) | | $ | — |
| | $ | — |
| | |
| |
(A) | These charges were not recorded through the restructuring liability and related to the partial impairment of certain capitalized software intangible assets that will no longer be developed. |
In fiscal 2016, the Company implemented a series of restructuring actions at the global headquarters office and in the Europe region to better align the organizational structure and corporate staffing levels with strategic priorities. As part of this plan, the Company impaired certain capitalized software assets. As of March 31, 2016, the restructuring liability for the corporate office was $2 million and related to severance charges.
Novelis Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
3. ACCOUNTS RECEIVABLE
“Accounts receivable, net” consists of the following (in millions).
| | | | | March 31, | | March 31, |
| | | 2016 | | 2015 | | 2018 | | 2017 |
| Trade accounts receivable | | $ | 884 |
| | $ | 1,158 |
| | $ | 1,260 |
| | $ | 971 |
|
| Other accounts receivable | | 75 |
| | 134 |
| | 100 |
| | 102 |
|
| Accounts receivable — third parties | | 959 |
| | 1,292 |
| | 1,360 |
| | 1,073 |
|
| Allowance for doubtful accounts — third parties | | (3 | ) | | (3 | ) | | (7 | ) | | (6 | ) |
| Accounts receivable, net — third parties | | $ | 956 |
| | $ | 1,289 |
| | $ | 1,353 |
| | $ | 1,067 |
|
| | | | | | | | | |
| Accounts receivable, net — related parties | | $ | 59 |
| | $ | 53 |
| | $ | 242 |
| | $ | 60 |
|
Allowance for Doubtful Accounts
As of March 31, 20162018 and 20152017, our allowance for doubtful accounts represented approximately 0.3%0.5% and 0.2%0.6%, respectively, of gross accounts receivable.receivable, net - third parties (exclusive of accounts receivable - related parties).
Activity in the allowance for doubtful accounts is as follows (in millions).
|
| | | | | | | | | | | | | | | | | | | | |
| | | Balance at
Beginning
of Period | | Additions
Charged to
Expense | | Accounts
Recovered/
(Written-
Off) | | Foreign
Exchange
and Other | | Balance at
End of Period |
| Year Ended March 31, 2016 | | $ | 3 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 3 |
|
| Year Ended March 31, 2015 | | $ | 4 |
| | $ | — |
| | $ | — |
| | $ | (1 | ) | | $ | 3 |
|
| Year Ended March 31, 2014 | | $ | 3 |
| | $ | 2 |
| | $ | (1 | ) | | $ | — |
| | $ | 4 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| | | Balance at
Beginning
of Period | | Additions
Charged to
Expense | | Accounts
Recovered/
(Written-
Off) | | Foreign
Exchange
and Other | | Balance at
End of Period |
| Year Ended March 31, 2018 | | $ | 6 |
| | $ | 1 |
| | $ | — |
| | $ | — |
| | $ | 7 |
|
| Year Ended March 31, 2017 | | $ | 3 |
| | $ | 3 |
| | $ | — |
| | $ | — |
| | $ | 6 |
|
| Year Ended March 31, 2016 | | $ | 3 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 3 |
|
Factoring of Trade Receivables
We factor and forfait trade receivables (collectively, we refer to these as "factoring" programs) based on local cash needs, as well as attempting to balance the timing of cash flows of trade payables and receivables and to fund other business needs.receivables. Factored receivablesinvoices are not included in our consolidated balance sheets when we do not retain a financial or legal interest. If a financial or legal interest is retained, we classify these factorings as secured borrowings.
The following tables summarize amounts relating to our factoring activities (in millions). |
| | | | | | | | | | | | |
| | | Year Ended March 31, |
| | | 2016 | | 2015 | | 2014 |
| Aggregated receivables factored | | $ | 3,314 |
| | $ | 1,796 |
| | $ | 1,081 |
|
| Factoring expense | | $ | 19 |
| | $ | 10 |
| | $ | 5 |
|
|
| | | | | | | | | | | | |
| | | Year Ended March 31, |
| | | 2018 | | 2017 | | 2016 |
| Factoring expense | | $ | 39 |
| | $ | 16 |
| | $ | 19 |
|
|
| | | | | | | | |
| | | March 31, |
| | | 2016 | | 2015 |
| Factored receivables outstanding | | $ | 626 |
| | $ | 591 |
|
|
| | | | | | | | |
| | | March 31, |
| | | 2018 | | 2017 |
| Factored receivables outstanding | | $ | 547 |
| | $ | 679 |
|
Novelis Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
4. INVENTORIES
“Inventories” consists of the following (in millions).
| | | | | March 31, | | March 31, |
| | | 2016 | | 2015 | | 2018 | | 2017 |
| Finished goods | | $ | 295 |
| | $ | 358 |
| | $ | 416 |
| | $ | 389 |
|
| Work in process | | 416 |
| | 531 |
| | 730 |
| | 576 |
|
| Raw materials | | 322 |
| | 419 |
| | 248 |
| | 213 |
|
| Supplies | | 147 |
| | 123 |
| | 166 |
| | 155 |
|
| Inventories | | $ | 1,180 |
| | $ | 1,431 |
| | $ | 1,560 |
| | $ | 1,333 |
|
Novelis Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
5. ASSETS HELD FOR SALE
We are focused on capturing the global growth we see in our product markets of beverage can, automotive and specialty products. We continually analyze our product portfolio to ensure we are focused on growing in attractive market segments. The following transactions relate to exiting certain non-core operations to focus on our growth strategy in the premium product markets.
In April 2014, we entered into agreements to sell the hydroelectric generation operations in South America and our share of the joint venture of the Consorcio Candonga to two separate parties. In December 2014, we sold our share of the joint venture of the Consorcio Candonga. Additionally, we sold the majority of our hydroelectric power generation operations fully owned by the Company in February 2015. The remaining assets include two hydroelectric power generation facilities, with a net book value of $4 million as of March 31, 2016 and $6 million as of March 31, 2015, which were classified as "Assets held for sale" in our consolidated balance sheets. The contract for the sale of one facility is subject to final regulatory approval and resolution of certain license issues, and the other facility is in the final stages of being sold. Additionally, during the fourth quarter of fiscal 2016, an impairment of $1 million was recorded due to the expiration of a license related to a portion of the hydroelectric power generation facilities.
In March 2016, we made a decision to sell properties in Ouro Preto, Brazil related to the closure of the Ouro Preto smelter facility in South America with a net book value of $1 million as of March 31, 2016, which were classified as "Assets held for sale" in our consolidated balance sheet.
During the year ended March 31, 2015, "Gain on assets held for sale" includes a $23 million gain from our sale of the joint venture of Consorcio Candonga, $7 million from the sale of our consumer foil operations in North America and $6 million for a property and mining rights sale in South America. These gains were partially offset during the twelve months ended March 31, 2015 by an estimated loss of $14 million related to the sale of certain hydroelectric assets that was completed in the fourth quarter of fiscal 2015.
Novelis Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
6. PROPERTY, PLANT AND EQUIPMENT
“Property, plant and equipment, net” consists of the following (in millions).
|
| | | | | | | | |
| | | March 31, |
| | | 2016 | | 2015 |
| Land and property rights | | $ | 179 |
| | $ | 180 |
|
| Buildings | | 1,325 |
| | 1,183 |
|
| Machinery and equipment | | 4,265 |
| | 3,947 |
|
| | | 5,769 |
| | 5,310 |
|
| Accumulated depreciation and amortization | | (2,398 | ) | | (2,132 | ) |
| | | 3,371 |
| | 3,178 |
|
| Construction in progress | | 135 |
| | 364 |
|
| Property, plant and equipment, net | | $ | 3,506 |
| | $ | 3,542 |
|
As of March 31, 2016 and 2015, there were $1 billion and $756 million, respectively, of fully depreciated assets included in our consolidated balance sheets. |
| | | | | | | | |
| | | March 31, |
| | | 2018 | | 2017 |
| Land and property rights | | $ | 148 |
| | $ | 173 |
|
| Buildings | | 1,259 |
| | 1,309 |
|
| Machinery and equipment | | 4,179 |
| | 4,312 |
|
| | | 5,586 |
| | 5,794 |
|
| Accumulated depreciation and amortization | | (2,644 | ) | | (2,575 | ) |
| | | 2,942 |
| | 3,219 |
|
| Construction in progress | | 168 |
| | 138 |
|
| Property, plant and equipment, net | | $ | 3,110 |
| | $ | 3,357 |
|
For the years ended March 31, 20162018, 20152017 and 2014,2016, we capitalized $141 million, $20$2 million and $33$14 million of interest related to construction of property, plant and equipment and intangibles under development, respectively.
Depreciation expense related to property, plant, and equipment, net is shown in the table below (in millions).
|
| | | | | | | | | | | | |
| | | Year Ended March 31, |
| | | 2016 | | 2015 | | 2014 |
| Depreciation expense related to property, plant and equipment, net | | $ | 294 |
| | $ | 294 |
| | $ | 279 |
|
|
| | | | | | | | | | | | |
| | | Year Ended March 31, |
| | | 2018 | | 2017 | | 2016 |
| Depreciation expense related to property, plant and equipment, net | | $ | 290 |
| | $ | 299 |
| | $ | 294 |
|
Asset impairments
Impairment charges are recorded in "Restructuring and impairment, net." See Note 2 — Restructuring and impairmentImpairment for additional information.
Leases
We lease certain land, buildings and equipment under non-cancelable operating leases expiring at various dates, and we lease assets in Sierre, Switzerland, including a fifteen-year capital lease through December 2019 from Rio Tinto.dates. Operating leases generally have five to ten-year terms that are less than ten years, with one or more renewal options withand 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. During fiscal 2014 and 2015 we entered into various capital lease arrangements to upgrade and expand our information technology infrastructure.
The following table summarizes rent expense included in our consolidated statements of operations (in millions):
|
| | | | | | | | | | | | |
| | | Year Ended March 31, |
| | | 2016 | | 2015 | | 2014 |
| Rent expense | | $ | 22 |
| | $ | 22 |
| | $ | 21 |
|
|
| | | | | | | | | | | | |
| | | Year Ended March 31, |
| | | 2018 | | 2017 | | 2016 |
| Rent expense | | $ | 27 |
| | $ | 24 |
| | $ | 22 |
|
Novelis Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Future minimum lease payments as of March 31, 20162018, 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).
| | | Year Ending March 31, | | Operating leases | | Capital lease obligations | | Operating leases | | Capital lease obligations |
| 2017 | | $ | 30 |
| | $ | 11 |
| |
| 2018 | | 19 |
| | 9 |
| |
| 2019 | | 17 |
| | 7 |
| | $ | 31 |
| | $ | 7 |
|
| 2020 | | 15 |
| | 5 |
| | 24 |
| | 5 |
|
| 2021 | | 13 |
| | — |
| | 18 |
| | — |
|
| 2022 | | | 14 |
| | — |
|
| 2023 | | | 12 |
| | — |
|
| Thereafter | | 39 |
| | — |
| | 24 |
| | — |
|
| Total minimum lease payments | | $ | 133 |
| | $ | 32 |
| | $ | 123 |
| | $ | 12 |
|
| Less: interest portion on capital lease | | | | 4 |
| | | | 1 |
|
| Principal obligation on capital leases | |
|
| | $ | 28 |
| |
|
| | $ | 11 |
|
Assets and related accumulated amortization under capital lease obligations as of March 31, 20162018 and 20152017 are as follows (in millions).
| | | | | March 31, | | March 31, |
| | | 2016 | | 2015 | | 2018 | | 2017 |
| Assets under capital lease obligations: | | | | | | | | |
| Buildings | | $ | 11 |
| | $ | 11 |
| | $ | 12 |
| | $ | 11 |
|
| Machinery and equipment | | 77 |
| | 76 |
| | 76 |
| | 73 |
|
| CWIP | | | 2 |
| | 2 |
|
| | | 88 |
| | 87 |
| | 90 |
| | 86 |
|
| Accumulated amortization | | (70 | ) | | (65 | ) | | (77 | ) | | (70 | ) |
| | | $ | 18 |
| | $ | 22 |
| | $ | 13 |
| | $ | 16 |
|
Novelis Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
7.6. GOODWILL AND INTANGIBLE ASSETS
There were no changes to the gross carrying amount or accumulated impairment of goodwill during the years ended March 31, 20162018 and 20152017. The following table summarizes “Goodwill” (in millions) for the years ended March 31, 2016 and 2015.
| | | | | March 31, 2016 | | March 31, 2015 | | March 31, 2018 | | March 31, 2017 |
| | | Gross Carrying Amount | | Accumulated Impairment | | Net Carrying Value | | Gross
Carrying
Amount | | Accumulated
Impairment | | Net
Carrying
Value | | Gross Carrying Amount | | Accumulated Impairment | | Net Carrying Value | | Gross
Carrying
Amount | | Accumulated
Impairment | | Net
Carrying
Value |
| North America | | $ | 1,145 |
| | $ | (860 | ) | | $ | 285 |
| | $ | 1,145 |
| | $ | (860 | ) | | $ | 285 |
| | $ | 1,145 |
| | $ | (860 | ) | | $ | 285 |
| | $ | 1,145 |
| | $ | (860 | ) | | $ | 285 |
|
| Europe | | 511 |
| | (330 | ) | | 181 |
| | 511 |
| | (330 | ) | | 181 |
| | 511 |
| | (330 | ) | | 181 |
| | 511 |
| | (330 | ) | | 181 |
|
| South America | | 291 |
| | (150 | ) | | 141 |
| | 291 |
| | (150 | ) | | 141 |
| | 291 |
| | (150 | ) | | 141 |
| | 291 |
| | (150 | ) | | 141 |
|
| | | $ | 1,947 |
| | $ | (1,340 | ) | | $ | 607 |
| | $ | 1,947 |
| | $ | (1,340 | ) | | $ | 607 |
| | $ | 1,947 |
| | $ | (1,340 | ) | | $ | 607 |
| | $ | 1,947 |
| | $ | (1,340 | ) | | $ | 607 |
|
The components of “Intangible assets, net” are as follows (in millions).
| | | | | March 31, 2016 | | March 31, 2015 | | March 31, 2018 | | March 31, 2017 |
| | | Weighted Average Life | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Weighted Average Life | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
| Tradenames | | 20 years | | $ | 142 |
| | $ | (63 | ) | | $ | 79 |
| | $ | 142 |
| | $ | (56 | ) | | $ | 86 |
| | 20 years | | $ | 142 |
| | $ | (77 | ) | | $ | 65 |
| | $ | 142 |
| | $ | (70 | ) | | $ | 72 |
|
| Technology and software | | 10.6 years | | 365 |
| | (179 | ) | | 186 |
| | 357 |
| | (149 | ) | | 208 |
| | 9.2 years | | 382 |
| | (246 | ) | | 136 |
| | 369 |
| | (209 | ) | | 160 |
|
| Customer-related intangible assets | | 20 years | | 449 |
| | (199 | ) | | 250 |
| | 444 |
| | (173 | ) | | 271 |
| | 20 years | | 456 |
| | (247 | ) | | 209 |
| | 443 |
| | (218 | ) | | 225 |
|
| Favorable energy supply contract | | 9.5 years | | 124 |
| | (116 | ) | | 8 |
| | 124 |
| | (105 | ) | | 19 |
| |
| | | 15.6 years | | $ | 1,080 |
| | $ | (557 | ) | | $ | 523 |
| | $ | 1,067 |
| | $ | (483 | ) | | $ | 584 |
| | 15.8 years | | $ | 980 |
| | $ | (570 | ) | | $ | 410 |
| | $ | 954 |
| | $ | (497 | ) | | $ | 457 |
|
In the year ended March 31, 2016,2018, we recorded impairment charges related to certain capitalized software.intangible software assets. In the year of March 31, 2017, there were no such impairments recorded. For additional information refer to Note 2 -— Restructuring and impairment.Impairment.
Our favorable energy supply contract is amortized over its estimated useful life using a method that reflects the pattern in which the economic benefits are expected to be consumed. All other intangible assets are amortized using the straight-line method.
Amortization expense related to “Intangible assets, net” is as follows (in millions). | | | | | Year Ended March 31, | | Year Ended March 31, |
| | | 2016 | | 2015 | | 2014 | | 2018 | | 2017 | | 2016 |
| Total amortization expense related to intangible assets | | $ | 71 |
| | $ | 70 |
| | $ | 67 |
| | $ | 64 |
| | $ | 69 |
| | $ | 71 |
|
| Less: Amortization expense related to intangible assets included in “Cost of goods sold (exclusive of depreciation and amortization)” (A) | | (12 | ) | | (12 | ) | | (12 | ) | | — |
| | (8 | ) | | (12 | ) |
| Amortization expense related to intangible assets included in “Depreciation and amortization” | | $ | 59 |
| | $ | 58 |
| | $ | 55 |
| | $ | 64 |
| | $ | 61 |
| | $ | 59 |
|
________________________
| |
| (A) | Relates to amortization of favorable energy supply contract.contract, which is fully amortized as of March 31, 2018. |
Estimated total amortization expense related to “Intangible assets, net” for each of the five succeeding fiscal years is as follows (in millions). Actual amounts may differ from these estimates due to such factors as customer turnover, raw material consumption patterns, impairments, additional intangible asset acquisitions and other events.
| | | Fiscal Year Ending March 31, | | |
| 2017 | $ | 72 |
| |
| 2018 | 64 |
| |
| 2019 | 64 |
| $ | 71 |
|
| 2020 | 64 |
| 71 |
|
| 2021 | 64 |
| 71 |
|
| 2022 | | 71 |
|
| 2023 | | 71 |
|
Novelis Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
8.7. CONSOLIDATION
Variable Interest Entities (VIE)
The entity that has a controlling financial interest in a VIE is referred to as the primary beneficiary and consolidates the VIE. An entity is deemed to have a controlling financial interest and is the primary beneficiary of a VIE if it has both the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and an obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE.
We have a joint interest in Logan Aluminum Inc. (Logan) with Tri-Arrows Aluminum Inc. (Tri-Arrows). Logan processes metal received from Novelis and Tri-Arrows and charges the respective partner a fee to cover expenses. Logan is thinly capitalized and relies on the regular reimbursement of costs and expenses by Novelis and Tri-Arrows to fund its operations. This reimbursement is considered a variable interest as it constitutes a form of financing of the activities of Logan. Other than these contractually required reimbursements, we do not provide other materialAs Logan is dependent upon the investors for ongoing capital to support the operations of the entity, Logan is a variable interest entity ("VIE"). The entity that has a controlling financial interest in a VIE is referred to Logan. Logan’s creditors do notas the primary beneficiary and consolidates the VIE. An entity is deemed to have recoursea controlling financial interest and is the primary beneficiary of a VIE if it has both the power to our general credit.
direct the activities of the VIE that most significantly impact the VIE’s economic performance and an obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE. We have the ability to make decisions regarding Logan'sLogan’s production operations. We also have the ability to take the majority share of production and associated costs. These facts qualify us as Logan'sLogan’s primary beneficiary and this entity is consolidated for all periods presented. All significant intercompany transactions and balances
Other than the contractually required reimbursements, we do not provide other material support to Logan. Logan's creditors do not have been eliminated.
The following table summarizes the carrying value and classification of assets and liabilities owned by the Logan joint venture and consolidated inrecourse to our consolidated balance sheets (in millions).general credit. There are significant other assets used in the operations of Logan that are not part of the joint venture, as they are directly owned and consolidated by Novelis or Tri-Arrows. The following table summarizes the carrying value and classification of assets and liabilities owned by the Logan joint venture and consolidated in our consolidated balance sheets (in millions).
| | | | | March 31, | | March 31, |
| | | 2016 | | 2015 | | 2018 | | 2017 |
| Assets | | | | | | | | |
| Current assets | | | | | | | | |
| Cash and cash equivalents | | $ | 3 |
| | $ | 2 |
| | $ | — |
| | $ | 2 |
|
| Accounts receivable | | 33 |
| | 40 |
| | 39 |
| | 29 |
|
| Inventories | | 61 |
| | 52 |
| | 67 |
| | 62 |
|
| Prepaid expenses and other current assets | | 2 |
| | 1 |
| | 1 |
| | 2 |
|
| Total current assets | | 99 |
| | 95 |
| | 107 |
| | 95 |
|
| Property, plant and equipment, net | | 21 |
| | 20 |
| | 27 |
| | 25 |
|
| Goodwill | | 12 |
| | 12 |
| | 12 |
| | 12 |
|
| Deferred income taxes | | 84 |
| | 65 |
| | 67 |
| | 89 |
|
| Other long-term assets | | 8 |
| | 4 |
| | 26 |
| | 30 |
|
| Total assets | | $ | 224 |
| | $ | 196 |
| | $ | 239 |
| | $ | 251 |
|
| Liabilities | | | | | | | | |
| Current liabilities | | | | | | | | |
| Accounts payable | | $ | 30 |
| | $ | 33 |
| | $ | 43 |
| | $ | 32 |
|
| Accrued expenses and other current liabilities | | 15 |
| | 12 |
| | 22 |
| | 21 |
|
| Total current liabilities | | 45 |
| | 45 |
| | 65 |
| | 53 |
|
| Accrued postretirement benefits | | 214 |
| | 166 |
| | 245 |
| | 224 |
|
| Other long-term liabilities | | 3 |
| | 2 |
| | 1 |
| | 3 |
|
| Total liabilities | | $ | 262 |
| | $ | 213 |
| | $ | 311 |
| | $ | 280 |
|
Novelis Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
| |
9.8. | INVESTMENT IN AND ADVANCES TO NON-CONSOLIDATED AFFILIATES AND RELATED PARTY TRANSACTIONS |
Investments in and Advances to Non-Consolidated Affiliates
We have two non-consolidated affiliates, Aluminum Norf GmbH (Alunorf) and Ulsan Aluminum, Ltd. (UAL). Included in the accompanying consolidated financial statements are transactions and balances arising from business we conducted with these non-consolidated affiliates, which we classify as related party transactions and balances.
In May 2017, Novelis Korea Ltd. (Novelis Korea), a subsidiary of Novelis Inc., entered into definitive agreements with Kobe Steel Ltd. (Kobe), an unrelated party, under which Novelis Korea and Kobe will jointly own and operate the Ulsan manufacturing plant owned by Novelis Korea. In April 2017, Novelis Korea formed a new wholly owned subsidiary, UAL. In September 2017, the transaction closed and Novelis Korea sold 49.9% of its shares in UAL to Kobe for the purchase price of $314 million. We recognized a net gain of $318 million on the transaction, pre-tax, consisting of: (1) $168 million gain related to the difference between the fair value of the consideration received and the carrying amount of the former subsidiary's assets and liabilities; (2) $163 million net gain related to the remeasurement of the retained investment by Novelis Korea; (3) $11 million in transaction fees and (4) $2 million in pension settlement losses. The net gain is recognized in "Gain (loss) on sale of a business" within the consolidated statement of operations. The fair value of the retained investment was derived from cash consideration paid by a market participant, Kobe, for its 49.9% interest.
As a result of this transaction, we have shared power in UAL with Kobe. Novelis Korea and Kobe will supply input metal to UAL and UAL will produce flat rolled aluminum products exclusively for Novelis Korea and Kobe. In addition, we hold several variable interests in UAL through the regular funding of costs and expenses by Novelis Korea and Kobe. As UAL is dependent upon the investors for ongoing capital to support the operations of the entity, UAL is a variable interest entity ("VIE"). The entity that has a controlling financial interest in a VIE is referred to as the primary beneficiary and consolidates the VIE. An entity is deemed to have a controlling financial interest and is the primary beneficiary of a VIE if it has both the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and an obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE. The entity will be controlled by the Board of Directors. We do not have the sole decision-making ability regarding UAL's production operations and other significant decisions as the Board of Directors have ultimate control over these decisions. In addition, we do not have the ability to take the majority share of production and associated costs over the life of the joint venture. As we share power jointly with Kobe, we determined Novelis is not the primary beneficiary. Our risk of loss with respect to this VIE is limited to the carrying value of our investment in and inventory-related receivables from UAL. UAL's creditors do not have recourse to our general credit. We have no obligation to provide additional funding to this VIE outside of the contractually required reimbursements.
The following table summarizes the ownership structure and our ownership percentage of the non-consolidated affiliateaffiliates in which we have an investmentinvestments in as of March 31, 20162018 and 2015,2017, and which we account for using the equity method. We do not control our non-consolidated affiliate, but have the ability to exercise significant influence over the operating and financial policies. We have no material investments that we account for using the cost method.
|
| | | | |
| Affiliate Name | | Ownership Structure | | Ownership Percentage |
| Aluminium Norf GmbH (Alunorf) | | Corporation | | 50% |
| Ulsan Aluminum, Ltd. (UAL) | | Corporation | | 50.1% |
Novelis Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following table summarizes the assets, liabilities and equity of our equity method affiliateaffiliates in the aggregate as of March 31, 20162018 and 20152017 (in millions).
| | | | | March 31, | | March 31, |
| | | 2016 | | 2015 | | 2018 | | 2017 |
| Assets: | | | | | | | | |
| Current assets | | $ | 148 |
| | $ | 145 |
| | $ | 396 |
| | $ | 143 |
|
| Non-current assets | | 394 |
| | 357 |
| | 944 |
| | 355 |
|
| Total assets | | $ | 542 |
| | $ | 502 |
| | $ | 1,340 |
| | $ | 498 |
|
| Liabilities: | | | | | | | | |
| Current liabilities | | $ | 55 |
| | $ | 51 |
| | $ | 281 |
| | $ | 53 |
|
| Non-current liabilities | | 337 |
| | 232 |
| | 342 |
| | 283 |
|
| Total liabilities | | 392 |
| | 283 |
| | 623 |
| | 336 |
|
| Equity: | | | | | | | | |
| Total equity | | 150 |
| | 219 |
| | 717 |
| | 162 |
|
| Total liabilities and equity | | $ | 542 |
| | $ | 502 |
| | $ | 1,340 |
| | $ | 498 |
|
As of March 31, 2016,2018, the investment in Alunorf exceeded our proportionate share of the net assets of Alunorf by $413$441 million. The difference is primarily related to the unamortized fair value adjustments that are included in our investment balance as a result of the acquisition of Novelis by Hindalco in 2007.
As of March 31, 2018, the investment in UAL exceeded our proportionate share of the net assets by $47 million. The difference primarily relates to goodwill.
The following table summarizes the results of operations of our equity method affiliates in the aggregate for the years ending March 31, 20162018, 20152017 and 20142016; and the nature and amounts of significant transactions that we had with our non-consolidated affiliates (in millions). The amounts in the table below are disclosed at 100% of the operating results of these affiliates. |
| | | | | | | | | | | | |
| | | Year Ended March 31, |
| | | 2016 | | 2015 | | 2014 |
| Net sales | | $ | 464 |
| | $ | 524 |
| | $ | 550 |
|
| Costs and expenses related to net sales | | 463 |
| | 527 |
| | 543 |
|
| Provision for taxes on income | | 2 |
| | — |
| | 4 |
|
| Net (loss) income | | $ | (1 | ) | | $ | (3 | ) | | $ | 3 |
|
| Purchase of tolling services from Aluminium Norf GmbH (Alunorf) | | $ | 232 |
| | $ | 261 |
| | $ | 275 |
|
Novelis Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
|
| | | | | | | | | | | | |
| | | Year Ended March 31, |
| | | 2018 | | 2017 | | 2016 |
| Net sales | | $ | 866 |
| | $ | 447 |
| | $ | 464 |
|
| Costs and expenses related to net sales | | 836 |
| | 463 |
| | 463 |
|
| Provision (benefit) for taxes on income | | 4 |
| | (5 | ) | | 2 |
|
| Net income (loss) | | $ | 26 |
| | $ | (11 | ) | | $ | (1 | ) |
| Purchase of tolling services from Alunorf | | $ | 245 |
| | $ | 224 |
| | $ | 232 |
|
Included in the accompanying consolidated financial statements are transactions and balances arising from business we conduct with Alunorf which we classify as related party transactions and balances.UAL. The following table describes the period-end account balances that we had with Norf,Alunorf and UAL, shown as related party balances in the accompanying consolidated balance sheets (in millions). We had no other material related party balances with non-consolidated affiliates.
| | | | | March 31, | | March 31, |
| | | 2016 | | 2015 | | 2018 | | 2017 |
| Accounts receivable-related parties | | $ | 59 |
| | $ | 53 |
| | $ | 242 |
| | $ | 60 |
|
| Other long-term assets-related parties | | $ | 16 |
| | $ | 15 |
| | $ | 3 |
| | $ | 15 |
|
| Accounts payable-related parties | | $ | 48 |
| | $ | 44 |
| | $ | 205 |
| | $ | 51 |
|
We earned less than $1 million of interest income on a loan due from Alunorf during each of the years presented in "Other long-term assets-related parties" in the table above. We believe collection of the full receivable from Alunorf is probable; thus no allowance for loan loss was provided for this loan as of March 31, 20162018 and 20152017.
We have guaranteed the indebtedness for a credit facility and loan on behalf of Alunorf. The guarantee is limited to 50% of the outstanding debt, not to exceed 6 million euros. As of March 31, 2016,2018, there were no amounts outstanding under
Novelis Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
our guarantee with Alunorf. We have also guaranteed the payment of early retirement benefits on behalf of Alunorf. As of March 31, 2016,2018, this guarantee totaled $2 million.
Transactions with Hindalco and AV Metals Inc.
We occasionally have related party transactions with our indirect parent company, Hindalco. During the years ended March 31, 20162018, 20152017 and 20142016 we recorded “Net sales” of less than $1 million, $1 million and $1 million respectively, between Novelis and our indirect parent related primarily to sales of equipment and other services. During the year ended As of March 31, 2014, we sold our bauxite mining rights2018 and certain alumina assets and liabilities in Brazil to Hindalco for $8 million in cash. As of March 31, 2016 and 20152017 there were less than $1 million and $1 million of "Accounts receivable, net - related parties" outstanding related to transactions with Hindalco, respectively.Hindalco.
During the year ended March 31, 2016,2018, Novelis purchased $5less than $1 million in raw materials from Hindalco that were fully paid for during the quarter ended March 31, 2018. During the year ended March 31, 2017, Novelis purchased $3 million in raw materials from Hindalco that were fully paid for during the quarter ended December 31, 2015. There were no such comparable purchases in the prior year.
In March 2014, we declared a return of capital to our direct shareholder, AV Metals Inc., in the amount of $250 million, which we subsequently paid on April 30, 2014.
2016.
Novelis Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
10.9. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
“Accrued expenses and other current liabilities” consists of the following (in millions).
| | | | | March 31, | | March 31, |
| | | 2016 | | 2015 | | 2018 | | 2017 |
| Accrued compensation and benefits | | $ | 174 |
| | $ | 172 |
| | $ | 193 |
| | $ | 191 |
|
| Accrued interest payable | | 66 |
| | 67 |
| | 44 |
| | 60 |
|
| Accrued income taxes | | 13 |
| | 11 |
| | 29 |
| | 26 |
|
| Other current liabilities | | 316 |
| | 322 |
| | 325 |
| | 301 |
|
| Accrued expenses and other current liabilities — third parties | | $ | 569 |
| | $ | 572 |
| | $ | 591 |
| | $ | 578 |
|
| | | | | | |
Novelis Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
11.10. DEBT
Debt consists of the following (in millions).
| | | | March 31, 2016 | | March 31, 2015 | March 31, 2018 | | March 31, 2017 |
| | Interest Rates (A) | | Principal | | Unamortized Carrying Value Adjustments | | | | Carrying Value | | Principal | | Unamortized Carrying Value Adjustments | | | | Carrying Value | Interest Rates (A) | | Principal | | Unamortized
Carrying Value
Adjustments (B) | | Carrying Value | | Principal | | Unamortized
Carrying Value
Adjustments (B) | | Carrying Value |
| Third party debt: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Short term borrowings | 2.84 | % | | $ | 579 |
| | $ | — |
| | | | $ | 579 |
| | $ | 846 |
| | $ | — |
| | | | $ | 846 |
| 3.49 | % | | $ | 49 |
| | $ | — |
| | $ | 49 |
| | $ | 294 |
| | $ | — |
| | $ | 294 |
|
| Novelis Inc. | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Floating rate Term Loan Facility, due June 2022 | 4.00 | % | | 1,787 |
| | (16 | ) | | (B) | | 1,771 |
| | 1,731 |
| | (13 | ) | | (B) | | 1,718 |
| 4.15 | % | | 1,778 |
| | (43 | ) | | 1,735 |
| | 1,796 |
| | (53 | ) | | 1,743 |
|
| 8.375% Senior Notes, due December 2017 | 8.375 | % | | 1,100 |
| | — |
| | | | 1,100 |
| | 1,100 |
| | — |
| | | | 1,100 |
| |
| 8.75% Senior Notes, due December 2020 | 8.75 | % | | 1,400 |
| | — |
| | | | 1,400 |
| | 1,400 |
| | — |
| | 1,400 |
| |
| Capital lease obligations, due through July 2017 | 3.64 | % | | 5 |
| | — |
| | 5 |
| | 9 |
| | — |
| | 9 |
| |
| Novelis Corporation | | | | | | | | | | | | | | |
| 5.875% Senior Notes, due September 2026 | | 5.875 | % | | 1,500 |
| | (21 | ) | | 1,479 |
| | 1,500 |
| | (23 | ) | | 1,477 |
|
| 6.25% Senior Notes, due August 2024 | | 6.25 | % | | 1,150 |
| | (17 | ) | | 1,133 |
| | 1,150 |
| | (19 | ) | | 1,131 |
|
| Novelis Korea Limited | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Bank loans, due through September 2020 (KRW 226 billion) | 2.79 | % | | 195 |
| | — |
| | | | 195 |
| | 192 |
| | — |
| | | | 192 |
| |
| Bank loans, due through September 2020 (KRW 102 billion) | | 2.88 | % | | 95 |
| | — |
| | 95 |
| | 184 |
| | — |
| | 184 |
|
| Novelis Switzerland S.A. | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Capital lease obligation, due through December 2019 (Swiss francs (CHF) 23 million) | 7.50 | % | | 23 |
| | (1 | ) | | (C) | | 22 |
| | 28 |
| | (1 | ) | | (C) | | 27 |
| |
| Capital lease obligation, due through December 2019 (Swiss francs (CHF) 11 million) | | 7.50 | % | | 12 |
| | — |
| | 12 |
| | 17 |
| | (1 | ) | | 16 |
|
| Novelis do Brasil Ltda. | | | | | | | | | | | | | | | | | | | | | | | | | | |
| BNDES loans, due through April 2021 (BRL 16 million) | 5.93 | % | | 5 |
| | (1 | ) | | (D) | | 4 |
| | 7 |
| | (1 | ) | | (D) | | 6 |
| |
| BNDES loans, due through April 2021 (BRL 6 million) | | 6.06 | % | | 2 |
| | — |
| | 2 |
| | 4 |
| | — |
| | 4 |
|
| Other | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Other debt, due through December 2020 | 3.64 | % | | 1 |
| | — |
| | | | 1 |
| | 5 |
| | — |
| | | | 5 |
| |
| Capital Lease Obligations and Other debt, due through December 2020 | | 5.56 | % | | 1 |
| | — |
| | 1 |
| | 3 |
| | — |
| | 3 |
|
| Total debt | | | 5,095 |
| | (18 | ) | | 5,077 |
| | 5,318 |
| | (15 | ) | | 5,303 |
| | | 4,587 |
| | (81 | ) | | 4,506 |
| | 4,948 |
| | (96 | ) | | 4,852 |
|
| Less: Short term borrowings | | | (579 | ) | | — |
| | | | (579 | ) | | (846 | ) | | — |
| | | | (846 | ) | | | (49 | ) | | — |
| | (49 | ) | | (294 | ) | | — |
| | (294 | ) |
| Current portion of long-term debt | | | (47 | ) | | — |
| | | | (47 | ) | | (108 | ) | | — |
| | | | (108 | ) | | | (121 | ) | | — |
| | (121 | ) | | (121 | ) | | — |
| | (121 | ) |
| Long-term debt, net of current portion: | | | $ | 4,469 |
| | $ | (18 | ) | | $ | 4,451 |
| | $ | 4,364 |
| | $ | (15 | ) | | $ | 4,349 |
| |
| Long-term debt, net of current portion | | | | $ | 4,417 |
| | $ | (81 | ) | | $ | 4,336 |
| | $ | 4,533 |
| | $ | (96 | ) | | $ | 4,437 |
|
_________________________
| |
| (A) | InterestInterest rates are the stated rates of interest on the debt instrument (not the effective interest rate) as of March 31, 20162018, and therefore, exclude the effects of related interest rate swaps and accretion/amortization of fair value adjustments as a result of purchase accounting in connection with Hindalco's purchase of Novelis and accretion/amortization of debt issuance costs related to the debt exchange completed in fiscal 2009 and the series of refinancing transactions and additional borrowings we completed in fiscal 2011 through 2016.borrowings. We present stated rates of interest because they reflect the rate at which cash will be paid for future debt service.
|
| |
| (B) | Debt existing at the time of Hindalco's purchase of Novelis was recorded at fair value. In connection with a series of refinancing transactions, a portion of the historicalAmounts include unamortized debt issuance costs, fair value adjustments were allocated to the Term Loan Facility, resulting in carrying value adjustments on thisand debt obligation. The unamortized carrying value also includes issuance discounts from subsequent refinancings.discounts. |
| |
(C) | Debt existing at the time of Hindalco's purchase of Novelis was recorded at fair value resulting in carrying value adjustments to our capital lease obligations in Novelis Switzerland. |
Novelis Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
| |
(D) | The unamortized carrying value balance includes issuance discounts related to the difference resulting from the contractual rates of interest specified in the instruments that are lower than the market rates of interest upon issuance. |
Principal repayment requirements for our total debt over the next five years and thereafter (excluding unamortized carrying value adjustments and using exchange rates as of March 31, 20162018 for our debt denominated in foreign currencies)currencies are as follows (in millions).
| | | As of March 31, 2016 | Amount | |
| Short-term borrowings and Current portion of long term debt due within one year | $ | 626 |
| |
| As of March 31, 2018 | | Amount |
| Short-term borrowings and current portion of long term debt due within one year | | $ | 170 |
|
| 2 years | 1,204 |
| 24 |
|
| 3 years | 125 |
| 20 |
|
| 4 years | 23 |
| 18 |
|
| 5 years | 1,421 |
| 1,705 |
|
| Thereafter | 1,696 |
| 2,650 |
|
| Total | $ | 5,095 |
| $ | 4,587 |
|
| | | |
Senior Secured Credit Facilities
As of March 31, 2016,2018, the senior secured credit facilities consisted of (i) a $1.8 billion seven-yearfive-year secured term loan credit facility (Term Loan Facility), and (ii) a $1.2$1 billion five-year asset based loan facility (ABL Revolver) and (iii) a $200 million 15-month subordinated secured lien revolving facility (Subordinated Lien Revolver). As of March 31, 2016,2018, $18 million of the Term Loan Facility is due within one year.
In June 2015, we entered into the Subordinated Lien Revolver with a maturity date of September 10, 2016. The interest rate for a loan under the Subordinated Lien Revolver is either equal to (i) a prime rate plus a spread of 2.5% or 2.25% depending on the total net leverage ratio then in effect or (ii) the higher of LIBOR and 0.75% plus a spread of 3.50% or 3.25% depending on the total net leverage ratio then in effect. The Subordinated Lien Revolver requires us to maintain a secured net leverage ratio of 4 to 1. Pursuant to the terms of the Term Loan Facility, such secured net leverage maintenance covenant will automatically apply to the Term Loan Facility as well for so long as the Subordinated Lien Revolver is in effect.
In June 2015, we entered into a Refinancing Amendment Agreement with respect to our Term Loan Facility. The Amendment increases the principal amount of the Term Loan Facility from $1.7 billion to $1.8 billion and extends the final maturity from December 17, 2017 to June 2, 2022; provided that, in the event that any series of our senior unsecured notes remain outstanding 92 days prior to its maturity date, then the Term Loan Facility will mature on such date, subject to limited exceptions. The loans under the Term Loan Facility accrue interest at the higher of LIBOR and 0.75% plus a 3.25% spread. The Amendment eliminates the senior secured net leverage covenant that requires us to maintain a minimum senior secured net leverage ratio (subject to the terms disclosed in the preceding paragraph). In addition, certain negative covenants were amended to increase the Company’s operational flexibility, including increasing flexibility to enter into working capital management programs and incur other debt.
In October 2014, we amended and extended our ABL Revolver by entering into a $1.2 billion, five-year, senior secured ABL Revolver bearing an interest rate of LIBOR plus a spread of 1.50% to 2.00% plus a prime spread of 0.50% to 1.00% based on excess availability. The ABL Revolver has a provision that allows the facility to be increased by an additional $500 million. The ABL Revolver has various customary covenants including maintaining a minimum fixed charge coverage ratio of 1.25 to 1 if excess availability is less than the greater of (1) $110 million and (2) 12.5% of the lesser of (a) the maximum size of the ABL Revolver and (b) the borrowing base. The fixed charge coverage ratio will be equal to the ratio of (1) (a) ABL Revolver defined Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA") less (b) maintenance capital expenditures less (c) cash taxes; to (2) (a) interest expense plus (b) scheduled principal payments plus (c) dividends to the Company's direct holding company to pay certain taxes, operating expenses and management fees and repurchases of equity interests from employees, officers and directors. The ABL Revolver matures on October 6, 2019; provided that, in the event that any of the Notes, the Term Loan Facility, or certain other indebtedness are outstanding (and not refinanced with a maturity date later than April 6, 2020) 90 days prior to their respective maturity dates, then the ABL Revolver will mature 90 days prior to the maturity date for the Notes, the Term Loan Facility or such other indebtedness, as applicable; unless excess availability under the ABL Revolver is at least (i) 25% of the lesser of (x) the total ABL Revolver commitment and (y) the then applicable borrowing base and (ii) 20% of the lesser of (x) the total ABL Revolver commitment and (y) the then applicable borrowing base, and a minimum fixed charged ratio test of at least 1.25 to 1 is met.
Novelis Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The senior secured credit facilities contain various affirmative covenants, including covenants with respect to our financial statements, litigation and other reporting requirements, insurance, payment of taxes, employee benefits and (subject to certain limitations) causing new subsidiaries to pledge collateral and guaranty our obligations. The senior secured credit facilities also include various customary negative covenants and events of default, including limitations on our ability to (1) make certain restricted payments, (2) incur additional indebtedness, (3) sell certain assets, (4) enter into sale and leaseback transactions, (5) make investments, loans and advances, (6) pay dividends or returns of capital and distributions beyond certain amounts, (7) engage in mergers, amalgamations or consolidations, (8) engage in certain transactions with affiliates, and (9) prepay certain indebtedness. The Term Loan Credit Agreement also contains a financial maintenance covenant, prohibiting the Company's senior secured net leverage ratio as of the last day of each fiscal quarter period and measured on a rolling four quarter basis from exceeding 3.50 to 1.00, subject to customary equity cure rights. The senior secured credit facilities include a cross-default provision under which lenders could accelerate repayment of the loans if a payment or non-payment default arises under any other indebtedness with an aggregate principal amount of more than $100 million (or, in the case of the Term Loan Facility, and Subordinated Lien Revolver, under the ABL Revolver regardless of the amount outstanding). Substantially all of our assets are pledged as collateral under the senior secured credit facilities. As
Term Loan Facility
In September 2017, we amended our Term Loan Credit Agreement (the "Term Loan Amendment") to our $1.8 billion Credit Agreement (the "Term Loan Facility") dated as of March 31, 2016, we were in compliance with the covenants in the Subordinated Lien Revolver,January 10, 2017.
The Term Loan Facility matures on June 2, 2022, and is subject to 0.25% quarterly amortization payments. The loans under the Term Loan Facility accrue interest at LIBOR plus 1.85%. The Term Loan Facility also requires customary mandatory prepayments with excess cash flow, asset sale and casualty event proceeds and proceeds of prohibited indebtedness, all subject to customary exceptions. The Term Loan may be prepaid, in full or in part, at any time at the Company’s election without penalty or premium. The Term Loan Facility allows for additional term loans to be issued in an amount not to exceed $300 million (or its equivalent in other currencies) plus an unlimited amount if, after giving effect to such incurrences on a pro forma basis, the senior secured net leverage ratio does not exceed 3.00 to 1.00. The lenders under the Term Loan Facility have not committed to provide any such additional term loans.
ABL Revolver
In September 2017, we amended and extended the ABL Revolver. The facility is a senior secured revolver bearing an interest rate of LIBOR plus a spread of 1.25% to 1.75% or a prime rate plus a prime spread of 0.25% to 0.75% based on excess availability. The ABL Revolver has a provision that allows the facility to be increased by an additional $500 million. The ABL Revolver has various customary covenants including maintaining a specified minimum fixed charge coverage ratio of 1.25 to 1 if excess availability is less than the greater of (1) $90 million and (2) 10% of the lesser of (a) the maximum size of the ABL Revolver and (b) the borrowing base. The ABL Revolver matures on September 14, 2022; provided that, in the event that the Term Loan Facility, or certain other indebtedness matures on or prior to March 14, 2023 and is outstanding 90 days prior to its maturity (and not refinanced with a maturity date later than March 14, 2023), then the ABL Revolver will mature 90 days prior to the maturity date for such other indebtedness, as applicable; unless excess availability under the ABL Revolver is at least (i)
Novelis Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
20% of the lesser of (x) the total ABL Revolver commitment and (y) the then applicable borrowing base and (ii) 15% of the lesser of (x) the total ABL Revolver commitment and (y) the then applicable borrowing base, and a minimum fixed charge ratio test of at least 1.25 to 1 is met.
Short-Term Borrowings
As of March 31, 20162018, our short-term borrowings were $57949 million consisting of $39412 million of short-term loans under our ABL Revolver, $38 million (KRW 44 billion) in Novelis Korea bank loans, $77 million in Novelis Brazil loans, $9 million (VND 203 billion) in Novelis Vietnam loans, $46$36 million in Novelis China loans (CNY 296234 million), $12 million in Novelis Middle East and Africa loans and $3$1 million of other short term borrowings.
As of March 31, 2016, $122018, $12 million of the ABL Revolver was utilized for letters of credit, and we had $204$789 million in remaining availability under the ABL Revolver.
As of March 31, 2016, $200 million2018, we had availability under the Subordinated Lien Revolver was available.
In fiscal years 2015 and 2016,our Novelis Korea, entered into various short-term facilities, includingNovelis Middle East and Africa, and Novelis
China revolving loancredit facilities and committed credit lines. Aslines of March 31, 2016, we had $204$184 million (KRW 236196 billion) in remaining availability under these facilities.
In December 2014, Novelis China entered into a committed facility. As of March 31, 2016, we had $4, $20 million, and $5 million (CNY 2335 million) in remaining availability under this facility., respectively.
Senior Notes
In December 2010, weOn August 29, 2016, Novelis Corporation, an indirect wholly owned subsidiary of Novelis Inc., issued $1.1$1.15 billion in aggregate principal amount of 8.375%6.25% Senior Notes Due 20172024 (the 20172024 Notes). The 2024 Notes are guaranteed, jointly and $1.4severally, on a senior unsecured basis, by Novelis Inc. and certain of its subsidiaries.
Additionally, on September 14, 2016, Novelis Corporation issued $1.5 billion in aggregate principal amount of 8.75%5.875% Senior Notes Due 20202026 (the 20202026 Notes, and together with the 20172024 Notes, the Notes). The 2026 Notes are guaranteed, jointly and severally, on a senior unsecured basis, by Novelis Inc. and certain of its subsidiaries.
The proceeds from the issuance of the 2024 Notes and the 2026 Notes were used to extinguish our 8.375% 2017 Senior Notes and our 8.75% 2020 Senior Notes, respectively. In addition, we paid combined tender offer premiums and issuance costs of $139 million associated with the refinancing transactions, including fees paid to lenders, arrangers, and outside professionals such as attorneys and rating agencies. We recorded a "Loss on extinguishment of debt" of $112 million in the second quarter of fiscal 2017 related to refinancing transactions. We incurred debt issuance costs of $45 million on the Notes which were capitalized and will be amortized as an increase to "Interest expense and amortization of debt issuance costs" over the term of these instruments.
The Notes contain customary covenants and events of default that will limit our ability and, in certain instances, the ability of certain of our subsidiaries to (1) incur additional debt and provide additional guarantees, (2) pay dividends or return capital beyond certain amounts and make other restricted payments, (3) create or permit certain liens, (4) make certain asset sales, (5) use the proceeds from the sales of assets and subsidiary stock, (6) create or permit restrictions on the ability of certain of the Company's subsidiaries to pay dividends or make other distributions to the Company, (7) engage in certain transactions with affiliates, (8) enter into sale and leaseback transactions, (9) designate subsidiaries as unrestricted subsidiaries and (10) consolidate, merge or transfer all or substantially all of our assets and the assets of certain of our subsidiaries. During any future period in which either Standard & Poor's Ratings Group, Inc. or Moody's Investors Service, Inc. have assigned an investment grade credit rating to the Notes and no default or event of default under the indenture has occurred and is continuing, most of the covenants will be suspended. The Notes include a cross-acceleration event of default triggered if (1) any other indebtedness with an aggregate principal amount of more than $100 million is (1) accelerated prior to its maturity or (2) not repaid at its maturity. As of March 31, 2016, we were in compliance with the covenants in the Notes. The Notes also contain customary call protection provisions for our bond holders that extend through December 2016August 2022 for the 20172024 Notes and through December 2018September 2024 for the 20202026 Notes. As of March 31, 2018, we were in compliance with the covenants for our Senior Notes.
Korean Bank Loans
As of March 31, 2016,2018, Novelis Korea had $17$94 million (KRW 20100 billion) of outstanding long-term loans with various banks due within one year. All loans have variable interest rates with base rates tied to Korea's 91-day CD rate plus an applicable spread ranging from 0.91%0.80% to 1.58%.
Novelis Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Brazil BNDES Loans
Novelis Brazil entered into loan agreements with Brazil’sBrazil's National Bank for Economic and Social Development (the BNDES loans) related to the plant expansion in Pindamonhangaba, Brazil (Pinda). As of March 31, 2016,2018, there are $1$2 million of BNDES loans due within one year.
Other Long-term Debt
In December 2004, 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 fixed quarterly payments of CHF 1.7 million, (USD $1.8 million).
During fiscal 2013 and 2014, Novelis Inc. entered into various five-year capital lease arrangements to upgrade and expand our information technology infrastructure.
As of March 31, 2016, we had $1 million of other debt, including certain capital lease obligations, with due dates through December 2020.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Interest Rate Swaps
We use interest rate swaps to manage our exposure to changes in benchmark interest rates which impact our variable-rate debt. See Note 15-14 — Financial Instruments and Commodity Contracts for further information about these interest rate swaps.
Novelis Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
12.11. SHARE-BASED COMPENSATION
The Company's board of directors has authorized long term incentive plans (LTIPs), under which Hindalco stock appreciation rights (Hindalco SARs), Novelis stock appreciation rights (Novelis SARs), and phantom restricted stock units (RSUs), and Novelis Performance Units (Novelis PUs) are granted to certain executive officers and key employees.
The Hindalco SARs and Novelis SARs vest at the rate of 25% or 33% per year, subject to the achievement of an annual performance target,target. Fiscal 2012 through fiscal 2016 SARs expire in May of the seventh year from the original grant date, while Fiscal 2017 and onwards SARs expire 7seven years from their original grant date. The performance criterion for vesting of the Hindalco SARs is based on the actual overall Novelis operating EBITDA compared to the target established and approved each fiscal year. The minimum threshold for vesting each year is 75% of each annual target operating EBITDA. Given that the performance criterion is based on an earnings target in a future period for each fiscal year, the grant date of the awards for accounting purposes is generally not established until the performance criterion has been defined.
Each Hindalco SAR is to be settled in cash based on the difference between the market value of one Hindalco share on the date of grant and the market value on the date of exercise. Each Novelis SAR is to be settled in cash based on the difference between the fair value of one Novelis phantom share on the original date of grant and the fair value of a phantom share on the date of the exercise. The amount of cash paid to settle Hindalco SARs and Novelis SARs areis limited to two and a half or three times the target payout, depending on the plan year. The Hindalco SARs and Novelis SARs do not transfer any shareholder rights in Hindalco or Novelis to a participant. The Hindalco SARs and Novelis SARs are classified as liability awards and are remeasured at fair value each reporting period until the SARs are settled.
The In May 2016, the Company's board of directors approved the issuance of Novelis PUs which have a fixed $100 value per unit and will vest in full three years from the grant date, subject to specific performance criterion for vesting of both the Hindalco SARs and Novelis SARs is based on the actual overall Novelis operating EBITDAcriteria compared to the target established and approved eachtarget. The Company made a voluntary offer to the participants with outstanding Novelis SARs granted for fiscal year.years 2012 through 2016 to exchange their Novelis SARs for an equivalently valued number of Novelis PUs. The minimum threshold for vesting each year is 75% of each annual target operating EBITDA. Given that the performance criterion isvoluntary exchange resulted in 1,054,662 Novelis SARs being modified into PUs which are not based on an earnings targetNovelis' nor Hindalco's fair values and are accounted for outside the scope of ASC 718, Compensation - Stock Compensation. This exchange was accounted for as a modification. There were 92,223 of Novelis SARs that remain outstanding as of March 31, 2018.
The RSUs are based on Hindalco's stock price. The RSUs vest either in a future period for each fiscal year,full three years from the grant date of the awards for accounting purposes is generally not established until the performance criterion has been defined.
The RSUs vest in full or 33% per year over three years, from the grant date, subject to continued employment with the Company, but are not subject to performance criteria. Each RSU is to be settled in cash equal to the market value of one Hindalco share. The payout on the RSUs is limited to three times the market value of one Hindalco share measured on the original date of grant. The RSUs are classified as liability awards and expensed over the requisite service period (three years) based on the Hindalco stock price as of each balance sheet date.
On May 13, 2013, the Company's board of directors amended the long-term incentive plans for fiscal years 2010 - 2013 (FY 2010 Plan), fiscal years 2011- 2014 (FY 2011 Plan), fiscal years 2012 - 2015 (FY 2012 Plan) and fiscal years 2013 - 2016 (FY 2013 Plan). The amendment gave each participant the option to cancel a portion of their outstanding Hindalco SARs for a lump-sum cash payment and/or the issuance of new Novelis SARs. The remaining Hindalco SARs and the new Novelis SARs continue to vest according to the terms and conditions of the original grant. The table below reflects the fiscal 2014 activity related to the participants' elections under the amendment.
Total compensation expense related to Hindalco SARs, Novelis SARs, and RSUs under the plans for the respective periods is presented in the table below (in millions). These amounts are included in “Selling, general and administrative expenses” in our consolidated statements of operations. As the performance criteria for fiscal years 2017, 20182019, 2020, and 20192021 have not yet been established, measurement periods for Hindalco SARs and Novelis SARs relating to those periods have not yet commenced. As a result, only compensation expense for vested and current year Hindalco SARs and Novelis SARs has been recorded.
|
| | | | | | | | | | | | |
| | | Year Ended March 31, |
| | | 2016 | | 2015 | | 2014 |
| Total compensation (income) expense | | $ | (2 | ) | | $ | 9 |
| | $ | 27 |
|
|
| | | | | | | | | | | | |
| | | Year Ended March 31, |
| | | 2018 | | 2017 | | 2016 |
| Total compensation expense (income) | | $ | 21 |
| | $ | 21 |
| | $ | (2 | ) |
The table below shows the RSUs activity for the year ended March 31, 20162018. | | | | | Number of RSUs | | Grant Date Fair Value (in Indian Rupees) | | Aggregate Intrinsic Value (USD in millions) | | Number of RSUs | | Grant Date Fair Value (in Indian Rupees) | | Aggregate Intrinsic Value (USD in millions) |
| RSUs outstanding as of March 31, 2015 | | 5,338,612 |
| | 120.77 |
| | $ | 12 |
| |
| RSUs outstanding as of March 31, 2017 | | | 7,712,984 |
| | 105.68 |
| | $ | 23 |
|
| Granted | | 2,193,752 |
| | 123.69 |
| | — |
| | 2,594,805 |
| | 186.96 |
| | — |
|
| Exercised | | (2,160,299 | ) | | 132.82 |
| | 5 |
| | (2,826,252 | ) | | 112.52 |
| | 8 |
|
| Forfeited/Cancelled | | (789,340 | ) | | 130.44 |
| | — |
| | (367,480 | ) | | 126.06 |
| | — |
|
| RSUs outstanding as of March 31, 2016 | | 4,582,725 |
| | 124.52 |
| | $ | 7 |
| |
| RSUs outstanding as of March 31, 2018 | | | 7,114,057 |
| | 131.74 |
| | $ | 23 |
|
Novelis Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The table below shows Hindalco SARs activity for the year ended March 31, 20162018. | | | | | Number of Hindalco SARs | | Weighted Average Exercise Price (in Indian Rupees) | | Weighted Average Remaining Contractual Term (In years) | | Aggregate Intrinsic Value (USD in millions) | | Number of Hindalco SARs | | Weighted Average Exercise Price (in Indian Rupees) | | Weighted Average Remaining Contractual Term (In years) | | Aggregate Intrinsic Value (USD in millions) |
| SARs outstanding as of March 31, 2015 | | 21,176,557 |
| | 126.77 |
| | 4.4 |
| | $ | 6 |
| |
| SARs outstanding as of March 31, 2017 | | | 15,161,233 |
| | 122.16 |
| | 4.4 | | $ | 18 |
|
| Granted | | 7,643,528 |
| | 123.69 |
| | 6.1 |
| | — |
| | 2,324,230 |
| | 186.11 |
| | 6.1 | | — |
|
| Exercised | | (1,543,314 | ) | | 94.85 |
| | — |
| | 1 |
| | (5,928,524 | ) | | 123.54 |
| | 0.0 | | 10 |
|
| Forfeited/Cancelled | | (5,783,059 | ) | | 135.49 |
| | — |
| | — |
| | (358,965 | ) | | 131.94 |
| | 0.0 | | — |
|
| SARs outstanding as of March 31, 2016 | | 21,493,712 |
| | 125.65 |
| | 4.4 |
| | — |
| |
| SARs exercisable as of March 31, 2016 | | 7,958,423 |
| | 127.22 |
| | 2.8 |
| | $ | — |
| |
| SARs outstanding as of March 31, 2018 | | | 11,197,974 |
| | 134.32 |
| | 4.3 | | 14 |
|
| SARs exercisable as of March 31, 2018 | | | 2,923,178 |
| | 134.62 |
| | 2.8 | | $ | 4 |
|
The table below shows the Novelis SARs activity for the year ended March 31, 20162018.
|
| | | | | | | | | | | | | | |
| | | Number of
Novelis SARs | | Weighted
Average
Exercise Price
(in USD) | | Weighted Average
Remaining
Contractual Term
(In years) | | Aggregate
Intrinsic
Value (USD
in millions) |
| SARs outstanding as of March 31, 2015 | | 1,033,735 |
| | $ | 92.85 |
| | 5.2 |
| | $ | 3 |
|
| Granted | | 673,677 |
| | 65.35 |
| | 6.1 |
| | — |
|
| Exercised | | (49,534 | ) | | 83.26 |
| | — |
| | 1 |
|
| Forfeited/Cancelled | | (315,995 | ) | | 90.29 |
| | — |
| | — |
|
| SARs outstanding as of March 31, 2016 | | 1,341,883 |
| | 80.00 |
| | 5.1 |
| | — |
|
| SARs exercisable as of March 31, 2016 | | 322,151 |
| | $ | 91.08 |
| | 3.7 |
| | $ | — |
|
|
| | | | | | | | | | | | | |
| | | Number of
Novelis SARs | | Weighted
Average
Exercise Price
(in USD) | | Weighted Average
Remaining
Contractual Term
(In years) | | Aggregate
Intrinsic
Value (USD
in millions) |
| SARs outstanding as of March 31, 2017 | | 108,549 |
| | $ | 83.57 |
| | 3.5 | | $ | — |
|
| Exercised | | (8,808 | ) | | 63.54 |
| | 0.0 | | — |
|
| Forfeited/Cancelled | | (7,518 | ) | | 87.25 |
| | 0.0 | | — |
|
| SARs outstanding as of March 31, 2018 | | 92,223 |
| | 85.18 |
| | 2.8 | | — |
|
| SARs exercisable as of March 31, 2018 | | 71,153 |
| | $ | 88.22 |
| | 2.5 | | $ | — |
|
The fair value of each unvested Hindalco SAR was estimated using the following assumptions: | | | | | Year ended March 31, | | Year ended March 31, |
| | | 2016 | | 2015 | | 2014 | | 2018 | | 2017 | | 2016 |
| Risk-free interest rate | | 7.23% - 7.68% |
| | 7.75% - 7.79% |
| | 8.67% - 8.96% |
| | 6.14% - 7.67% |
| | 5.82% - 6.99% |
| | 7.23% - 7.68% |
|
| Dividend yield | | 1.14 | % | | 0.78 | % | | 0.99 | % | | 0.53 | % | | 0.51 | % | | 1.14 | % |
| Volatility | | 43% - 44% |
| | 39% - 46% |
| | 37% - 51% |
| | 29% - 42% |
| | 35% - 44% |
| | 43% - 44% |
|
The fair value of each unvested Novelis SAR was estimated using the following assumptions:
| | | | | Year ended March 31, | | Year ended March 31, |
| | | 2016 | | 2015 | | 2014 | | 2018 | | 2017 | | 2016 |
| Risk-free interest rate | | 0.89% - 1.39% |
| | 0.96% - 1.59% |
| | 0.96% - 2.05% |
| | 1.71% - 2.55% |
| | 0.78% - 1.95% |
| | 0.89% - 1.39% |
|
| Dividend yield | | — | % | | — | % | | — | % | | — | % | | — | % | | — | % |
| Volatility | | 38% - 41% |
| | 27% - 34% |
| | 28% - 41% |
| | 20% - 25% |
| | 25% - 28% |
| | 38% - 41% |
|
The fair value of each unvested Hindalco SAR was based on the difference between the fair value of a long call and a short call option. The fair value of each of these call options was determined using the Monte Carlo Simulation model. We used historical stock price volatility data of Hindalco on the National Stock Exchange of India to determine expected volatility assumptions. The risk-free interest rate is based on Indian treasury yields interpolated for a time period corresponding to the remaining contractual life. The forfeiture rate is estimated based on actual historical forfeitures. The dividend yield is estimated to be the annual dividend of the Hindalco stock over the remaining contractual lives of the Hindalco SARs. The value of each vested Hindalco SAR is remeasured at fair value each reporting period based on the excess of the current stock price over the exercise price, not to exceed the maximum payout as defined by the plans. The fair value of the Hindalco SARs is being recognized over the requisite performance and service period of each tranche, subject to the achievement of any performance criteria.
Novelis Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The fair value of each unvested Novelis SAR was based on the difference between the fair value of a long call and a short call option. The fair value of each of these call options was determined using the Monte Carlo Simulation model. We used the historical volatility of comparable companies to determine expected volatility assumptions. The risk-free interest rate is based on U.S. treasury yields for a time period corresponding to the remaining contractual life. The forfeiture rate is estimated based on actual historical forfeitures of Hindalco SARs. The value of each vested Novelis SAR is remeasured at fair value each reporting period based on the percentage increase in the current Novelis phantom stock price over the exercise price, not to exceed the maximum payout as defined by the plans. The fair value of the Novelis SARs is being recognized over the requisite performance and service period of each tranche, subject to the achievement of any performance criteria.
The cash payments made to settle SAR liabilities were $210 million, $87 million, and $152 million, in the years ended March 31, 2016, 2015,2018, 2017, and 2014,2016, respectively. Total cash payments made to settle Hindalco RSUs were $5$8 million, $3$2 million, and $2$5 million in the years ended March 31, 2016, 20152018, 2017 and 2014,2016, respectively. Unrecognized compensation expense related to the non-vested Hindalco SARs (assuming all future performance criteria are met) was $4$5 million which is expected to be recognized over a weighted average period of 2.71.2 years. Unrecognized compensation expense related to the non-vested Novelis SARs (assuming all future performance criteria are met) was $10less than $1 million, which is expected to be recognized over a weighted average period of 2.7 years.1 year. Unrecognized compensation expense related to the RSUs was $36 million, which will be recognized over the remaining weighted average vesting period of 1.3 years years..
Novelis Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
13.12. POSTRETIREMENT BENEFIT PLANS
Our pension obligations relate to: (1) funded defined benefit pension plans in the U.S., Canada, Switzerland, and the U.K.; (2) unfunded defined benefit pension plans in Germany; (3)(2) unfunded lump sum indemnities payable upon retirement to employees in France Malaysia and Italy; and (4) partially funded lump sum indemnities in South Korea. Our other postretirement obligations (Other Benefits, as shown in certain tables below) include unfunded health care and life insurance benefits provided to retired employees in the U.S., Canada, and Brazil. We have combined our domestic (i.e. Canadian Plans) and foreign (i.e. All other Plans other than Canadian Plans) postretirement benefit plan disclosures because our domestic benefit obligation is not significant as compared to our total benefit obligation, as our foreign benefit obligation is 94%95% of the total benefit obligation, and the assumptions used to value domestic and foreign plans were not significantly different.
During fiscal Fiscal year 2015 and as a result of the sale of our North America foil operations, $11 million of benefits were transferred out of the pension plan along with a corresponding amount of plan assets resulting inended March 31, 2018 settlement accounting. Various other pension plans recognized settlements totaling $3 million as a result of restructuring initiatives and other factors. The settlements resulted in an insignificant impactactivity primarily relates to the statementformation of operations.Ulsan Aluminum Ltd., (UAL).
In October 2014, the Society of Actuaries published an updated mortality table and mortality improvement scale for U.S. plans. We recognized an increase of $33 million to our benefit obligation and net actuarial loss as a result of updating mortality assumptions applicable to our U.S. plans. These deferred costs will be amortized on a straight-line basis to net periodic benefit costs in future years.
In June 2014, the Company amended its U.S. non-union retiree medical plan to extend retirees' option to participate in a Retiree Health Access Exchange (RHA). For calendar years 2014 through 2017, the Company will subsidize a portion of the retiree medical premium rates of the RHA. The Company will not provide a subsidy beginning in calendar year 2018. The amendment to the plan resulted in a plan remeasurement and recognition of prior service costs of approximately $11 million which is being amortized on a straight-line basis through December 31, 2017, subject to an annual remeasurement adjustment.
In August 2013, the Company amended its U.S. non-union retiree medical plan. Beginning January 2014, the health care benefits provided by the Company to retirees' was discontinued and replaced with the retirees' option to participate in a new Retiree Health Access Exchange. For calendar year 2014 and 2015, the Company will subsidize a portion of the retiree medical premium rates of the RHA. The amendment resulted in the Company no longer providing a subsidy beginning in calendar year 2016. The amendments to the plan resulted in a plan remeasurement and recognition of a negative plan amendment, which reduced our obligation by $97 million as of August 31, 2013. The negative plan amendment, net of unrecognized actuarial losses resulted in a credit balance of $70 million recorded in AOCI as of August 31, 2013. The $70 million is being amortized, on a straight-line basis, as a reduction to net periodic benefit cost from September 1, 2013 through December 31, 2015, subject to an annual remeasurement adjustment.
Employer Contributions to Plans
For pension plans, our policy is to fund an amount required to provide for contractual benefits attributed to service to-date, and amortize unfunded actuarial liabilities typically over periods of 15 years or less. We also participate in savings plans in Canada and the U.S., as well as defined contribution pension plans in the U.S., U.K., Canada, Germany, Italy, Switzerland Malaysia and Brazil. We contributed the following amounts (in millions) to all plans.
| | | | | Year Ended March 31, | | Year Ended March 31, |
| | | 2016 | | 2015 | | 2014 | | 2018 | | 2017 | | 2016 |
| Funded pension plans | | $ | 28 |
| | $ | 28 |
| | $ | 31 |
| | $ | 57 |
| | $ | 26 |
| | $ | 28 |
|
| Unfunded pension plans | | 12 |
| | 13 |
| | 13 |
| | 12 |
| | 15 |
| | 12 |
|
| Savings and defined contribution pension plans | | 24 |
| | 18 |
| | 20 |
| | 27 |
| | 25 |
| | 24 |
|
| Total contributions | | $ | 64 |
| | $ | 59 |
| | $ | 64 |
| | $ | 96 |
| | $ | 66 |
| | $ | 64 |
|
During fiscal year 2017,2019, we expect to contribute $2326 million to our funded pension plans, $1314 million to our unfunded pension plans and $2328 million to our savings and defined contribution pension plans.
Benefit Obligations, Fair Value of Plan Assets, Funded Status and Amounts Recognized in Financial Statements
The following tables present the change in benefit obligation, change in fair value of plan assets and the funded status for pension and other benefits (in millions).
|
| | | | | | | | | | | | | | | | |
| | | Pension Benefits | | Other Benefits |
| | | Year Ended March 31, | | Year Ended
March 31, |
| | | 2018 | | 2017 | | 2018 | | 2017 |
| Benefit obligation at beginning of period | | $ | 1,865 |
| | $ | 1,868 |
| | $ | 153 |
| | $ | 151 |
|
| Service cost | | 44 |
| | 45 |
| | 7 |
| | 6 |
|
| Interest cost | | 60 |
| | 59 |
| | 7 |
| | 6 |
|
| Members’ contributions | | 5 |
| | 4 |
| | — |
| | — |
|
| Benefits paid | | (60 | ) | | (74 | ) | | (8 | ) | | (8 | ) |
| Amendments | | (8 | ) | | 2 |
| | 3 |
| | — |
|
| Curtailments, settlements and special termination benefits | | (25 | ) | | (4 | ) | | — |
| | — |
|
| Actuarial losses (gains) | | 17 |
| | 35 |
| | 14 |
| | (3 | ) |
| Other | | (3 | ) | | (4 | ) | | — |
| | — |
|
| Currency losses (gains) | | 88 |
| | (66 | ) | | — |
| | 1 |
|
| Benefit obligation at end of period | | $ | 1,983 |
| | $ | 1,865 |
| | $ | 176 |
| | $ | 153 |
|
| Benefit obligation of funded plans | | $ | 1,677 |
| | $ | 1,594 |
| | $ | — |
| | $ | — |
|
| Benefit obligation of unfunded plans | | 306 |
| | 271 |
| | 176 |
| | 153 |
|
| Benefit obligation at end of period | | $ | 1,983 |
| | $ | 1,865 |
| | $ | 176 |
| | $ | 153 |
|
Novelis Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
|
| | | | | | | | | | | | | | | | |
| | | Pension Benefits | | Other Benefits |
| | | Year Ended March 31, | | Year Ended
March 31, |
| | | 2016 | | 2015 | | 2016 | | 2015 |
| Benefit obligation at beginning of period | | $ | 1,863 |
| | $ | 1,672 |
| | $ | 139 |
| | $ | 135 |
|
| Service cost | | 47 |
| | 43 |
| | 5 |
| | 5 |
|
| Interest cost | | 59 |
| | 66 |
| | 5 |
| | 5 |
|
| Members’ contributions | | 5 |
| | 5 |
| | — |
| | — |
|
| Benefits paid | | (65 | ) | | (56 | ) | | (10 | ) | | (10 | ) |
| Amendments | | — |
| | (3 | ) | | — |
| | 11 |
|
| Curtailments, settlements and special termination benefits | | (1 | ) | | (16 | ) | | — |
| | (1 | ) |
| Actuarial (gains) losses | | (43 | ) | | 296 |
| | 11 |
| | (4 | ) |
| Other | | (1 | ) | | (2 | ) | | — |
| | — |
|
| Currency losses (gains) | | 4 |
| | (142 | ) | | 1 |
| | (2 | ) |
| Benefit obligation at end of period | | $ | 1,868 |
| | $ | 1,863 |
| | $ | 151 |
| | $ | 139 |
|
| Benefit obligation of funded plans | | $ | 1,578 |
| | $ | 1,558 |
| | $ | — |
| | $ | — |
|
| Benefit obligation of unfunded plans | | 290 |
| | 305 |
| | 151 |
| | 139 |
|
| Benefit obligation at end of period | | $ | 1,868 |
| | $ | 1,863 |
| | $ | 151 |
| | $ | 139 |
|
|
| | | | | | | | |
| | | Pension Benefits |
| | | Year Ended March 31, |
| | | 2018 | | 2017 |
| Change in fair value of plan assets | | | | |
| Fair value of plan assets at beginning of period | | $ | 1,200 |
| | $ | 1,177 |
|
| Actual return on plan assets | | 85 |
| | 106 |
|
| Members’ contributions | | 5 |
| | 4 |
|
| Benefits paid | | (60 | ) | | (74 | ) |
| Company contributions | | 69 |
| | 37 |
|
| Settlements (A) | | (24 | ) | | (4 | ) |
| Other | | (3 | ) | | (3 | ) |
| Currency | | 45 |
| | (43 | ) |
| Fair value of plan assets at end of period | | $ | 1,317 |
| | $ | 1,200 |
|
|
| | | | | | | | |
| | | Pension Benefits |
| | | Year Ended March 31, |
| | | 2016 | | 2015 |
| Change in fair value of plan assets | | | | |
| Fair value of plan assets at beginning of period | | $ | 1,233 |
| | $ | 1,163 |
|
| Actual return on plan assets | | (21 | ) | | 159 |
|
| Members’ contributions | | 5 |
| | 5 |
|
| Benefits paid | | (65 | ) | | (56 | ) |
| Company contributions | | 39 |
| | 41 |
|
| Settlements | | (1 | ) | | (14 | ) |
| Other | | (1 | ) | | (2 | ) |
| Currency | | (12 | ) | | (63 | ) |
| Fair value of plan assets at end of period | | $ | 1,177 |
| | $ | 1,233 |
|
|
| | | | | | | | | | | | | | | | |
| | | March 31, |
| | | 2016 | | 2015 |
| | | Pension Benefits | | Other Benefits | | Pension Benefits | | Other Benefits |
| Funded status | | | | | | | | |
| Funded status at end of period: | | | | | | | | |
| Assets less the benefit obligation of funded plans | | $ | (401 | ) | | $ | — |
| | $ | (325 | ) | | $ | — |
|
| Benefit obligation of unfunded plans | | (290 | ) | | (151 | ) | | (305 | ) | | (139 | ) |
| | | $ | (691 | ) | | $ | (151 | ) | | $ | (630 | ) | | $ | (139 | ) |
| As included in our consolidated balance sheets within Total assets / (Total liabilities) | | | | | | | | |
| Other non- current assets | | $ | — |
| | $ | — |
| | $ | 1 |
| | $ | — |
|
| Accrued expenses and other current liabilities | | (13 | ) | | (9 | ) | | (12 | ) | | (10 | ) |
| Accrued postretirement benefits | | (678 | ) | | (142 | ) | | (619 | ) | | (129 | ) |
| | | $ | (691 | ) | | $ | (151 | ) | | $ | (630 | ) | | $ | (139 | ) |
Novelis Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
|
| | | | | | | | | | | | | | | | |
| | | March 31, |
| | | 2018 | | 2017 |
| | | Pension Benefits | | Other Benefits | | Pension Benefits | | Other Benefits |
| Funded status | | | | | | | | |
| Funded status at end of period: | | | | | | | | |
| Assets less the benefit obligation of funded plans | | $ | (360 | ) | | $ | — |
| | $ | (394 | ) | | $ | — |
|
| Benefit obligation of unfunded plans | | (306 | ) | | (176 | ) | | (271 | ) | | (153 | ) |
| | | $ | (666 | ) | | $ | (176 | ) | | $ | (665 | ) | | $ | (153 | ) |
| As included in our consolidated balance sheets within Total assets / (Total liabilities) | | | | | | | | |
| Other non- current assets | | $ | 3 |
| | $ | — |
| | $ | 2 |
| | $ | — |
|
| Accrued expenses and other current liabilities | | (13 | ) | | (6 | ) | | (12 | ) | | (10 | ) |
| Accrued postretirement benefits | | (656 | ) | | (169 | ) | | (655 | ) | | (143 | ) |
| | | $ | (666 | ) | | $ | (175 | ) | | $ | (665 | ) | | $ | (153 | ) |
The postretirement amounts recognized in “Accumulated other comprehensive loss,” before tax effects, are presented in the table below (in millions), and includes the impact related to our equity method investments. Amounts are amortized to net periodic benefit cost over the group’s average future service life of the employees or the group's average life expectancy.
| | | | | March 31, | | March 31, |
| | | 2016 | | 2015 | | 2018 | | 2017 |
| | | Pension Benefits | | Other Benefits | | Pension Benefits | | Other Benefits | | Pension Benefits | | Other Benefits | | Pension Benefits | | Other Benefits |
| Net actuarial losses | | $ | (444 | ) | | $ | (22 | ) | | $ | (450 | ) | | $ | (14 | ) | | $ | (355 | ) | | $ | (29 | ) | | $ | (375 | ) | | $ | (16 | ) |
| Prior service credit | | 9 |
| | 6 |
| | 11 |
| | 32 |
| | 13 |
| | 5 |
| | 4 |
| | 7 |
|
| Total postretirement amounts recognized in Accumulated other comprehensive (loss) income | | $ | (435 | ) | | $ | (16 | ) | | $ | (439 | ) | | $ | 18 |
| |
| Total postretirement amounts recognized in Accumulated other comprehensive income | | | $ | (342 | ) | | $ | (24 | ) | | $ | (371 | ) | | $ | (9 | ) |
The estimated amounts that will be amortized from “Accumulated other comprehensive loss” into net periodic benefit costs in fiscal year 20172019 (exclusive of equity method investments) are $3832 million for pension benefit costs related to net actuarial losses of $40$33 million partially offset by prior service credits of $2$1 million, and $62 million for other postretirement benefits, primarily related to amortization of prior service costs of $2 million and net actuarial losses of $4 million.
The postretirement changes recognized in “Accumulated other comprehensive loss,” before tax effects, are presented in the table below (in millions), and include the impact related to our equity method investments.
|
| | | | | | | | | | | | | | | | |
| | | March 31, |
| | | 2016 | | 2015 |
| | | Pension Benefits | | Other Benefits | | Pension Benefits | | Other Benefits |
| Beginning balance in Accumulated other comprehensive (loss) income | | $ | (439 | ) | | $ | 18 |
| | $ | (268 | ) | | $ | 56 |
|
| Plan amendment | | — |
| | — |
| | 3 |
| | (11 | ) |
| Net actuarial (loss) gain | | (25 | ) | | (11 | ) | | (249 | ) | | 5 |
|
| Amortization of: | |
| |
| | | | |
| Prior service credits | | (2 | ) | | (27 | ) | | (2 | ) | | (37 | ) |
| Actuarial losses | | 41 |
| | 4 |
| | 24 |
| | 5 |
|
| Effect of currency exchange | | (10 | ) | | — |
| | 53 |
| | — |
|
| Total postretirement amounts recognized in Accumulated other comprehensive (loss) income | | $ | (435 | ) | | $ | (16 | ) | | $ | (439 | ) | | $ | 18 |
|
Novelis Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
|
| | | | | | | | | | | | | | | | |
| | | March 31, |
| | | 2018 | | 2017 |
| | | Pension Benefits | | Other Benefits | | Pension Benefits | | Other Benefits |
| Beginning balance in Accumulated other comprehensive loss | | $ | (371 | ) | | $ | (9 | ) | | $ | (435 | ) | | $ | (16 | ) |
| Curtailments, settlements, and special termination benefits | | 1 |
| | — |
| | 1 |
| | — |
|
| Plan amendment | | — |
| | (3 | ) | | — |
| | — |
|
| Net actuarial gain (loss) | | 7 |
| | (15 | ) | | 11 |
| | 2 |
|
| Prior service cost | | 8 |
| | — |
| | (2 | ) | | — |
|
| Amortization of: | | | | | | | | |
| Prior service credits | | (1 | ) | | 1 |
| | (2 | ) | | 1 |
|
| Actuarial losses | | 40 |
| | 2 |
| | 43 |
| | 4 |
|
| Effect of currency exchange | | (26 | ) | | — |
| | 13 |
| | — |
|
| Total postretirement amounts recognized in Accumulated other comprehensive income | | $ | (342 | ) | | $ | (24 | ) | | $ | (371 | ) | | $ | (9 | ) |
Pension Plan Obligations
The projected benefit obligation, accumulated benefit obligation and fair value of plan assets are presented in the table below (in millions). | | | | | March 31, | | March 31, |
| | | 2016 | | 2015 | | 2018 | | 2017 |
| The projected benefit obligation and accumulated benefit obligation for all defined benefit pension plans: | | | | | | | | |
| Projected benefit obligation | | $ | 1,868 |
| | $ | 1,863 |
| | $ | 1,983 |
| | $ | 1,865 |
|
| Accumulated benefit obligation | | $ | 1,692 |
| | $ | 1,689 |
| | $ | 1,830 |
| | $ | 1,711 |
|
| Pension plans with projected benefit obligations in excess of plan assets: | | | | | | | | |
| Projected benefit obligation | | $ | 1,868 |
| | $ | 1,760 |
| | $ | 1,880 |
| | $ | 1,769 |
|
| Fair value of plan assets | | $ | 1,177 |
| | $ | 1,129 |
| | $ | 1,211 |
| | $ | 1,103 |
|
| Pension plans with accumulated benefit obligations in excess of plan assets: | | | | | | | | |
| Accumulated benefit obligation | | $ | 1,567 |
| | $ | 1,563 |
| | $ | 1,733 |
| | $ | 1,581 |
|
| Fair value of plan assets | | $ | 1,039 |
| | $ | 1,093 |
| | $ | 1,171 |
| | $ | 1,049 |
|
| Pension plans with projected benefit obligations less than plan assets: | | | | | | | | |
| Projected benefit obligation | | $ | — |
| | $ | 103 |
| | $ | 103 |
| | $ | 96 |
|
| Fair value of plan assets | | $ | — |
| | $ | 104 |
| | $ | 106 |
| | $ | 97 |
|
Future Benefit Payments
Expected benefit payments to be made during the next ten fiscal years are listed in the table below (in millions). | | | | | Pension Benefits | | Other Benefits | | Pension Benefits | | Other Benefits |
| 2017 | | $ | 66 |
| | $ | 9 |
| |
| 2018 | | 68 |
| | 8 |
| |
| 2019 | | 72 |
| | 6 |
| | $ | 74 |
| | $ | 6 |
|
| 2020 | | 77 |
| | 7 |
| | 79 |
| | 8 |
|
| 2021 | | 81 |
| | 8 |
| | 82 |
| | 9 |
|
| 2021 through 2025 | | 465 |
| | 50 |
| |
| 2022 | | | 86 |
| | 9 |
|
| 2023 | | | 89 |
| | 10 |
|
| 2024 through 2028 | | | 509 |
| | 59 |
|
| Total | | $ | 829 |
| | $ | 88 |
| | $ | 919 |
| | $ | 101 |
|
Novelis Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Components of Net Periodic Benefit Cost
The components of net periodic benefit cost for the respective periods are listed in the table below (in millions).
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Pension Benefits | | Other Benefits |
| | | Year Ended March 31, | | Year Ended
March 31, |
| | | 2016 | | 2015 | | 2014 | | 2016 | | 2015 | | 2014 |
| Net periodic benefit costs | | | | | | | | | | | | |
| Service cost | | $ | 47 |
| | $ | 43 |
| | $ | 48 |
| | $ | 5 |
| | $ | 5 |
| | $ | 8 |
|
| Interest cost | | 59 |
| | 66 |
| | 63 |
| | 5 |
| | 5 |
| | 7 |
|
| Expected return on assets | | (67 | ) | | (69 | ) | | (67 | ) | | — |
| | — |
| | — |
|
| Amortization — losses | | 37 |
| | 22 |
| | 30 |
| | 4 |
| | 5 |
| | 7 |
|
| Amortization — prior service credit | | (2 | ) | | (2 | ) | | (2 | ) | | (27 | ) | | (37 | ) | | (24 | ) |
Curtailment/settlement/special termination losses (gains) | | — |
| | 1 |
| | 1 |
| | — |
| | (1 | ) | | — |
|
| Net periodic benefit cost (income) | | $ | 74 |
| | $ | 61 |
| | $ | 73 |
| | $ | (13 | ) | | $ | (23 | ) | | $ | (2 | ) |
| Proportionate share of non-consolidated affiliates’ pension costs | | 9 |
| | 7 |
| | 7 |
| | — |
| | — |
| | — |
|
| Total net periodic benefit costs (income) recognized | | $ | 83 |
| | $ | 68 |
| | $ | 80 |
| | $ | (13 | ) | | $ | (23 | ) | | $ | (2 | ) |
Novelis Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Pension Benefits | | Other Benefits |
| | | Year Ended March 31, | | Year Ended
March 31, |
| | | 2018 | | 2017 | | 2016 | | 2018 | | 2017 | | 2016 |
| Net periodic benefit costs | | | | | | | | | | | | |
| Service cost | | $ | 44 |
| | $ | 45 |
| | $ | 47 |
| | $ | 7 |
| | $ | 6 |
| | $ | 5 |
|
| Interest cost | | 60 |
| | 59 |
| | 59 |
| | 7 |
| | 6 |
| | 5 |
|
| Expected return on assets | | (63 | ) | | (61 | ) | | (67 | ) | | — |
| | — |
| | — |
|
| Amortization — losses | | 36 |
| | 40 |
| | 37 |
| | 1 |
| | 4 |
| | 4 |
|
| Amortization — prior service credit | | (1 | ) | | (2 | ) | | (2 | ) | | — |
| | 2 |
| | (27 | ) |
Curtailment, settlement, and special termination losses | | 2 |
| | 1 |
| | — |
| | — |
| | — |
| | — |
|
| Net periodic benefit cost (income) | | $ | 78 |
| | $ | 82 |
| | $ | 74 |
| | $ | 15 |
| | $ | 18 |
| | $ | (13 | ) |
| Proportionate share of non-consolidated affiliates’ pension costs | | 9 |
| | 8 |
| | 9 |
| | — |
| | — |
| | — |
|
| Total net periodic benefit costs (income) recognized | | $ | 87 |
| | $ | 90 |
| | $ | 83 |
| | $ | 15 |
| | $ | 18 |
| | $ | (13 | ) |
Actuarial Assumptions and Sensitivity Analysis
The weighted average assumptions used to determine benefit obligations and net periodic benefit costs for the respective periods are listed in the table below.
| | | | | Pension Benefits | | Other Benefits | | Pension Benefits | | Other Benefits |
| | | Year Ended March 31, | | Year Ended March 31, | | Year Ended March 31, | | Year Ended March 31, |
| | | 2016 | | 2015 | | 2014 | | 2016 | | 2015 | | 2014 | | 2018 | | 2017 | | 2016 | | 2018 | | 2017 | | 2016 |
| Weighted average assumptions used to determine benefit obligations | | | | | | | | | | | | | | | | | | | | | | | | |
| Discount rate | | 3.3 | % | | 3.1 | % | | 4.0 | % | | 4.0 | % | | 3.6 | % | | 4.1 | % | | 3.1 | % | | 3.2 | % | | 3.3 | % | | 4.0 | % | | 4.1 | % | | 4.0 | % |
| Average compensation growth | | 3.1 | % | | 3.1 | % | | 3.1 | % | | 3.5 | % | | 3.5 | % | | 3.5 | % | | 3.1 | % | | 3.1 | % | | 3.1 | % | | 3.5 | % | | 3.5 | % | | 3.5 | % |
| Weighted average assumptions used to determine net periodic benefit cost | | | | | | | | | | | | | | | | | | | | | | | | |
| Discount rate | | 3.1 | % | | 4.0 | % | | 3.9 | % | | 3.6 | % | | 4.1 | % | | 3.8 | % | | 3.2 | % | | 3.3 | % | | 3.1 | % | | 4.1 | % | | 4.0 | % | | 3.6 | % |
| Average compensation growth | | 3.1 | % | | 3.1 | % | | 3.1 | % | | 3.5 | % | | 3.5 | % | | 3.5 | % | | 3.1 | % | | 3.1 | % | | 3.1 | % | | 3.5 | % | | 3.5 | % | | 3.5 | % |
| Expected return on plan assets | | 5.6 | % | | 6.1 | % | | 6.3 | % | | — | % | | — | % | | — | % | | 5.2 | % | | 5.4 | % | | 5.6 | % | | — | % | | — | % | | — | % |
In selecting the appropriate discount rate for each plan, for pension and other postretirement plans in Canada, the U.S., U.K., and other Euro zone countries, we used spot rate yield curves and individual bond matching models. For other countries we used published long-term high quality corporate bond indices with adjustments made to the index rates based on the duration of the plans' obligation.
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 of equity or real estate over long-term bond 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. The expected long-term rate of return on plan assets is 5.4%5.2% in fiscal 2017.2019.
We provide unfunded health care and life insurance benefits to our retired employees in Canada, the U.S. and Brazil, for which we paid $108 million, $108 million, and $9$10 million in fiscal 2016, 20152018, 2017 and 2014,2016, respectively. The assumed health care cost trend used for measurement purposes is 7.1%7.5% for fiscal 2017,2019, decreasing gradually to 5% in 20262028 and remaining at that level thereafter.
Novelis Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
A change of one percentage point in the assumed health care cost trend rates would have the following effects on our other benefits (in millions).
| | | | | 1% Increase | | 1% Decrease | | 1% Increase | | 1% Decrease |
| Sensitivity Analysis | | | | | | | | |
| Effect on service and interest costs | | $ | 1 |
| | $ | (1 | ) | | $ | 2 |
| | $ | (2 | ) |
| Effect on benefit obligation | | $ | 14 |
| | $ | (13 | ) | | $ | 17 |
| | $ | (15 | ) |
In addition, we provide post-employment benefits, including disability, early retirement and continuation of benefits (medical, dental, and life insurance) to our former or inactive employees, which are accounted for on the accrual basis in accordance with ASC No. 712, Compensation — Retirement Benefits. “Other long-term liabilities” and "Accrued expenses and other current liabilities" on our consolidated balance sheets include $1210 million and $5$4 million, respectively, as of March 31, 20162018, for these benefits. Comparatively, “Other long-term liabilities” and "Accrued expenses and other current liabilities" on our consolidated balance sheets include $109 million and $4 million, respectively, as of March 31, 2015.2017.
Novelis Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Investment Policy and Asset Allocation
The Company’s overall investment strategy is to achieve a mix of approximately 50% of investments for long-term growth (equities, real estate) and 50% for near-term benefit payments (debt securities, other) with a wide diversification of asset categories, investment styles, fund strategies and fund managers. Since most of the defined benefit plans are closed to new entrants, we expect this strategy to gradually shift more investments toward near-term benefit payments.
Each of our funded pension plans 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 monitoring compliance with the investment policy. The targeted allocation ranges by asset class, and the actual allocation percentages for each class are listed in the table below.
| | | Asset Category | | Target Allocation Ranges | | Allocation in Aggregate as of March 31, | | Target Allocation Ranges | | Allocation in Aggregate as of March 31, |
| 2016 | | 2015 | 2018 | | 2017 |
| Equity | | 15-53% | | 32% | | 36% | | 14-54% | | 33% | | 32% |
| Fixed income | | 47-68% | | 62% | | 60% | | 46-78% | | 55% | | 49% |
| Real estate | | 0-15% | | 2% | | 1% | | 0-15% | | 3% | | 3% |
| Other | | 0-16% | | 5% | | 3% | | 0-18% | | 9% | | 17% |
Novelis Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Fair Value of Plan Assets
The following pension plan assets are measured and recognized at fair value on a recurring basis (in millions). Please see Note 17—16 — Fair value measurementsValue Measurements for a description of the fair value hierarchy. The U.S. and Canadian pension plan assets are invested exclusively in commingled funds and classified in Level 2, and the U.K., Switzerland, and South Korea pension plan assets are invested in both direct investments (Levels 1 and 2) and commingled funds (Level 2).
Pension Plan Assets
| | | | | March 31, 2016
Fair Value Measurements Using | | March 31, 2015
Fair Value Measurements Using | | March 31, 2018 | | March 31, 2017 |
| | | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total |
| Equity | | $ | — |
| | $ | 375 |
| | $ | — |
| | $ | 375 |
| | $ | 85 |
| | $ | 361 |
| | $ | — |
| | $ | 446 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Fixed income | | 131 |
| | 592 |
| | — |
| | 723 |
| | 135 |
| | 608 |
| | — |
| | 743 |
| | 163 |
| | 41 |
| | — |
| | 204 |
| | 136 |
| | 54 |
| | — |
| | 190 |
|
| Real estate | | — |
| | 25 |
| | — |
| | 25 |
| | — |
| | 15 |
| | — |
| | 15 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Cash and cash equivalents | | 9 |
| |
|
| | — |
| | 9 |
| | 8 |
| | — |
| | — |
| | 8 |
| | 7 |
| | — |
| | — |
| | 7 |
| | 8 |
| | — |
| | — |
| | 8 |
|
| Other | | — |
| | 45 |
| | — |
| | 45 |
| | — |
| | 21 |
| | — |
| | 21 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Investments measured at net asset value (A) | | | — |
| | — |
| | — |
| | 1,106 |
| | — |
| | — |
| | — |
| | 1,002 |
|
| Total | | $ | 140 |
| | $ | 1,037 |
| | $ | — |
| | $ | 1,177 |
| | $ | 228 |
| | $ | 1,005 |
| | $ | — |
| | $ | 1,233 |
| | $ | 170 |
| | $ | 41 |
| | $ | — |
| | $ | 1,317 |
| | $ | 144 |
| | $ | 54 |
| | $ | — |
| | $ | 1,200 |
|
_________________________
| |
| (A) | Certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been categorized in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the statement of financial position. |
Novelis Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
14.13. CURRENCY LOSSES (GAINS) LOSSES
The following currency losses (gains) losses are included in “Other expense (income) expense,, net” in the accompanying consolidated statements of operations (in millions).
| | | | | Year Ended March 31, | | Year Ended March 31, |
| | | 2016 | | 2015 | | 2014 | | 2018 | | 2017 | | 2016 |
| (Gain) loss on remeasurement of monetary assets and liabilities, net | | $ | (55 | ) | | $ | 14 |
| | $ | (26 | ) | | $ | (46 | ) | | $ | 30 |
| | $ | (55 | ) |
| Loss released from accumulated other comprehensive loss | | 1 |
| | 3 |
| | 2 |
| | — |
| | — |
| | 1 |
|
| Loss recognized on balance sheet remeasurement currency exchange contracts, net | | 52 |
| | 10 |
| | 17 |
| |
| Currency (gains) losses, net | | $ | (2 | ) | | $ | 27 |
| | $ | (7 | ) | |
| Loss (gain) recognized on balance sheet remeasurement currency exchange contracts, net | | | 47 |
| | (35 | ) | | 52 |
|
| Currency losses (gains), net | | | $ | 1 |
| | $ | (5 | ) | | $ | (2 | ) |
The following currency (losses) gainslosses are included in Accumulated"Accumulated other comprehensive loss, (“AOCI”)net of tax" and “Noncontrolling interests” in the accompanying consolidated balance sheets (in millions).
| | | | | Year Ended March 31, | | Year Ended March 31, |
| | | 2016 | | 2015 | | 2014 | | 2018 | | 2017 | | 2016 |
| Cumulative currency translation adjustment — beginning of period | | $ | (214 | ) | | $ | 90 |
| | $ | (30 | ) | | $ | (256 | ) | | $ | (197 | ) | | $ | (214 | ) |
| Effect of changes in exchange rates | | 17 |
| | (304 | ) | | 120 |
| | 191 |
| | (75 | ) | | 17 |
|
| Sale of investment in foreign entities (A) | | | — |
| | 16 |
| | — |
|
| Cumulative currency translation adjustment — end of period | | $ | (197 | ) | | $ | (214 | ) | | $ | 90 |
| | $ | (65 | ) | | $ | (256 | ) | | $ | (197 | ) |
_________________________
| |
| (A) | We reclassified $16 million of cumulative currency losses from AOCI to "(Gain) loss on sale of a business, net" during the year-ended March 31, 2017 due to the sale of our equity interest in Aluminium Company of Malaysia Berhad (ALCOM). |
Novelis Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
15.14. FINANCIAL INSTRUMENTS AND COMMODITY CONTRACTS
The following tables summarize the gross fair values of our financial instruments and commodity contracts as of March 31, 20162018 and 20152017 (in millions):
| | | | | March 31, 2016 | | March 31, 2018 |
| | | Assets | | Liabilities | | Net Fair Value | | Assets | | Liabilities | | Net Fair Value |
| | | Current | | Noncurrent(A) | | Current | | Noncurrent(A) | | Assets/(Liabilities) | | Current | | Noncurrent(A) | | Current | | Noncurrent(A) | | Assets/(Liabilities) |
| Derivatives designated as hedging instruments: | | | | | | | | | | | | | | | | | | | | |
| Cash flow hedges | | | | | | | | | | | | | | | | | | | | |
| Aluminum contracts | | $ | 10 |
| | $ | — |
| | $ | (2 | ) | | $ | — |
| | $ | 8 |
| | $ | 63 |
| | $ | 1 |
| | $ | (1 | ) | | $ | — |
| | $ | 63 |
|
| Currency exchange contracts | | 15 |
| | 5 |
| | (3 | ) | | (5 | ) | | 12 |
| | 5 |
| | — |
| | (7 | ) | | — |
| | (2 | ) |
| Energy contracts | | — |
| | — |
| | (4 | ) | | — |
| | (4 | ) | | — |
| | 1 |
| | (2 | ) | | (7 | ) | | (8 | ) |
| Interest rate swaps | | — |
| | — |
| | — |
| | (1 | ) | | (1 | ) | |
| Net Investment hedges | | | | | | | | | | | |
| Currency exchange contracts | | — |
| | — |
| | (1 | ) | | — |
| | (1 | ) | |
| Total derivatives designated as hedging instruments | | 25 |
| | 5 |
| | (10 | ) | | (6 | ) | | 14 |
| | 68 |
| | 2 |
| | (10 | ) | | (7 | ) | | 53 |
|
| Derivatives not designated as hedging instruments | | | | | | | | | | | | | | | | | | | | |
| Aluminum contracts | | 24 |
| | — |
| | (26 | ) | | — |
| | (2 | ) | | 75 |
| | — |
| | (64 | ) | | — |
| | 11 |
|
| Currency exchange contracts | | 39 |
| | — |
| | (39 | ) | | (1 | ) | | (1 | ) | | 15 |
| | — |
| | (32 | ) | | (1 | ) | | (18 | ) |
| Energy contracts | | — |
| | 1 |
| | (10 | ) | | — |
| | (9 | ) | | 1 |
| | — |
| | — |
| | — |
| | 1 |
|
| Total derivatives not designated as hedging instruments | | 63 |
| | 1 |
| | (75 | ) | | (1 | ) | | (12 | ) | | 91 |
| | — |
| | (96 | ) | | (1 | ) | | (6 | ) |
| Total derivative fair value | | $ | 88 |
| | $ | 6 |
| | $ | (85 | ) | | $ | (7 | ) | | $ | 2 |
| | $ | 159 |
| | $ | 2 |
| | $ | (106 | ) | | $ | (8 | ) | | $ | 47 |
|
| | | | | March 31, 2015 | | March 31, 2017 |
| | | Assets | | Liabilities | | Net Fair Value | | Assets | | Liabilities | | Net Fair Value |
| | | Current | | Noncurrent(A) | | Current | | Noncurrent(A) | | Assets/(Liabilities) | | Current | | Noncurrent(A) | | Current | | Noncurrent(A) | | Assets/(Liabilities) |
| Derivatives designated as hedging instruments: | | | | | | | | | | | | | | | | | | | | |
| Cash flow hedges | | | | | | | | | | | | | | | | | | | | |
| Aluminum contracts | | $ | 15 |
| | $ | — |
| | $ | (5 | ) | | $ | — |
| | $ | 10 |
| | $ | — |
| | $ | — |
| | $ | (69 | ) | | $ | — |
| | $ | (69 | ) |
| Currency exchange contracts | | 4 |
| | — |
| | (42 | ) | | (15 | ) | | (53 | ) | | 26 |
| | 1 |
| | (1 | ) | | (3 | ) | | 23 |
|
| Energy contracts | | — |
| | — |
| | (6 | ) | | (2 | ) | | (8 | ) | | 1 |
| | — |
| | — |
| | (9 | ) | | (8 | ) |
| Interest rate swaps | | — |
| | — |
| | (1 | ) | | — |
| | (1 | ) | |
| Net Investment hedges | | | | | | | | | | | |
| Currency exchange contracts | | 5 |
| | — |
| | — |
| | — |
| | 5 |
| |
| Total derivatives designated as hedging instruments | | 24 |
| | — |
| | (54 | ) | | (17 | ) | | (47 | ) | | 27 |
| | 1 |
| | (70 | ) | | (12 | ) | | (54 | ) |
| Derivatives not designated as hedging instruments | | | | | | | | | | | | | | | | | | | | |
| Aluminum contracts | | 24 |
| | — |
| | (26 | ) | | — |
| | (2 | ) | | 57 |
| | 1 |
| | (68 | ) | | (1 | ) | | (11 | ) |
| Currency exchange contracts | | 26 |
| | — |
| | (54 | ) | | — |
| | (28 | ) | | 29 |
| | — |
| | (13 | ) | | — |
| | 16 |
|
| Energy contracts | | 3 |
| | — |
| | (15 | ) | | (7 | ) | | (19 | ) | |
| Total derivatives not designated as hedging instruments | | 53 |
| | — |
| | (95 | ) | | (7 | ) | | (49 | ) | | 86 |
| | 1 |
| | (81 | ) | | (1 | ) | | 5 |
|
| Total derivative fair value | | $ | 77 |
| | $ | — |
| | $ | (149 | ) | | $ | (24 | ) | | $ | (96 | ) | | $ | 113 |
| | $ | 2 |
| | $ | (151 | ) | | $ | (13 | ) | | $ | (49 | ) |
Novelis Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
_________________________
| |
| (A) | The noncurrent portions of derivative assets and liabilities are included in “Other long-term assets-third parties” and in “Other long-term liabilities”, respectively, in the accompanying consolidated balance sheets. |
Novelis Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Aluminum
We use derivative instruments to preserve our conversion margins and manage the timing differences associated with metal price lag. We use over-the-counter derivatives indexed to the London Metals Exchange (LME) (referred to as our "aluminum derivative forward contracts") to reduce our exposure to fluctuating metal prices associated with the period of time between the pricing of our purchases of inventory and the pricing of the sale of that inventory to our customers, which is known as "metal price lag." We also purchase forward LME aluminum contracts simultaneously with our sales contracts with customers that contain fixed metal prices. These LME aluminum forward contracts directly hedge the economic risk of future metal price fluctuations to better match the selling price of the metal with the purchase price of the metal. The volatility in local market premiums also results in metal price lag, although we do not have derivative contracts associated with local market premiums as these are not prevalent in the market.lag.
Price risk exposure arises from commitments to sell aluminum in future periods at fixed prices. We identify and designate certain LME aluminum forward contracts as fair value hedges of the metal price risk associated with fixed price sales commitments that qualify as firm commitments. Such exposures doWe did not extend beyond two years in length. We had less than 1 kt and 2 kt ofhave any outstanding aluminum forward purchase contracts designated as fair value hedges as of March 31, 20162018 and 2015, respectively. One kilotonne (kt) is 1,000 metric tonnes.March 31, 2017.
The following table summarizes the amount of gain (loss) recognized on fair value hedges of metal price risk (in millions): |
| | | | | | | | |
| | | Amount of Gain (Loss) Recognized on Changes in Fair Value |
| | | Year Ended March 31, |
| | | 2016 | | 2015 |
| Fair Value Hedges of Metal Price Risk | | | | |
| Derivative contracts | | $ | (2 | ) | | $ | — |
|
| Designated hedged items | | 2 |
| | — |
|
| Net ineffectiveness (A) | | $ | — |
| | $ | — |
|
| |
(A) | Effective portion is recorded in "Net sales" and net ineffectiveness in "Other (income) expense, net". There was no amount excluded from the assessment of hedge effectiveness related to Fair Value Hedges. |
Price risk arises due to fluctuating aluminum prices between the time the sales order is committed and the time the order is shipped. We identify and designate certain LME aluminum forward purchase contracts as cash flow hedges of the metal price risk associated with our future metal purchases that vary based on changes in the price of aluminum. Such exposures doWe did not extend beyond two years in length. We had 1 kt ofhave any outstanding aluminum forward purchase contracts designated as cash flow hedges as of March 31, 20162018 and 2015.March 31, 2017.
Price risk exposure arises due to the timing lag between the LME based pricing of raw material metalaluminum purchases and the LME based pricing of finished product sales. We identify and designate certain LME aluminum forward sales contracts as cash flow hedges of the metal price risk associated with our future metal sales that vary based on changes in the price of aluminum. Generally, such exposures do not extend beyond two years in length. We had 301 kt and 285 kt of outstanding aluminum forward sales contracts designated as cash flow hedges as of March 31, 2016 and 2015, respectively.
The remaining aluminum derivative contracts are not designated as accounting hedges. As of March 31, 2016 and 2015, we had 76 kt and 36 kt, respectively, of outstanding aluminum sales contracts not designated as hedges. The average duration of undesignated contracts is less than six monthsone year.
Novelis Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following table summarizes our notional amount (in kt).
|
| | | | | | |
| | | March 31, |
| | | 2016 | | 2015 |
| Hedge Type | | | | |
| Purchase (Sale) | | | | |
| Cash flow purchases | | 1 |
| | 1 |
|
| Cash flow sales | | (301 | ) | | (285 | ) |
| Fair value | | — |
| | 2 |
|
| Not designated | | (76 | ) | | (36 | ) |
| Total, net | | (376 | ) | | (318 | ) |
|
| | | | | | |
| | | March 31, |
| | | 2018 | | 2017 |
| Hedge type | | | | |
| Purchase (sale) | | | | |
| Cash flow sales | | (423 | ) | | (391 | ) |
| Not designated | | (74 | ) | | (89 | ) |
| Total, net | | (497 | ) | | (480 | ) |
Foreign Currency
We use foreign exchange forward contracts, cross-currency swaps and options to manage our exposure to changes in exchange rates. These exposures arise from recorded assets and liabilities, firm commitments and forecasted cash flows denominated in currencies other than the functional currency of certain operations.
We use foreign currency contracts to hedge expected future foreign currency transactions, which include capital expenditures. These contracts cover the same periods as known or expected exposures. We had total notional amounts of $601499 million and $590465 million in outstanding foreign currency forwards designated as cash flow hedges as of March 31, 20162018 and 2015,2017, respectively.
We use foreign currency contracts to hedge our foreign currency exposure to our net investment in foreign subsidiaries. We had $36 million and $28 million ofdid not have any outstanding foreign currency forwards designated as net investment hedges as of March 31, 20162018 and March 31, 2015, respectively.2017.
As of March 31, 20162018 and 2015,2017, we had outstanding foreign currency exchange contracts with a total notional amount of $6361,024 million and $868683 million, respectively, to primarily hedge balance sheet remeasurement risk, which were not designated as hedges. Contracts representing the majority of this notional amount will mature during the first quarter of fiscal 20172019 and offset the remeasurement impact.
Novelis Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Energy
We ownowned an interest in an electricity swap that maturesmatured January 5, 2017 which we formerly designated as a cash flow hedge of our exposure to fluctuating electricity prices. As of March 31, 2011, due to significant credit deterioration of our counterparty, we discontinued hedge accounting for this electricity swap, even though the counterparty's credit has subsequently improved. Less than 1 million ofswap. We did not have any outstanding notional megawatt hours remained outstandingremaining as of March 31, 2016, and the fair value of this swap was a liability of $9 million as of March 31, 2016. As of March 31, 2015, the fair value of this electricity swap was a liability of $16 million.2017 or March 31, 2018.
On December 31, 2015, we entered into an agreement to extend the existing electricity swap contract for an additional five years, effective January 6, 2017 and maturing on January 5, 2022. As of March 31, 2016,2018 and 2017, 1 million of notional megawatt hours was outstanding and the fair value of this swap was an asseta liability of $1 million.$7 million and $9 million, respectively. The electricity swap was not designated as a cash flow hedge in the first quarter of March 31, 2016.fiscal year 2017.
We use natural gas forward purchase contracts to manage our exposure to fluctuating energy prices in North America. We had 5a notional of 20 million MMBTUs MMBTU designated as cash flow hedges as of March 31, 2016,2018, and the fair value was a liability of $4$1 million. There was a notional of 6 million. There were 7 million MMBTUs MMBTU of natural gas forward purchase contracts designated as cash flow hedges as of March 31, 20152017 and the fair value was a liabilityan asset of $8$1 million. As of March 31, 20162018 and 2015,2017, we had notionals of less than 1 million MMBTUs and 2 million MMBTUs, respectively,MMBTU of natural gas forward purchase contracts that were not designated as hedges. The fair value of forward contracts not designated as hedges as of March 31, 20162018 and 2015 was2017 were both a liability of less than $1 million and a liability of $3 million, respectively, for the forward purchase contracts not designated as hedges.million. The average duration of undesignated contracts is less than two years. in length. One MMBTU is the equivalent of one decatherm, or one million British Thermal Units.
We use diesel fuel forward purchase contracts to manage our exposure to fluctuating fuel prices in North America, which arewere not designated as hedges as of March 31, 2016. We2018. As of March 31, 2018 and 2017, we had 45 million gallons and 8 million gallons, respectively, of diesel fuel forward purchase contracts outstandingoutstanding. The fair value as of March 31, 2016,2018 was an asset of $2 million, and the fair valueas of March 31, 2017 was a liability of less than $1 million. The average duration of undesignated contracts is less than one year.two years in length.
Novelis Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Interest Rate
As of March 31, 20162018, we swapped $115$28 million (KRW 13330 billion) floating rate loans to a weighted average fixed rate of 2.92%3.35%. All swaps expire concurrent with the maturity of the related loans. As of March 31, 20162018 and 2015, $1152017, $28 million (KRW 13330 billion) and $78$119 million (KRW 86133 billion), respectively, were designated as cash flow hedges, respectively.hedges.
Gain (Loss) Recognition
The following table summarizes the gains (losses) associated with the change in fair value of derivative instruments not designated as hedges and the ineffectiveness of designated derivatives recognized in “Other expense (income) expense,, net” (in millions). Gains (losses) recognized in other line items in the consolidated statement of operations are separately disclosed within this footnote.
|
| | | | | | | | | | | | |
| | | Year Ended March 31, |
| | | 2016 | | 2015 | | 2014 |
| Derivative instruments not designated as hedges | | | | | | |
| Aluminum contracts | | $ | 47 |
| | $ | (31 | ) | | $ | (4 | ) |
| Currency exchange contracts | | (60 | ) | | (5 | ) | | (15 | ) |
| Energy contracts (A) | | 3 |
| | 2 |
| | 14 |
|
| Loss recognized in "Other (income) expense, net" | | (10 | ) | | (34 | ) | | (5 | ) |
| Derivative instruments designated as hedges | | | | | | |
| Gain recognized in "Other (income) expense, net" (B) | | 17 |
| | 19 |
| | 38 |
|
| Total gain (loss) recognized in "Other (income) expense, net" | | $ | 7 |
| | $ | (15 | ) | | $ | 33 |
|
| Balance sheet remeasurement currency exchange contract losses | | $ | (53 | ) | | $ | (13 | ) | | $ | (19 | ) |
| Realized gains (losses), net (C) | | 64 |
| | (2 | ) | | 62 |
|
| Unrealized losses on other derivative instruments, net | | (4 | ) | | — |
| | (10 | ) |
| Total gain (loss) recognized in "Other (income) expense, net" | | $ | 7 |
| | $ | (15 | ) | | $ | 33 |
|
|
| | | | | | | | | | | | |
| | | Year Ended March 31, |
| | | 2018 | | 2017 | | 2016 |
| Derivative instruments not designated as hedges | | | | | | |
| Aluminum contracts | | $ | 10 |
| | $ | (44 | ) | | $ | 47 |
|
| Currency exchange contracts | | (57 | ) | | 40 |
| | (60 | ) |
| Energy contracts (A) | | 7 |
| | 8 |
| | 3 |
|
| (Loss) gain recognized in "Other expense (income), net" | | (40 | ) | | 4 |
| | (10 | ) |
| Derivative instruments designated as hedges | | | | | | |
| (Loss) gain recognized in "Other expense (income), net" (B) | | (7 | ) | | (25 | ) | | 17 |
|
| Total (loss) gain recognized in "Other expense (income), net" | | $ | (47 | ) | | $ | (21 | ) | | $ | 7 |
|
| Balance sheet remeasurement currency exchange contract (losses) gains | | $ | (47 | ) | | $ | 35 |
| | $ | (53 | ) |
| Realized (losses) gains, net | | (20 | ) | | (61 | ) | | 64 |
|
| Unrealized gains (losses) on other derivative instruments, net | | 20 |
| | 5 |
| | (4 | ) |
| Total (loss) gain recognized in "Other expense (income), net" | | $ | (47 | ) | | $ | (21 | ) | | $ | 7 |
|
Novelis Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
_________________________
| |
| (A) | Includes amounts related to de-designated electricity swap and natural gas and diesel swaps not designated as hedges. |
| |
| (B) | Amount includes: forward market premium/discount excluded from hedging relationship and ineffectiveness on designated aluminum and foreign currency capex contracts; releases to income from AOCI on balance sheet remeasurement contracts; and ineffectiveness of fair value hedges involving aluminum derivatives. |
| |
(C) | During the year ended March 31, 2016, the level of undesignated aluminum derivatives was higher due to the recent volatility in the local market premium component of our net selling prices, forward market premium/discount excluded from hedging relationship and ineffectiveness on designated aluminum and foreign currency capex contracts. |
Novelis Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following table summarizes the impact on AOCI and earnings of derivative instruments designated as cash flow and net investment hedges (in millions). Within the next twelve months, we expect to reclassify $864 million of gains from “AOCI”AOCI to earnings, before taxes.
| | | | | Amount of Gain (Loss) Recognized in OCI (Effective Portion) | | Amount of Gain (Loss) Recognized in “Other (Income) Expense, net” (Ineffective and Excluded Portion) | | Amount of Gain (Loss) Recognized in OCI (Effective Portion) | | Amount of Gain (Loss) Recognized in “Other (Income) Expense, net” (Ineffective and Excluded Portion) |
| | | Year Ended March 31, | | Year Ended March 31, | | Year Ended March 31, | | Year Ended March 31, |
| | | 2016 | | 2015 | | 2014 | | 2016 | | 2015 | | 2014 | | 2018 | | 2017 | | 2016 | | 2018 | | 2017 | | 2016 |
| Cash flow hedging derivatives | | | | | | | | | | | | | | | | | | | | | | | | |
| Aluminum contracts | | $ | 84 |
| | $ | (26 | ) | | $ | 35 |
| | $ | 17 |
| | $ | 24 |
| | $ | 39 |
| | $ | 35 |
| | $ | (137 | ) | | $ | 84 |
| | $ | (9 | ) | | $ | (27 | ) | | $ | 17 |
|
| Currency exchange contracts | | (7 | ) | | (44 | ) | | (16 | ) | | 1 |
| | (2 | ) | | 1 |
| | (5 | ) | | 48 |
| | (7 | ) | | 1 |
| | 2 |
| | 1 |
|
| Energy contracts | | (5 | ) | | (12 | ) | | 1 |
| | (1 | ) | | — |
| | — |
| | (4 | ) | | (7 | ) | | (5 | ) | | 1 |
| | (1 | ) | | (1 | ) |
| Interest Rate Swaps | | (1 | ) | | (1 | ) | | — |
| | — |
| | — |
| | — |
| |
| Interest rate swaps | | | — |
| | — |
| | (1 | ) | | — |
| | — |
| | — |
|
| Total cash flow hedging derivatives | | 71 |
| | (83 | ) | | 20 |
| | 17 |
| | 22 |
| | 40 |
| | 26 |
| | (96 | ) | | 71 |
| | (7 | ) | | (26 | ) | | 17 |
|
| Net Investment derivatives | | | | | | | | | | | | | |
| Net investment derivatives | | | | | | | | | | | | | |
| Currency exchange contracts | | (2 | ) | | 11 |
| | (3 | ) | | — |
| | — |
| | — |
| | (17 | ) | | — |
| | (2 | ) | | — |
| | — |
| | — |
|
| Total | | $ | 69 |
| | $ | (72 | ) | | $ | 17 |
| | $ | 17 |
| | $ | 22 |
| | $ | 40 |
| | $ | 9 |
| | $ | (96 | ) | | $ | 69 |
| | $ | (7 | ) | | $ | (26 | ) | | $ | 17 |
|
Novelis Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Gain (Loss) Reclassification
| | | | | Amount of Gain (Loss) Reclassified from AOCI into Income/(Expense) (Effective Portion) Year Ended March 31, | | Location of Gain (Loss) Reclassified from AOCI into Earnings | | Amount of Gain (Loss) Reclassified from AOCI into Income/(Expense) (Effective Portion) Year Ended March 31, | | Location of Gain (Loss) Reclassified from AOCI into Earnings |
| Cash flow hedging derivatives | | 2016 | | 2015 | | 2014 | | | | 2018 | | 2017 | | 2016 | | |
| Energy contracts (A) | | $ | (5 | ) | | $ | (5 | ) | | $ | (5 | ) | | Other (income) expense, net | | $ | — |
| | $ | (4 | ) | | $ | (5 | ) | | Other expense (income), net |
| Energy contracts (C) | | (10 | ) | | — |
| | — |
| | Cost of goods sold (B) | | (3 | ) | | (4 | ) | | (10 | ) | | Cost of goods sold (B) |
| Aluminum contracts | | 83 |
| | (40 | ) | | 53 |
| | Cost of goods sold (B) | | (78 | ) | | (55 | ) | | 83 |
| | Cost of goods sold (B) |
| Aluminum contracts | | — |
| | — |
| | 7 |
| | Net sales | | (22 | ) | | (3 | ) | | — |
| | Net sales |
| Currency exchange contracts | | (44 | ) | | (14 | ) | | (14 | ) | | Cost of goods sold (B) | | 14 |
| | 18 |
| | (44 | ) | | Cost of goods sold (B) |
| Currency exchange contracts | | (4 | ) | | (1 | ) | | (1 | ) | | Selling, general and administrative expenses | | 1 |
| | 2 |
| | (4 | ) | | Selling, general and administrative expenses |
| Currency exchange contracts | | (9 | ) | | 18 |
| | 3 |
| | Net sales | | 7 |
| | 7 |
| | (9 | ) | | Net sales |
| Currency exchange contracts | | (1 | ) | | (3 | ) | | (2 | ) | | Other (income) expense, net | | — |
| | — |
| | (1 | ) | | Other expense (income), net |
| Currency exchange contracts | | — |
| | 7 |
| | — |
| | Gain on assets held for sale, net | | (1 | ) | | (1 | ) | | (1 | ) | | Depreciation and amortization |
| Currency exchange contracts | | (1 | ) | | (1 | ) | | — |
| | Depreciation and amortization | |
| Interest rate swaps | | (1 | ) | | — |
| | — |
| | Interest expense | | — |
| | — |
| | (1 | ) | | Interest expense |
| Total | | 8 |
| | (39 | ) | | 41 |
| | Income (loss) before income taxes | | (82 | ) | | (40 | ) | | 8 |
| | (Loss) income before income taxes |
| | | (19 | ) | | 8 |
| | (16 | ) | | Income tax (provision) benefit | | 24 |
| | 12 |
| | (19 | ) | | Income tax benefit (provision) |
| | | $ | (11 | ) | | $ | (31 | ) | | $ | 25 |
| | Net income (loss) | | $ | (58 | ) | | $ | (28 | ) | | $ | (11 | ) | | Net loss |
_________________________
| |
| (A) | Includes amounts related to de-designated electricity swap. AOCI related to this swap iswas amortized to income over the remaining term of the hedged item. |
| |
| (B) | "Cost of goods sold" is exclusive of depreciation and amortization. |
| |
| (C) | Includes amounts related to electricity, natural gas, and diesel swaps. |
Novelis Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following table summarizes the location and amount of gain (loss) that was reclassified from accumulated other comprehensive income into earnings and the amount excluded from the assessment of effectiveness for the three months ended March 31, 2018. |
| | | | | | | | | | | | | | | | | |
| | Net Sales | | Cost of Goods Sold | | Selling, General and Administrative Expenses | | Depreciation and Amortization | | Interest Expense | | Other Expense (Income), Net |
| Gain (loss) on cash flow hedging relationships: | | | | | | | | | | | |
| Aluminum commodity contracts: | | | | | | | | | | | |
| Amount of loss reclassified from AOCI into income | (22 | ) | | — |
| | — |
| | — |
| | — |
| | — |
|
| Energy commodity contracts: | | | | | | | | | | | |
| Amount of loss reclassified from AOCI into income | — |
| | (1 | ) | | — |
| | — |
| | — |
| | — |
|
| Foreign exchange contracts: | | | | | | | | | | | |
| Amount of gain reclassified from AOCI into income | 4 |
| | 3 |
| | — |
| | — |
| | — |
| | — |
|
Novelis Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
16.15. ACCUMULATED OTHER COMPREHENSIVE LOSS
The following table summarizes the change in the components of accumulated"Accumulated other comprehensive loss, net of taxtax" and excluding "Noncontrolling interests", for the periods presented (in millions).
| | | | | Currency Translation | | (A) Cash Flow Hedges | | (B) Postretirement Benefit Plans | | Total | | Currency Translation | | (B) Cash Flow Hedges | | (C) Postretirement Benefit Plans | | Total |
| Balance as of March 31, 2013 | | $ | (33 | ) | | $ | (2 | ) | | $ | (233 | ) | | $ | (268 | ) | |
| Other comprehensive income before reclassifications | | 122 |
| | 7 |
| | 64 |
| | 193 |
| |
| Amounts reclassified from AOCI, net | | — |
| | (25 | ) | | 9 |
| | (16 | ) | |
| Net current-period other comprehensive income (loss) | | 122 |
| | (18 | ) | | 73 |
| | 177 |
| |
| Balance as of March 31, 2014 | | 89 |
| | (20 | ) | | (160 | ) | | (91 | ) | |
| Other comprehensive loss before reclassifications | | (302 | ) | | (74 | ) | | (118 | ) | | (494 | ) | |
| Amounts reclassified from AOCI, net | | — |
| | 31 |
| | (7 | ) | | 24 |
| |
| Net current-period other comprehensive loss | | (302 | ) | | (43 | ) | | (125 | ) | | (470 | ) | |
| Balance as of March 31, 2015 | | (213 | ) | | (63 | ) | | (285 | ) | | (561 | ) | | $ | (213 | ) | | $ | (63 | ) | | $ | (285 | ) | | $ | (561 | ) |
| Other comprehensive income (loss) before reclassifications | | 17 |
| | 41 |
| | (15 | ) | | 43 |
| | 17 |
| | 41 |
| | (15 | ) | | 43 |
|
| Amounts reclassified from AOCI, net | | — |
| | 11 |
| | 7 |
| | 18 |
| | — |
| | 11 |
| | 7 |
| | 18 |
|
| Net current-period other comprehensive income (loss) | | 17 |
| | 52 |
| | (8 | ) | | 61 |
| | 17 |
| | 52 |
| | (8 | ) | | 61 |
|
| Balance as of March 31, 2016 | | $ | (196 | ) | | $ | (11 | ) | | $ | (293 | ) | | $ | (500 | ) | | (196 | ) | | (11 | ) | | (293 | ) | | (500 | ) |
| Other comprehensive (loss) income before reclassifications | | | (76 | ) | | (63 | ) | | 22 |
| | (117 | ) |
| Amounts reclassified from AOCI, net (A) | | | 16 |
| | 28 |
| | 28 |
| | 72 |
|
| Net current-period other comprehensive (loss) income | | | (60 | ) | | (35 | ) | | 50 |
| | (45 | ) |
| Balance as of March 31, 2017 | | | (256 | ) | | (46 | ) | | (243 | ) | | (545 | ) |
| Other comprehensive income before reclassifications | | | 191 |
| | 19 |
| | 29 |
| | 239 |
|
| Amounts reclassified from AOCI, net | | | — |
| | 58 |
| | (13 | ) | | 45 |
|
| Net current-period other comprehensive income | | | 191 |
| | 77 |
| | 16 |
| | 284 |
|
| Balance as of March 31, 2018 | | | $ | (65 | ) | | $ | 31 |
| | $ | (227 | ) | | $ | (261 | ) |
_________________________
(A) The $16 million in currency translation reclassified from AOCI relates to CTA that was written off as part of our sale of the Aluminium Company of Malaysia Berhad (ALCOM) business. Refer to Note 17 — Other Expense (Income) for additional information.
| |
(A)(B) | For additional information on our cash flow hedges see Note 15 -14 — Financial Instruments and Commodity Contracts. |
| |
(B)(C) | For additional information on our postretirement benefit plans see Note 13 -12 — Postretirement Benefit Plans. |
Novelis Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
17.16. FAIR VALUE MEASUREMENTS
We record certain assets and liabilities, primarily derivative instruments, on our consolidated balance sheets at fair value. We also disclose the fair values of certain financial instruments, including debt and loans receivable, which are not recorded at fair value. Our objective in measuring fair value is to estimate an exit price in an orderly transaction between market participants on the measurement date. We consider factors such as liquidity, bid/offer spreads and nonperformance risk, including our own nonperformance risk, in measuring fair value. We use observable market inputs wherever possible. To the extent observable market inputs are not available, our fair value measurements will reflect the assumptions we used. We grade the level of the inputs and assumptions used according to a three-tier hierarchy:
Level 1 — Unadjusted quoted prices in active markets for identical, unrestricted assets or liabilities we have the ability to access at the measurement date.
Level 2 — Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.
Level 3 — Unobservable inputs for which there is little or no market data, which require us to develop our own assumptions based on the best information available as what market participants would use in pricing the asset or liability.
The following section describes the valuation methodologies we used to measure our various financial instruments at fair value, including an indication of the level in the fair value hierarchy in which each instrument is generally classified.
Derivative Contracts
For certain derivative contracts with fair values based upon trades in liquid markets, such as aluminum, foreign exchange, natural gas and diesel fuel forward contracts and options, valuation model inputs can generally be verified and valuation techniques do not involve significant judgment. The fair values of such financial instruments are generally classified within Level 2 of the fair value hierarchy.
The majority of our derivative contracts are valued using industry-standard models with observable market inputs as their basis, such as time value, forward interest rates, volatility factors, and current (spot) and forward market prices. We generally classify these instruments within Level 2 of the valuation hierarchy. Such derivatives include interest rate swaps, cross-currency swaps, foreign currency contracts, aluminum derivative contracts, natural gas and diesel fuel forward contracts.
We classify derivative contracts that are valued based on models with significant unobservable market inputs as Level 3 of the valuation hierarchy. Our two electricity swaps, which are our only Level 3 derivative contracts, represent agreements to buy electricity at a fixed price at our Oswego, New York facility. Forward prices are not observable for this market, so we must make certain assumptions based on available information we believe to be relevant to market participants. We use observable forward prices for a geographically nearby market and adjust for 1) historical spreads between the cash prices of the two markets, and 2) historical spreads between retail and wholesale prices.
For the electricity swap maturingthat matured January 5, 2017, the average forward price at we did not have any outstanding notional megawatt hours remaining as of March 31, 2016, estimated using the method described above, was $41 per megawatt hour, which represented a $2 premium over forward prices in the nearby observable market. The actual rate from the most recent swap settlement was approximately $25 per megawatt hour. Each $1 per megawatt hour decline in price decreases the valuation of the electricity swap by less than $1 million.2017.
For the electricity swap maturing January 5, 2022, the average forward price at March 31, 2016,2018, estimated using the method described above, was $46$40 per megawatt hour, which represented aan approximately $3 premium over forward prices in the nearby observable market. The actual rate from the most recent swap settlement was approximately $25$35 per megawatt hour. Each $1 per megawatt hour decline in price decreases the valuation of the electricity swap by $1 million.
For Level 2 and 3 of the fair value hierarchy, where appropriate, valuations are adjusted for various factors such as liquidity, bid/offer spreads and credit considerations (nonperformance risk). We regularly monitor these factors along with significant market inputs and assumptions used in our fair value measurements and evaluate the level of the valuation input according to the fair value hierarchy. This may result in a transfer between levels in the hierarchy from period to period. As of March 31, 20162018 and March 31, 2015,2017, we did not have any Level 1 derivative contracts. No amounts were transferred between levels in the fair value hierarchy.
All of the Company's derivative instruments are carried at fair value in the statements of financial position prior to considering master netting agreements.
Novelis Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following table presents our derivative assets and liabilities which were measured and recognized at fair value on a recurring basis classified under the appropriate level of the fair value hierarchy as of March 31, 20162018 and March 31, 20152017 (in millions). The table below also discloses the net fair value of the derivative instruments after considering the impact of master netting agreements.
| | | | | March 31, | | March 31, |
| | | 2016 | | 2015 | | 2018 | | 2017 |
| | | Assets | | Liabilities | | Assets | | Liabilities | | Assets | | Liabilities | | Assets | | Liabilities |
| Level 2 instruments | | | | | | | | | | | | | | | | |
| Aluminum contracts | | $ | 34 |
| | $ | (28 | ) | | $ | 39 |
| | $ | (31 | ) | | $ | 139 |
| | $ | (65 | ) | | $ | 58 |
| | $ | (138 | ) |
| Currency exchange contracts | | 59 |
| | (49 | ) | | 35 |
| | (111 | ) | | 20 |
| | (40 | ) | | 56 |
| | (17 | ) |
| Energy contracts | | — |
| | (5 | ) | | 3 |
| | (14 | ) | | 2 |
| | (2 | ) | | 1 |
| | — |
|
| Interest rate swaps | | — |
| | (1 | ) | | — |
| | (1 | ) | |
| Total level 2 instruments | | 93 |
| | (83 | ) | | 77 |
| | (157 | ) | | 161 |
| | (107 | ) | | 115 |
| | (155 | ) |
| Level 3 instruments | | | | | | | | | | | | | | | | |
| Energy contracts | | 1 |
| | (9 | ) | | — |
| | (16 | ) | | — |
| | (7 | ) | | — |
| | (9 | ) |
| Total level 3 instruments | | 1 |
| | (9 | ) | | — |
| | (16 | ) | | — |
| | (7 | ) | | — |
| | (9 | ) |
| Total gross | | $ | 94 |
| | $ | (92 | ) | | $ | 77 |
| | $ | (173 | ) | | $ | 161 |
| | $ | (114 | ) | | $ | 115 |
| | $ | (164 | ) |
| Netting adjustment (A) | | $ | (31 | ) | | $ | 31 |
| | $ | (28 | ) | | $ | 28 |
| | $ | (57 | ) | | $ | 57 |
| | $ | (46 | ) | | $ | 46 |
|
| Total net | | $ | 63 |
| | $ | (61 | ) | | $ | 49 |
| | $ | (145 | ) | | $ | 104 |
| | $ | (57 | ) | | $ | 69 |
| | $ | (118 | ) |
(A) Amounts represent the impact of legally enforceable master netting agreements that allow the Company to settle positive and negative positions with the same counterparties._________________________
| |
| (A) | Amounts represent the impact of legally enforceable master netting agreements that allow the Company to settle positive and negative positions with the same counterparties. |
We recognized unrealized gains of $2$2 million for the year ended March 31, 20162018 related to Level 3 financial instrumentsinstrument that werewas still held as of March 31, 2016.2018. These unrealized gains were included in “Other expense (income) expense,, net.”
The following table presents a reconciliation of fair value activity for Level 3 derivative contracts (in millions).
| | | | Level 3 – Derivative Instruments (A) | Level 3 – Derivative Instruments (A) |
| Balance as of March 31, 2014 | $ | (19 | ) | |
| Unrealized gain included in earnings (B) | 10 |
| |
| Balance as of March 31, 2016 | | $ | (8 | ) |
| Unrealized/realized gain included in earnings (B) | | 11 |
|
| Unrealized/realized (loss) included in AOCI (C) | | (9 | ) |
| Settlements | (7 | ) | (3 | ) |
| Balance as of March 31, 2015 | $ | (16 | ) | |
| Balance as of March 31, 2017 | | $ | (9 | ) |
| Unrealized/realized gain included in earnings (B) | 9 |
| 5 |
|
| Settlements | (1 | ) | |
| Balance as of March 31, 2016 | $ | (8 | ) | |
| Settlements (B) | | (3 | ) |
| Balance as of March 31, 2018 | | $ | (7 | ) |
(A)Represents net derivative liabilities._________________________
(B)Included in “Other (income) expense, net.”
| |
| (A) | Represents net derivative liabilities. |
| |
| (B) | Included in "Other expense (income), net" |
| |
| (C) | Included in "Change in fair value of effective portion of cash flow hedges, net" |
Novelis Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Financial Instruments Not Recorded at Fair Value
The table below presents the estimated fair value of certain financial instruments not recorded at fair value on a recurring basis (in millions). The table excludes short-term financial assets and liabilities for which we believe carrying value approximates fair value. We value long-term receivables and long-term debt using Level 2 inputs. Valuations are based on either market and/or broker ask prices when available or on a standard credit adjusted discounted cash flow model using market observable inputs.
| | | | | March 31, | | March 31, |
| | | 2016 | | 2015 | | 2018 | | 2017 |
| | | Carrying Value | | Fair Value | | Carrying Value | | Fair Value | | Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
| Assets | | | | | | | | | | | | | | | | |
| Long-term receivables from related parties | | $ | 16 |
| | $ | 17 |
| | $ | 15 |
| | $ | 15 |
| | $ | 3 |
| | $ | 3 |
| | $ | 15 |
| | $ | 14 |
|
| Liabilities | | | | | | | | | | | | | | | | |
| Total debt — third parties (excluding short term borrowings) | | $ | 4,498 |
| | $ | 4,659 |
| | $ | 4,457 |
| | $ | 4,659 |
| | $ | 4,457 |
| | $ | 4,569 |
| | $ | 4,558 |
| | $ | 4,797 |
|
Novelis Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
18.17. OTHER EXPENSE (INCOME) EXPENSE
“Other expense (income) expense,, net” is comprised of the following (in millions).
| | | | | Year Ended March 31, | | Year Ended March 31, |
| | | 2016 | | 2015 | | 2014 | | 2018 | | 2017 | | 2016 |
| Foreign currency remeasurement (gains) losses, net (A) | | $ | (2 | ) | | $ | 27 |
| | $ | (7 | ) | |
| Loss on change in fair value of other unrealized derivative instruments, net (B) | | 4 |
| | — |
| | 10 |
| |
| (Gain) loss on change in fair value of other realized derivative instruments, net (B) | | (64 | ) | | 2 |
| | (62 | ) | |
| Currency losses (gains), net (A) | | | $ | 1 |
| | $ | (5 | ) | | $ | (2 | ) |
| Unrealized (gains) losses on change in fair value of derivative instruments, net (B) | | | (20 | ) | | (5 | ) | | 4 |
|
| Realized losses (gains) on change in fair value of derivative instruments, net (B) | | | 20 |
| | 61 |
| | (64 | ) |
| Loss on sale of assets, net | | 4 |
| | 5 |
| | 9 |
| | 7 |
| | 6 |
| | 4 |
|
| Loss on Brazilian tax litigation, net (C) | | 5 |
| | 7 |
| | 6 |
| | 3 |
| | 5 |
| | 5 |
|
| Interest income | | (13 | ) | | (7 | ) | | (6 | ) | | (9 | ) | | (11 | ) | | (13 | ) |
| Gain on business interruption insurance recovery (D) | | (10 | ) | | (19 | ) | | — |
| | — |
| | — |
| | (10 | ) |
| Other, net | | 8 |
| | 2 |
| | 9 |
| | 7 |
| | 17 |
| | 8 |
|
| Other (income) expense, net | | $ | (68 | ) | | $ | 17 |
| | $ | (41 | ) | |
| Other expense (income), net (E) | | | $ | 9 |
| | $ | 68 |
| | $ | (68 | ) |
_________________________
| |
| (A) | Includes “(Gain) loss recognized on balance sheet remeasurement currency exchange contracts, net.” |
| |
| (B) | See Note 15 -14 — Financial Instruments and Commodity Contracts for further details. |
| |
| (C) | See Note 20 –19 — Commitments and Contingencies – Brazil Tax and Legal Matters for further details. |
| |
| (D) | We experienced an outage at the hotmill in the Logana facility in North America due to an unexpected failure of a motor, which resulted in lost shipments and profits during the fourth quarter of fiscal 2015. A repaired motor was installed and operations at the hotmill resumed within approximately three weeks of the outage. WeAs a result, we recognized gains of $5 million, $5 million and $13$(10) million during the second quarteryear ended March 31, 2016. |
| |
| (E) | We have reclassified the "Loss on sale of fiscal 2016, first quartera business" for the year ended March 31, 2017 of fiscal 2016, and fourth quarter$27 million from "Other expense (income), net" to "(Gain) loss on sale of fiscal 2015, respectively, as settlements of the relateda business, interruption recovery claim were reached. The paymentnet" in the second quarterconsolidated statement of operations for presentation purposes. In fiscal 2016 represented the final settlement payment. Additionally, the fiscal year 2015 gain also includes an insurance settlement which2017, we sold our equity interest in Aluminium Company of Malaysia Berhad (ALCOM), a previously consolidated subsidiary. The sale resulted in a gainloss of $6$27 million related to lost shipments and profits resulting from an electrical short circuit impacting a hot mill motor at one of our facilities in our Europe segment in fiscal 2015.during the year ended March 31, 2017. |
Novelis Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
19.18. 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 our "Income before income taxes" (and after removing our "Equity in net loss of non-consolidated affiliates") are as follows (in millions).
| | | | | Year Ended March 31, | | Year Ended March 31, |
| | | 2016 | | 2015 | | 2014 | | 2018 | | 2017 | | 2016 |
| Domestic (Canada) | | $ | (313 | ) | | $ | (267 | ) | | $ | (294 | ) | | $ | (50 | ) | | $ | (286 | ) | | $ | (313 | ) |
| Foreign (all other countries) | | 324 |
| | 434 |
| | 421 |
| | 906 |
| | 491 |
| | 324 |
|
| Pre-tax income before equity in net loss of non-consolidated affiliates | | $ | 11 |
| | $ | 167 |
| | $ | 127 |
| | $ | 856 |
| | $ | 205 |
| | $ | 11 |
|
The components of the "Income tax provision" are as follows (in millions). | | | | | Year Ended March 31, | | Year Ended March 31, |
| | | 2016 | | 2015 | | 2014 | | 2018 | | 2017 | | 2016 |
| Current provision: | | | | | | | | | | | | |
| Domestic (Canada) | | $ | 5 |
| | $ | 4 |
| | $ | 12 |
| | $ | 4 |
| | $ | 8 |
| | $ | 5 |
|
| Foreign (all other countries) | | 134 |
| | 98 |
| | 128 |
| | 176 |
| | 137 |
| | 134 |
|
| Total current | | 139 |
| | 102 |
| | 140 |
| | 180 |
| | 145 |
| | 139 |
|
| Deferred provision (benefit): | | | | | | | | | | | | |
| Domestic (Canada) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Foreign (all other countries) | | (93 | ) | | (88 | ) | | (129 | ) | | 53 |
| | 6 |
| | (93 | ) |
| Total deferred | | (93 | ) | | (88 | ) | | (129 | ) | | 53 |
| | 6 |
| | (93 | ) |
| Income tax provision | | $ | 46 |
| | $ | 14 |
| | $ | 11 |
| | $ | 233 |
| | $ | 151 |
| | $ | 46 |
|
The reconciliation of the Canadian statutory tax rates to our effective tax rates are shown below (in millions, except percentages). | | | | | Year Ended March 31, | | Year Ended March 31, |
| | | 2016 | | 2015 | | 2014 | | 2018 | | 2017 | | 2016 |
| Pre-tax income before equity in net loss on non-consolidated affiliates | | $ | 11 |
| | $ | 167 |
| | $ | 127 |
| | $ | 856 |
| | $ | 205 |
| | $ | 11 |
|
| Canadian Statutory tax rate | | 25 | % | | 25 | % | | 25 | % | |
| Canadian statutory tax rate | | | 25 | % | | 25 | % | | 25 | % |
| Provision at the Canadian statutory rate | | $ | 3 |
| | $ | 42 |
| | $ | 32 |
| | $ | 214 |
| | $ | 51 |
| | $ | 3 |
|
| Increase (decrease) for taxes on income (loss) resulting from: | | | | | | | | | | | | |
| Exchange translation items | | 16 |
| | (22 | ) | | — |
| | 10 |
| | 9 |
| | 16 |
|
| Exchange remeasurement of deferred income taxes | | (8 | ) | | (31 | ) | | (20 | ) | | (3 | ) | | 8 |
| | (8 | ) |
| Change in valuation allowances | | 104 |
| | 95 |
| | 94 |
| | 22 |
| | 67 |
| | 104 |
|
| Tax credits and other allowances | | (22 | ) | | (22 | ) | | (38 | ) | |
| Tax credits | | | (22 | ) | | (14 | ) | | (22 | ) |
| Income items not subject to tax | | — |
| | 2 |
| | (6 | ) | | (5 | ) | | (3 | ) | | — |
|
| State tax benefit, net | | (10 | ) | | (7 | ) | | (7 | ) | |
| State tax expense, net | | | 4 |
| | 1 |
| | (10 | ) |
| Dividends not subject to tax | | (52 | ) | | (52 | ) | | (52 | ) | | — |
| | (23 | ) | | (52 | ) |
| Enacted tax rate changes | | 5 |
| | (1 | ) | | 3 |
| | (19 | ) | | 1 |
| | 5 |
|
| Tax rate differences on foreign earnings | | 4 |
| | 7 |
| | (4 | ) | | 23 |
| | 36 |
| | 4 |
|
| Uncertain tax positions | | 7 |
| | 10 |
| | 8 |
| | 7 |
| | 6 |
| | 7 |
|
| Prior year adjustments | | (2 | ) | | 2 |
| | (1 | ) | | 1 |
| | 4 |
| | (2 | ) |
| Income tax settlements | | — |
| | (6 | ) | | — |
| | 1 |
| | 6 |
| | — |
|
| Other — net | | 1 |
| | (3 | ) | | 2 |
| | — |
| | 2 |
| | 1 |
|
| Income tax provision | | $ | 46 |
| | $ | 14 |
| | $ | 11 |
| | $ | 233 |
| | $ | 151 |
| | $ | 46 |
|
| Effective tax rate | | 411 | % | | 8 | % | | 9 | % | | 27 | % | | 73 | % | | 411 | % |
Novelis Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the U.S. Tax Cuts and Jobs Act of 2017 (the "Act"). The Act makes broad and complex changes to the U.S. tax code that affects our fiscal year ended March 31, 2018, including, but not limited to, (1) reducing the U.S. federal corporate tax rate from 35% to 21% effective January 1, 2018 and (2) bonus depreciation that allows for full expensing of qualified property. Section 15 of the Internal Revenue Code stipulates that our fiscal year ending March 31, 2018 has a blended corporate tax rate of 31.55%, which is based on the applicable tax rates before and after the Tax Act and the number of days in the year. Also recorded in the fiscal year is a provisional income tax benefit of $19 million for the remeasurement of deferred tax asset and liabilities to reflect the anticipated rate at which the deferred items will be realized. The amounts are subject to change as the Company obtains information necessary to complete the calculations. The Company will continue to review the technical interpretations of the Tax Act and other applicable laws, monitor legislative changes, and review U.S. state guidance as it is issued. The Company expects to complete the analysis of the provisional items within the one-year measurement period during fiscal year ending March 31, 2019. The following information is needed to complete the accounting for the remeasurement of deferred tax assets and liabilities:
Determination of state conformity
Actual reversals of temporary differences based on tax return filing positions
Based on an initial assessment of the Act, the Company believes that most significant impact on the Company’s consolidated fiscal year 2018 financial statements is the remeasurement of deferred tax assets and liabilities. Other provisions of the Act did not have a material impact on the fiscal year 2018 consolidated financial statements.
Our effective tax rate differs from the Canadian statutory rate primarily due to the following factors: (1) pre-tax foreign currency gains or losses with no tax effect and the tax effect of U.S. dollar denominated currency gains or losses with no pre-tax effect, which is shown above as exchange translation items; (2) the remeasurement of deferred income taxes due to foreign currency changes, which is shown above as exchange remeasurement of deferred income taxes; (3) changes in valuation allowances; (4) non-taxable dividends;remeasurement of deferred taxes for recently enacted tax reform; and (5) income tax settlements; (6) differences between the Canadian statutory and foreign effectivestatutory tax rates applied to entities in different jurisdictions shown above as tax rate differences on foreign earnings; (7) tax credits in various jurisdictions; (8) state income tax benefit; and (9) increases or decreases in uncertain tax positions recorded under the provisions of ASC 740.earnings.
We continue to maintain valuation allowances in Canada and certain foreign jurisdictions primarily related to tax losses where we believe it is more likely than not that we will be unable to utilize those losses. The impact on our income tax provision of the change in these valuation allowances during the year ended March 31, 20162018 was an increase of $104$22 million.
We earn tax credits in a number of the jurisdictions in which we operate. Primarily comprised of empire zone credits in New York in the current year of $7 million, and foreign tax credits in the U.K. of $118 million. in the current year and empire zone credits in New York of $6 million. The impact on our income tax provision of these credits during the year ended March 31, 20162018 was a benefit of $22 million. However, legislation enacted in New York state on March 31, 2014 established a zero percent statutory income tax rate for manufacturers. As a result, the current year empire zone credits in New York are offset with a corresponding valuation allowance of $7$6 million.
In 2005, we entered into a tax sharing and disaffiliation agreement with Alcan 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 our spin-off from Alcan. 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 accrued prior to the spin-off and after the spin-off as well as transfer taxes resulting there from. 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 receive the benefits of favorable tax holidays in various jurisdictions, which resulted in a $104 million reduction to tax expense for the year ended March 31, 2016,2018, and phase out as of December 31, 2015.2020.
Deferred Income Taxes
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 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.
As of March 31, 2016, we elected to early adopt ASU 2015-17. The new standard requires that all deferred tax assets and liabilities, along with any related valuation allowance, be classified as noncurrent on the balance sheet. We applied the new standard prospectively to the Consolidated Balance Sheet as of March 31, 2016. The Consolidated Balance Sheet as of March 31, 2015 was not retrospectively adjusted.
Novelis Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Our deferred income tax assets and deferred income tax liabilities are as follows (in millions). | | | | | March 31, | | March 31, |
| | | 2016 | | 2015 | | 2018 | | 2017 |
| Deferred income tax assets: | | | | | | | | |
| Provisions not currently deductible for tax purposes | | $ | 396 |
| | $ | 366 |
| | $ | 323 |
| | $ | 418 |
|
| Tax losses/benefit carryforwards, net | | 741 |
| | 627 |
| | 767 |
| | 771 |
|
| Depreciation and amortization | | 41 |
| | 38 |
| | 46 |
| | 45 |
|
| Other assets | | (1 | ) | | 4 |
| | 6 |
| | 4 |
|
| Total deferred income tax assets | | 1,177 |
| | 1,035 |
| | 1,142 |
| | 1,238 |
|
| Less: valuation allowance | | (613 | ) | | (528 | ) | | (727 | ) | | (688 | ) |
| Net deferred income tax assets | | $ | 564 |
| | $ | 507 |
| | $ | 415 |
| | $ | 550 |
|
| Deferred income tax liabilities: | | | | | | | | |
| Depreciation and amortization | | $ | 457 |
| | $ | 477 |
| | $ | 384 |
| | $ | 442 |
|
| Inventory valuation reserves | | 64 |
| | 102 |
| | 83 |
| | 84 |
|
| Monetary exchange gains, net | | 15 |
| | 9 |
| | 12 |
| | 14 |
|
| Other liabilities | | 30 |
| | 26 |
| | 37 |
| | 24 |
|
| Total deferred income tax liabilities | | $ | 566 |
| | $ | 614 |
| | $ | 516 |
| | $ | 564 |
|
| Net deferred income tax liabilities | | $ | 2 |
| | $ | 107 |
| | $ | 101 |
| | $ | 14 |
|
ASC 740 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 be unable to realize a portion of our deferred tax assets and that valuation allowances of $613727 million and $528688 million were necessary as of March 31, 20162018 and 2015,2017, respectively.
It is reasonably possible that our estimates of future taxable income may change within the next 12 months, resulting in a change to the valuation allowance in one or more jurisdictions.
As of March 31, 2016,2018, we had net operating loss carryforwards of approximately $638627 million (tax effected) and tax credit carryforwards of $103140 million, which will be available to offset future taxable income and tax liabilities, respectively. The carryforwards will begin expiring in fiscal year 2019 with some amounts being carried forward indefinitely.2019. As of March 31, 20162018, valuation allowances of $468541 million, $88119 million and $57$67 million had been recorded against net operating loss carryforwards, tax credit carryforwards and other deferred tax assets, respectively, where it appeared more likely than not that such benefits will not be realized. The net operating loss carryforwards are predominantly in Canada, the U.S., Italy, Germany, Switzerland China and the U.K.
As of March 31, 2015,2017, we had net operating loss carryforwards of approximately $515655 million (tax effected) and tax credit carryforwards of $112116 million, which will be available to offset future taxable income and tax liabilities, respectively. The carryforwards will begin expiring in fiscal 20202017 with some amounts being carried forward indefinitely. As of March 31, 2015,2017, valuation allowances of $381531 million, $9998 million and $48$59 million had been recorded against net operating loss carryforwards, tax credit carryforwards and other deferred tax assets, respectively, where it appeared more likely than not that such benefits will not be realized. The net operating loss carryforwards are predominantly in Canada, the U.S., Italy, Germany, Switzerland, China and the U.K.
Although realization is not assured, management believes it is more likely than not that all the remaining net deferred tax assets will be realized. In the near term, the amount of deferred tax assets considered realizable could be reduced if we do not generate sufficient taxable income in certain jurisdictions.
As of March 31, 2016,2018, we had cumulative earnings of approximately $2.53 billion for which we had not provided Canadian income tax or withholding taxes because we consider them to be indefinitely reinvested. We acknowledge that we would need to accrue and pay taxes should we decide to repatriate cash and short term investments generated from earnings of our foreign subsidiaries that are considered indefinitely reinvested. Except for those jurisdictions where we have already distributed and paid taxes on the earnings, we have reinvested and expect to continue to reinvest undistributed earnings of foreign subsidiaries indefinitely. Cash and cash equivalents held by foreign subsidiaries that are indefinitely reinvested are used to cover expansion and short-term cash flow needs of such subsidiaries. The amounts considered indefinitely reinvested would be subject to possible Canadian taxation only if remitted as dividends. However, due to our full valuation allowance position of $538618 million in Canada, in excess of $443500 million of net operating loss carryforwards, exempt surpluses for Canadian tax purposes, $51 million of tax credits and other deferred tax assets of $67 million, a portion of the cumulative
Novelis Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Canadian tax purposes, and $47 million of tax credits in Canada, a portion of the cumulative earnings would not be taxed if distributed. Due to the complex structure of our international holdings, and the various methods available for repatriation, quantification of the deferred tax liability, if any, associated with these undistributed earnings is not practicable.
Tax Uncertainties
As of March 31, 20162018 and 2015,2017, the total amount of unrecognized benefits that, if recognized, would affect the effective income tax rate in future periods based on anticipated settlement dates is $3444 million and $3736 million, respectively.
Tax authorities continue to examine certain other of our tax filings for fiscal years 2005 through 2014.2017. As a result of further settlement of audits, judicial decisions, the filing of amended tax returns or the expiration of statutes of limitations, our reserves for unrecognized tax benefits, as well as reserves for interest and penalties, may decrease in the next 12 months by an amount up to approximately $1426 million. With few exceptions, tax returns for all jurisdictions for all tax years before 20032005 are no longer subject to examination by taxing authorities.
Our policy is to record interest and penalties related to unrecognized tax benefits in the income tax provision (benefit). As of March 31, 20162018, 20152017 and 2014,2016, we had $49 million, $5 million and $4 million accrued, respectively, for interest and penalties. For the year ended March 31, 20162018, we recognized $23 million expense related to accrued interest and penalties. For the years ended March 31, 20152017 and 20142016 we recognized a tax expense and benefit of $1 million and $1$2 million, respectively, related to reductionschanges in accrued interest and penalties.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in millions):
| | | | | Year Ended March 31, | | Year Ended March 31, |
| | | 2016 | | 2015 | | 2014 | | 2018 | | 2017 | | 2016 |
| Beginning balance | | $ | 37 |
| | $ | 39 |
| | $ | 30 |
| | $ | 36 |
| | $ | 34 |
| | $ | 37 |
|
| Additions based on tax positions related to the current period | | 6 |
| | 7 |
| | 7 |
| | 4 |
| | 5 |
| | 6 |
|
| Additions based on tax positions of prior years | | 3 |
| | 3 |
| | 1 |
| | 6 |
| | — |
| | 3 |
|
| Reductions based on tax positions of prior years | | (6 | ) | | (1 | ) | | — |
| | (7 | ) | | — |
| | (6 | ) |
| Settlements | | (10 | ) | | (3 | ) | | — |
| | — |
| | (1 | ) | | (10 | ) |
| Foreign exchange | | 4 |
| | (8 | ) | | 1 |
| | 5 |
| | (2 | ) | | 4 |
|
| Ending Balance | | $ | 34 |
| | $ | 37 |
| | $ | 39 |
| | $ | 44 |
| | $ | 36 |
| | $ | 34 |
|
Income Taxes Payable
Our consolidated balance sheets include income taxes payable (net) of $4238 million and $1444 million as of March 31, 20162018 and 2015,2017, respectively. Of these amounts, $1329 million and $1126 million are reflected in “Accrued expenses and other current liabilities” as of March 31, 20162018 and 2015,2017, respectively.
Novelis Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
20.19. COMMITMENTS AND CONTINGENCIES
We are party to, and may in the future be involved in, or subject to, disputes, claims and proceedings arising in the ordinary course of our business, including some we assert against others, such as environmental, health and safety, product liability, employee, tax, personal injury and other matters. We have established a liability with respect to contingencies for which a loss is probable and estimable. While the ultimate resolution of and liability and costs related to these matters cannot be determined with certainty, we do not believe any of these pending actions, individually or in the aggregate, will materially impact our operations or materially affect our financial condition or liquidity.
For certain matters in which the Company is involved for which a loss is reasonably possible, we are unable to estimate a loss. For certain other matters for which a loss is reasonably possible and the loss is estimable, we have estimated the aggregated range of loss as $0 to $70$110 million. This estimated aggregate range of reasonably possible losses is based upon currently available information. The Company’s estimates involve significant judgment, and therefore, the estimate will change from time to time and actual losses may differ from the current estimate. We review the status of, and estimated liability related to, pending claims and civil actions on a quarterly basis. The evaluation model includes all asserted and unasserted claims that can be reasonably identified including claims relating to our responsibility for compliance with environmental, health and safety laws and regulations in the jurisdictions in which we operate or formerly operated. The estimated costs in respect of such reported liabilities are not offset by amounts related to insurance or indemnification arrangements unless otherwise noted.
The following describes certain contingencies relating to our business, including those for which we assumed liability as a result of our spin-off from Alcan Inc.
Environmental Matters
We own and operate numerous manufacturing and other facilities in various countries around the world. Our operations are subject to environmental laws and regulations from various jurisdictions, which govern, among other things, air emissions, wastewater discharges, the handling, storage and disposal of hazardous substances and wastes, the remediation of contaminated sites, post-mining reclamation and restoration of natural resources, and employee health and safety. Future environmental regulations may impose stricter compliance requirements on the industries in which we operate. Additional equipment or process changes at some of our facilities may be needed to meet future requirements. The cost of meeting these requirements may be significant. Failure to comply with such laws and regulations could subject us to administrative, civil or criminal penalties, obligations to pay damages or other costs, and injunctions and other orders, including orders to cease operations.
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 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. Many of these jurisdictions have laws that 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. In addition, we are, from time to time, subject to environmental reviews and investigations by relevant governmental authorities. We are also involved in claims and litigation filed on behalf of persons alleging exposure to substances and other hazards at our current and former facilities.
We have established liabilities based on our estimates for the currently anticipated costs associated with these environmental matters. We estimated that the remaining undiscounted clean-up costs related to our environmental liabilities as of March 31, 20162018 were approximately $17$14 million, of which $13$10 million was associated with restructuring actions and the remaining undiscounted clean-up costs were approximately $4 million. Additionally, $7 million of the environmental liability was included in “Other long-term liabilities,” with the remaining $10$7 million included in “Accrued expenses and other current liabilities” in our consolidated balance sheet as of March 31, 2016.2018. As of March 31, 2015, $182017, $10 million of the environmental liability was included in “Other long-term liabilities,” with the remaining $4$5 million included in “Accrued expenses and other current liabilities” in our consolidated balance sheet. Management has reviewed the environmental matters, including those for which we assumed liability as a result of our spin-off from Alcan Inc. As a result of management's review of these items, management has determined that the currently anticipated costs associated with these environmental matters will not, individually or in the aggregate, materially impact our operations or materially adversely affect our financial condition, results of operations or liquidity.
Novelis Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Brazil Tax and Legal Matters
Under a federal tax dispute settlement program established by the Brazilian government, we have settled several disputes with Brazil’s tax authorities regarding various forms of manufacturing taxes and social security contributions. In most cases, we are paying the settlement amounts over a period of 180 months, although in some cases we are paying the settlement amounts over a shorter period. The assets and liabilities related to these settlements are presented in the table below (in millions). |
| | | | | | | |
| | March 31, |
| | 2018 | | 2017 |
| Cash deposits (A) | $ | 7 |
| | $ | 7 |
|
| | | | |
| Short-term settlement liability (B) | $ | 9 |
| | $ | 9 |
|
| Long-term settlement liability (B) | 49 |
| | 59 |
|
| Total settlement liability | $ | 58 |
| | $ | 68 |
|
| | | | |
| Liability for other disputes and claims (C) | $ | 29 |
| | $ | 22 |
|
_________________________
|
| | | | | | | |
| | March 31, |
| | 2016 | | 2015 |
| Cash deposits (A) | $ | 2 |
| | $ | 3 |
|
| | | | |
| Short-term settlement liability (B) | $ | 7 |
| | $ | 7 |
|
| Long-term settlement liability (B) | 57 |
| | 66 |
|
| Total settlement liability | $ | 64 |
| | $ | 73 |
|
| | | | |
| Liability for other disputes and claims (C) | $ | 17 |
| | $ | 12 |
|
(A) We have maintain these cash deposits as a result of legal proceedings with Brazil's tax authorities. These deposits, which are included in “Other long-term assets — third parties” in our accompanying consolidated balance sheets, will be expended toward these legal proceedings.
(B) The short-term and long-term settlement liabilities are included in "Accrued expenses and other current liabilities" and "Other long-term liabilities", respectively, in our accompanying consolidated balance sheets.
| |
| (A) | Effective in the third quarter of fiscal 2018, management defines “Cash deposits” to include cash deposits related to tax, labor, and civil disputes. To conform with current year presentation, we have updated prior period amounts to also include cash deposits related to labor and civil disputes. We have maintained these cash deposits as a result of legal proceedings with Brazil's tax authorities, labor courts, or designated civil courts. These deposits, which are included in “Other long-term assets - third parties” in our accompanying consolidated balance sheets, will be expended toward these legal proceedings. |
| |
| (B) | The short-term and long-term settlement liabilities are included in "Accrued expenses and other current liabilities" and "Other long-term liabilities", respectively, in our accompanying consolidated balance sheets. |
| |
| (C) | In addition to the disputes we have settled under the federal tax dispute settlement program, we are involved in several other unresolved tax and other legal claims in Brazil. The related liabilities are included in "Other long-term liabilities" in our accompanying consolidated balance sheets. |
The interest cost recorded on these settlement liabilities, partially offset by interest earned on the cash deposits is included in the table below (in millions).
|
| | | | | | | | | | | |
| | Year Ended March 31, |
| | 2016 | | 2015 | | 2014 |
| Loss on Brazilian tax litigation, net | $ | 5 |
| | $ | 7 |
| | $ | 6 |
|
|
| | | | | | | | | | | |
| | Year Ended March 31, |
| | 2018 | | 2017 | | 2016 |
| Loss on Brazilian tax litigation, net | $ | 3 |
| | $ | 5 |
| | $ | 5 |
|
Additionally, we have included in the range of reasonably possible losses disclosed above, any unresolved tax disputes or other contingencies for which a loss is reasonably possible and estimable.
Other Commitments
As of March 31, 2016 and 2015, we had sold certain inventories to third parties and have agreed to repurchase the same or similar inventory back from the third parties subsequent to the balance sheet dates. Our estimated outstanding repurchase obligations for this inventory as of March 31, 2016 is $22 million and as of March 31, 2015 was approximately $218 million, based on market prices as of these dates. We sell and repurchase inventory with third parties in an attempt to better manage inventory levels and to better match the purchasing of inventory with the demand for our products. As of March 31, 2016 and 2015, there was no liability related to these repurchase obligations on our accompanying consolidated balance sheets.
Novelis Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
21.20. SEGMENT, GEOGRAPHICAL AREA, MAJOR CUSTOMER AND MAJOR SUPPLIER INFORMATION
Segment Information
Due in part to the regional nature of supply and demand of aluminum rolled products and to best serve our customers, we manage our activities based on geographical areas and are organized under four operating segments: North America, Europe, Asia and South America. All of our segments manufacture aluminum sheet and light gauge products.
The following is a description of our operating segments:
North America. Headquartered in Atlanta, Georgia, this segment operates eight plants, including two fully dedicated recycling facilities and one facility with recycling operations, in two countries.
Europe. Headquartered in Küsnacht, Switzerland, this segment operates ten plants, including two fully dedicated recycling facilities and two facilities with recycling operations, in four countries.
Asia. Headquartered in Seoul, South Korea, this segment operates fivefour plants, including three facilities with recycling operations, in fourthree countries.
South America. Headquartered in Sao Paulo, Brazil, this segment comprises power generation operations, and operates two plants, including a facility with recycling operations, in Brazil. Our remaining smelting operations facilities ceased operations in December 2014. The majority of our power generation operations were sold during the fourth quarter of fiscal 2015.
Net sales and expenses are measured in accordance with the policies and procedures described in Note 1 — Business and Summary of Significant Accounting Policies.
We measure the profitability and financial performance of our operating segments based on “Segment income.” “Segment income” provides a measure of our underlying segment results that is in line with our approach to risk management. We define “Segment income” as earnings before (a) “depreciation and amortization”; (b) “interest expense and amortization of debt issuance costs”; (c) “interest income”; (d) unrealized gains (losses) on change in fair value of derivative instruments, net, except for foreign currency remeasurement hedging activities, which are included in segment income; (e) impairment of goodwill; (f) gain or loss on extinguishment of debt; (g) noncontrolling interests' share; (h) adjustments to reconcile our proportional share of “Segment income” from non-consolidated affiliates to income as determined on the equity method of accounting; (i) “restructuring and impairment, net”; (j) gains or losses on disposals of property, plant and equipment and businesses, net; (k) other costs, net; (l) litigation settlement, net of insurance recoveries; (m) sale transaction fees; (n) provision or benefit for taxes on income (loss) and; (o) cumulative effect of accounting change, net of tax.tax; and (p) metal price lag.
The tables below show selected segment financial information (in millions). The “Eliminations and Other” column in the table below includes eliminations and functions that are managed directly from our corporate office that have not been allocated to our operating segments, as well as the adjustments for proportional consolidation, and eliminations of intersegment “Net sales.” The financial information for our segments includes the results of our affiliates on a proportionately consolidated basis, which is consistent with the way we manage our business segments. In order to reconcile the financial information for the segments shown in the tables below to the relevant U.S. GAAP-basedGAAP based measures, we must adjust proportional consolidation of each line item. The “Eliminations and Other” in “Net sales – third party” includes the net sales attributable to our joint venture party, Tri-Arrows, for our Logan affiliate because we consolidate 100% of the Logan joint venture for U.S. GAAP, but we manage our Logan affiliate on a proportionately consolidated basis. See Note 8-7 — Consolidation and Note 9 -8 — Investment in and Advances to Non-Consolidated Affiliates and Related Party Transactions for further information about these affiliates. Additionally, we eliminate intersegment sales and intersegment income for reporting on a consolidated basis.
Novelis Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Selected Segment Financial Information
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Selected Operating Results Year Ended March 31, 2016 | | North America | | Europe | | Asia | | South America | | Eliminations and Other | | Total | |
| Selected Operating Results Year Ended March 31, 2018 | | | North America | | Europe | | Asia | | South America | | Eliminations and Other | | Total |
| Net sales - third party | | $ | 3,262 |
| | $ | 3,055 |
| | $ | 1,879 |
| | $ | 1,482 |
| | $ | 194 |
| | $ | 9,872 |
| | $ | 3,933 |
| | $ | 3,390 |
| | $ | 2,066 |
| | $ | 1,851 |
| | $ | 222 |
| | $ | 11,462 |
|
| Net sales - intersegment | | 4 |
| | 168 |
| | 113 |
| | 93 |
| | (378 | ) | | — |
| | 18 |
| | 57 |
| | 44 |
| | 80 |
| | (199 | ) | | — |
|
| Net sales | | $ | 3,266 |
| | $ | 3,223 |
| | $ | 1,992 |
| | $ | 1,575 |
| | $ | (184 | ) | | $ | 9,872 |
| | $ | 3,951 |
| | $ | 3,447 |
| | $ | 2,110 |
| | $ | 1,931 |
| | $ | 23 |
| | $ | 11,462 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Depreciation and amortization | | $ | 143 |
| | $ | 106 |
| | $ | 61 |
| | $ | 61 |
| | $ | (18 | ) | | $ | 353 |
| | $ | 149 |
| | $ | 112 |
| | $ | 65 |
| | $ | 65 |
| | $ | (37 | ) | | $ | 354 |
|
| Income tax (benefit) provision | | $ | (53 | ) | | $ | (11 | ) | | $ | 12 |
| | $ | 81 |
| | $ | 17 |
| | $ | 46 |
| |
| Income tax provision | | | $ | 13 |
| | $ | 19 |
| | $ | 108 |
| | $ | 77 |
| | $ | 16 |
| | $ | 233 |
|
| Capital expenditures | | $ | 143 |
| | $ | 146 |
| | $ | 35 |
| | $ | 39 |
| | $ | 7 |
| | $ | 370 |
| | $ | 78 |
| | $ | 71 |
| | $ | 36 |
| | $ | 38 |
| | $ | 3 |
| | $ | 226 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2016 | | | | | | | | | | | | | |
| March 31, 2018 | | | | | | | | | | | | | |
| Investment in and advances to non–consolidated affiliates | | $ | — |
| | $ | 488 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 488 |
| | $ | — |
| | $ | 522 |
| | $ | 327 |
| | $ | — |
| | $ | — |
| | $ | 849 |
|
| Total assets | | $ | 2,370 |
| | $ | 2,687 |
| | $ | 1,516 |
| | $ | 1,584 |
| | $ | 153 |
| | $ | 8,310 |
| | $ | 2,569 |
| | $ | 3,151 |
| | $ | 1,796 |
| | $ | 1,781 |
| | $ | 206 |
| | $ | 9,503 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Selected Operating Results Year Ended March 31, 2015 | | North America | | Europe | | Asia | | South America | | Eliminations and Other | | Total | |
| Selected Operating Results Year Ended March 31, 2017 | | | North America | | Europe | | Asia | | South America | | Eliminations and Other | | Total |
| Net sales - third party | | $ | 3,465 |
| | $ | 3,609 |
| | $ | 2,139 |
| | $ | 1,749 |
| | $ | 185 |
| | $ | 11,147 |
| | $ | 3,226 |
| | $ | 2,930 |
| | $ | 1,771 |
| | $ | 1,448 |
| | $ | 216 |
| | $ | 9,591 |
|
| Net sales - intersegment | | 18 |
| | 174 |
| | 201 |
| | 101 |
| | (494 | ) | | — |
| | 2 |
| | 38 |
| | 20 |
| | 62 |
| | (122 | ) | | — |
|
| Net sales | | $ | 3,483 |
| | $ | 3,783 |
| | $ | 2,340 |
| | $ | 1,850 |
| | $ | (309 | ) | | $ | 11,147 |
| | $ | 3,228 |
| | $ | 2,968 |
| | $ | 1,791 |
| | $ | 1,510 |
| | $ | 94 |
| | $ | 9,591 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Depreciation and amortization | | $ | 137 |
| | $ | 103 |
| | $ | 71 |
| | $ | 63 |
| | $ | (22 | ) | | $ | 352 |
| | $ | 149 |
| | $ | 106 |
| | $ | 59 |
| | $ | 63 |
| | $ | (17 | ) | | $ | 360 |
|
| Income tax (benefit) provision | | $ | (27 | ) | | $ | 12 |
| | $ | 16 |
| | $ | (1 | ) | | $ | 14 |
| | $ | 14 |
| |
| Income tax provision | | | $ | 18 |
| | $ | 12 |
| | $ | 20 |
| | $ | 88 |
| | $ | 13 |
| | $ | 151 |
|
| Capital expenditures | | $ | 122 |
| | $ | 257 |
| | $ | 85 |
| | $ | 53 |
| | $ | 1 |
| | $ | 518 |
| | $ | 80 |
| | $ | 65 |
| | $ | 38 |
| | $ | 39 |
| | $ | 2 |
| | $ | 224 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2015 | | | | | | | | | | | | | |
| March 31, 2017 | | | | | | | | | | | | | |
| Investment in and advances to non–consolidated affiliates | | $ | — |
| | $ | 447 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 447 |
| | $ | — |
| | $ | 451 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 451 |
|
| Total assets | | $ | 2,744 |
| | $ | 2,952 |
| | $ | 1,663 |
| | $ | 1,588 |
| | $ | 155 |
| | $ | 9,102 |
| | $ | 2,358 |
|
| $ | 2,683 |
|
| $ | 1,602 |
|
| $ | 1,637 |
|
| $ | 93 |
| | $ | 8,373 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Selected Operating Results Year Ended March 31, 2014 | | North America | | Europe | | Asia | | South America | | Eliminations and Other | | Total | |
| Selected Operating Results Year Ended March 31, 2016 | | | North America | | Europe | | Asia | | South America | | Eliminations and Other | | Total |
| Net sales - third party | | $ | 3,042 |
| | $ | 3,145 |
| | $ | 1,849 |
| | $ | 1,543 |
| | $ | 188 |
| | $ | 9,767 |
| | $ | 3,262 |
| | $ | 3,055 |
| | $ | 1,879 |
| | $ | 1,482 |
| | $ | 194 |
| | $ | 9,872 |
|
| Net sales - intersegment | | 8 |
| | 135 |
| | 27 |
| | 45 |
| | (215 | ) | | — |
| | 4 |
| | 168 |
| | 113 |
| | 93 |
| | (378 | ) | | — |
|
| Net sales | | $ | 3,050 |
| | $ | 3,280 |
| | $ | 1,876 |
| | $ | 1,588 |
| | $ | (27 | ) | | $ | 9,767 |
| | $ | 3,266 |
| | $ | 3,223 |
| | $ | 1,992 |
| | $ | 1,575 |
| | $ | (184 | ) | | $ | 9,872 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Depreciation and amortization | | $ | 126 |
| | $ | 103 |
| | $ | 68 |
| | $ | 69 |
| | $ | (32 | ) | | $ | 334 |
| | $ | 143 |
| | $ | 106 |
| | $ | 61 |
| | $ | 61 |
| | $ | (18 | ) | | $ | 353 |
|
| Income tax provision | | $ | (34 | ) | | $ | 6 |
| | $ | 16 |
| | $ | 6 |
| | $ | 17 |
| | $ | 11 |
| |
| Income tax (benefit) provision | | | $ | (53 | ) | | $ | (11 | ) | | $ | 12 |
| | $ | 81 |
| | $ | 17 |
| | $ | 46 |
|
| Capital expenditures | | $ | 147 |
| | $ | 241 |
| | $ | 198 |
| | $ | 117 |
| | $ | 14 |
| | $ | 717 |
| | $ | 143 |
| | $ | 146 |
| | $ | 35 |
| | $ | 39 |
| | $ | 7 |
| | $ | 370 |
|
Novelis Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following table showsdisplays the reconciliation from income from reportable segments to “Net income attributable to our common shareholder” to "Segment income" from reportable segments (in millions).
|
| | | | | | | | | | | | |
| | | Year Ended March 31, |
| | | 2016 | | 2015 | | 2014 |
| North America | | $ | 258 |
| | $ | 273 |
| | $ | 229 |
|
| Europe | | 116 |
| | 250 |
| | 265 |
|
| Asia | | 135 |
| | 141 |
| | 160 |
|
| South America | | 282 |
| | 240 |
| | 231 |
|
| Intersegment eliminations | | — |
| | (2 | ) | | — |
|
| Depreciation and amortization | | (353 | ) | | (352 | ) | | (334 | ) |
| Interest expense and amortization of debt issuance costs | | (327 | ) | | (326 | ) | | (304 | ) |
| Adjustment to eliminate proportional consolidation | | (30 | ) | | (33 | ) | | (40 | ) |
| Unrealized losses on change in fair value of derivative instruments, net | | (4 | ) | | — |
| | (10 | ) |
| Realized (losses) gains on derivative instruments not included in segment income | | (1 | ) | | (6 | ) | | 5 |
|
| Gain on assets held for sale | | — |
| | 22 |
| | 6 |
|
| Loss on extinguishment of debt | | (13 | ) | | — |
| | — |
|
| Restructuring and impairment, net | | (48 | ) | | (37 | ) | | (75 | ) |
| Loss on sale of fixed assets | | (4 | ) | | (5 | ) | | (9 | ) |
| Other costs, net | | (3 | ) | | (3 | ) | | (9 | ) |
| Income before income taxes | | 8 |
| | 162 |
| | 115 |
|
| Income tax provision | | 46 |
| | 14 |
| | 11 |
|
| Net (loss) income | | (38 | ) | | 148 |
| | 104 |
|
| Net income attributable to noncontrolling interests | | — |
| | — |
| | — |
|
| Net (loss) income attributable to our common shareholder | | $ | (38 | ) | | $ | 148 |
| | $ | 104 |
|
|
| | | | | | | | | | | | |
| | | Year Ended March 31, |
| | | 2018 | | 2017 | | 2016 |
| Net income (loss) attributable to our common shareholder | | $ | 635 |
| | $ | 45 |
| | $ | (38 | ) |
| Noncontrolling interests | | (13 | ) | | 1 |
| | — |
|
| Income tax provision | | 233 |
| | 151 |
| | 46 |
|
| Depreciation and amortization | | 354 |
| | 360 |
| | 353 |
|
| Interest expense and amortization of debt issuance costs | | 255 |
| | 294 |
| | 327 |
|
| Adjustment to reconcile proportional consolidation | | 51 |
| | 28 |
| | 30 |
|
| Unrealized (gains) losses on change in fair value of derivative instruments, net | | (20 | ) | | (5 | ) | | 4 |
|
| Realized (gains) losses on derivative instruments not included in segment income | | — |
| | (5 | ) | | 1 |
|
| Gain on assets held for sale | | — |
| | (2 | ) | | — |
|
| Loss on extinguishment of debt | | — |
| | 134 |
| | 13 |
|
| Restructuring and impairment, net | | 34 |
| | 10 |
| | 48 |
|
| Loss on sale of fixed assets | | 7 |
| | 6 |
| | 4 |
|
| (Gain) loss on sale of a business (A) | | (318 | ) | | 27 |
| | — |
|
| Metal price lag (B) | | (4 | ) | | 31 |
| | 172 |
|
| Other, net | | 1 |
| | 10 |
| | 3 |
|
| Total of reportable segments | | $ | 1,215 |
| | $ | 1,085 |
| | $ | 963 |
|
_________________________
| |
| (A) | In September 2017, Novelis Korea Ltd., a subsidiary of Novelis Inc., sold a portion of its shares in Ulsan Aluminum, Ltd. (UAL) for $314 million, which resulted in a gain on sale of investments. For additional information related to the transaction, see Note 8 — Investment in and Advances to Non-Consolidated Affiliates and Related Party Transactions. |
| |
| (B) | Effective in the first quarter of fiscal 2018, management removed the impact of metal price lag from Segment Income in order to enhance the visibility of the underlying operating performance of the Company. The impact of metal price lag is now reported as a separate line item in this reconciliation. This change does not impact our consolidated financial statements. Segment Income for prior periods presented has been updated to reflect this change. For additional information related to metal price lag, see Note 14 — Financial Instruments and Commodity Contracts. |
Novelis Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following table displays "Segment income" from reportable segments by region.
|
| | | | | | | | | | | | |
| | | Year Ended March 31, |
| | | 2018 | | 2017 | | 2016 |
| North America | | $ | 474 |
| | $ | 380 |
| | $ | 338 |
|
| Europe | | 219 |
| | 208 |
| | 203 |
|
| Asia | | 167 |
| | 163 |
| | 142 |
|
| South America | | 363 |
| | 337 |
| | 280 |
|
| Intersegment eliminations | | (8 | ) | | (3 | ) | | — |
|
| Total of reportable segments | | $ | 1,215 |
| | $ | 1,085 |
| | $ | 963 |
|
Geographical Area Information
We had 2524 operating facilities in eleventen countries as of March 31, 20162018. The tables below present “Net sales” and “Long-lived assets and other intangible assets” by geographical area (in millions). “Net sales” are attributed to geographical areas based on the origin of the sale. “Long-lived assets and other intangible assets” are attributed to geographical areas based on asset location and exclude investments in and advances to our non-consolidated affiliates and goodwill.
| | | | | Year Ended March 31, | | Year Ended March 31, |
| | | 2016 | | 2015 | | 2014 | | 2018 | | 2017 | | 2016 |
| Net sales: | | | | | | | | | | | | |
| United States | | $ | 3,334 |
| | $ | 3,507 |
| | $ | 3,021 |
| | $ | 4,041 |
| | $ | 3,336 |
| | $ | 3,334 |
|
| Asia and Other Pacific | | 1,879 |
| | 2,139 |
| | 1,845 |
| | 2,068 |
| | 1,771 |
| | 1,879 |
|
| Brazil | | 1,482 |
| | 1,750 |
| | 1,544 |
| | 1,851 |
| | 1,448 |
| | 1,482 |
|
| Canada | | 121 |
| | 144 |
| | 209 |
| | 113 |
| | 106 |
| | 121 |
|
| Germany | | 2,506 |
| | 2,976 |
| | 2,449 |
| | 2,853 |
| | 2,428 |
| | 2,506 |
|
| Other Europe | | 550 |
| | 631 |
| | 699 |
| | 536 |
| | 502 |
| | 550 |
|
| Total Net sales | | $ | 9,872 |
| | $ | 11,147 |
| | $ | 9,767 |
| | $ | 11,462 |
| | $ | 9,591 |
| | $ | 9,872 |
|
|
| | | | | | | | |
| | | March 31, |
| | | 2018 | | 2017 |
| Long-lived assets and other intangibles: | | | | |
| United States | | $ | 1,338 |
| | $ | 1,400 |
|
| Asia and Other Pacific | | 490 |
| | 756 |
|
| Brazil | | 796 |
| | 823 |
|
| Canada | | 60 |
| | 64 |
|
| Germany | | 287 |
| | 260 |
|
| United Kingdom | | 43 |
| | 39 |
|
| Other Europe | | 506 |
| | 472 |
|
| Total long-lived assets | | $ | 3,520 |
| | $ | 3,814 |
|
Information about Product Sales, Major Customers and Primary Supplier
Product Sales
The percentage of “Net sales” generated from beverage and food can products were 52%, 52%, and 55% for the years ended March 31, 2018, 2017, and 2016, respectively. The percentage of “Net sales” generated from automotive products increased to 24% in the year ended March 31, 2018, compared to 23% and 20% in the years ended March 31, 2017 and 2016, respectively.
Novelis Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
|
| | | | | | | | |
| | | March 31, |
| | | 2016 | | 2015 |
| Long-lived assets and other intangibles: | | | | |
| United States | | $ | 1,483 |
| | $ | 1,518 |
|
| Asia and Other Pacific | | 784 |
| | 840 |
|
| Brazil | | 840 |
| | 866 |
|
| Canada | | 70 |
| | 78 |
|
| Germany | | 287 |
| | 251 |
|
| United Kingdom | | 43 |
| | 45 |
|
| Other Europe | | 522 |
| | 528 |
|
| Total long-lived assets | | $ | 4,029 |
| | $ | 4,126 |
|
Information about Product Sales, Major Customers and Primary Supplier
The percentage of “Net sales” generated from beverage and food can products were 55%, 56%, and 55% in the years ended March 31, 2016, 2015, and 2014, respectively. The percentage of “Net sales” generated from automotive products increased to 20% in the year ended March 31, 2016, compared to 13% and 11% in the years ended March 31, 2015 and 2014, respectively.
Thefollowing table below showsdisplays our net sales to Rexam Plc (Rexam) andthe Affiliates of Ball Corporation (Ball Corporation)(Ball) and Ford Motor Company (Ford), our two largest customers, as a percentage of total “Net sales.”
|
| | | | | | | | | |
| | | Year Ended March 31, |
| | | 2016 | | 2015 | | 2014 |
| Rexam (A) | | 19 | % | | 18 | % | | 17 | % |
| Ball Corporation (A) | | 11 | % | | 10 | % | | 10 | % |
|
| | | | | | | | | |
| | | Year Ended March 31, |
| | | 2018 | | 2017 | | 2016 |
| Ball (A) | | 21 | % | | 27 | % | | 30 | % |
| Ford | | 10 | % | | 10 | % | | 4 | % |
_________________________
| |
| (A) | In Februaryfiscal 2017, Ball completed the acquisition of 2015,Rexam and the divestiture of certain assets to the Ardagh Group (Ardagh). We combined the sales of Ball Corporation made an offerand Rexam for presentation purposes. For the year ended March 31, 2018 combined sales to acquire Rexam. This acquisition will be subjectBall and Rexam totaled 29%. For the years ended March 31, 2017 and March 31, 2016, combined sales to regulatoryBall, Rexam, and shareholder approval.Ardagh totaled 30%. |
RTPrimary Supplier
Rio Tinto (RT) is our primary supplier of metal inputs, including prime and sheet ingot. The table below shows our purchases from RT as a percentage of our total combined metal purchases.
|
| | | | | | | | | |
| | | Year Ended March 31, |
| | | 2016 | | 2015 | | 2014 |
| Purchases from RT as a percentage of total combined metal purchases | | 12 | % | | 15 | % | | 17 | % |
|
| | | | | | | | | |
| | | Year Ended March 31, |
| | | 2018 | | 2017 | | 2016 |
| Purchases from RT as a percentage of total combined metal purchases | | 10 | % | | 10 | % | | 12 | % |
Novelis Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
22.21. SUPPLEMENTAL INFORMATION
Supplemental cash flow information is as follows (in millions).
| | | | | Year Ended March 31, | | Year Ended March 31, |
| | | 2016 | | 2015 | | 2014 | | 2018 | | 2017 | | 2016 |
| Supplemental disclosures of cash flow information: | | | | | | | | | | | | |
| Interest paid | | $ | 308 |
| | $ | 303 |
| | $ | 278 |
| | $ | 254 |
| | $ | 288 |
| | $ | 308 |
|
| Income taxes paid | | $ | 123 |
| | $ | 131 |
| | $ | 120 |
| | $ | 191 |
| | $ | 128 |
| | $ | 123 |
|
As of March 31, 20162018, we recorded $53 million of outstanding accounts payable and accrued liabilities related to capital expenditures in which the cash outflows will occur subsequent to March 31, 20162018. During the yearyears ended March 31, 2018 and 2016, we did not incur any new capital lease obligations. During the years ended 2015 and 2014, weWe incurred capital lease obligations of less than $1$2 million related to capital lease acquisitions.during the year ended March 31, 2017.
Novelis Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
23.22. QUARTERLY RESULTS (UNAUDITED)
The tables below present select operating results (in millions) by period:
|
| | | | | | | | | | | | | | | | |
| | | (Unaudited) Quarter Ended |
| | | June 30,
2015 | | September 30,
2015 | | December 31,
2015 | | March 31,
2016 |
| Net sales | | $ | 2,634 |
| | $ | 2,482 |
| | $ | 2,354 |
| | $ | 2,402 |
|
| Cost of goods sold (exclusive of depreciation and amortization) | | 2,400 |
| | 2,241 |
| | 2,051 |
| | 2,035 |
|
| Selling, general and administrative expenses | | 100 |
| | 100 |
| | 104 |
| | 103 |
|
| Depreciation and amortization | | 87 |
| | 89 |
| | 88 |
| | 89 |
|
| Interest expense and amortization of debt issuance costs | | 80 |
| | 82 |
| | 82 |
| | 83 |
|
| Research and development expenses | | 13 |
| | 13 |
| | 13 |
| | 15 |
|
| Loss on extinguishment of debt | | 13 |
| | — |
| | — |
| | — |
|
| Restructuring and impairment, net | | 15 |
| | 4 |
| | 10 |
| | 19 |
|
| Equity in net loss of non-consolidated affiliates | | 1 |
| | 1 |
| | — |
| | 1 |
|
| Other (income) expense, net | | (30 | ) | | (32 | ) | | (16 | ) | | 10 |
|
| Income tax provision (benefit) | | 15 |
| | (3 | ) | | 16 |
| | 18 |
|
| Net (loss) income | | (60 | ) | | (13 | ) | | 6 |
| | 29 |
|
| Net income attributable to noncontrolling interests | | — |
| | — |
| | — |
| | — |
|
| Net (loss) income attributable to our common shareholder | | $ | (60 | ) | | $ | (13 | ) | | $ | 6 |
| | $ | 29 |
|
| | | | | (Unaudited) Quarter Ended | | (Unaudited) Quarter Ended |
| | | June 30,
2014 | | September 30,
2014 | | December 31,
2014 | | March 31,
2015 | | June 30,
2017 | | September 30,
2017 | | December 31, 2017 | | March 31,
2018 |
Net sales | | $ | 2,680 |
| | $ | 2,831 |
| | $ | 2,847 |
| | $ | 2,789 |
| | $ | 2,669 |
| | $ | 2,794 |
| | $ | 2,933 |
| | $ | 3,066 |
|
Cost of goods sold (exclusive of depreciation and amortization) | | 2,329 |
| | 2,483 |
| | 2,498 |
| | 2,483 |
| | 2,261 |
| | 2,361 |
| | 2,494 |
| | 2,603 |
|
| Selling, general and administrative expenses | | 108 |
| | 103 |
| | 108 |
| | 108 |
| | 106 |
| | 124 |
| | 128 |
| | 131 |
|
| Depreciation and amortization | | 89 |
| | 90 |
| | 87 |
| | 86 |
| | 90 |
| | 91 |
| | 86 |
| | 87 |
|
| Interest expense and amortization of debt issuance costs | | 81 |
| | 82 |
| | 85 |
| | 78 |
| | 64 |
| | 64 |
| | 64 |
| | 63 |
|
| Research and development expenses | | 12 |
| | 12 |
| | 14 |
| | 12 |
| | 15 |
| | 16 |
| | 17 |
| | 16 |
|
| (Gain) loss on assets held for sale | | (11 | ) | | — |
| | (12 | ) | | 1 |
| |
| Gain on sale of a business, net | | | — |
| | (318 | ) | | — |
| | — |
|
| Restructuring and impairment, net | | 6 |
| | 7 |
| | 25 |
| | (1 | ) | | 1 |
| | 7 |
| | 25 |
| | 1 |
|
| Equity in net loss of non-consolidated affiliates | | 2 |
| | — |
| | 2 |
| | 1 |
| | — |
| | 1 |
| | — |
| | — |
|
| Other expense (income), net | | 5 |
| | 18 |
| | (9 | ) | | 3 |
| |
| Income tax provision (benefit) | | 24 |
| | (2 | ) | | 3 |
| | (11 | ) | |
| Other (income) expense, net | | | (12 | ) | | 25 |
| | (6 | ) | | 2 |
|
| Income tax provision | | | 43 |
| | 116 |
| | 20 |
| | 54 |
|
| Net income | | 35 |
| | 38 |
| | 46 |
| | 29 |
| | 101 |
| | 307 |
| | 105 |
| | 109 |
|
| Net income attributable to noncontrolling interests | | — |
| | — |
| | — |
| | — |
| |
| Net loss (income) attributable to noncontrolling interests | | | — |
| | — |
| | (16 | ) | | 3 |
|
| Net income attributable to our common shareholder | | $ | 35 |
| | $ | 38 |
| | $ | 46 |
| | $ | 29 |
| | $ | 101 |
| | $ | 307 |
| | $ | 121 |
| | $ | 106 |
|
Novelis Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
24. SUPPLEMENTAL GUARANTOR INFORMATION
In connection with the issuance of Novelis Inc.'s (the Parent and Issuer) 2017 Notes and 2020 Notes, certain of our wholly-owned subsidiaries, which are 100% owned within the meaning of Rule 3-10(h)(1) of Regulation S-X, provided guarantees. These guarantees are full and unconditional as well as joint and several. In the periods presented below, the guarantor subsidiaries (the Guarantors) are comprised of the majority of our businesses in Canada, the U.S., the U.K., Brazil, Portugal and Switzerland, as well as certain businesses in Germany and France. The remaining subsidiaries (the Non-Guarantors) of the Parent are not guarantors of the Notes.
The fiscal 2015 and 2014 amounts below have been retrospectively adjusted to reflect the amalgamations of certain subsidiaries in the U.S. and Canada that occurred during fiscal 2016. These amalgamations had no impact on the consolidated financial statements.
CONSOLIDATING STATEMENT OF OPERATIONS
(In millions)
|
| | | | | | | | | | | | | | | | | | | |
| | Year Ended March 31, 2016 |
| | Parent | | Guarantors | | Non-
Guarantors | | Eliminations | | Consolidated |
| Net sales | $ | 648 |
| | $ | 8,519 |
| | $ | 2,386 |
| | $ | (1,681 | ) | | $ | 9,872 |
|
| Cost of goods sold (exclusive of depreciation and amortization) | 655 |
| | 7,582 |
| | 2,169 |
| | (1,679 | ) | | 8,727 |
|
| Selling, general and administrative expenses | 32 |
| | 315 |
| | 60 |
| | — |
| | 407 |
|
| Depreciation and amortization | 19 |
| | 269 |
| | 65 |
| | — |
| | 353 |
|
| Research and development expenses | — |
| | 53 |
| | 1 |
| | — |
| | 54 |
|
| Interest expense and amortization of debt issuance costs | 318 |
| | 121 |
| | 11 |
| | (123 | ) | | 327 |
|
| Loss on extinguishment of debt | 13 |
| | — |
| | — |
| | — |
| | 13 |
|
| Restructuring and impairment, net | 14 |
| | 30 |
| | 4 |
| | — |
| | 48 |
|
| Equity in net loss of non-consolidated affiliates | — |
| | 3 |
| | — |
| | — |
| | 3 |
|
| Equity in net income of consolidated subsidiaries | (263 | ) | | (44 | ) | | — |
| | 307 |
| | — |
|
| Other (income) expense, net | (106 | ) | | (105 | ) | | 20 |
| | 123 |
| | (68 | ) |
| | 682 |
| | 8,224 |
| | 2,330 |
| | (1,372 | ) | | 9,864 |
|
| (Loss) income before income taxes | (34 | ) | | 295 |
| | 56 |
| | (309 | ) | | 8 |
|
| Income tax provision | 4 |
| | 25 |
| | 17 |
| | — |
| | 46 |
|
| Net (loss) income | (38 | ) | | 270 |
| | 39 |
| | (309 | ) | | (38 | ) |
| Net income attributable to noncontrolling interests | — |
| | — |
| | — |
| | — |
| | — |
|
| Net (loss) income attributable to our common shareholder | $ | (38 | ) | | $ | 270 |
| | $ | 39 |
| | $ | (309 | ) | | $ | (38 | ) |
| Comprehensive (loss) income | $ | 23 |
| | $ | 302 |
| | $ | (6 | ) | | $ | (307 | ) | | $ | 12 |
|
| Less: Comprehensive loss attributable to noncontrolling interest | — |
| | — |
| | (11 | ) | | — |
| | (11 | ) |
| Comprehensive income attributable to our common shareholder | $ | 23 |
| | $ | 302 |
| | $ | 5 |
| | $ | (307 | ) | | $ | 23 |
|
| |
| (A) | "Net Sales" and "Cost of goods sold (exclusive of depreciation and amortization)" for the quarter ended December 31, 2017 have each been reduced from amounts previously reported by $152 million to correct a misstatement in the presentation of certain transactions. We have determined this misstatement to be immaterial to our previously issued financial statements. |
Novelis Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
CONSOLIDATING STATEMENT OF OPERATIONS
(In millions)
|
| | | | | | | | | | | | | | | | | | | |
| | Year Ended March 31, 2015 |
| | Parent | | Guarantors | | Non-
Guarantors | | Eliminations | | Consolidated |
| Net sales | $ | 665 |
| | $ | 9,525 |
| | $ | 2,743 |
| | $ | (1,786 | ) | | $ | 11,147 |
|
| Cost of goods sold (exclusive of depreciation and amortization) | 650 |
| | 8,413 |
| | 2,514 |
| | (1,784 | ) | | 9,793 |
|
| Selling, general and administrative expenses | 6 |
| | 344 |
| | 77 |
| | — |
| | 427 |
|
| Depreciation and amortization | 18 |
| | 258 |
| | 76 |
| | — |
| | 352 |
|
| Research and development expenses | — |
| | 49 |
| | 1 |
| | — |
| | 50 |
|
| Interest expense and amortization of debt issuance costs | 319 |
| | 127 |
| | 7 |
| | (127 | ) | | 326 |
|
| Gain on assets held for sale, net | (5 | ) | | (17 | ) | | — |
| | — |
| | (22 | ) |
| Restructuring and impairment, net | 1 |
| | 33 |
| | 3 |
| | — |
| | 37 |
|
| Equity in net loss of non-consolidated affiliates | — |
| | 5 |
| | — |
| | — |
| | 5 |
|
| Equity in net income of consolidated subsidiaries | (403 | ) | | (30 | ) | | — |
| | 433 |
| | — |
|
| Other (income) expense, net | (71 | ) | | (46 | ) | | 7 |
| | 127 |
| | 17 |
|
| 515 |
| | 9,136 |
| | 2,685 |
| | (1,351 | ) | | 10,985 |
|
| Income before income taxes | 150 |
| | 389 |
| | 58 |
| | (435 | ) | | 162 |
|
| Income tax provision (benefit) | 2 |
| | (8 | ) | | 20 |
| | — |
| | 14 |
|
| Net income | 148 |
| | 397 |
| | 38 |
| | (435 | ) | | 148 |
|
| Net income attributable to noncontrolling interests | — |
| | — |
| | — |
| | — |
| | — |
|
| Net income attributable to our common shareholder | $ | 148 |
| | $ | 397 |
| | $ | 38 |
| | $ | (435 | ) | | $ | 148 |
|
| Comprehensive (loss) income | $ | (322 | ) | | $ | 138 |
| | $ | (7 | ) | | $ | (146 | ) | | $ | (337 | ) |
| Less: Comprehensive loss attributable to noncontrolling interest | — |
| | — |
| | (15 | ) | | — |
| | (15 | ) |
| Comprehensive (loss) income attributable to our common shareholder | $ | (322 | ) | | $ | 138 |
| | $ | 8 |
| | $ | (146 | ) | | $ | (322 | ) |
Novelis Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
CONSOLIDATING STATEMENT OF OPERATIONS
(In millions)
|
| | | | | | | | | | | | | | | | | | | | |
| | | Year Ended March 31, 2014 |
| | | Parent | | Guarantors | | Non- Guarantors | | Eliminations | | Consolidated |
| Net sales | | $ | 693 |
| | $ | 8,080 |
| | $ | 2,416 |
| | $ | (1,422 | ) | | $ | 9,767 |
|
| Cost of goods sold (exclusive of depreciation and amortization) | | 677 |
| | 7,055 |
| | 2,158 |
| | (1,422 | ) | | 8,468 |
|
| Selling, general and administrative expenses | | 48 |
| | 338 |
| | 75 |
| | — |
| | 461 |
|
| Depreciation and amortization | | 16 |
| | 246 |
| | 72 |
| | — |
| | 334 |
|
| Research and development expenses | | 1 |
| | 43 |
| | 1 |
| | — |
| | 45 |
|
| Interest expense and amortization of debt issuance costs | | 315 |
| | 87 |
| | 1 |
| | (99 | ) | | 304 |
|
| Gain on assets held for sale | | — |
| | (6 | ) | | — |
| | — |
| | (6 | ) |
| Restructuring and impairment, net | | 8 |
| | 59 |
| | 8 |
| | — |
| | 75 |
|
| Equity in net loss of non-consolidated affiliates | | — |
| | 12 |
| | — |
| | — |
| | 12 |
|
| Equity in net income of consolidated subsidiaries | | (389 | ) | | (99 | ) | | — |
| | 488 |
| | — |
|
| Other (income) expense, net | | (94 | ) | | (57 | ) | | 11 |
| | 99 |
| | (41 | ) |
| | 582 |
| | 7,678 |
| | 2,326 |
| | (934 | ) | | 9,652 |
|
| Income before income taxes | | 111 |
| | 402 |
| | 90 |
| | (488 | ) | | 115 |
|
| Income tax provision (benefit) | | 7 |
| | 16 |
| | (12 | ) | | — |
| | 11 |
|
| Net income | | 104 |
| | 386 |
| | 102 |
| | (488 | ) | | 104 |
|
| Net income attributable to noncontrolling interests | | — |
| | — |
| | — |
| | — |
| | — |
|
| Net income attributable to our common shareholder | | $ | 104 |
| | $ | 386 |
| | $ | 102 |
| | $ | (488 | ) | | $ | 104 |
|
| Comprehensive income | | $ | 281 |
| | $ | 480 |
| | $ | 153 |
| | $ | (635 | ) | | $ | 279 |
|
| Less: Comprehensive loss attributable to noncontrolling interest | | — |
| | — |
| | (2 | ) | | — |
| | (2 | ) |
| Comprehensive income attributable to our common shareholder | | $ | 281 |
| | $ | 480 |
| | $ | 155 |
| | $ | (635 | ) | | $ | 281 |
|
Novelis Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
CONSOLIDATING BALANCE SHEET (In millions) |
| | | | | | | | | | | | | | | | | | | |
| | As of March 31, 2016 |
| | Parent | | Guarantors | | Non-
Guarantors | | Eliminations | | Consolidated |
| ASSETS |
| Current assets | | | | | | | | | |
| Cash and cash equivalents | $ | 2 |
| | $ | 301 |
| | $ | 253 |
| | $ | — |
| | $ | 556 |
|
| Accounts receivable, net of allowances | | | | | | | | | |
| — third parties | 23 |
| | 716 |
| | 217 |
| | — |
| | 956 |
|
| — related parties | 188 |
| | 139 |
| | 175 |
| | (443 | ) | | 59 |
|
| Inventories | 46 |
| | 873 |
| | 264 |
| | (3 | ) | | 1,180 |
|
| Prepaid expenses and other current assets | 5 |
| | 91 |
| | 31 |
| | — |
| | 127 |
|
| Fair value of derivative instruments | 26 |
| | 49 |
| | 16 |
| | (3 | ) | | 88 |
|
| Assets held for sale | — |
| | 5 |
| | — |
| | — |
| | 5 |
|
| Total current assets | 290 |
| | 2,174 |
| | 956 |
| | (449 | ) | | 2,971 |
|
| Property, plant and equipment, net | 81 |
| | 2,581 |
| | 844 |
| | — |
| | 3,506 |
|
| Goodwill | — |
| | 596 |
| | 11 |
| | — |
| | 607 |
|
| Intangible assets, net | 17 |
| | 503 |
| | 3 |
| | — |
| | 523 |
|
| Investments in and advances to non-consolidated affiliates | — |
| | 488 |
| | — |
| | — |
| | 488 |
|
| Investments in consolidated subsidiaries | 2,667 |
| | 619 |
| | — |
| | (3,286 | ) | | — |
|
| Deferred income tax assets | — |
| | 18 |
| | 69 |
| | — |
| | 87 |
|
| Other long-term assets | | | | | | | | | |
| — third parties | 45 |
| | 48 |
| | 19 |
| | — |
| | 112 |
|
| — related parties | 1,752 |
| | 16 |
| | — |
| | (1,752 | ) | | 16 |
|
| Total assets | $ | 4,852 |
| | $ | 7,043 |
| | $ | 1,902 |
| | $ | (5,487 | ) | | $ | 8,310 |
|
| LIABILITIES AND (DEFICIT) EQUITY |
| Current liabilities | | | | | | | | | |
| Current portion of long-term debt | $ | 21 |
| | $ | 8 |
| | $ | 18 |
| | $ | — |
| | $ | 47 |
|
| Short-term borrowings | | | | | | | | | |
| — third parties | 337 |
| | 149 |
| | 93 |
| | — |
| | 579 |
|
| — related parties | 20 |
| | (71 | ) | | — |
| | 51 |
| | — |
|
| Accounts payable | | | | | | | | | |
| — third parties | 43 |
| | 958 |
| | 505 |
| | — |
| | 1,506 |
|
| — related parties | 69 |
| | 322 |
| | 39 |
| | (382 | ) | | 48 |
|
| Fair value of derivative instruments | 19 |
| | 58 |
| | 11 |
| | (3 | ) | | 85 |
|
| Accrued expenses and other current liabilities | | | | | | | | | |
| — third parties | 95 |
| | 398 |
| | 76 |
| | — |
| | 569 |
|
| — related parties | — |
| | 102 |
| | 10 |
| | (112 | ) | | — |
|
| Total current liabilities | 604 |
| | 1,924 |
| | 752 |
| | (446 | ) | | 2,834 |
|
| Long-term debt, net of current portion | | | | | | | | | |
| — third parties | 4,253 |
| | 20 |
| | 178 |
| | — |
| | 4,451 |
|
| — related parties | — |
| | 1,697 |
| | 55 |
| | (1,752 | ) | | — |
|
| Deferred income tax liabilities | — |
| | 87 |
| | 2 |
| | — |
| | 89 |
|
| Accrued postretirement benefits | 32 |
| | 557 |
| | 231 |
| | — |
| | 820 |
|
| Other long-term liabilities | 22 |
| | 143 |
| | 10 |
| | — |
| | 175 |
|
| Total liabilities | 4,911 |
| | 4,428 |
| | 1,228 |
| | (2,198 | ) | | 8,369 |
|
| Commitments and contingencies |
|
| |
|
| |
|
| |
|
| |
|
|
| Temporary equity - intercompany | — |
| | 1,681 |
| | — |
| | (1,681 | ) | | — |
|
| Shareholder’s (deficit) equity | | | | | | | | | |
| Common stock | — |
| | — |
| | — |
| | — |
| | — |
|
| Additional paid-in capital | 1,404 |
| | — |
| | — |
| | — |
| | 1,404 |
|
| (Accumulated deficit) retained earnings | (963 | ) | | 1,329 |
| | 754 |
| | (2,083 | ) | | (963 | ) |
| Accumulated other comprehensive loss | (500 | ) | | (395 | ) | | (80 | ) | | 475 |
| | (500 | ) |
| Total (deficit) equity of our common shareholder | (59 | ) | | 934 |
| | 674 |
| | (1,608 | ) | | (59 | ) |
| Noncontrolling interests | — |
| | — |
| | — |
| | — |
| | — |
|
| Total (deficit) equity | (59 | ) | | 934 |
| | 674 |
| | (1,608 | ) | | (59 | ) |
| Total liabilities and (deficit) equity | $ | 4,852 |
| | $ | 7,043 |
| | $ | 1,902 |
| | $ | (5,487 | ) | | $ | 8,310 |
|
Novelis Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
CONSOLIDATING BALANCE SHEET (In millions)
|
| | | | | | | | | | | | | | | | | | | |
| | As of March 31, 2015 |
| | Parent | | Guarantors | | Non-
Guarantors | | Eliminations | | Consolidated |
| ASSETS |
| Current assets | | | | | | | | | |
| Cash and cash equivalents | $ | 4 |
| | $ | 365 |
| | $ | 259 |
| | $ | — |
| | $ | 628 |
|
| Accounts receivable, net of allowances | | | | | | | | | |
| — third parties | 23 |
| | 1,034 |
| | 232 |
| | — |
| | 1,289 |
|
| — related parties | 385 |
| | 154 |
| | 158 |
| | (644 | ) | | 53 |
|
| Inventories | 55 |
| | 1,084 |
| | 294 |
| | (2 | ) | | 1,431 |
|
| Prepaid expenses and other current assets | 6 |
| | 89 |
| | 17 |
| | — |
| | 112 |
|
| Fair value of derivative instruments | 19 |
| | 55 |
| | 9 |
| | (6 | ) | | 77 |
|
| Deferred income tax assets | — |
| | 70 |
| | 9 |
| | — |
| | 79 |
|
| Assets held for sale | — |
| | 6 |
| | — |
| | — |
| | 6 |
|
| Total current assets | 492 |
| | 2,857 |
| | 978 |
| | (652 | ) | | 3,675 |
|
| Property, plant and equipment, net | 95 |
| | 2,549 |
| | 898 |
| | — |
| | 3,542 |
|
| Goodwill | — |
| | 596 |
| | 11 |
| | — |
| | 607 |
|
| Intangible assets, net | 19 |
| | 562 |
| | 3 |
| | — |
| | 584 |
|
| Investments in and advances to non-consolidated affiliates | — |
| | 447 |
| | — |
| | — |
| | 447 |
|
| Investments in consolidated subsidiaries | 2,442 |
| | 597 |
| | — |
| | (3,039 | ) | | — |
|
| Deferred income tax assets | — |
| | 47 |
| | 48 |
| | — |
| | 95 |
|
| Other long-term assets | | | | | | | | | |
| — third parties | 57 |
| | 70 |
| | 10 |
| | — |
| | 137 |
|
| — related parties | 1,836 |
| | 64 |
| | — |
| | (1,885 | ) | | 15 |
|
| Total assets | $ | 4,941 |
| | $ | 7,789 |
| | $ | 1,948 |
| | $ | (5,576 | ) | | $ | 9,102 |
|
| LIABILITIES AND EQUITY |
| Current liabilities | | | | | | | | | |
| Current portion of long-term debt | $ | 22 |
| | $ | 8 |
| | $ | 78 |
| | $ | — |
| | $ | 108 |
|
| Short-term borrowings | | | | | | | | | |
| — third parties | 394 |
| | 381 |
| | 71 |
| | — |
| | 846 |
|
| — related parties | — |
| | 122 |
| | — |
| | (122 | ) | | — |
|
| Accounts payable | | | | | | | | | |
| — third parties | 27 |
| | 1,195 |
| | 632 |
| | — |
| | 1,854 |
|
| — related parties | 78 |
| | 393 |
| | 42 |
| | (469 | ) | | 44 |
|
| Fair value of derivative instruments | 83 |
| | 62 |
| | 10 |
| | (6 | ) | | 149 |
|
| Accrued expenses and other current liabilities | | | | | | | | | |
| — third parties | 99 |
| | 412 |
| | 61 |
| | — |
| | 572 |
|
| — related parties | — |
| | 47 |
| | 6 |
| | (53 | ) | | — |
|
| Deferred income tax liabilities | — |
| | 20 |
| | — |
| | — |
| | 20 |
|
| Total current liabilities | 703 |
| | 2,640 |
| | 900 |
| | (650 | ) | | 3,593 |
|
| Long-term debt, net of current portion | | | | | | | | | |
| — third parties | 4,205 |
| | 28 |
| | 116 |
| | — |
| | 4,349 |
|
| — related parties | 49 |
| | 1,780 |
| | 56 |
| | (1,885 | ) | | — |
|
| Deferred income tax liabilities | — |
| | 254 |
| | 7 |
| | — |
| | 261 |
|
| Accrued postretirement benefits | 30 |
| | 534 |
| | 184 |
| | — |
| | 748 |
|
| Other long-term liabilities | 36 |
| | 175 |
| | 10 |
| | — |
| | 221 |
|
| Total liabilities | 5,023 |
| | 5,411 |
| | 1,273 |
| | (2,535 | ) | | 9,172 |
|
| Commitments and contingencies |
|
| |
|
| |
|
| |
|
| |
|
|
| Temporary equity - intercompany | — |
| | 1,681 |
| | — |
| | (1,681 | ) | | — |
|
| Shareholder’s (deficit) equity | | | | | | | | | |
| Common stock | — |
| | — |
| | — |
| | — |
| | — |
|
| Additional paid-in capital | 1,404 |
| | — |
| | — |
| | — |
| | 1,404 |
|
| (Accumulated deficit) retained earnings | (925 | ) | | 1,122 |
| | 711 |
| | (1,833 | ) | | (925 | ) |
| Accumulated other comprehensive loss | (561 | ) | | (425 | ) | | (48 | ) | | 473 |
| | (561 | ) |
| Total (deficit) equity of our common shareholder | (82 | ) | | 697 |
| | 663 |
| | (1,360 | ) | | (82 | ) |
| Noncontrolling interests | — |
| | — |
| | 12 |
| | — |
| | 12 |
|
| Total (deficit) equity | (82 | ) | | 697 |
| | 675 |
| | (1,360 | ) | | (70 | ) |
| Total liabilities and (deficit) equity | $ | 4,941 |
| | $ | 7,789 |
| | $ | 1,948 |
| | $ | (5,576 | ) | | $ | 9,102 |
|
Novelis Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
CONSOLIDATING STATEMENT OF CASH FLOWS
(In millions)
|
| | | | | | | | | | | | | | | | | | | | |
| | | Year Ended March 31, 2016 |
| | | Parent | | Guarantors | | Non-
Guarantors | | Eliminations | | Consolidated |
| OPERATING ACTIVITIES | | | | | | | | | | |
| Net cash (used in) provided by operating activities | | $ | (6 | ) | | $ | 728 |
| | $ | 85 |
| | $ | (266 | ) | | $ | 541 |
|
| INVESTING ACTIVITIES | | | | | | | | | | |
| Capital expenditures | | (10 | ) | | (314 | ) | | (46 | ) | |
|
| | (370 | ) |
| Proceeds from sales of assets, net of transaction fees and hedging | | | | | | | | | |
|
|
| — third parties | | 1 |
| | 2 |
| | — |
| | — |
| | 3 |
|
| Proceeds (outflows) from investment in and advances to affiliates, net | | 180 |
| | 47 |
| | (65 | ) | | (164 | ) | | (2 | ) |
| (Outflows) proceeds from settlement of other undesignated derivative instruments, net | | (107 | ) | | 117 |
| | (19 | ) | | — |
| | (9 | ) |
| Net cash provided by (used in) investing activities | | 64 |
| | (148 | ) | | (130 | ) | | (164 | ) | | (378 | ) |
| FINANCING ACTIVITIES | | | | | | | | | | |
| Proceeds from issuance of long-term and short-term borrowings | | | | | | | | | | |
| — third parties | | 59 |
| | 48 |
| | 67 |
| | — |
| | 174 |
|
| — related parties | |
|
| | 140 |
| |
|
| | (140 | ) | | — |
|
| Principal payments of long-term and short-term borrowings | | | | | | | | | | |
| — third parties | | (18 | ) | | (141 | ) | | (57 | ) | | — |
| | (216 | ) |
| — related parties | | (49 | ) | | (82 | ) | | — |
| | 131 |
| | — |
|
| Short-term borrowings, net | | | | | | | | | | |
| — third parties | | (57 | ) | | (158 | ) | | 28 |
| | — |
| | (187 | ) |
| — related parties | | 20 |
| | (193 | ) | | — |
| | 173 |
| | — |
|
| Dividends, noncontrolling interest and intercompany | | — |
| | (265 | ) | | (2 | ) | | 266 |
| | (1 | ) |
| Debt issuance costs | | (15 | ) | | — |
| | — |
| | — |
| | (15 | ) |
| Net cash (used in) provided by financing activities | | (60 | ) | | (651 | ) | | 36 |
| | 430 |
| | (245 | ) |
| Net decrease in cash and cash equivalents | | (2 | ) | | (71 | ) | | (9 | ) | | — |
| | (82 | ) |
| Effect of exchange rate changes on cash | | — |
| | 7 |
| | 3 |
| | — |
| | 10 |
|
| Cash and cash equivalents — beginning of period | | 4 |
| | 365 |
| | 259 |
| | — |
| | 628 |
|
| Cash and cash equivalents — end of period | | $ | 2 |
| | $ | 301 |
| | $ | 253 |
| | $ | — |
| | $ | 556 |
|
Novelis Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
CONSOLIDATING STATEMENT OF CASH FLOWS
(In millions)
|
| | | | | | | | | | | | | | | | | | | |
| | Year Ended March 31, 2015 |
| | Parent | | Guarantors | | Non-
Guarantors | | Eliminations | | Consolidated |
| OPERATING ACTIVITIES | | | | | | | | | |
| Net cash provided by operating activities | $ | 29 |
| | $ | 606 |
| | $ | 161 |
| | $ | (192 | ) | | $ | 604 |
|
| INVESTING ACTIVITIES | | | | | | | | | |
| Capital expenditures | (17 | ) | | (404 | ) | | (97 | ) | | — |
| | (518 | ) |
| Proceeds from the sale of assets, net of transaction fees | | | | | | | | | |
| — third parties | 29 |
| | 88 |
| | — |
| | — |
| | 117 |
|
Proceeds (outflows) from investment in and advances to affiliates, net
| 250 |
| | 5 |
| | — |
| | (275 | ) | | (20 | ) |
| (Outflows) proceeds from settlement of other undesignated derivative instruments, net | (19 | ) | | 23 |
| | 1 |
| | — |
| | 5 |
|
| Net cash provided by (used in) investing activities | 243 |
| | (288 | ) | | (96 | ) | | (275 | ) | | (416 | ) |
| FINANCING ACTIVITIES | | | | | | | | | |
| Proceeds from issuance of long-term and short-term borrowings | | | | | | | | | |
| — third parties | — |
| | 315 |
| | 47 |
| | — |
| | 362 |
|
| — related parties | — |
| | 500 |
| | 3 |
| | (503 | ) | | — |
|
| Principal payments of long-term and short-term borrowings | | | | | | | | | |
| — third parties | (21 | ) | | (266 | ) | | (37 | ) | | — |
| | (324 | ) |
| — related parties | — |
| | (80 | ) | | — |
| | 80 |
| | — |
|
| Short-term borrowings, net | | | | | | | | | |
| — third parties | 27 |
| | 97 |
| | 36 |
| | — |
| | 160 |
|
| — related parties | (25 | ) | | (686 | ) | | — |
| | 711 |
| | — |
|
| Return of capital to our common shareholder | (250 | ) | | — |
| | 13 |
| | (13 | ) | | (250 | ) |
| Dividends, noncontrolling interests and intercompany | — |
| | (191 | ) | | (2 | ) | | 192 |
| | (1 | ) |
| Debt issuance costs | (3 | ) | | — |
| | — |
| | — |
| | (3 | ) |
| Net cash (used in) provided by financing activities | (272 | ) | | (311 | ) | | 60 |
| | 467 |
| | (56 | ) |
| Net decrease in cash and cash equivalents | — |
| | 7 |
| | 125 |
| |
|
| | 132 |
|
| Effect of exchange rate changes on cash | — |
| | (14 | ) | | 1 |
| | — |
| | (13 | ) |
| Cash and cash equivalents — beginning of period | 4 |
| | 372 |
| | 133 |
| | — |
| | 509 |
|
| Cash and cash equivalents — end of period | $ | 4 |
| | $ | 365 |
| | $ | 259 |
| | $ | — |
| | $ | 628 |
|
Novelis Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
CONSOLIDATING STATEMENT OF CASH FLOWS
(In millions)
|
| | | | | | | | | | | | | | | | | | | | |
| | | Year Ended March 31, 2014 |
| | | Parent | | Guarantors | | Non- Guarantors | | Eliminations | | Consolidated |
| OPERATING ACTIVITIES | | | | | | | | | | |
| Net cash provided by operating activities | | $ | 144 |
| | $ | 834 |
| | $ | 233 |
| | $ | (509 | ) | | $ | 702 |
|
| INVESTING ACTIVITIES | | | | | | | | | | |
| Capital expenditures | | (22 | ) | | (492 | ) | | (203 | ) | | — |
| | (717 | ) |
| Proceeds from the sale of assets, net of transaction fees | | | | | | | | | |
|
|
| — third parties | | — |
| | 7 |
| | 1 |
| | — |
| | 8 |
|
| — related parties | | — |
| | 8 |
| | — |
| | — |
| | 8 |
|
Outflows from investment in and advances to affiliates, net
| | (261 | ) | | (41 | ) | | — |
| | 286 |
| | (16 | ) |
| (Outflow) proceeds from settlement of undesignated derivative instruments, net | | (21 | ) | | 21 |
| | 15 |
| | — |
| | 15 |
|
| Net cash used in investing activities | | (304 | ) | | (497 | ) | | (187 | ) | | 286 |
| | (702 | ) |
| FINANCING ACTIVITIES | | | | | | | | | | |
| Proceeds from issuance of long-term and short-term borrowings | | | | | | | | | | |
| — third parties | | — |
| | 147 |
| | 22 |
| | — |
| | 169 |
|
| — related parties | | — |
| | — |
| | 56 |
| | (56 | ) | | — |
|
| Principal payments of long-term and short-term borrowings | | | | | | | | | | |
| — third parties | | (19 | ) | | (143 | ) | | (2 | ) | | — |
| | (164 | ) |
| Short-term borrowings, net | | | | | | | | | | |
| — third parties | | 162 |
| | 44 |
| | 2 |
| | — |
| | 208 |
|
| — related parties | | 25 |
| | 208 |
| | — |
| | (233 | ) | | — |
|
| Return of capital | | — |
| | — |
| | (3 | ) | | 3 |
| | — |
|
| Dividends, noncontrolling interests | | — |
| | (420 | ) | | (89 | ) | | 509 |
| | — |
|
| Debt issuance costs | | (8 | ) | | — |
| | — |
| | — |
| | (8 | ) |
| Net cash provided by (used in) financing activities | | 160 |
| | (164 | ) | | (14 | ) | | 223 |
| | 205 |
|
| Net increase in cash and cash equivalents | | — |
| | 173 |
| | 32 |
| | — |
| | 205 |
|
| Effect of exchange rate changes on cash | | — |
| | 3 |
| | — |
| | — |
| | 3 |
|
| Cash and cash equivalents — beginning of period | | 4 |
| | 196 |
| | 101 |
| | — |
| | 301 |
|
| Cash and cash equivalents — end of period | | $ | 4 |
| | $ | 372 |
| | $ | 133 |
| | $ | — |
| | $ | 509 |
|
|
| | | | | | | | | | | | | | | | |
| | | (Unaudited) Quarter Ended |
| | | June 30,
2016 | | September 30,
2016 | | December 31,
2016 | | March 31,
2017 |
| Net sales | | $ | 2,296 |
| | $ | 2,361 |
| | $ | 2,313 |
| | $ | 2,621 |
|
| Cost of goods sold (exclusive of depreciation and amortization) | | 1,930 |
| | 1,980 |
| | 1,924 |
| | 2,182 |
|
| Selling, general and administrative expenses | | 92 |
| | 108 |
| | 103 |
| | 118 |
|
| Depreciation and amortization | | 89 |
| | 90 |
| | 88 |
| | 93 |
|
| Interest expense and amortization of debt issuance costs | | 83 |
| | 81 |
| | 67 |
| | 63 |
|
| Research and development expenses | | 13 |
| | 14 |
| | 14 |
| | 17 |
|
| Loss on sale of a business, net | | — |
| | 27 |
| | — |
| | — |
|
| Gain on assets held for sale, net | | (1 | ) | | (1 | ) | | — |
| | — |
|
| Loss on extinguishment of debt | | — |
| | 112 |
| | — |
| | 22 |
|
| Restructuring and impairment, net | | 2 |
| | 1 |
| | 1 |
| | 6 |
|
| Equity in net loss of non-consolidated affiliates | | — |
| | — |
| | 8 |
| | — |
|
| Other expense (income), net | | 28 |
| | 11 |
| | (3 | ) | | 32 |
|
| Income tax provision | | 36 |
| | 27 |
| | 47 |
| | 41 |
|
| Net income (loss) | | 24 |
| | (89 | ) | | 64 |
| | 47 |
|
| Net income attributable to noncontrolling interests | | — |
| | — |
| | 1 |
| | — |
|
| Net income (loss) attributable to our common shareholder | | $ | 24 |
| | $ | (89 | ) | | $ | 63 |
| | $ | 47 |
|
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934, as amended (the Exchange Act) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, include controls and procedures designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including the Principal Executive Officer and the Principal Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system are met.
As required by Securities and Exchange Commission rules, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this Annual Report on Form 10-K. This evaluation was carried out under the supervision and with the participation of our management, including our Principal Executive Officer and Principal Financial Officer. Based on this evaluation, our management, including our Principal Executive Officer and Principal Financial Officer, havehas concluded that our disclosure controls and procedures were effective as of March 31, 20162018.
Management’s Report on Internal Control over Financial Reporting
The report of management on our internal control over financial reporting as of March 31, 20162018 is set forth in Part II, "Item 8. Financial Statements and Supplementary Data" in this report.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information
On May 5, 2016,2, 2018, our Board of Directors approved a fiscal year 20172019 executive annual incentive plan (2017(2019 Executive AIP) and an executive long term incentive plan covering fiscal years 20162019 through 2019 (20172021 (2019 Executive LTIP). For additional information regarding the 20172019 Executive AIP and the 20172019 Executive LTIP, see Item 11 - Executive Compensation, Fiscal Year 20172019 Incentive Compensation Plans, which is incorporated by reference into this item.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Our Directors
Our Board of Directors is currently comprised of six directors. All of our directors were appointed by our sole shareholder, Hindalco. Our directors’ terms will expire at each annual shareholder meeting, provided that if an election of directors is not held at an annual shareholder meeting, the directors then in office shall continue in office or until their successors shall be elected. Biographical details for each of our directors are set forth below.
|
| | | | | | |
| Name | | Director Since | | Age | | Position |
| Kumar Mangalam Birla | | May 15, 2007 | | 4850 | | Chairman of the Board |
| Askaran Agarwala (B) | | May 15, 2007 | | 8284 | | Director |
| D. Bhattacharya (A)(B) | | May 15, 2007 | | 6769 | | Director and Vice Chairman of the Board |
| Clarence J. Chandran (A)(B) | | January 6, 2005 | | 6769 | | Director |
| Donald A. Stewart (A) | | May 15, 2007 | | 6971 | | Director |
| Satish Pai (B) | | August 6, 2013 | | 5456 | | Director |
_________________________
| |
| (A) | Member of our Audit Committee |
| |
| (B) | Member of our Compensation Committee |
Mr. Kumar Mangalam Birla was elected as the Chairman of the Board of Directors of Novelis on May 15, 2007. Mr. Birla is the Chairman of Hindalco Industries Limited which is an industry leader in aluminum and copper. He is also the Chairman of Aditya Birla Group’s leading blue-chip companies including Grasim, UltraTech Cement Aditya Birla Nuvo and Idea Cellular; and globally, Novelis, Aditya Birla Chemicals (Thailand) Limited and Indo Phil Textile Mills Inc. Philippines. Mr. Birla also serves as director on the board of the Group’s international companies spanning Thailand, Indonesia, Philippines, Egypt, and Canada. Additionally, Mr. Birla is the Chancellor of the Birla Institute of Technology & Science, Pilani.Pilani and the Chairman of the Board of Governors Indian Institute of Management, Ahmedabad and Indian Institute of Technology. He is a member of the London Business School’s Asia Pacific Advisory Board. Mr. Birla’s past affiliations include service on the boards of Maruti Udyog Limited and Tata Iron and Steel Co. Limited. He was a part time non officialnon-official director on the Central Board of Reserve Bank of India. Mr. Birla brings to the board significant global leadership experience acquired through his service as a director of numerous corporate, professional and regulatory entities in various regions of the world.
Mr. Askaran Agarwala has served as a Director of Hindalco since July 2004.September 1998. He was Chairman of the Business Review Council of the Aditya Birla Group from October 2003 to March 2010. From 1982 to October 2003, he was President of Hindalco. Mr. Agarwala serves on the Compensation Committee of the Novelis Board of Directors. Mr. Agarwala also serves as a director of several other companies, including Hindalco, Udyog Services Ltd., Tanfac Industries Ltd., Aditya Birla Insurance Advisory ServicesBrokers Limited and Aditya Birla Health Services Limited. He is a Trusteetrustee of G.D.Sarla Basant Birla Medical Research and Education Foundation, Vaibhav Medical and Education Foundation and Sarla BasantParam Bhakti Trust, Aditya Vikram Birla Memorial Trust and the Aditya Vikram Birla Memorial Trust.Foundation and the Hellen Keller Institute of the Deaf and Blind, among many other organizations. Mr. Agarwala’s past and current service as a director of several companies and industry associations in the metals and manufacturing industries adds a very valuable perspective to the board. Having served as president of our parent company, Hindalco, Mr. Agarwala also brings a depth of understanding of our business and operations.
Mr. Debnarayan Bhattacharya has served as Managing Director of Hindalco since 2004. Mr. Bhattacharya is Vice Chairman of Novelis and serves on the Audit and Compensation Committees of the Novelis Board of Directors. He retired from his position as Managing Director of Hindalco in July 2016. Mr. Bhattacharya continues to serve as Non Executive Director and is appointed as the Vice Chairman of Aditya Birla Minerals Limited in Australia and also serves as a Director of Aditya Birla Management Corporation Private Ltd.Hindalco. Mr. Bhattacharya’s extensive knowledge of the aluminum and metals industries provides a valuable resource to the company in the setting and implementation of its operating business plans as the Company considers various strategic alternatives. Mr. Bhattacharya brings to the board a high degree of financial literacy.
Clarence J. Chandran has been a director of the Company since 2005. Mr. Chandran serves on the Compensation and Audit Committees of the Novelis Board of Directors, and acts as the Chairman of the Compensation Committee. Mr. Chandran is Chairmansenior advisor of 4Front Capital Partners Inc. Mr. Chandran also serves as Venture Partner of The Walsingham Fund. He is a past director of Alcan Inc. and MDS Inc. He retired as Chief Operating Officer of Nortel Networks Corporation (communications) in 2001. Mr. Chandran is a past member of the Board of Visitors of the Pratt School of Engineering at Duke University. He has acquired years of significant experience through his leadership and management of companies with international business operations. Mr. Chandran brings to the board his deep knowledge in the areas of technology, sales and global operations.
Donald A. Stewart isserves as Chairman of the Audit Committee of the Novelis Board of Directors. He retired as Chief Executive Officer and Director of Sun Life Financial Inc. and Sun Life Assurance Company of Canada. Mr. Stewart serves on the Audit Committee of the Novelis Board of Directors and serves as its Chairman. Mr. Stewart also servescontinues to serve as a director of Birla Sun Life Insurance Company Limited, Birla Sun Life Asset Management Company Limited, Sun Life Global Investments Inc., Sun Life Everbright Life Insurance Company Limited and Sun Life Assurance Company of Canada (UK) Limited. He is the Chairman of AV Group NB Inc., AV Terrace Bay Inc., and of the federal-provincial Nominating Committee for the Canada Pension Plan Investment Board. Mr. Stewart brings extensive financial management and operating experience to the board.
Mr. Satish Pai has served as the Managing Director of Hindalco Industries Limited since August 2016. Mr. Pai previously served as served as Deputy Managing Director of Hindalco Industries Limited sincefrom February 2014. He previously served2014 to May 2016, and as Chief Executive Officer - Aluminum Business of Hindalco Industries Limited from August 2013 to January 2014. Prior to that, Mr. Pai served as Executive Vice President, Worldwide Operations of Schlumberger Ltd. Mr. Pai joined Schlumberger Ltd. in 1985 as a field engineer and held various positions of increased responsibility over the course of his 28 year tenure with the company. He serves on the Compensation Committee of the Novelis Board of Directors and also serves as a director of Hindalco. Mr. Pai also serves as a Director of ABB Limited, Switzerland and Hindalco-Almex Aerospace Limited.Switzerland. Mr. Pai brings extensive industry and global operating experience to the board.
Our Executive Officers
The following table sets forth information for persons serving as executive officers of our Company as of April 30, 2016.2018. Biographical details for each of our executive officers are also set forth below.
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| | | | |
| Name | | Age | | Position |
| Steven Fisher | | 4547 | | President and Chief Executive Officer |
| Devinder Ahuja | | 52 | | Senior Vice President and Chief Financial Officer |
| Steven E. Pohl | | 5658 | | Interim Chief Financial OfficerSenior Vice President, Business Performance and Execution |
| Marco Palmieri | | 5961 | | Senior Vice President and President, Novelis North America |
Erwin MayrEmilio Braghi | | 4650 | | Senior Vice President and President, Novelis Europe |
| Antonio Tadeu Coelho Nardocci | | 5860 | | Senior Vice President and President, Novelis South America |
Shashi MaudgalSachin Satpute | | 6252 | | Senior Vice President and President, Novelis Asia |
| Leslie J. Parrette, Jr. | | 5456 | | Senior Vice President, General Counsel, Compliance Officer and Corporate Secretary
|
| Nicholas Madden | | 5961 | | Senior Vice President, Manufacturing Excellence and Procurement |
| H.R. Shashikant | | 5355 | | Senior Vice President and Chief Human Resources Officer |
| Randal Miller | | 5355 | | Vice President, Treasurer |
| Stephanie Rauls | | 4749 | | Vice President, Controller and Chief Accounting Officer |
Steven Fisher is our President and Chief Executive Officer. HeSince joining the company in 2006, Mr. Fisher has served in a number of executive positions, most recently as Senior Vice President and Chief Financial Officer from May 2007 to MayNovember 2015. Mr. Fisher joined Novelis in February 2006 as Vice President, Strategic Planning and Corporate Development. He previouslyPrior to joining Novelis, Mr. Fisher served as Vice President and Controller for TXU Energy, the non-regulated subsidiary of TXU Corp. from July 2005 to February 2006, and prior to joining TXU Energy,, at its headquarters in Dallas, Texas. Mr. Fisher served in various senior finance roles at Aquila, Inc., an international electric and gas utility and energy trading company, including Vice President, Controller and Strategic Planning, from 2001 to 2005. He is also a member of the boardBusiness Roundtable, an association of directorsleading U.S. companies working to promote sound public policy. In addition, he is a member of Lionbridge Technologies, Inc. since 2009.the Board of Directors for the Metro Atlanta Chamber of Commerce. Mr. Fisher isreceived a graduate ofBachelor’s Degree in Finance and Accounting from the University of IowaIowa.
Devinder Ahuja is our Senior Vice President and Chief Financial Officer, and has served in 1993,this role since August 2016. Before joining Novelis, Mr. Ahuja spent 15 years at Novartis Group, where he earnedserved most recently as Chief Financial Officer of the Alcon Division’s North America business. Prior to that, Mr. Ahuja held positions of increasing responsibility at Novartis covering the areas of finance, strategic planning, supply chain and purchasing. During his career, Mr. Ahuja has held various finance leadership roles including posts in Switzerland, South Korea, Japan and India. Mr. Ahuja holds a B.B.A.Bachelor of Commerce degree from the RA Podar College of Commerce and Economics in FinanceMumbai, India and Accounting. He is a Certified PublicChartered Accountant.
Steven Pohl is our Interim Chief Financial Officer.Senior Vice President, Business Performance and Execution and has served in this role since June 2016. Mr. Pohl joined Novelis in 2009 as Vice President Finance, Chief Financial Officer North America, and most recently served as Vice President, Financial Planning & Analysis since 2012.from 2012 to July 2015, and as Interim Chief Financial Officer from October 2015 to August 2016. Mr. Pohl was previously employed bycame to Novelis from PPG Industries, Inc., the world’s leading coatings and specialty products company, where he served as General Auditor from 2008 to 2009. Prior toBefore that, he held key finance and management positions of increasing responsibility at PPG Industries, Inc. from 1981 to 2008. He is also a board member and trustee of La Roche College in Pittsburgh, Pennsylvania. Mr. Pohl earned his B.S. in Accounting from La Roche College.
Marco Palmieri has served as our Senior Vice President and President, Novelis North America since June 2013. He previously served as Senior Vice President and President, Novelis South America from August 2011 to May 2013. Prior to joining Novelis, Mr. Palmieri spent more than 30 years in the metals and engineering industries, including more than 25 years with Rio Tinto Alcan, where he held a succession of international leadership positions in various areas, including business development, primary metal and energy production. Before joining Novelis, Mr. Palmieri was most recently Aluminum Business Director for Votorantim Metais Ltd.
Erwin MayrEmilio Braghi has served as our Senior Vice President and President, Novelis Europe since May 2013. He previouslySeptember 2016. Previously, he served as Senior Vice President, Operations, Novelis North America, since February 2015. Mr. Braghi joined Novelis in 1999 as Sales Manager, Europe. During his tenure, he has taken on many leadership roles of increasing responsibility and Chief Strategy and Commercial Officer from October 2009moved into his first general management role in 2006, when he was named head of Novelis' business in Italy. Mr. Braghi went on to April 2013. Prior to that, Mr. Mayr held a number ofhold multiple general management leadership positions within our European operations, including Business Unitwith Novelis' Litho and Painted Products value streams in Europe, directing both commercial and operational activities and he joined the Asia leadership team in March 2012 as Vice President Advanced Rolled Products,of Operations. Mr. Braghi holds a degree in Engineering and Industrial Production Technologies from 2002 to 2009. Before joining our companyPolitecnico di Milano in 2002, Mr. Mayr was an associate partner with the consulting firm Monitor Group. Mr. Mayr earned his Ph.D., Physics from Ulm University (Germany).Milan, Italy.
Antonio Tadeu Coelho Nardocci has served as our Senior Vice President and President, Novelis South America since May 2013. He previously served as our Senior Vice President and President, Novelis Europe from June 2009 to April 2013. Prior to that, he served as our Strategy, Innovation and Technology from August 2008 to June 2009, and as Senior Vice President and President of our South American operations from February 2005 to August 2008. Before our spin-off from Alcan, Mr. Nardocci held a number of leadership positions with Alcan, most recently serving as President of Rolled Products South America from March 2002 until January 2005. Mr. Nardocci graduated from the University of São Paulo in Brazil with a degree in metallurgy. Mr. Nardocci is Chairman of the Brazilian Aluminum Association Board.
Shashi MaudgalSachin Satpute joined Novelis May 14, 2012, asis Senior Vice President and President, of Novelis Asia. Mr. Maudgal wasAsia and has served in this role since June 2016. He previously served as Chief Marketing Officer for Hindalco Industries since 2012, and was Managing Director of Aluminum Company of Malaysia (ALCOM) from February 2001April 2011 until June 2012. Prior to May 2012. During his tenure atmost recent role with Hindalco, Mr. Maudgal built and led the company’s marketing department, led the European due diligence process during Hindalco's acquisition ofSatpute spent five years with Novelis in 2007, and servedvarious roles of increasing responsibility. Mr. Satpute began his career at a Hindalco aluminum plant in 1987 as a member of the executive leadership team in setting strategic direction.development engineer. In addition to a degree in mechanical engineering from Pune University, Mr. Maudgal is a member of the Aditya Birla Group’s Business Review Councils for Grasim Viscose Fiber and Ultratech’s Birla White Cement. Mr. Maudgal earned his Bachelor of TechnologySatpute also holds an MBA in Chemical Engineeringmarketing from the Indian Institute of Technology, Delhi, and his M.B.A. in Marketing & Finance from the Indian Institute of Management, Calcutta.Mumbai University, India.
Leslie J. Parrette, Jr. rejoined our company in October 2009 to serve as our Senior Vice President, General Counsel and Compliance Officer, and he was appointed Corporate Secretary in February 2010. Before rejoining Novelis, Mr. Parrette served as Senior Vice President, Legal Affairs and General Counsel for WESCO International, Inc. (formerly Westinghouse Electric Supply Co.) (electrical product distribution) from March 2009 until October 2009. From March 2005 until March 2009, he served as our Senior Vice President, General Counsel, Secretary and Compliance Officer. Prior to that, Mr. Parrette served as Senior Vice President, General Counsel and Secretary for Aquila, Inc. (gas and electric utility; energy trading) from July 2000 until February 2005. Mr. Parrette holds an A.B. in Sociology from Harvard College and received his J.D. from Harvard Law School.
Nicholas Madden is our Senior Vice President, Manufacturing Excellence and Procurement. Prior to this role, he served as Senior Vice President, Chief Supply Chain Officer, which he assumed in January 2012 and served as Senior Vice President and Chief Procurement Officer from October 2006 until December 2011 and President of Novelis Europe’s Can, Litho and Recycling business unit beginning in October 2004. He was Vice President of Metal Management and Procurement for Alcan's Rolled Products division in Europe from December 2000 until September 2004 and was also responsible for the secondary recycling business. Mr. Madden holds a B.Sc. (Hons) degree in Economics and Social Studies from University College in Cardiff, Wales.
H.R. Shashikant has served as our Senior Vice President and Chief Human Resources Officer since August 2015. In this role, Mr. Shashikant is responsible for the formulation and implementation of the company's worldwide human resources objectives, policies and practices. As the head of the global Human Resources function, he has responsibility for Talent Acquisition and Development, Compensation, Benefits, HRIS and Global Security. Before joining Novelis, Mr. Shashikant was Group Executive President, Group Human Resources, for the Aditya Birla Group, the Mumbai-based conglomerate of which Novelis is a part. He joined the Aditya Birla Group as a Vice President in 1999 and was instrumental in setting up HR systems, processes, and Centers of Excellence across the Group. An Economics graduate from Karnataka University in Dharwad, India, Mr. Shashikant holds a post graduate degree in Personnel Management from the Tata Institute of Social Sciences, Mumbai.
Randal P. Miller is our Vice President, Treasurer. Prior to joining Novelis in July 2008, Mr. Miller served as Vice President and Treasurer of Transocean Offshore Deepwater Drilling from May 2006 to November 2007 where he was
responsible for all treasury, banking, and capital markets activities for Transocean and its subsidiaries. From 2001 to 2006, Mr. Miller served as Vice President Finance, Treasurer of Aquila, Inc. Mr. Miller earned his B.S.B.A. from Iowa State University and M.B.A from the University of Missouri — Kansas City.
Stephanie Raulsis has served as our Vice President, Controller and Chief Accounting Officer since February 2016. Ms. Rauls previously served as Vice President of Global Tax since December 2013. Prior to joining Novelis, Ms. Rauls served as Vice President, Tax of Wal-Mart Stores, Inc. from 2011 to 2013, and prior to that, she was employed by GE Healthcare as a tax director from 2002 to 2011. Before joining GE Healthcare, Ms. Rauls was employed by KPMG LLP from 1994 to 2002. She earned a Bachelor of Business Administration in Accounting from the University of Wisconsin-Madison and a Juris Doctor from Valparaiso University School of Law. Ms. Rauls is a Certified Public Accountant.
Board of Directors and Corporate Governance Matters
We are committed to our corporate governance practices, which we believe are essential to our success and to the enhancement of shareholder value. Our Senior Notes are publicly traded in the U.S., and, accordingly, we make required filings with 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 applicable regulatory requirements to ensure transparency and effective governance of the company.
Our Board of Directors 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 currently has six members, all of whom are appointed by our sole shareholder. Our Board of Directors has the responsibility for stewardship of Novelis Inc., including the responsibility to ensure that we are managed in the interest of our sole shareholder, 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) our articles of incorporation and bylaws; (2) the charters of its committees and (3) other applicable legislation and company policies.
Our corporate governance practices require that, in addition to certain 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 by our by-laws and (4) any matter which may have the potential for substantial impact on Novelis. Our Board of Directors reviews its composition and size once a year. Senior management makes regular presentations to our Board of Directors on the main areas of our business.
Corporate Governance
Holders of our Senior Notes and other interestedInterested parties may communicate with the Board of Directors, a committee or an individual director by writing to Novelis Inc., Two Alliance Center, 3560 Lenox Road N.E., Suite 2000, 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.
Committees of Our Board of Directors
Our Board of Directors has established two standing committees: the Audit Committee and the Compensation Committee. Each committee is governed by its own charter. According to their authority as set out in their charters, our Board of Directors and each of its committees may engage outside advisors at the expense of Novelis.
Audit Committee and Financial Experts
Our Board of Directors has established an Audit Committee. Messrs. Stewart, Bhattacharya and Chandran are the members of the Audit Committee. Mr. Stewart, an independent director, has been identified as an “audit committee financial expert” as that term is defined in the rules and regulations of the SEC.
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:
evaluating and compensating our independent registered public accounting firm;
making recommendations to the Board of Directors and shareholder relating to the appointment, retention and termination of our independent registered public accounting firm;
discussing with our independent registered public accounting firm its qualifications and independence from management;
reviewing with our independent registered public accounting firm the scope and results of its audit;
pre-approving all audit and permissible non-audit services to be performed by our independent registered public accounting firm;
reviewing areas of potential significant financial risk and the steps taken to monitor and manage such exposures;
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
reviewing and monitoring our accounting principles, accounting policies and disclosure, internal control over financial reporting and disclosure controls and procedures.
Compensation Committee
Our Compensation Committee establishes our general compensation philosophy and oversees the development and implementation of compensation policies and programs. It also reviews and approves the level of and/or changes in the compensation of individual executive officers taking into consideration individual performance and competitive compensation practices. The committee’s specific roles and responsibilities are set out in its charter. Our Compensation Committee periodically reviews the effectiveness of our overall management organization structure and succession planning for senior management, reviews recommendations for the appointment of executive officers, and reviews annually the development process for high potential employees.
Code of Conduct and Guidelines for Ethical Behavior
Novelis has adopted a Code of Conduct and maintains a Code of Ethics for Senior Financial Officers that applies to our senior financial officers including our principal executive officer, principal financial officer, principal accounting officer, or persons performing similar functions. Copies of the Code of Conduct and the Code of Ethics for Senior Financial Officers are available on our website at www.novelis.com. 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 from our Corporate Secretary upon request.
Item 11. Executive Compensation
This section provides a discussion of the background and objectives of our compensation programs for our named executive officers and other senior management employees. Our named executive officers are determined in accordance with rules of the Securities and Exchange Commission and include persons serving in the role of our principal executive officer, persons serving in the role of our principal financial officer and the three other highest paid executive officers thatwho were employed by the Company on March 31, 2016. Steven Fisher was appointed as the Company’s President and Chief Executive Officer on August 10, 2015, replacing our former President and Chief Executive Officer, Philip Martens, who separated from the Company on April 20, 2015. Steven Pohl was appointed Interim Chief Financial Officer on October 19, 2015.2018.
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| |
Named Executive Officer for Fiscal 2016
| Title |
| Steven Fisher | President and Chief Executive Officer |
Steven E. PohlDevinder Ahuja | InterimSenior Vice President, Chief Financial Officer |
Leslie J. Parrette Jr. | Senior Vice President, General Counsel, Compliance Officer and Corporate Secretary |
Erwin Mayr | Senior Vice President and President of Novelis Europe |
| Marco Palmieri | Senior Vice President and President, of Novelis North America |
| Emilio Braghi | Senior Vice President and President Novelis Europe |
Compensation Committee and Role of Management
The Compensation Committee of our board of directors (the “Committee”)Committee) is responsible for approving the compensation programs for our named executive officers and making decisions regarding specific compensation to be paid or awarded to them. The Committee acts pursuant to a charter approved by our board.
Our Chief Human Resources Officer serves as the primary management liaison officer for the Committee. Our human resources and legal departments provide assistance to the Committee in the administration of the Committee’s responsibilities.
Our named executive officers have no direct role in setting their own compensation. The Committee, however, meets with members of our management team to evaluate performance against pre‑establishedpre-established goals, and management makes recommendations to the board regarding budgets, production and sales forecasts and other information, which affect certain goals.
The Committee may seek input from our senior management concerning individual performance, expected future contributions and compensation matters generally.
Management assists the Committee by providing information needed or requested by the Committee (such as our performance against budget and objectives, historical compensation, compensation expense, current Company policies and programs, country‑specific prevalentcountry-specific compensation practices, peer group metrics and peer group target pay levels) and by providing input and advice regarding potential changes to compensation programs and policies and their impact on the Company and its executives.
In the first quarter of each fiscal year, the Committee (1) reviews prior year performance and approves the distribution of short‑termshort-term incentive and long‑long term incentive earned payouts, if any, for the prior year, (2) reviews and approves base pay and short‑short term incentive targets for executives for the current year, and (3) recommends to the board of directors the form of long‑termlong term‑ incentive award vehicles and vesting performance criteria for the current cycle of the program. The Committee may employ alternative practices when appropriate under the circumstances.
Although the
The Committee did not independently engage a third party compensation consultant to assist in developing our fiscal 2016 compensation program,2018. However, management worked with Mercer LLC (a global human resource consulting firm) to evaluate and benchmark our executive compensation program, and management reportsshared Mercer’s analysis towith the Committee..Committee. Management also routinely reviews compensation surveys published by other leading global human resources consulting firms. Hay Group (a global human resource consulting firm) periodically assists management with the internal leveling of executive jobsroles to ensure internal equity and external competitiveness of pay opportunities based on an executive’s jobthe scope and complexity.complexity of executive roles.
For executive compensation benchmarking purposes, management focuseswe focus on large global companies headquartered in the southeastern United States with whom Novelis may compete for executive talent, as well as other major companies in the manufacturing and materials sectors having revenues in excess of $1$2 billion. The companies that comprise our peer group may change from year to year as a result of merger and acquisition activity or revenue growth of relevant companies that moves such companies into consideration. The peer group considered in management’s most recent compensation competitive analysis consisted of the following companies, which have median revenues of approximately $13 billion:companies:
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| | |
| AGCO Corp | Coca-Cola Co.Ashland Global Holdings Inc | Noranda Aluminum HoldingKennametal Inc |
Air Products & Chemicals Inc.Inc | Dow ChemicalBerry Plastics Group Inc | Southern Co.Newell Brands Inc |
Alcoa Inc.Corp | Ingersoll- Rand PLCEastman Chemical Co | Genuine Parts Co.PPG Industries Inc |
Altria Group Inc.Inc | PPG IndustriesGenuine Parts Co | Praxair Inc |
AshlandArconic Corp | Eastman Chemical Co.Ingersoll-Rand PLC | Newell Rubbermaid |
Caterpillar Inc. | Kennametal | Southern Co |
While both the Committee and management review compensation data (both in(in surveys and public filings) to confirm that our executive compensation program is competitive, the Committee retains discretion to set an individual executive’s compensation. As a result, compensation for an executive may differ materiallysignificantly from the survey or peer group data and may be influenced by factors including past performance, experience and potential, retention needs, job position and/or tenure. Management and the Committee focus on target compensation opportunities disclosed in survey and peer group compensation data (and not actual compensation earned, which is influenced by the historical company or individual performance of the survey and peer group participants).
Objectives and Design of Our Compensation Program
Our executive compensation program is designed to attract, retain, and reward talented executives who will contribute to our long-term financial and operational success and thereby build value for our shareholder. The program is organized around three fundamental principles:
•Provide Total Cash and Total Direct Compensation Opportunities that are Competitive with Similar Positions at Comparable Companies: To enable us to attract, motivate and retain qualified executives to build long-term stockholdershareholder value, total cash compensation (base pay plus annual short-term incentives) and total direct compensation (total cash compensation plus the value of long-term incentives) opportunities for each executive are targeted at levels to be market competitive and reflect the value paid to executives in similar positions at comparable companies and also be appropriately positioned within the Company to ensure internal equity based on the scope and complexity of the role as it is designed at Novelis.
•A Substantial Portion of Total Direct Compensation Should be at Risk Because it is Performance-Based: We believe an executive’s actual compensation should be linked directly to the Company’s short-term and long-term financial performance and each individual’s annual contribution. Consequently, a substantial portion of an executive’s total direct compensation should be at risk, with amounts that are paid dependent on actual performance against pre-established objectives for both the individual and financial goals of the Company. The portion of an individual’s total direct compensation that is based upon these performance objectives and financial goals should increase as the individual’s business responsibilities and job scope increase. Additionally, we believe performance that exceeds target goals should be appropriately rewarded and aligned with prevalent market practices.
•A Substantial Portion of Total Direct Compensation Should be Delivered in the Form of Long-Term Performance Based Awards: We believe a long-term stake in the sustained financial performance of Novelis effectively aligns executive and shareholder interests and provides motivation for enhancing shareholder value.
The Committee recognizes that the engagement of strongtop talent in critical functions may require the recruitment of new executives and involve negotiations with individual candidates. As a result, the Committee may determine in a particular situation that it is in our best interests to negotiate a compensation package that varies from the principles set forth above.
Key Elements of Our Compensation Program
Our compensation program consists of four key elements: base pay, short‑termshort-term (annual) incentives, long‑termlong-term incentives, and employee benefits, which includes certain executive perquisites. The Committee reviews these compensation elements, generally during the first quarter of the fiscal year. On a regular basis, theThe Committee also compares the competitiveness of these key elements to that of companies in our peer group and/or to available compensation survey market data. Our objective for named executive officer compensation is to be at or near the market median (50th percentile) for both target total cash compensation and total direct compensation. In fiscal 2016, Mercer LLC conducted a compensation analysis for us which revealed that our aggregate fiscal 2016 target total cash compensation and total direct compensation for our named executive officers were 74% and 58%, respectively, of the market median. This comparison was impacted by the changes in our Chief Executive Officer and Chief Financial Officer roles in fiscal 2016. Over time it is expected that these compensation metrics will move closer to the market median based on the executives’ performance and as the executives’ tenure in these roles lengthens. Unless otherwise indicated, all amounts paid in currencies other than U.S. dollars are reflected in the Compensation Discussion and Analysis in U.S. dollars as adjusted by the applicable exchange rates on March 31, 2016 exchange rates.2018.
Base Pay.Based on market practices, we believe it is appropriate that a minimum portion of total direct compensation be provided in a form that is fixed and recognizes individual performance in the prior fiscal year. Any changes in base salaries are generally effective July 1 of the current year (i.e., the start of the Company’s second quarter of the fiscal year), unless an executive is promoted or assumes a new role during the fiscal year. The Committee’s objective is to position base salaries for the named executive officers at or near the median of comparable positions at companies in our peer group. In aggregate, fiscal 2016 salaries of our named executive officers were 87% of the market median.
The base salaries for certain of our named executive officers were increased in fiscal 2016 as shown in the table below. All increases reflect changes in annual base salary in an officer’s home country currency and exclude any additional payments related to a job assignment outside of one’s home country.
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| | | |
Named Executive
Officer
| | Fiscal 2016 %
Salary Increase
|
Steven Fisher | | 36.2 | % |
Steven E. Pohl | | 3.5 | % |
Leslie Parrette | | 3.0 | % |
Erwin Mayr | | 3.5 | % |
Marco Palmieri | | 8.0 | % |
Steven Fisher's salary increased substantially as a result of his promotion to Chief Executive Officer in fiscal 2016, although his salary remains significantly below the market median.
Short-Term (Annual) Cash Incentives.We believe that an annual incentive opportunity is necessary to attract, retain and reward our executives. Our philosophy concerning annual incentive program design for executives is based on the guiding values below:
Annual incentives should be directly linked with and clearly communicate the strategic priorities setapproved by the board.our board of directors.
Annual incentives should be primarily weighted on the achievement of Company-wide financial goals.
Annual incentives should be 100% at-risk, and there should be a minimum financial performance threshold that must be attained to receive any payout.
Performance goals should be sufficiently ambitious to drive enterprise value creation, but also be based on metrics that executives can meaningfully influence over the annual time frame, and payouts should not be concentrated on a single metric.
Threshold, target and maximum opportunity payouts (as a percent of salary) should be comparable with opportunity payouts of executives in similar roles atin other benchmark companies/companies or industries.
The Committee retains the discretion to adjust, up or down, annual incentives earned based on the Committee’s subjective assessment of individual performance.
Our Committee and board of directors, after input from management, approved our fiscal 20162018 annual incentive plan (“AIP”)(2018 AIP) during the first quarter of fiscal 2016.2018. The performance benchmarks for the year were tied to threefour key metrics: (1) the Company’s normalized earnings before interest, taxes, depreciation and amortization (“EBITDA”)(EBITDA) performance; (2) the Company’s operating free cash flow performance; and (3) the executive’s individual performance in recognition of each individual’s unique job responsibilities and annual objectives.objectives; and (4) the company’s performance against safety goals of reduction in serious injuries and reduction in total recordable incidents.
No 2018 AIP bonuses are payable with respect to any of the three incentive metrics unless overall Novelis EBITDA performance for fiscal 20162018 achieves at least 75% of the financial target. If the EBITDA threshold is achieved, the actual payout under the two financial metrics will range from 60% to 200% of target payout opportunity for EBITDA and 50% to 200% of target payout opportunity for Cash Flow depending upon the actual performance results, attributable to each metric, and the actual payout under the metric for individual performance metric’s actual payout can range from 60%0% to 200% of target payout opportunity. Actual performance below the threshold for a particular metric results in no payout for that specific metric.
The table below shows the 20162018 AIP target and actual performance for each goal and the amount earned based on actual performance. Mr. Martens, Novelis' former Chief Executive Officer, did not participate inperformance rounded to the AIP for fiscal 2016.nearest whole dollar.
|
| | | | | | |
Named Executive Officer | Target Bonus as Percentage of Salary (A) | Performance Metric (B) | Performance Metric Weighting | Bonus Payable at Target Performance
(C)
$
| Bonus Earned Based on Actual Performance
(C)
$
| Actual Bonus as a Percentage of Target Bonus (rounded) |
Steven Fisher | 95% | EBITDA Cash Flow
Individual
| 50%
40%
10%
100%
| 356,250
285,000
71,250
712,500
| 298,088
567,787
141,947
1,007,822
| 84%
200%
200%
142%
|
Steven Pohl | 40% | EBITDA Cash Flow
Individual
| 50%
40%
10%
100%
| 67,192
53,753
13,438
134,383
| 56,441
107,507
16,126
180,074
| 84%
200%
120%
134%
|
Erwin Mayr | 65% | EBITDA Cash Flow
Individual
| 50%
40%
10%
100%
| 181,442
145,153
36,288
362,883
| 152,411
290,306
36,288
479,005
| 84%
200%
100%
132%
|
Leslie Parrette | 70% | EBITDA Cash Flow
Individual
| 50%
40%
10%
100%
| 188,442
150,754
37,688
376,884
| 158,292
301,508
45,226
505,026
| 84%
200%
120%
134%
|
Marco Palmieri | 65% | EBITDA Cash Flow
Individual
| 50%
40%
10%
100%
| 113,070
90,456
22,614
226,140
| 94,979
180,912
27,137
303,027
| 84%
200%
120%
134%
|
|
| | | | | |
| Name | Target Bonus as Percentage of Salary (A) | Performance Objective (B) | Performance Weighting | Targeted Performance ($) | Actual Performance ($) |
| Steven Fisher | 111% | EBITDA | 40% | 398,702 | 621,657 |
| Cash Flow | 35% | 348,865 | 631,829 |
| Personal | 15% | 149,513 | 179,416 |
| Safety | 10% | 99,676 | 39,870 |
| | 100% | 996,756 | 1,472,772 |
| Devinder Ahuja | 79% | EBITDA | 40% | 164,326 | 256,217 |
| Cash Flow | 35% | 143,785 | 260,409 |
| Personal | 15% | 61,622 | 73,946 |
| Safety | 10% | 41,081 | 16,433 |
| | 100% | 410,814 | 607,005 |
| Leslie Parrette | 70% | EBITDA | 40% | 159,936 | 249,372 |
| Cash Flow | 35% | 139,944 | 253,453 |
| Personal | 15% | 59,976 | 119,952 |
| Safety | 10% | 39,984 | 15,993 |
| | 100% | 399,840 | 638,770 |
| Marco Palmieri | 65% | EBITDA | 40% | 130,000 | 202,696 |
| Cash Flow | 35% | 113,750 | 206,013 |
| Personal | 15% | 48,750 | 58,500 |
| Safety | 10% | 32,500 | 13,000 |
| | 100% | 325,000 | 480,209 |
| Emilio Braghi | 60% | EBITDA | 40% | 94,619 | 147,530 |
| Cash Flow | 35% | 82,792 | 149,944 |
| Personal | 15% | 35,482 | 35,482 |
| Safety | 10% | 23,655 | 9,462 |
| | 100% | 236,548 | 342,418 |
_________________________
| |
| (A) | Mr. Fisher's targetTarget bonus is prorated and rounded up to the nearest percent to reflect the change in his bonus target on August 10, 2015 from 85% to 100% of his salary.percentages are adjusted for any mid-year changes. |
| |
| (B) | Fiscal 2018 AIP fiscal 2016 performance metric definitions are approved by the Compensation Committee and definedset forth in the footnotes to the Grants of Plan-Based Awards table.2018 AIP |
| |
(C) | Amounts for Mayr and Palmieri are reflected in US dollars as adjusted by March 31, 2016 exchange rates. |
Long-Term Incentives. We believe a long-term incentive program that comprises a substantial portion of each executive’s total direct compensation opportunity is necessary to reward our executives. Our philosophy concerning long-term incentive design for executives is based on the guiding values below:
Long-term incentives should motivate achievement of long-term strategic and financial goals and incentivize actions that are intended to create sustainable value for our shareholder.
Long-term incentives should be designed to effectively retain valuable executive talent.
Long-term incentives should create a clear and understandable platform for wealth creation that is tied closely with the long-term performance of Novelis.
A majority of the long-term incentive award value should be at-riskat risk and tied to financial and/or stock-price performance.
Vesting schedules generally should span several years to reward long-term service.
The value of long-term incentives as a percent of salary should be competitive with opportunity payouts of executives in similar roles atin other benchmark companies/companies or industries.
Long-term incentive award intended values should not be affected by currency exchange rates once the awards have been authorized by the Committee.
During the first quarter of fiscal 2016,2018, the Committee authorized the long terma long-term incentive plan covering fiscal years 20162018 through 2019 (“2016 LTIP”)2020 (2018 LTIP). Under the 20162018 LTIP, participants arewere awarded three types of long‑termlong-term incentive vehicles. ThirtyTwenty percent of a participant’s total long termlong-term incentive opportunity consists of performance‑basedperformance-based Hindalco stock appreciation rights (“Hindalco SARs”)(Hindalco SARs), 20%30% of a participant’s total long termthe long-term incentive opportunity consists of Hindalco restricted stock units (“Hindalco RSUs”)(Hindalco RSUs) and the remaining 50% consists of Novelis stock appreciation rightsPerformance Units (“Novelis SARs”PUs”). The Committee provided Steve Fisher with an additional award of $500,000 Hindalco SARs. For additional information, see the table below setting forth grants of plan‑based plan-based
awards in fiscal 2016. The aggregate value of all long‑term incentive award vehicles for the named executive officers are approved by the Committee and apportioned appropriately among the three vehicles.2018. The actual number of Hindalco SARs and Novelis SARs awarded are determined using a Black‑Black Scholes multiple.methodology. The Committee approved the fiscal 2018 long-term incentive awards for our named executive officers.
The
Hindalco SARs and Novelis SARs awarded in fiscal 20162018 have seven yearseven-year terms and vest at a rate of 25%33.33% per year measured from the authorization date, subject toinitial grant date; provided the Company achieves the 75% EBITDA threshold performance hurdle being met for the year. If the EBITDA threshold is not achieved, then the portion of the SARs that would otherwise vest for that year as described in the paragraph below.will be forfeited. Each SAR is to be settled in cash at the time of exercise based on the increaseappreciation in value of one Hindalco or Novelis share as applicable, from the date of award through the date of exercise. As Novelis shares are not publicly traded on a stock exchange, an annual Company valuation is performed by a global financial services company, and this valuation is the basis for the numberPayout of NovelisHindalco SARs awarded and is also the basis for the stock price appreciation each year for Novelis SARs. The total amount of cash paid is limited to three times theaward value.SARs do not transfer any shareholder rights in Hindalco or Novelis to a participant, and dividend equivalents are neither accumulated nor paid during or after vesting between the award date and date of exercise, forfeiture or cancellation of the awards.at any time.
The performance hurdle for vesting each year for both Hindalco SARs and Novelis SARs is based on achieving at least 75% of the overall Novelis EBITDA target established and approved each fiscal year by the Committee. EBITDA is defined identically as in the short‑term annual cash incentive program, described above.
The Hindalco RSUs awarded in fiscal 2016 fully2018 vest at a rate of 33.33% per year over three years and are not subject to performance criteria. Payout on theof Hindalco RSUs is also limited to three times the award value. RSUs do not transfer any shareholder rights in Hindalco to a participant, and dividend equivalents are neither accumulated nor paid betweenat any time.
Novelis PUs are at risk and are measured over a three year performance period. At the award date and date of vesting or forfeitureend of the awards.performance period, the number of units earned will be calculated based on the Company’s average return on capital employed (ROCE) over the performance period. Actual payout will range from 50% (threshold) to 200% (maximum) of target award value, based on actual results, and will be paid in cash. Performance results between threshold level and target level or between target level and maximum level are determined by means of interpolation. To receive payment of Novelis PUs, a participant must remain employed by Novelis through the end of the performance period, subject to certain exceptions, including death, disability and retirement.
The table below shows the fiscal 2016 aggregate target value by officer. Mr. Martens did not participate inlong-term incentive of our named executive officers under the 20162018 LTIP.
|
| | | |
| Named Executive Officer | 20162018 LTIP Target Award
($) |
| Steven Fisher | | 2,500,000 |
$3,740,000 |
Steven E. PohlDevinder Ahuja | | 180,000 |
$500,000 |
| Leslie Parrette | | $700,000 |
|
Erwin Mayr | | 700,000 |
|
| Marco Palmieri | $760,000 |
| Emilio Braghi | 700,000 |
$480,000 |
Exchange rates areThe Indian Rupee exchange rate is fixed on the date of the LTIP awardsaward so that the awards are not affected bysubject to fluctuating currency exchange rates during the award vesting periods and the terms of the SARs.
Named Executive Officers’ Total Direct Compensation Mix of Pay Elements. The chart below illustrates the fiscal 2016 target compensation elements for our named executive officers as a percentage of their total direct compensation. Salary and target annual incentive percentages reflect the value of compensation in an officer’s home currency as of the end of fiscal 2016, and long‑term incentives reflect fiscal 2016 award values in U.S. dollars and then converted to an officer’s home currency as of the date of the award. The chart also shows that approximately 81% of the President and Chief Executive Officer’s total direct compensation is variable at‑risk pay, which is tied to both short‑term and long‑term financial, individual and stock‑price performance. The variable at-risk percentages for our other officers range from 48% to 70% of total direct compensation.
Employee Benefits. Our named executive officers are eligible to participate in our broad-based retirement, health and welfare, and other employee benefit plans on the same basis as other Company employees. In addition to these broad-based plans, some of our named executive officers may be eligible for certain non-qualified retirement benefits, which are designed to provide levels of retirement benefits that are limited under broad-based retirement plan caps mandated by certain regulatory restrictions on highly-compensated employees. Our named executive officers are also eligible for certain perquisites consistent with market practice. We do not view our executive perquisites as a significant element of our overall compensation structure. See the All Other Compensation column and related footnotes to the Summary Compensation Table below for details.further information about perquisites.
Employment-Related Agreements
Agreements with Mr. Fisher. On May 7, 2015, the Company approved a compensation arrangement with Mr. Fisher in which he will receive an amount up to $400,000 related to his service as Interim President and Chief Executive Officer, to be determined and paid at a future date. On August 10, 2015, the Company entered into a letter agreement with Mr. Fisher setting forth the terms his appointment as President and Chief Executive Officer. The letter agreement is filed as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed with the SEC on November 9, 2015.
Retention Agreements. On July 1, 2014, we enteredWe enter into individual retention agreements from time to time with eachcertain key employees, including our named executive officer.officers. These retention agreements were adopted in connection with the changes to our LTIP design beginning with fiscal year 2014 and are intended to serve as a supplementalsupplement our long-term incentive. The retention agreements provide cash payments over a three-year period as follows: $50,000incentive program and sometimes are entered into to reflect changes in responsibilities or other special circumstances. Retention amounts are paid in December 2014 (or $37,500 for Mr. Parrette and $20,000 for Mr. Pohl), $25,000 paid in December 2015 (or $18,750 for Mr. Parrette and $10,000 for Mr. Pohl) and $25,000 payable in December 2016 (or $18,750 for Mr. Parrette and $10,000 to Mr. Pohl) ifcash provided the officeremployee remains employed with the Company through the applicable vesting date. In June 2015, additionalmost cases, the retention agreements were entered into with each named executive officer (except Mr. Fisher), providing cash payments to the named executive officers as follows: $30,000 paid in December 2015 (or $22,500 for Mr. Parrette and $12,000 for Mr. Pohl), $30,000 payable in December 2016 (or $22,500 for Mr. Parrette and $12,000 for Mr. Pohl) and $40,000 payable in December 2017 (or $30,000 for Mr. Parrette and $16,000 for Mr. Pohl) if the officer remains employed with the Company through the applicable vesting date.awards vest ratably over a three-year retention period. If the named executive officeremployee voluntarily terminates employment prior to the expiration date of the retention awards or is terminated by the Company for cause prior to thatthe expiration date of the named executive officerretention award, the employee will be required to repay any payments made under the agreementsagreement in the previous 12 months less applicable taxes, and will be not be entitled to any other payments thereafter.under the retention agreement. If the named executive officeran employee is terminated involuntarily without cause, any unpaid cash installments will not occur. On June 18, 2015, we entered into an additionalunder the retention agreement with Mr. Pohlwill be forfeited. Any amounts paid to our named executive officers under a retention award during fiscal 2018 are shown in recognition of his additional responsibilities in managing the Company’s global finance operations.Summary Compensation Table. The agreement provides for a cash payment of $40,000 to befollowing chart summarizes the retention payments made in June 2016.during fiscal 2018 and scheduled future payments.
|
| | | | | | | | | | | | | | | | | |
| Name | Agreement Date | --------------------------Payment Dates-------------------------- |
| Jun-‘17 | Jul-'17 | Dec-'17 | Jun-'18 | Jul-'18 | Dec-'18 | Jun-‘19 | Jul-‘19 |
| Steven Fisher | Jun-'16 | | 180,000 |
| | | 240,000 |
| | | |
| Devinder Ahuja | Jun’16 | 67,000 |
| | | 67,000 |
| | | 67,000 |
| |
| Leslie Parrette | Jun-'15 | | | 30,000 |
| | | | | |
| Jul-'16 | | | 22,500 |
| | | 30,000 |
| | |
| Marco Palmieri | Jun-'15 | | | 40,000 |
| | | | | |
| Jul-'16 | | | 30,000 |
| | | 40,000 |
| | |
| Jun-‘17 | | 150,000 |
| | | 150,000 |
| | | 150,000 |
|
| Emilio Braghi | Jun-'15 | | | 20,000 |
| | | | | |
| Jul-'16 | | | 15,000 |
| | | 20,000 |
| | |
Change in Control Agreements. Each of our named executive officers(except Mr. Pohl) is were party to a Change in Control Agreement during fiscal 2018, which provides that the executive will be entitled to certain payments and benefits if the executive’s employment is terminated by the Company without cause, or by the executive for good reason, within 24 months following a change in control of the Company. The change in control severance payment is equal to 2.0 times the sum of the executive’s annual base salary plus target short‑termshort-term incentive for the year and is payable in a lump sum. The executive may also receive (i) a special one‑time payment to assist with post‑employment medical coverage; (ii) continuation of coverage under the Company’s group life insurance plan for a period of 12 months; (iii) 12 months of additional credit for benefit accrual or contribution purposes under our retirement plans; and (iv) accelerated vesting, if applicable, under our retirement plans.
Severance Compensation Agreements. We also have entered into Severance Agreementsseverance arrangements with our named executive officers (except for Mr. Pohl)Braghi, whose severance arrangements are subject to local law and practice), which provide that the executive will be entitled to certain payments and benefits if their employment is terminated by the Company without cause. The severance payment is equal to 1.5 times the executive’s annual base salary in effect at termination. Severance payments for these executivesamounts are payable in a lump sum. The executive may also receive (i) a special one‑time payment to assist with post‑employment medical coverage; (ii) continuation of coverage under the Company’s group life insurance plan for a period of 12 months; (iii) 12 months of additional credit for benefit accrual or contribution purposes under our retirement plans; and (iv) accelerated vesting, if applicable, under our retirement plans. Each agreement also contains a non‑competitionnoncompetition and non‑solicitationnon-solicitation provision, which prohibits the executive from competing with us or soliciting our customers, suppliers or employees for a period of 18 months following termination.termination (or 24 months in the case of Mr. Fisher). An executive may be required to sign a general release of claims against the Company as a condition to receivereceiving the payments and benefits described above. See the Potential Payments Upon Termination or Change in Control table below for details. In connection with Mr. Fisher’s promotion to Chief Executive Officer, his severance agreement was superseded by his appointment letter agreement.
Agreement with Mr.Martens. Mr. Martens and the Company entered into a separation agreement related to Mr. Marten’s separation from service on April 20, 2015, which generally provided for a lump sum severance payment and continuation of group term life insurance coverage for twelve months. The terms of Mr. Martens’ agreement were disclosed in a Form 8‑K filing with the Securities and Exchange Commission on April 29, 2015.further information.
Agreement with Mr. Pohl. On November 4, 2015, the Company entered into a compensation arrangement with Mr. Pohl, under which he is eligible for a cash bonus payment in respect of his appointment as Interim Chief Financial Officer, in an amount between $30,000 and $60,000 for up to three months of service, or between $60,000 and $120,000 for up to six months of service. The actual payment amount will be based on the length of Mr. Pohl’s service in the role and his performance in managing the role.
Compensation Risk Assessment
In fiscal 2016,2018, the Committee reviewed the Company’s executive compensation policies and practices, and determined that the Company’s executive compensation programs are not reasonably likely to have a material adverse effect on the Company. Our compensation programs contain design features that mitigate the incentive for our employees, including named executive officers, to take unreasonable risks in managing the business, which include:
An appropriate balance between short-term and long-term incentive compensation with multiple time horizons;
Short-term incentives that provide for lower payouts for lower performance and higher payouts for higher performance;
Short-term incentives that must haverequire minimum financial performance to achieve any payouts and also set capped maximum payouts at 200% of target;
Short-term incentive payouts that are tied to multiple performance factors with no one performance factor having excessive weighting;
Long-term incentives with multi-year vesting schedules, which reward employees for long-term performance;
Goals that are not unreasonable and that are approved by the Committee on an annual basis and goals with no excessive payout opportunities at certain performance levels that may encourage short-term decisions and actions to meet payout thresholds;
Oversight of the compensation programs by the Committee and a broad group ofmultiple functions within the Company and at various levels within the functions to gain different viewpoints and prevent a small number of people to be exclusively involved in compensation decisions; and
Advice from expert outside advisors regarding the design of the compensation program.
Based on its review, the Committee determined that the Company’s compensation programs do not encourage excessive risk and instead encourage behaviors that support sustainable value creation.
Compensation Committee Report
The Committee has reviewed and discussed the foregoing Compensation Discussion and Analysis with management. Based on the Committee’s review and discussions with management, the Committee recommended to the board of directors that the Compensation Discussion and Analysis be included in the Company’s Annual Report on Form 10-K for fiscal 2016.2018.
The foregoing report is provided by the following directors, who constitute the Committee:
Mr. Clarence J. Chandran, Chairman
Mr. Debnarayan Bhattacharya
Mr. Askaran Agarwala
Mr. Satish Pai
Summary Compensation Table
The table below sets forth information regarding compensation for our named executive officers for fiscal 20162018 and the two prior fiscal years, as applicable. Any amounts paid to our named executive officers in a foreign currency are reflected in the table below and elsewhere in U.S. dollars as adjusted by the March 31, 20162018 exchange rate.
|
| | | | | | | | | | | | | | | | | |
| Name and Principal Position | Fiscal Year | Salary ($) | Bonus ($) (A) | | Stock Awards ($) (A) | | Option Awards ($) (B) | | Non-Equity Incentive Plan Compensation ($) (C) | | All Other Compensation ($) (D) | | Total ($) |
| | | | | | | | | | | | | | |
| Steven Fisher, President and Chief Executive Officer | 2016 | 676,128 | 350,000 |
| | 500,000 |
| | 2,000,000 |
| | 1,007,822 |
| | 204,512 | | 4,738,462 |
| 2015 | 545,607 | — |
| | 170,000 |
| | 680,000 |
| | 577,545 |
| | 195,925 | | 2,169,077 |
| 2014 | 513,427 | — |
| | 170,000 |
| | 680,000 |
| | 517,902 |
| | 863,371 | | 2,744,700 |
| | | | | | | | | | | | | | |
| Steven E. Pohl, Interim Chief Financial Officer | 2016 | 332,899 | 110,000 |
| | 36,000 |
| | 144,000 |
| | 180,074 |
| | 146,693 | | 949,666 |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| Erwin Mayr, Senior Vice President and President of Novelis Europe | 2016 | 541,067 | — |
| | 140,000 |
| | 560,000 |
| | 479,005 |
| | 379,864 | | 2,099,936 |
| 2015 | 515,608 | — |
| | 124,000 |
| | 496,000 |
| | 434,516 |
| | 279,309 | | 1,849,433 |
| 2014 | 563,434 | — |
| | 72,100 |
| | 288,400 |
| | 391,170 |
| | 1,148,060 | | 2,463,164 |
| | | | | | | | | | | | | | |
| Marco Palmieri, Senior Vice President and President of Novelis North America | 2016 | 602,945 | — |
| | 140,000 |
| | 560,000 |
| | 303,027 |
| | 884,129 | | 2,490,101 |
| 2015 | 560,961 | — |
| | 130,000 |
| | 520,000 |
| | 291,260 |
| | 885,784 | | 2,388,005 |
| 2014 | 512,383 | — |
| | 123,600 |
| | 494,400 |
| | 372,152 |
| | 614,310 | | 2,116,845 |
| | | | | | | | | | | | | | |
| Leslie Parrette, Senior Vice President, General Counsel, Compliance Officer and Corporate Secretary | 2016 | 534,185 | — |
| | 140,000 |
| | 560,000 |
| | 505,026 |
| | 178,893 | | 1,918,104 |
| 2015 | 518,626 | — |
| | 120,000 |
| | 480,000 |
| | 393,298 |
| | 176,710 | | 1,688,634 |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| Philip Martens, Former President and Chief Executive Officer | 2016 | 84,801 | — |
| | — |
| | — |
| | — |
| | 5,157,597 | | 5,242,398 |
| 2015 | 1,036,539 | — |
| | 900,000 |
| | 3,600,000 |
| | 1,678,950 |
| | 1,367,708 | | 8,583,197 |
| 2014 | 960,577 | — |
| | 800,000 |
| | 3,200,000 |
| | 1,461,600 |
| | 4,841,762 | | 11,263,939 |
|
| | | | | | | | | |
| Name | Fiscal Year | Salary ($) | Bonus ($) | | Stock Awards ($) (B) | Options Awards ($) (B) | Non-Equity Incentive Plan Compensation ($) (C) | All Other Compensation ($) (D) | Total Compensation ($) |
Steven Fisher, President and Chief Executive Officer | 2018 | 865,385 | — | | 972,000 | 1,148,000 | 1,472,772 | 408,462 | 4,866,619 |
| 2017 | 771,462 | — | | 840,000 | 560,000 | 1,144,916 | 412,118 | 3,728,496 |
| 2016 | 676,128 | 350,000 | | 500,000 | 2,000,000 | 1,007,822 | 204,512 | 4,738,462 |
Devinder Ahuja, Senior Vice President, Chief Financial Officer | 2018 | 514,231 | 429,292 | (A) | 150,000 | 100,000 | 607,005 | 191,393 | 1,991,921 |
| 2017 | 334,615 | 350,000 | | 121,500 | 81,000 | 390,978 | 279,047 | 1,557,140 |
Leslie Parrette, Senior Vice President, General Counsel, Compliance Officer and Corporate Secretary | 2018 | 567,176 | — | | 210,000 | 140,000 | 638,770 | 194,629 | 1,750,575 |
| 2017 | 551,888 | — | | 210,000 | 140,000 | 563,426 | 202,678 | 1,667,992 |
| 2016 | 534,185 | — | | 140,000 | 560,000 | 505,026 | 171,325 | 1,910,536 |
Marco Palmieri, Senior Vice President and President, Novelis North America | 2018 | 536,784 | — | | 228,000 | 152,000 | 480,209 | 1,729,248 | 3,126,241 |
| 2017 | 624,017 | — | | 210,000 | 140,000 | 413,053 | 734,738 | 2,121,808 |
| 2016 | 602,945 | — | | 140,000 | 560,000 | 303,027 | 886,389 | 2,492,361 |
Emilio Braghi, Senior Vice President and President, Novelis Europe | 2018 | 394,247 | — | | 144,000 | 96,000 | 342,418 | 611,687 | 1,588,352 |
| 2017 | 336,546 | — | | 108,000 | 72,000 | 261,100 | 1,112,597 | 1,890,243 |
_________________________
| |
| (A) | These are discretionary awards for Messrs. Fisher and Pohl described previously under Employee-Related Agreements.This amount reflects payments related to a sign on bonus. |
| |
| (B) | These awards arewere granted under the 20162018 LTIP. Please see the Grants of Plan-Based Awards in Fiscal 2016 table for more information. |
| |
| (C) | This amount reflects the cash award earned under the 20162018 AIP. |
| |
| (D) | The amounts shown in the All Other Compensation Columnthis column reflect the values from the table below, except for Mr. Martens. Mr. Martens' amount is in connection with this separation agreement. The terms of Mr. Martens' separation agreement and the amount payable thereunder are described in a current report on Form 8-K filed with the Securities and Exchange Commission on April 29, 2015, plus the following items: prorated flex allowance ($4,615), executive life insurance ($2,844), Company contributions to defined contribution plans ($2,156) and earned, but unused, vacation at the time of his separation ($76,731).below. |
All Other Compensation Table |
| | | | | | | | | | |
| Name | Company Contribution to Defined Contribution Plans and Nonqualified Plans ($) (A) | | Group Life Insurance ($) (B) | Retention Payments ($) (C) | | Relocation, Assignee and Housing Related Payments ($) | | Other Perquisites and Personal Benefits ($) | | Total ($) |
| Steven Fisher | 161,034 | | 4,607 | 180,000 | | — | | 62,821 | (F) | 408,462 |
| Devinder Ahuja | 74,232 | | 2,161 | 67,000 | | — | | 48,000 | (G) | 191,393 |
| Leslie Parrette | 90,939 | | 3,190 | 52,500 | | — | | 48,000 | (G) | 194,629 |
| Marco Palmieri | 99,874 | | 2,232 | 220,000 | | 1,356,644 | (D) | 50,498 | (H) | 1,729,248 |
| Emilio Braghi | 7,381 | | 1,530 | 35,000 | | 469,513 | (E) | 98,263 | (I) | 611,687 |
| |
| (A) | All company contributions made to government social security systems are excluded. |
| |
| (B) | This amount represents additional Company-paid life insurance for named executive officers beyond the regular employee coverage. |
|
| | | | | | | | | | | | | | | | | |
| Name | Company Contribution to Defined Contribution Plans and Nonqualified Plans ($) | | Group Life Insurance ($) (d) | | Retention Payments ($) (e) | | Relocation, Assignee and Housing Related Payments ($) | | Other Perquisites and Personal Benefits ($) | | Total ($) |
| | | | | | | | | | | | |
| Steven Fisher | 119,099 |
| (a) | 2,133 |
| | 25,000 |
| | — |
| | 58,280 |
| (h) | 204,512 |
|
| Steven Pohl | 47,093 |
| (a) | — |
| | 62,000 |
| | — |
| | 37,600 |
| (i) | 146,693 |
|
| Erwin Mayr | 104,540 |
| (b) | 1,545 |
| | 57,838 |
| | 205,912 |
| (f) | 10,029 |
| (j) | 379,864 |
|
| Marco Palmieri | 3,418 |
| (c) | 1,750 |
| | 55,000 |
| | 823,461 |
| (g) | 500 |
| (k) | 884,129 |
|
| Leslie Parrette | 88,111 |
| (a) | 1,532 |
| | 41,250 |
| | — |
| | 48,000 |
| (l) | 178,893 |
|
(a) This amount represents the Company’s contribution to our U.S. qualified and non‑qualified defined contribution plans. See the Non‑Qualified Deferred Compensation table below for more information.
(b) This amount represents the Company’s contribution to our Swiss defined contribution plan (Novelis Pensionskasse) and our Swiss supplemental defined contribution plan (Novelis Zusatzkasse).
(c) This amount represents the Company’s contribution to our Brazilian defined contribution plan.
(d) This amount represents additional Company‑paid life insurance for named executive officers beyond the regular employee coverage.
(e) These amounts represents payments pursuant to retention agreements as previously described under Employee Related Agreements.
(f) This amount represents tax payments related to Mr. Mayr’s previous foreign assignment.
(g) This amount includes $76,520 for housing allowance and related costs, $58,458 goods and services adjustment, $20,404 home leave, $11,377 for services related to the executive’s global assignment, and $656,702 related to tax payments for foreign assignment.
(h) This amount includes $56,154 flex allowance and $2,126 executive physical.
(i) This amount includes $35,000 flex allowance and $2,600 executive physical.
(j) This amount represents Mr. Mayr’s automobile lease.
(k) This amount represents the imputed value of tax preparation.
(l) This amount represents Mr. Parrette’s flex allowance.
| |
| (C) | These amounts represent payments pursuant to retention agreements as detailed above under Employee Related Agreements. |
| |
| (D) | This amount includes $477,192 for relocation, $15,832 for goods and services adjustment, $21,912 for home leave, and $841,708 related to tax payments for foreign assignment. |
| |
| (E) | This amount includes $122,612 for housing allowance and related costs, $11,329 for home leave, $123,233 for goods and services adjustment, $212,339 related to tax payments for foreign assignment. |
| |
| (F) | This amount includes $60,000 flex allowance and $2,821 executive physical. |
| |
| (G) | This amount represents flex allowance |
| |
| (H) | This amount includes $35,577 flex allowance, $8,750 auto lease, $500 individual tax planning, $1,530 global assignment services fees, $30 other compensation related to assignment and $4,111 for an executive physical. |
| |
| (I) | This amount includes $87,286 child tuition and reimbursement, $8,249 auto lease, $500 individual tax planning, $1,530 global assignment services fees and $698 other compensation related to assignment. |
Grants of Plan-Based Awards in Fiscal 20162018
The table below sets forth information regarding grants of plan-based awards made to our named executive officers for the year ended March 31, 2016.during fiscal 2018 pursuant to our 2018 AIP and 2018 LTIP.
|
| | | | | | | | | | | | | | | | | | |
| Name | Date of Award | Estimated Future Payout Under Non-Equity Incentive Plan Awards (A) | | All Other Stock Awards: Number of Shares of Stock or Units (#) (B) | All Other Option Awards: Number of Securities Underlying Options (#) (C) | | Exercise or Base Price of Option Awards ($/Sh) | Value of Stock and Option Awards (D) |
Threshold ($) | Target ($) | Maximum ($) | | Award Type |
| Steven Fisher | 5/7/2015 | 363,375 |
| 712,500 |
| 1,425,000 |
| | — |
| — |
| — |
| — |
| — |
|
| | 5/7/2015 | — |
| — |
| — |
| | 90,462 |
| — |
| Hindalco RSU |
| — |
| 190,000 |
|
| 5/7/2015 | — |
| — |
| — |
| | — |
| 315,196 |
| Hindalco SAR |
| 2.10 |
| 285,000 |
|
| 5/7/2015 | — |
| — |
| — |
| | — |
| 30,286 |
| Novelis SAR |
| 65.35 |
| 475,000 |
|
| 10/1/2015 | — |
| — |
| — |
| | 285,356 |
| — |
| Hindalco RSU |
| — |
| 310,000 |
|
| 10/1/2015 | — |
| — |
| — |
| | — |
| 994,270 |
| Hindalco SAR |
| 1.09 |
| 465,000 |
|
| 10/1/2015 | — |
| — |
| — |
| | — |
| 49,414 |
| Novelis SAR |
| 65.35 |
| 775,000 |
|
| | | | | | | | | | | |
| Steven Pohl | 5/7/2015 | 68,535 |
| 134,383 |
| 268,766 |
| | — |
| — |
| — |
| — |
| — |
|
| 5/7/2015 | — |
| — |
| — |
| | 17,141 |
| — |
| Hindalco RSU |
| 0 |
| 36,000 |
|
| 5/7/2015 | — |
| — |
| — |
| | — |
| 59,722 |
| Hindalco SAR |
| 2.10 |
| 54,000 |
|
| 5/7/2015 | — |
| — |
| — |
| | — |
| 5,739 |
| Novelis SAR |
| 65.35 |
| 90,000 |
|
| | | | | | | | | | | |
| Leslie Parrette | 5/7/2015 | 192,211 |
| 376,885 |
| 753,770 |
| | — |
| — |
| — |
| — |
| — |
|
| 5/7/2015 | — |
| — |
| — |
| | 66,656 |
| — |
| Hindalco RSU |
| — |
| 140,000 |
|
| 5/7/2015 | — |
| — |
| — |
| | — |
| 232,250 |
| Hindalco SAR |
| 2.10 |
| 210,000 |
|
| 5/7/2015 | — |
| — |
| — |
| | — |
| 22,316 |
| Novelis SAR |
| 65.35 |
| 350,000 |
|
| | | | | | | | | | | |
| Erwin Mayr | 5/7/2015 | 185,070 |
| 362,883 |
| 752,766 |
| | — |
| — |
| — |
| — |
| — |
|
| 5/7/2015 | — |
| — |
| — |
| | 66,656 |
| | HIndalco RSU |
| | 140,000 |
|
| 5/7/2015 | — |
| — |
| — |
| | — |
| 232,250 |
| Hindalco SAR |
| 2.10 |
| 210,000 |
|
| 5/7/2015 | — |
| — |
| — |
| | — |
| 22,316 |
| Novelis SAR |
| 65.35 |
| 350,000 |
|
| | | | | | | | | | | |
| Marco Palmieri | 5/7/2015 | 115,331 |
| 226,140 |
| 452,280 |
| | — |
| — |
| — |
| — |
| — |
|
| 5/7/2015 | — |
| — |
| — |
| | 66,656 |
| | Hindalco RSU |
| | 140,000 |
|
| 5/7/2015 | — |
| — |
| — |
| | — |
| 232,250 |
| Hindalco SAR |
| 2.10 |
| 210,000 |
|
| 5/7/2015 | — |
| — |
| — |
| | — |
| 22,316 |
| Novelis SAR |
| 65.35 |
| 350,000 |
|
|
| | | | | | | | | |
| Name | Grant Date | Estimated Future Payout Under Non-Equity Incentive Plan Awards | All Other Stock Awards: Number of Shares or Stock Units | All Other Option Awards: Number of Securities Underlying Options | Award Type | Exercise or Base Price of Option Awards ($/Sh) | Grant Date Fair Value of Stock and Option Awards |
| Threshold ($) | Target | Maximum |
| Steven Fisher | 5/5/2017 | 553,200 | 996,756 | 1,993,512 | — | — | AIP | — | — |
| 5/5/2017 | — | — | — | 333,054 | — | Hindalco RSU | — | 972,000 |
| 5/5/2017 | — | — | — | — | 831,980 | Hindalco SAR | 1.38 | 1,148,000 |
| 5/5/2017 | 810,000 | 1,620,000 | 3,240,000 | — | — | Novelis PU | — | — |
| Devinder Ahuja | 5/5/2017 | 228,002 | 410,814 | 821,628 | — | — | AIP | — | — |
| 5/5/2017 | — | — | — | 51,398 | — | Hindalco RSU | — | 150,000 |
| 5/5/2017 | — | — | — | — | 72,473 | Hindalco SAR | 1.38 | 100,000 |
| 5/5/2017 | 125,000 | 250,000 | 500,000 | — | — | Novelis PU | — | — |
| Leslie Parrette | 5/5/2017 | 221,911 | 399,840 | 799,680 | — | — | AIP | — | — |
| 5/5/2017 | — | — | — | 71,957 | — | Hindalco RSU | — | 210,000 |
| 5/5/2017 | — | — | — | — | 101,461 | Hindalco SAR | 1.38 | 140,000 |
| 5/5/2017 | 175,000 | 350,000 | 700,000 | — | — | Novelis PU | — | — |
| Marco Palmieri | 5/5/2017 | 180,375 | 325,000 | 650,000 | — | — | AIP | — | — |
| 5/5/2017 | — | — | — | 78,124 | — | Hindalco RSU | — | 228,000 |
| 5/5/2017 | — | — | — | — | 110,158 | Hindalco SAR | 1.38 | 152,000 |
| 5/5/2017 | 190,000 | 380,000 | 760,000 | — | — | Novelis PU | — | — |
| Emilio Braghi | 5/5/2017 | 131,284 | 236,567 | 473,135 | — | — | AIP | — | — |
| 5/5/2017 | — | — | — | 49,342 | — | Hindalco RSU | — | 144,000 |
| 5/5/2017 | — | — | — | — | 69,574 | Hindalco SAR | 1.38 | 96,000 |
| 5/5/2017 | 120,000 | 240,000 | 480,000 | — | — | Novelis PU | — | — |
| |
(A) | These amounts reflect potential cash awards under our 2016 AIP. The financial performance metrics for fiscal 2016 are: (1) “EBTIDA”, which refers to our Adjusted EBITDA and is calculated by removing the following items from Operating EBITDA (the equivalent to “Segment Income” as reported in our external U.S. GAAP financial statements): i) the impact from timing differences in the pass‑through of metal price changes to our customers, net of realized derivative instruments; and ii) the impact from re‑measuring to current exchange rates any monetary assets and liabilities which are denominated in a currency other than the functional currency of the reporting unit, net of realized and unrealized derivative instruments and (2) “Cash Flow”, which refers to our operating free cash flow and is calculated by removing the following items from “Free cash flow” (as defined in the “Liquidity and Capital Resources” section of this 10‑K): i) the impact from timing differences in the pass‑through of metal price changes to our customers, net of realized derivative instruments; and ii) the impact of fourth quarter variations in metal prices (LME and local market premiums) from the Plan. See the Summary Compensation Table for actual results. |
| |
(B)
| These amounts represent the number of Hindalco RSUs granted under the 2016 LTIP and were calculated using a value of $2.10 on May 7, 2015 and $1.09 on October 1, 2015. See discussion of Long-Term Incentives above.
|
| |
(C) | The number of SARs awarded were calculated using a Black‑Scholes value of $0.90 on May 7, 2015 and $0.47on October 1, 2015 per Hindalco SAR and $15.68 on both May 7, 2015 and October 1, 2015 per Novelis SAR.
|
| |
(D) | As outlined under the Key Elements of Our Compensation Program above, SARs awarded under our 2016 LTIP are divided into four equal tranches and vest at a rate of 25% per year, subject to satisfaction of a threshold performance hurdle being met for the year. The performance hurdle for each tranche is determined prior to the start of each applicable vesting year. Therefore, for purposes of ASC 718, each tranche has a separate grant date, and the Company’s financials have been prepared consistent with ASC 718. For purposes of this table and the Summary Compensation Table, the amounts shown for SARs and RSUs represent intended target values of long‑term incentive awards authorized by the Committee on the date the awards were authorized and subsequently communicated to the executives
|
Outstanding Equity Awards as of March 31, 20162018
|
| | | | | | | | | | | | | | | | | | | |
| Novelis Options
| Hindalco Options
| |
| Hindalco RSUs
|
Name
| Number of Securities Underlying Unexercised Options # Exercisable
| Number of Securities Underlying Unexercised Options # Unexercisable
| | Option Exercise Price ($)
| Number of Securities Underlying Unexercised Options # Exercisable
| Number of Securities Underlying Unexercised Options # Unexercisable
| Option Exercise Price ($)
| | Option Expiration Date for Both Novelis and Hindalco Options
| Number of Shares or Units of Stock That Have Not Vested
| | Market Value of Shares or Units of Stock That Have Not Vested
|
Fisher
| —
|
| 30,286
|
| (A)
| 65.35
|
| —
|
| 315,196
|
| 2.10
| (A)
| May 7, 2022
| 90,462
|
| (A)
| 93,653
|
|
| —
|
| 49,414
|
| (A)
| 65.35
|
| —
|
| 994,270
|
| 1.09
| (A)
| May 7, 2022
| 285,356
|
| (A)
| 288,911
|
|
| 4,521
|
| 13,560
|
| (B)
| 94.40
|
| 58,521
|
| 175,563
|
| 2.43
| (B)
| May 13, 2021
| 69,960
|
| (B)
| 77,503
|
|
| 7,865
|
| 7,685
|
| (C)
| 91.87
|
| 151,442
|
| 151,443
|
| 1.91
| (C)
| May 13, 2020
| 88,967
|
| (C)
| 107,621
|
|
| 5,401
|
| 2,208
|
| (D)
| 101.81
|
| 166,609
|
| 68,114
|
| 1.98
| (D)
| May 22, 2019
| —
|
| | —
|
|
| 1,989
|
| —
|
| (E)
| 73.55
|
| 83,644
|
| —
|
| 4.28
| (E)
| May 20, 2018
| —
|
| | —
|
|
| —
|
| —
|
| | | 95,526
|
| —
|
| 3.13
| (F)
| May 25, 2017
| —
|
| | —
|
|
| | | | | | | | | | | | |
Pohl
| —
|
| 5,739
|
| (A)
| 65.35
|
| —
|
| 59,722
|
| 2.10
| (A)
| May 7, 2022
| 17,141
|
| (A)
| 17,746
|
|
| 797
|
| 2,394
|
| (B)
| 94.40
|
| 10,328
|
| 30,981
|
| 2.43
| (B)
| May 13, 2021
| 12,346
|
| (B)
| 13,677
|
|
| 710
|
| 1,420
|
| (C)
| 91.87
|
| 13,983
|
| 27,966
|
| 1.91
| (C)
| May 13, 2020
| 16,429
|
| (C)
| 19,874
|
|
| 832
|
| 340
|
| (D)
| 101.81
|
| 8,606
|
| 10,482
|
| 1.98
| (D)
| May 22, 2019
| —
|
| | —
|
|
| 337
|
| —
|
| (E)
| 73.55
|
| 14,166
|
| —
|
| 4.28
| (E)
| May 20. 2018
| —
|
| | —
|
|
| —
|
| —
|
| | | 14,330
|
| —
|
| 3.13
| (F)
| May 25, 2017
| —
|
| | —
|
|
| | | | | | | | | | | | |
Mayr
| —
|
| 22,316
|
| (A)
| 65.35
|
| —
|
| 232,250
|
| 2.10
| (A)
| May 7, 2022
| 66,656
|
| (A)
| 69,007
|
|
| 3,298
|
| 9,891
|
| (B)
| 94.40
|
| 42,686
|
| 128,058
|
| 2.43
| (B)
| May 13, 2021
| 51,030
|
| (B)
| 56,532
|
|
| 1,630
|
| 6,259
|
| (C)
| 91.87
|
| 64,230
|
| 64,230
|
| 1.91
| (C)
| May 13, 2020
| 37,733
|
| (C)
| 45,645
|
|
| 2,290
|
| 936
|
| (D)
| 101.81
|
| 70,663
|
| 28,889
|
| 1.98
| (D)
| May 22, 2019
| —
|
| | —
|
|
| 928
|
| —
|
| (E)
| 73.55
|
| 39,035
|
| —
|
| 4.28
| (E)
| May 20. 2018
| —
|
| | —
|
|
| —
|
| —
|
| | | 49,624
|
| —
|
| 3.13
| (F)
| May 25, 2017
| —
|
| | —
|
|
| —
|
| —
|
| | | 96,930
|
| —
|
| 1.79
| (G)
| June 25, 2017
| —
|
| | —
|
|
| | | | | | | | | | | | |
Palmieri
| —
|
| 22,316
|
| (A)
| 65.35
|
| —
|
| 232,250
|
| 2.10
| (A)
| May 7, 2022
| 66,656
|
| (A)
| 69,007
|
|
| 3,456
|
| 10,371
|
| (B)
| 94.40
|
| 44,752
|
| 134,253
|
| 2.43
| (B)
| May 13, 2021
| 53,499
|
| (B)
| 59,267
|
|
| 2,794
|
| 5,588
|
| (C)
| 91.87
|
| 55,054
|
| 110,108
|
| 1.91
| (C)
| May 13, 2020
| 64,684
|
| (C)
| 78,246
|
|
| 2,290
|
| 936
|
| (D)
| 101.81
|
| 23,718
|
| 28,889
|
| 1.98
| (D)
| May 22, 2019
| —
|
| | —
|
|
| 1,547
|
| —
|
| (E)
| 73.55
|
| 15,990
|
| —
|
| 2.57
| (E)
| May 20, 2018
| —
|
| | —
|
|
| | | | | | | | | | | | |
Parrette
| —
|
| 22,316
|
| (A)
| 65.35
|
| —
|
| 232,250
|
| 2.10
| (A)
| May 7. 2022
| 17,141
|
| (A)
| 17,746
|
|
| 3,190
|
| 9,573
|
| (B)
| 94.40
|
| 41,309
|
| 123,927
|
| 2.43
| (B)
| May 13, 2021
| 12,346
|
| (B)
| 13,677
|
|
| 5,424
|
| 5,425
|
| (C)
| 91.87
|
| 109,600
|
| 106,900
|
| 1.91
| (C)
| May 13, 2020
| 16,429
|
| (C)
| 19,874
|
|
| 3,812
|
| 1,558
|
| (D)
| 101.81
|
| 117,607
|
| 48,081
|
| 1.98
| (D)
| May 22, 2019
| —
|
| | —
|
|
| 3,216
|
| —
|
| (E)
| 73.55
|
| 66,914
|
| —
|
| 4.28
| (E)
| May 20. 2018
| —
|
| | —
|
|
| 1,072
|
| —
|
| (F)
| 63.23
|
| 54,587
|
| —
|
| 3.13
| (F)
| May 25, 2017
| —
|
| | —
|
|
| —
|
| —
|
| | | 92,611
|
| —
|
| 1.79
| (G)
| June 25, 2017
| —
|
| | —
|
|
|
| | | | | | | | | |
| | | | Hindalco Options | | Hindalco RSUs |
| Name | LTIP Year | | Number of Securities Underlying Unexercised Options # Exercisable | Number of Securities Underlying Unexercised Options # Unexercisable | Option Exercise Price ($) | Option Expiration Date | | Number of Shares or Units of Stock That Have Not Vested | Market Value of Shares or Units of Stock That Have Not Vested |
| Steven Fisher | 2018 | | — | 831,980 | 2.92 | May 5, 2024 | | 333,054 | 1,111,043 |
| 2017 | | — | 563,974 | 1.37 | May 5, 2023 | | 409,361 | 1,319,583 |
| 2016 | | 157,598 | 157,598 | 1.09 | May 7, 2022 | | 90,462 | 302,916 |
| 2016 | | — | 497,135 | 2.10 | May 7, 2022 | | 285,356 | 934,466 |
| 2015 | | 175,563 | 58,521 | 2.43 | May 13, 2021 | | — | — |
| 2014 | | — | — | 1.91 | May 13, 2020 | | — | — |
| 2013 | | — | — | 1.98 | May 22, 2019 | | — | — |
| 2012 | | — | — | 4.28 | May 20, 2018 | | — | — |
| Devinder Ahuja | 2018 | | — | 72,473 | 2.92 | May 5, 2024 | | 51,398 | 171,460 |
| 2017 | | — | 49,326 | 2.26 | Oct 1, 2023 | | 35,803 | 115,415 |
| Leslie Parrette | 2018 | | — | 101,461 | 2.92 | May 5, 2024 | | 71,957 | 240,043 |
| 2017 | | — | 140,994 | 1.37 | May 5, 2023 | | 102,340 | 329,895 |
| 2016 | | — | 116,125 | 2.10 | May 7, 2022 | | 66,656 | 223,200 |
| 2015 | | — | 41,309 | 2.43 | May 13, 2021 | | — | — |
| 2014 | | — | — | 1.91 | May 13, 2020 | | — | — |
| 2013 | | — | — | 1.98 | May 22, 2019 | | — | — |
| 2012 | | — | — | 4.28 | May 20, 2018 | | — | — |
| Marco Palmieri | 2018 | | — | 110,158 | 2.92 | May 5, 2024 | | 78,124 | 260,616 |
| 2017 | | — | 140,994 | 1.37 | May 5, 2023 | | 102,340 | 329,895 |
| 2016 | | — | 116,125 | 2.10 | May 7, 2022 | | 66,656 | 223,200 |
| 2015 | | — | 44,751 | 2.43 | May 13, 2021 | | — | — |
| 2014 | | — | — | 1.91 | May 13, 2020 | | — | — |
| 2013 | | — | — | 1.98 | May 22, 2019 | | — | — |
| 2012 | | — | — | 2.57 | May 20, 2018 | | — | — |
| Emilio Braghi | 2018 | | — | 69,574 | 2.92 | May 5, 2024 | | 49,342 | 164,601 |
| 2017 | | 22,157 | 44,312 | 1.37 | May 5, 2023 | | 32,165 | 103,685 |
| 2017 | | 8,526 | 17,051 | 2.26 | Oct 1, 2023 | | 12,376 | 39,895 |
| 2016 | | — | 33,178 | 2.10 | May 7, 2022 | | 19,045 | 63,773 |
| 2015 | | — | 10,327 | 2.43 | May 13, 2021 | | — | — |
| 2014 | | — | — | 1.91 | May 13, 2020 | | — | — |
| 2013 | | — | — | 1.98 | May 22, 2019 | | — | — |
| 2012 | | — | — | 4.28 | May 20, 2018 | | — | — |
| |
(A) | These awards were granted pursuant to our 2016 LTIP. The SARs vest over four years (25% per anniversary year) commencing May 7, 2015, and are subject to satisfaction of a predetermined normalized EBITDA performance hurdle. RSUs vest on the third anniversary of the date of grant. |
| |
(B) | These awards were granted pursuant to our 2015 LTIP. The SARs vest over four years (25% per anniversary year) commencing May 13, 2014, and are subject to satisfaction of a predetermined normalized EBITDA performance hurdle. RSUs vest on the third anniversary of the date of grant. |
| |
(C) | These awards were granted pursuant to our 2014 LTIP. The SARs vest over four years (25% per anniversary year) commencing May 13, 2013, and are subject to satisfaction of a predetermined normalized EBITDA performance hurdle. RSUs vest on the third anniversary of the date of grant. |
| |
(D) | These awards were granted pursuant to our 2013 LTIP (as amended by the amendment adopted on May 13, 2013). The SARs vest over four years (25% per anniversary year) commencing May 22, 2012, and are subject to satisfaction of a predetermined normalized EBITDA performance hurdle. RSUs vest on the third anniversary of the date of grant. |
| |
(E) | These awards were granted pursuant to our 2012 LTIP (as amended by the amendment adopted on May 13, 2013). The SARs vest over four years (25% per anniversary year) commencing May 20, 2011, and are subject to satisfaction of a predetermined normalized EBITDA performance hurdle. RSUs vest on the third anniversary of the date of grant |
| |
(F) | These awards were granted pursuant to our 2011 LTIP (as amended by the amendment adopted on May 13, 2013). The SARs vest over four years (25% per anniversary year) commencing May 25, 2010, and are subject to satisfaction of a predetermined normalized EBITDA performance hurdle. RSUs vest on the third anniversary of the date of grant. |
| |
(G) | These awards were granted pursuant to our 2010 LTIP (as amended by the amendment adopted on May 13, 2013). The SARs vest over four years (25% per anniversary year) commencing June 25, 2009, and are subject to satisfaction of a predetermined normalized EBITDA performance hurdle. RSUs vest on the third anniversary of the date of grant. |
Option Exercises and Stock Vested in Fiscal Year 20162018
The table below sets forth the information regarding stock options that were exercised during fiscal 20162018 and stock awards that vested and were paid out during fiscal 2016.2018.
|
| | | | | | | | | | | | | | | | |
| | | Option Awards | | Stock Awards |
| Name | | Number of Shares Acquired on Exercise, but Settled in Cash | | Value Realized on Exercise ($) | | Number of Shares Acquired on Vesting, but Settled in Cash | | Value Realized on Vesting ($) |
| Steven Fisher | | 3,906 |
| | | 100,800 |
| | | 85,842 |
| | | 213,712 |
| |
| Steven Pohl | | — |
| | | — |
| | | 13,210 |
| | | 32,887 |
| |
| Erwin Mayr | | 3,552 |
| | | 54,260 |
| | | 36,407 |
| | | 90,639 |
| |
| Marco Palmieri | | — |
| | | — |
| | | 36,407 |
| | | 90,639 |
| |
| Les Parrette | | — |
| | | — |
| | | 60,594 |
| | | 150,856 |
| |
| Philip Martens | | 1,017,693 |
| | | 813,433 |
| | | 773,394 |
| | | 1,916,990 |
| |
|
| | | | |
| | Options Awards | Stock Awards |
| Name | Number of Shares Acquired on Exercise, but Settled in Cash | Value Realized on Exercise ($ USD) | Number of Shares Acquired on Vesting, but Settled in Cash | Value Realized on Vesting ($ USD) |
| Steven Fisher | 917,085 | 1,638,069 | 274,641 | 806,110 |
| Devinder Ahuja | 24,663 | 41,535 | 17,902 | 64,945 |
| Leslie Parrette | 223,319 | 353,831 | 100,555 | 305,877 |
| Marco Palmieri | 228,365 | 309,708 | 104,670 | 319,340 |
| Emilio Braghi | 112,944 | 204,150 | 34,617 | 108,198 |
Non-Qualified Deferred Compensation
This table summarizes contributions and earnings under our Defined Contribution Supplemental Executive Retirement Plan for fiscal year 2016.2018. The plan is an unfunded, non‑qualified defined contribution plan for U.S. based executives. The plan provides eligible executives with the opportunity to voluntarily defer, on a pre‑taxpretax basis, a portion of their base salary and annual incentive pay that otherwise may not be deferred under the Company’s tax‑qualifiedtax-qualified savings plan due to limitations under the U.S. Internal Revenue Code. The plan also provides eligible executives with Company non‑electivenon-elective and matching contribution credits which they are restricted from receiving under the tax‑qualifiedtax-qualified savings plan due to those same limitations.
|
| | | | | | | | | | | | | | | | | | | | |
| Name | | Elective Contributions in Last Fiscal Year ($) | | Registrant Contributions in Last Fiscal Year ($) (A) | | Aggregate Earnings in Last Fiscal Year ($) (A) | | Aggregate Withdrawals/ Distributions ($) | | Aggregate Balance at Last Fiscal Year End ($) (B) |
| Steven Fisher | | 288,773 |
| | | 89,553 |
| | | (20,161 | ) | | | — |
| | | 893,644 |
| |
| Steven Pohl | | — |
| | | 21,669 |
| | | (815 | ) | | | — |
| | | 74,103 |
| |
| Leslie Parette | | — |
| | | 62,592 |
| | | (2,519 | ) | | | — |
| | | 317,513 |
| |
| Philip Martens | | — |
| | | 204,250 |
| | | 24,980 |
| | | — |
| | | 1,314,897 |
| |
|
| | | | | |
| Name | Elective Contributions in Last Fiscal Year ($) | Employer Contributions in Last Fiscal Year ($) | Aggregate Earnings in Last Fiscal Year ($) | Aggregate Withdrawals/ Distributions ($) | Aggregate Balance at Last Fiscal Year End ($) |
| Steven Fisher | — | 133,593 | 26,022 | — | 1,376,824 |
| Devinder Ahuja | — | 48,479 | — | — | 48,479 |
| Leslie Parrette | — | 64,983 | 9,947 | — | 519,190 |
| Marco Palmieri | — | 52,751 | — | — | 52,751 |
| |
(A) | Registrant contributions, but not Earnings, are included in the Summary Compensation Table above. |
| |
(B) | Of the balance at the end of the fiscal year, $337,250 for Mr. Fisher, $67,678 for Mr. Pohl, $282,853 for Mr. Parrette and $760,019 for Mr. Martens represents cumulative Company contributions. |
Potential Payments Upon Termination or Change in Control
This section provides an estimate of the payments and benefits that would be paid to certain of our named executive officers, on March 31, 2016,2018, upon voluntary termination or involuntary termination of employment without cause and were adjusted by the March 31, 2016 Swiss and Brazilian2018 Euro exchange ratesrate for Messrs. Mayr and Palmieri, respectively.Mr. Braghi. This section, however, does not reflect any payments or benefits that would be paid to our salaried employees generally, including for example accrued salary and vacation pay; regular retirement plan benefits under our defined contribution plans; or normal retirement, death or disability benefits. See Employment‑Employment Related Agreements above for a discussion of the change in control, severance compensation and retention agreements for our named executive officers and any restrictive covenants contained therein.
As noted above, Mr. Martens separated from the Company on April 20, 2015. The terms of Mr. Martens’ separation agreement and the amount payable thereunder are described on Form 8-K filed with the Securities and Exchange Commission on April 29, 2015.
| | | Name | Type of Payment | Voluntary Termination by Executive ($) | | Termination Without Cause ($) (C) (D) (J) | | Termination Without Cause or by Executive for Good Reason in Connection with Change in Control ($) (E) (F) | | Death or Disability($) | Type of Payment | Voluntary Termination by Executive ($) | Termination by us without Cause ($) | | Termination in Connection with CIC by us without Cause or by Executive for Good Reason($) | | Death or Disability ($) |
| Steven Fisher | Short-Term Incentive Payment (A) | 712,500 |
| | 712,500 |
| | 712,500 |
| | 712,500 |
| Short-Term Incentive Pay (A) | 1,472,772 |
| 1,472,772 |
| | 1,472,772 |
| | 1,472,772 |
|
| | Long-Term Incentive Plan (B) | — |
| | 255,275 |
| | 567,688 |
| | 255,275 |
| |
| | Severance | — |
| | 2,925,000 |
| | 2,925,000 |
| | — |
| |
| | Retirement plans | — |
| | 25,175 |
| | 25,175 |
| | — |
| |
| | Lump sum cash payment for continuation of health coverage (G) | — |
| | 30,695 |
| | 30,695 |
| | — |
| |
| | Continued group life insurance coverage (H) | — |
| | 6,399 |
| | 6,399 |
| | — |
| |
| | | | | | | | | | |
| | Total | 712,500 |
| | 3,955,044 |
| | 4,267,457 |
| | 967,775 |
| |
| Steven Pohl | Short-Term Incentive Payment (A) | 134,383 |
| | 134,383 |
| | 134,383 |
| | 134,383 |
| |
| | Long-Term Incentive Plan (B) | — |
| | 32,059 |
| | 51,296 |
| | 32,059 |
| |
| | Severance | — |
| | 251,969 |
| | 251,969 |
| | — |
| |
| | Retirement plans | — |
| | — |
| | — |
| | — |
| |
| | Lump sum cash payment for continuation of health coverage (G) | — |
| | — |
| | — |
| | — |
| |
| | Continued group life insurance coverage (H) | — |
| | — |
| | — |
| | — |
| |
| | Total | 134,383 |
| | 418,411 |
| | 437,648 |
| | 166,442 |
| |
| Erwin Mayr | Short-Term Incentive Payment (A) | 362,883 |
| | 362,883 |
| | 362,883 |
| | 362,883 |
| |
| | Long-Term Incentive Plan (B) | — |
| | 96,825 |
| | 171,184 |
| | 96,825 |
| |
| | Severance | — |
| | 837,422 |
| | 1,842,329 |
| | — |
| |
| | Retirement plans | — |
| | 104,540 |
| | 104,540 |
| | — |
| |
| | Lump sum cash payment for continuation of health coverage (G) | — |
| | — |
| | — |
| | — |
| |
| | Continued group life insurance coverage (H) | — |
| | 1,545 |
| | 1,545 |
| | — |
| |
| | Total | 362,883 |
| | 1,403,215 |
| | 2,482,481 |
| | 459,708 |
| |
| Steven Fisher | | Long-Term Incentive Plan (B) | 399,170 |
| 7,307,301 |
| | 8,808,189 |
| | 8,739,693 |
|
| Severance (C ) | — |
| 3,000,000 |
| | 3,793,512 |
| | — |
|
| Retirement plans (D) | — |
| 161,034 |
| | 161,034 |
| | — |
|
| Lump sum cash payment for continuation of health coverage (E) | — |
| 36,611 |
| | 36,611 |
| | — |
|
| Continued group life insurance coverage (F) | — |
| 4,607 |
| | 4,607 |
| | — |
|
| Total | 1,871,942 |
| 11,982,325 |
| | 14,276,725 |
| | 10,212,465 |
|
| Short-Term Incentive Pay (A) | 607,005 |
| 607,005 |
| | 607,005 |
| | 607,005 |
|
| Devinder Ahuja | | Long-Term Incentive Plan (B) | — |
| 363,910 |
| | 529,613 |
| | 529,613 |
|
| Severance (C ) | — |
| 1,320,000 |
| | 1,861,628 |
| | — |
|
| Retirement plans (D) | — |
| 74,232 |
| | 74,232 |
| | — |
|
| Lump sum cash payment for continuation of health coverage (E) | — |
| 36,611 |
| | 36,611 |
| | — |
|
| Continued group life insurance coverage (F) | — |
| 2,161 |
| | 2,161 |
| | — |
|
| Total | 607,005 |
| 2,403,919 |
| | 3,111,250 |
| | 1,136,618 |
|
| Short-Term Incentive Pay (A) | 638,770 |
| 638,770 |
| | 638,770 |
| | 638,770 |
|
| Leslie Parrette | | Long-Term Incentive Plan (B) | — |
| 1,664,836 |
| | 1,982,632 |
| | 1,970,232 |
|
| Severance (C ) | — |
| 856,800 |
| | 1,942,080 |
| | — |
|
| Retirement plans (D) | — |
| 90,939 |
| | 90,939 |
| | — |
|
| Lump sum cash payment for continuation of health coverage (E) | — |
| 9,222 |
| | 9,222 |
| | — |
|
| Continued group life insurance coverage (F) | — |
| 3,190 |
| | 3,190 |
| | — |
|
| Total | 638,770 |
| 3,263,757 |
| | 4,666,833 |
| | 2,609,002 |
|
| Short-Term Incentive Payment (A) | 226,140 |
| | 226,140 |
| | 226,140 |
| | 226,140 |
| Short-Term Incentive Pay (A) | 480,209 |
| 480,209 |
| | 480,209 |
| | 480,209 |
|
| | Long-Term Incentive Plan (B) | — |
| | 129,288 |
| | 206,521 |
| | 129,288 |
| |
| | Severance | — |
| | 521,861 |
| | 1,148,095 |
| | — |
| |
| | Retirement plans | — |
| | 41,014 |
| | 41,014 |
| | — |
| |
| | Lump sum cash payment for continuation of health coverage (G) | — |
| | 20,060 |
| | 20,060 |
| | — |
| |
| | Continued group life insurance coverage (H) | — |
| | 3,228 |
| | 3,228 |
| | — |
| |
| | Total | 226,140 |
| | 941,591 |
| | 1,645,058 |
| | 355,428 |
| |
| Les Parrette | Short-Term Incentive Payment (A) | 376,885 |
| | 376,885 |
| | 376,885 |
| | 376,885 |
| |
| | Long-Term Incentive Plan (B) | 2,273 |
| | 126,624 |
| | 201,956 |
| | 126,624 |
| |
| | Severance | — |
| | 807,611 |
| | 1,830,584 |
| | — |
| |
| | Retirement plans | — |
| | 25,175 |
| | 25,175 |
| | — |
| |
| | Lump sum cash payment for continuation of health coverage (G) | — |
| | 9,216 |
| | 9,216 |
| | — |
| |
| | Continued group life insurance coverage (H) | — |
| | 4,598 |
| | 4,598 |
| | — |
| |
| | Total | 379,158 |
| | 1,350,109 |
| | 2,448,414 |
| | 503,509 |
| |
| Marco Palmieri | | Long-Term Incentive Plan (B) | — |
| 1,673,411 |
| | 2,003,249 |
| | 1,990,849 |
|
| Severance (C ) | — |
| 1,237,500 |
| | 1,650,000 |
| | — |
|
| Retirement plans (D) | — |
| 108,412 |
| | 108,412 |
| | — |
|
| Lump sum cash payment for continuation of health coverage (E) | — |
| 36,611 |
| | 36,611 |
| | — |
|
| Continued group life insurance coverage (F) | — |
| 2,212 |
| | 2,212 |
| | — |
|
| Total | 480,209 |
| 3,538,355 |
| | 4,280,693 |
| | 2,471,058 |
|
| Short-Term Incentive Pay (A) | 342,418 |
| 342,418 |
| | 342,418 |
| | 342,418 |
|
| Emilio Braghi | | Long-Term Incentive Plan (B) | 49,308 |
| 697,417 |
| | 870,631 |
| | 867,088 |
|
| Severance (C ) | — |
| 583,067 |
| | 1,261,591 |
| | — |
|
| Retirement plans (D) | — |
| 7,381 |
| | 7,381 |
| | 7,381 |
|
| Lump sum cash payment for continuation of health coverage (E) | — |
| — |
| | — |
| | — |
|
| Continued group life insurance coverage (F) | — |
| — |
| | — |
| | — |
|
| Total | 391,726 |
| 1,630,283 |
| | 2,482,021 |
| | 1,216,887 |
|
_________________________
| |
| (A) | These amounts represent 100% of the executive's target AIP opportunity for the fiscal year. |
| |
| (B) | These amounts reflect the estimated value of the vested SARs, RSUs and RSUsPUs granted pursuant to our long term incentive plans. |
| |
| (C) | These amounts would be paid pursuant to the executive’s severance compensation agreement (or appointment letter agreement in the case of Mr. Fisher).agreement. Except for the retirement and life insurance benefits, these amounts would be paid in a single lump sum following termination of employment. The retirement benefit represents one additional year of benefit accrual or contribution credit, as applicable. The life insurance benefit represents the estimate value of coverage for one additional year. Mr. Pohl does not have a severance agreement and would be covered under a broad-based severance program. |
| |
(D) | Termination for "cause" means (i) the executive’s conviction of any crime (whether or not involving the Company) constituting a felony in the applicable jurisdiction; (ii) willful and material violation of the Company’s policies, including, but not limited to, those relating to sexual harassment and confidential information; (iii) willful misconduct in the performance of the executive’s duties for the Company; or (iv) willful failure or refusal to perform the executive’s material duties and responsibilities which is not remedied within ten days after written demand from the board of directors to remedy such failure or refusal. |
| |
(E)(D) | Under the executive's change in control agreement, these amounts would be paid to the executive if his employment is terminated without cause, or he resigns for good reason, within 24 months of a change of control. Except for the retirement and life insurance benefits, these amounts would be paid in a single lump sum following termination of employment. The retirement benefit represents one additional year of benefit accrual or contribution credit, as applicable. The life insurance benefit represents the estimate value of coverage for one additional year. |
| |
(F) | See footnote (D) above for definition of "cause." Termination for "good reason" means (i) a material reduction in the executive’s position, duties, reporting relationships, responsibilities, authority, or status with the Company; (ii) a reduction in the executive’s base salary and target short term and long term incentive opportunities in effect on the date hereof or as the same may be increased from time to time; or (iii) a failure of the Company to comply with its obligations under the change in control agreement. A "change in control" means the first to occur of any of the following events: (i) any person or entity (excluding any person or entity affiliated with the Aditya Birla Group) is or becomes the beneficial owner, directly or indirectly through any parent entity of the Company or otherwise, of securities of the Company representing 35% or more of either the then outstanding shares of common stock of the Company or the combined voting power of the Company's then outstanding securities (the “Value or Vote of the Company”); provided, however, that a Change in Control shall not be deemed to have occurred in the event that (A) any person or entity becomes the beneficial owner of securities representing 50% or less of the Value or Vote of the Company through (i) an initial public offering, (ii) a secondary offering, (iii) a private placement of securities, (iv) a share exchange transaction, or (v) any similar share purchase transaction in which the Company or any of its affiliates issues securities (any such transaction, a “Share Issuance Transaction”); and (B) a person or entity’s beneficial ownership interest in the Value or Vote of the Company is diluted solely as a result of any Share Issuance Transaction; or (ii) the majority of the members of the Board of Directors of the Company is replaced during any 12-month period by directors whose appointment or election is not endorsed by a majority of the members of the Board prior to the date of the appointment or election; or (iii) the consummation of a merger or consolidation of the Company with any other entity not affiliated with the Aditya Birla Group, other than (a) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof), in combination with the ownership of any trustee or other fiduciary holding securities under an employee benefit plan of the Company, 50% or more of the combined voting power of the voting securities of the Company or such surviving entity or any parent thereof outstanding immediately after such merger or consolidation, or (b) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no person or entity is or becomes the beneficial owner, directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such person or entity any securities acquired directly from the Company or its affiliates, other than in connection with the acquisition by the Company or its affiliates of a business) representing 50% or more of either the then outstanding shares of common stock of the Company or the combined voting power of the Company’s then outstanding securities; or (iv) the stockholders of the Company approve a plan of complete liquidation or dissolution; or (v) the sale or disposition of all or substantially all of the Company’s assets, other than a sale or disposition by the Company of all or substantially all of its assets to a member of the Aditya Birla Group. |
| |
(G)(E) | This amount is intended to assist the executive in paying post-employment health coverage and is equal tofor 12 months times the COBRA premium rate (except for Mr. Mayr, who will be covered under country-specific statutory benefits), grossed up for applicable taxes using an assumed tax rate of 40%.months. This amount would be paid in a single lump sum following termination of employment. |
| |
(H)(F) | This amount represents the estimateestimated value of one additional year of coverage under our group and executive life insurance plans (except for Mr. Pohl who would be covered under a broad-based severance program). |
| |
(I) | In the event of a Termination for Cause, all vested and unvested AIP and LTIP awards will be forfeited.plans. |
Director Compensation for Fiscal 20162018
The Chairman of our board of directors is entitled to receive cash compensation equal to $250,000 per year, and the Chair of our Audit Committee is entitled to receive $175,000 per year. Each of our other directors is entitled to receive compensation equal to $150,000 per year, plus an additional $5,000 if he is a member of our Audit Committee. Directors’ fees are ordinarily paid in quarterly installments.
Since July 2008, our Chairman, Mr. Birla has declined to receive the director compensation to which he is entitled. All directors continue to receive reimbursement for out‑of‑out of pocket expenses associated with attending board and Committee meetings. The table below sets forth the total compensation received by our non‑employee directors for fiscal 2016.2018.
|
| |
| Name | Fees Earned or Paid in Cash ($) |
| Kumar Mangalam Birla | — |
| D. Bhattacharya | 155,000 |
| Askaran K. Agarwala | 150,000 |
| Clarence J. Chandran | 155,000 |
| Donald A. Stewart | 175,000 |
| Satish Pai | 150,000 |
Compensation Committee Interlocks and Insider Participation
In fiscal 2016, only Independent Directors served on the Committee.2018, Clarence J. Chandran was the Chairman of the Committee. The other Committee members during all or part of the year were Mr. D. Bhattacharya, Mr. Askaran Agarwala and Mr. Satish Pai. During fiscal 2016,2018, none of our executive officers served as:
•
a member of the Committee (or other board committee performing equivalent functions or, in the absence of any such committee, the entire board of directors) of another entity, one of whose executive officers served on our Committee;
•a director of another entity, one of whose executive officers served on our Committee; or
•a member of the Committee (or other board committee performing equivalent functions or, in the absence of any such committee, the entire board of directors) of another entity, one of whose executive officers served as one of our directors.
Fiscal Year 20172019 Incentive Compensation Plans
On May 5, 2016,2, 2018, our board of directors approved our fiscal 2017 annual incentive plan (20172019 Annual Incentive Plan (2019 Executive AIP) and a long term incentive plan covering fiscal years 20172019 through 2019 (20172021 (2019 Executive LTIP). The target amounts for each plan for our named executive officers are as follows:
| | | Executive | 2017 Executive AIP Target (as % of base salary) | 2017 Executive LTIP Target Awarded May 5, 2016 ($) | |
| Name | | 2019 Executive AIP Target (as % of base salary) | 2019 Executive LTIP Target Awarded May 2, 2018 ($) |
| Steven Fisher | 110 | | 2,800,000 | | 120% | 4,000,000 |
| Steven Pohl | 60 | | 300,000 | | |
| Erwin Mayr | 65 | | 700,000 | | |
| Devinder Ahuja | | 85% | 680,000 |
| Leslie Parrette | | 70% | 750,000 |
| Marco Palmieri | 65 | | 700,000 | | 65% | 760,000 |
| Leslie Parrette | 70 | | 700,000 | | |
| Emilio Braghi | | 65% | 700,000 |
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters
On May 15, 2007, the Company was acquired by Hindalco through its indirect wholly-owned subsidiary AV Metals Inc. pursuant to a plan of arrangement entered into on February 10, 2007 and approved by the Ontario Superior Court of Justice on May 14, 2007.
Subsequent to completion of the Arrangement on May 15, 2007, all of our common shares were indirectly held by Hindalco.
Item 13. Certain Relationships and Related Transactions and Director Independence
We maintain various policies and procedures that govern related party transactions. Pursuant to our Code of Conduct and our Code of Ethics for Senior Financial Officers, senior managers and directors of the company (a) must avoid any action that creates or appears to create, a conflict of interest between their own interest and the interest of the company, (b) cannot usurp corporate opportunities, and (c) must deal fairly with third parties. This policy is available on our website at www.novelis.com. In addition, we have enacted procedures to monitor related party transactions by (x) identifying possible related parties through questions in our director and officer questionnaires, (y) determining whether we receive payments from or make payments to any of the identified related parties, and (z) if we determine payments are made or received, researching the nature of the interactions between the company and the related parties and ensuring that the related person does not have an interest in the transaction with the company. The Audit Committee is responsible for reviewing material related party transactions that involve the company, one of our directors or executive officers or any of their immediate family members.
We have entered intoSee Note 8 — Investment in and Advances to Non-Consolidated Affiliates and Related Party Transactions for more details related to various transactions with our parent company, Hindalco, and its affiliates for the sale of products and services of less than $1 million in the aggregate and purchases of $5 million.affiliates. These transactions are not material to Novelis individually or in the aggregate. Because of the relationship four of our directors have with Hindalco, we consider these salestransactions to be related party transactions.party.
Item 14. Principal Accountant Fees and Services
PricewaterhouseCoopers LLP has served as our independent registered public accounting firm since our spin-off from Alcan on January 6, 2005. The following table shows fees and expenses paidbilled to the Company by PricewaterhouseCoopers LLP for services rendered for the years ended March 31, 20162018 and 2015:2017:
| | | | | March 31, | | March 31, |
| | | 2016 | | 2015 | | 2018 | | 2017 |
| Audit fees (1) | | $ | 6,292,273 |
| | $ | 8,602,583 |
| | $ | 6,688,850 |
| | $ | 7,124,817 |
|
| Audit-Related Fees (2) | | 235,235 |
| | 50,000 |
| | 1,881,500 |
| | — |
|
| Tax Fees (3) | | 70,004 |
| | 131,137 |
| | 88,545 |
| | 56,373 |
|
| All Other Fees (4) | | 52,029 |
| | 71,541 |
| | 143,978 |
| | 597,356 |
|
| Total | | $ | 6,649,541 |
| | $ | 8,855,261 |
| | $ | 8,802,873 |
| | $ | 7,778,546 |
|
_________________________
| |
| (1) | Represent fees for professional services rendered and expenses incurred for the audit of the Company’s annual financial statements, review of financial statements included in the Company’s Form 10-Qs and services that are normally provided by PricewaterhouseCoopers LLP in connection with statutory and regulatory filings or engagements for those fiscal periods. |
| |
| (2) | Represent fees for assurance related services that are reasonably related to the performance of the audit or review of our consolidated financial statements and are not reported under “Audit Fees.” In the fiscal year ended March 31, 2016,2018, this fee includes consultations on accounting and disclosure matters as well as a quality assurance assessment of certain ERP functionalities. In the fiscal year ended March 31, 2015, this fee included consultations on accounting and disclosure matters.due diligence procedures performed. Note that the nature of such advice did not result in the principal auditor firm acting in a management function or providing services that were considered book-keeping in nature. |
| |
| (3) | Represent fees for servicesIn the fiscal year ended March 31, 2018, this fee includes procedures performed related to transfer pricing studies. In the fiscal year ended March 31, 2015,2017, this fee included fees for servicesincludes procedures performed related to transfer pricing studies and international tax consulting services.customs valuations audits. |
| |
| (4) | Represent feesIn the fiscal year ended March 31, 2018, this fee includes attest services performed over the Company's application for energy credits and certain agreed upon procedures work. In the fiscal year ended March 31, 2017, this fee includes services performed for Novelis Inc. in connection with an Offering Document of its' parent company, Hindalco Industries Limited, as well as for services not included in the Audit, Audit Related, and Tax categories.Tax. |
Pre-Approval of Audit and Permissible Non-Audit Services
The charter of the Audit Committee provides that the Committee is responsible for the pre-approval of all audit and permissible non-audit services to be performed by the independent auditors. The Audit Committee has adopted a policy for the pre-approval of services provided by the independent auditors. 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.
PART IV
Item 15. Exhibits and Financial Statement Schedules
1. Financial Statement Schedules
None.
2. Exhibits
|
| | |
Exhibit No. | | Description |
| | |
| 2.1 | | |
| | |
| 3.1 | | |
| | |
| 3.2 | | |
| | |
| 3.3 | | |
| | |
| 4.1 | | |
| | |
| 4.2 | | Indenture relating to the 8.375%6.25% Senior Notes due 2017,2024, dated as of December 17, 2010,August 29, 2016, between Novelis Corporation, as issuer, Novelis Inc., as guarantor, the subsidiary guarantors names on the signature page thereto and Regions Bank, as trustee (incorporated by reference to Exhibit 4.3 to our Current Report on Form 8-K filed on September 19, 2016 (File No. 001-32312))
|
| |
| 4.3 | | Indenture relating to the 5.875% Senior Notes due 2026, dated September 14, 2016, between Novelis Corporation, as issuer, Novelis Inc., as guarantor, the subsidiary guarantors named on the signature pagespage thereto and TheRegions Bank, of New York Mellon Trust Company, N.A., as trustee (incorporated by reference to Exhibit 4.1 to our Current Report on Form 8-K filed on December 17, 2010September 19, 2016 (File No. 001-32312))
|
| | |
4.310.1 | | Indenture, relatingAmendment No. 1 to the 8.75% Senior Notes due 2020,Second Amended and Restated Credit Agreement dated as of December 17, 2010,September 14, 2017, between Novelis Inc., as the guarantors named onParent Borrower, and the signature pagesother Borrowers and Loan Parties party thereto, AV Metals Inc., the Third Party Security Provider, the Lenders party thereto, the Issuing Banks party thereto, Wells Fargo Bank, National Association, as Administrative Agent and TheCollateral Agent, and Wells Fargo Bank, of New York Mellon Trust Company, N.A. (London Branch), as trusteeEuropean Swingline Lender (incorporated by reference to Exhibit 4.210.1 to our Quarterly Report on Form 10-Q filed on November 2, 2017 (File No. 001-32312)) |
| |
| 10.2 | | Amendment No. 1 to Credit Agreement, dated as of September 14, 2017, between Novelis Inc., as Borrower, AV Metals Inc., as Holdings, the other Loan Parties party thereto, the Third Party Security Provider, and Standard Chartered Bank, as Administrative Agent for the Lenders (incorporated by reference to Exhibit 10.2 to our Quarterly Report on Form 10-Q filed on November 2, 2017 (File No. 001-32312)) |
| | |
| 10.3* | | |
|
| | |
| | |
4.410.4*
| | |
| |
10.5*
| | |
| | |
| 10.6* | | |
| | |
| 10.7* | | |
| | |
4.510.8* | | Form of 8.75% Senior Note due 2020 |
| | |
4.610.9* | | Supplemental Indenture, relating to the 8.375% Senior Notes due |
| |
| 10.10* | | |
| |
| 10.11* | | |
| |
| 10.12* | | |
| |
| 10.13* | | |
| |
| 10.14* | | |
| |
| 10.15* | | |
| | |
4.710.16* | | Supplemental Indenture, relating to the 8.75% Senior Notes due 2017, among the Company, the guarantor named on the signature page thereto |
| |
| 10.17* | | |
| |
| 10.18* | | |
| |
| 10.19* | | |
| | |
|
| | |
4.810.20* | | Supplemental Indenture, relating to the 8.375% Senior Notes due 2017, among |
| |
| 10.21* | | |
| | | |
4.910.22* | | Supplemental Indenture, relatingRetention Award Letter to the 8.75% Senior Notes due 2020, among Novelis Inc., Novelis Delaware LLC, and The Bank of New York Mellon Trust Company, N.A., as Trustee,Marco Palmieri, dated as of March 27, 2012June 2015 (incorporated by reference intoto Exhibit 4.2110.47 to our Annual Report on Form 10-K filed on May 24, 201210, 2016 (File No. 001-32312)) |
| | | |
4.1010.23* | | Supplemental Indenture, relatingRetention Award Letter to the 8.375% Senior Notes due 2017, among Novelis Inc., 8018243 Canada Limited, and The Bank of New York Mellon Trust Company, N.A., as Trustee,Leslie J. Parrette, Jr. dated as of March 27, 2012June 2015 (incorporated by reference intoto Exhibit 4.2210.49 to our Annual Report on Form 10-K filed on May 24, 201210, 2016 (File No. 001-32312)) |
| | |
4.1110.24* | | Supplemental Indenture, relatingRetention Award Letter to the 8.75% Senior Notes due 2020, among Novelis Inc., 8018243 Canada Limited, and The Bank of New York Mellon Trust Company, N.A., as Trustee,Emilio Braghi dated as of March 27, 2012January 16, 2015 (incorporated by reference intoto Exhibit 4.2310.32 to our Annual Report on Form 10-K filed on May 24, 201210, 2017 (File No. 001-32312)) |
| | |
4.1210.25* | | Supplemental Indenture, relating |
| | |
4.13
10.26* | | Supplemental Indenture, relating |
| | |
10.110.27* | | $800 million asset-based lending credit facility |
| |
| 10.28* | | |
| |
| 10.29* | | |
| |
| 10.30* | | |
| |
| 10.31* | | |
| |
| 10.32* | | |
| |
| 10.33 | | Term Loan Credit Agreement dated as of December 17, 2010January 10, 2017, among Novelis Inc., as Parent Borrower, Novelis Corporation, Novelis PAE Corporation, Novelis Brand LLC, Novelis South America Holdings LLC, Aluminum Upstream Holdings LLC, as U.S. Borrowers, Novelis UK Limited,borrower, AV Metals, Inc., and the other loan parties from time to timeguarantors party thereto, the lenders from time to time party thereto, the Collateral Agent,and Standard Chartered Bank, of America, N.A., as Issuing Bank, U.S. Swingline Lenderadministrative agent and Administrative Agent, The Royal Bank of Scotland plc, as European Swingline Lender, and the other parties from time to time party theretocollateral agent (incorporated by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q filed on February 8, 20117, 2017 (File No. 001-32312)) |
| | |
10.210.34 | | $1.5 billion term loan facility dated as of December 17, 2010 among Novelis Inc., as Borrower, AV Metals Inc., as Holdings, and the other guarantors party thereto, with the lenders party thereto, Bank of America, N.A., as administrative agent, JPMorgan Chase Bank, N.A., as syndication agent, Citibank, N.A., The Royal Bank of Scotland PLC and UBS AG, Stamford Branch, as co-documentation agents, and Merrill Lynch, Pierce, Fenner and Smith Incorporated and J.P. Morgan Securities LLC, as joint lead arrangers and Merrill Lynch, Pierce, Fenner and Smith Incorporated, J.P. Morgan Securities LLC, Citigroup Global Markets Inc., RBS Securities Inc. and UBS Securities LLC, as joint bookrunners (incorporated by reference to Exhibit 10.2 to our Quarterly Report on Form 10-Q filed on February 8, 2011 (File No. 001-32312)) |
| |
10.3 | | Amendment No. 1 to Credit Agreement, dated as of March 10, 2011, among Novelis Inc., as borrower, AV Metals Inc., as holdings, and the other loan parties party thereto, the lenders party thereto, Bank of America, N.A., as administrative agent, and Merrill Lynch, Pierce, Fenner and Smith Incorporated, Citigroup Global Markets Inc. and UBS Securities LLC, as joint lead arrangers and joint bookrunners (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on March 14, 2011 (File No. 001-32312)) |
| |
10.4 | | Amendment No. 2 to Credit Facility, dated as of October 12, 2012, by and among Novelis Inc., AV Metals, Inc., the Subsidiary Guarantors Party thereto, Novelis Italia S.P.A. and Bank of America, N.A. as Administrative Agent (incorporated by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q filed on November 6, 2012 (File No. 001-32312)) |
|
| | |
| |
10.5 | | Amendment No. 3 to Credit Facility, dated as of March 5, 2013, by and among Novelis Inc., AV Metals, Inc., the Subsidiary Guarantors Party thereto, Novelis Italia S.P.A. and Bank of America, N.A. as Administrative Agent (incorporated by reference to Exhibit 10.5 to our Annual Report on Form 10-K filed on May 15, 2013 (File No. 001-32312)) |
| |
10.6 | | Intercreditor Agreement dated as of December 17, 2010 by and among Novelis Inc., Novelis Corporation, Novelis PAE Corporation, Novelis Brand LLC, Novelis South America Holdings LLC, Aluminum Upstream Holdings LLC, Novelis UK Limited, AV Metals Inc., and the subsidiary guarantors party thereto, as grantors, Bank of America, N.A., as revolving credit administrative agent, revolving credit collateral agent, Term Loan administrative agent, and Term Loan collateral agent (incorporated by reference to Exhibit 10.3 to our Quarterly Report on Form 10-Q filed on February 8, 2011 (File No. 001-32312)) |
| |
10.7 | | Security Agreement made by Novelis Inc., as Parent Borrower, Novelis Corporation, Novelis PAE Corporation, Novelis Brand LLC, Novelis South America Holdings LLC, Aluminum Upstream Holdings LLC, as U.S. Borrowers and the guarantors from time to time party thereto in favor of Bank of America, N.A., as collateral agent dated as of December 17, 2010 (incorporated by reference to Exhibit 10.4 to our Quarterly Report on Form 10-Q filed on February 8, 2011) (File No. 001-32312)) |
| |
10.8 | | Security Agreement made by Novelis Inc., as the Borrower and the guarantors from time to time party thereto in favor of Bank of America, N.A., as collateral agent dated as of December 17, 2010 (incorporated by reference to Exhibit 10.5 to our Quarterly Report on Form 10-Q filed on February 8, 2011) (File No. 001-32312)) |
| |
10.9 | | $225 million Increase Joinder Agreement dated as of December 7, 2011 among Novelis, Inc., AV Metals Inc. The Third Party Security Providers named therein and Bank of America, N.A., as Administrative Agent under the Credit Agreements (incorporated by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q filed on February 8, 2012 (File No. 001-32312)) |
| |
10.10 | | Increase Joinder Agreement, dated as of October 12, 2012, by and among Novelis Inc., AV Metals Inc., the Subsidiary Guarantors party thereto, Bank of America, N.A., as Administrative Agent and the Lenders Signatory thereto (incorporated by reference to Exhibit 10.1 to our Quarterly Report filed on November 6, 2012 (File No. 001-32312)) |
| |
10.11 | | Amended and Restated Credit Agreement dated as of May 13, 2013 among Novelis Inc. and subsidiary borrowers party thereto, guarantors party thereto, Wells Fargo as Administrative Agent and the Lenders signatory thereto (incorporated by reference to Exhibit 10.13 to our Annual Report on Form 10-K filed on May 15, 2013 (File No. 001-32312)) |
| |
10.12 | | Second Amended and Restated Credit Agreement dated as of October 6, 2014, by and among Novelis Inc. and other borrowers and guarantors party thereto and Wells Fargo Bank, National Association as Administrative Agent, Collateral Agent, Issuing Bank and U.S. Swingline Lender and other lenders party thereto (incorporated by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q filed on November 10, 2014 (File No. 001-32312)) |
| | |
10.13 | | Supplemental Indenture, dated as of July 30, 2013, among Novelis MEA Ltd, Novelis Inc., and The Bank of New York Mellon Trust Company N.A., as Trustee (incorporated by reference to Exhibit 10.2 to our Quarterly Report on Form 10-Q filed on November 10, 2014 (File No. 001-32312)) |
| | |
10.14 | | Supplemental Indenture, dated as of July 30, 2013, among Novelis MEA Ltd, Novelis Inc., and The Bank of New York Mellon Trust Company N.A., as Trustee (incorporated by reference to Exhibit 10.3 to our Quarterly Report on Form 10-Q filed on November 10, 2014 (File No. 001-32312)) |
| | |
10.15** | | Metal Supply Agreement between Novelis Inc., as Purchaser, and Rio Tinto Alcan Inc., as Supplier, for the supply of sheet ingot in North America, dated October 26, 2011(incorporated by reference to Exhibit 10.10 to our Annual Report on Form 10-K filed on May 24, 2012 (File No. 001-32312)) |
| | |
|
| | |
10.16* | | Form of Indemnity Agreement between Novelis Inc. and Members of the Board of Directors of Novelis Inc. (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on May 21, 2007 (File No. 001-32312)) |
| | |
10.17*21.1 | | Form |
| | |
10.18*
31.1 | | Form |
| |
10.19* | | Form of Change in Control Agreement between Novelis Inc. and certain executive officers |
| |
10.20*
| | Form of Severance Agreement (incorporated by reference to Exhibit 10.4 to our Current Report on Form 8-K filed on July 1, 2009 (File No. 001-32312)) |
| | |
10.21* | | Novelis 2012 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on May 26, 2011 (File No. 001-32312)) |
| |
10.22* | | Novelis Inc. 2013 Long-Term Incentive Plan (incorporated by reference into Exhibit 10.1 to our Current Report on Form 8-K filed on May 25, 2012 (File No. 001-32312)) |
| | |
10.23* | | Novelis Inc. Long-Term Incentive Plans Amendment dated May 13, 2013 (incorporated by reference to Exhibit 10.44 to our Annual Report on Form 10-K filed on May 15, 2013 (File No. 001-32312)) |
| |
10.24* | | Novelis Inc. Fiscal Year 2014 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.42 to our Annual Report on Form 10-K filed on May 15, 2013 (File No. 001-32312)) |
| | |
10.25* | | Novelis Inc. Fiscal Year 2015 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.30 to our Annual Report on Form 10-K filed on May 16, 2014 (File No. 001-32312)) |
| |
10.26* | | Novelis Inc. Fiscal Year 2016 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.31 to our Annual Report on Form 10-K filed on May 12, 2015 (File No. 001-32312)) |
| |
10.27* | | Novelis Inc. Fiscal Year 2017Principal Executive Long-Term Incentive Plan |
| |
10.28* | | Novelis Inc. Fiscal Year 2013 Annual Incentive Plan (incorporated by reference into Exhibit 10.2 to our Current Report on Form 8-K filed on May 25, 2012 (File No. 001-32312)) |
| |
10.29* | | Novelis Inc. Fiscal Year 2014 Annual Incentive Plan (incorporated by reference to Exhibit 10.43 to our Annual Report on Form 10-K filed on May 15, 2013 (File No. 001-32312)) |
| |
10.30* | | Novelis Inc. Fiscal Year 2015 Annual Incentive Plan (incorporated by reference to Exhibit 10.35 to our Annual Report on Form 10-K filed on May 16, 2014 (File No. 001-32312)) |
| |
10.31* | | Novelis Inc. Fiscal Year 2016 Annual Incentive Plan (incorporated by reference to Exhibit 10.36 to our Annual Report on Form 10-K filed on May 12, 2015 (File No. 001-32312)) |
| |
10.32* | | Novelis Inc. Fiscal Year 2017 Executive Annual Incentive Plan |
| | |
10.33* | | Novelis Supplementary Pension Plan dated January 1, 2012 ((incorporated by reference to Exhibit 10.31 to our Annual Report on Form 10-K filed on May 24, 2012 (File No. 001-32312))Officer |
|
| | |
| | |
10.34* | | Employment Agreement between Philip Martens and Novelis Inc., dated as of April 11, 2009 (incorporated by reference to Exhibit 10.36 to our Annual Report on Form 10-K filed on June 29, 2009 (File No. 001-32312)) |
| |
10.35* | | Retention Agreement between Novelis Inc. and Philip Martens, dated as of May 13, 2013 (incorporated by reference to Exhibit 10.38 to our Annual Report on Form 10-K filed on May 16, 2014 (File No. 001-32312)) |
| |
10.36* | | Separation and Release Agreement between Novelis Inc. and Philip Martens, dated April 23, 2015 ((incorporated by reference to Exhibit 10.40 to our Annual Report on Form 10-K filed on May 12, 2015 (File No. 001-32312)) |
| |
10.37* | | Employment Agreement between Novelis Inc. and Steven Fisher (incorporated by reference to our Current Report on Form 8-K filed on May 21, 2007 and our Current Report on Form 8-K/A filed on August 15, 2007 (File No. 001-32312)) |
| |
10.38* | | Employment Agreement between Novelis Inc. and Antonio Tadeu Coelho Nardocci dated September 4, 2009 (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K/A filed on September 9, 2009 (File No. 001-32312)) |
| |
10.39* | | Employment Agreement between Novelis Inc. and Erwin Mayr, dated as of September 17, 2009 (incorporated by reference in Exhibit 10.29 of our Annual Report on Form 10-K filed May 26, 2011) File No. 001-32312)) |
| |
10.40* | | Employment Agreement between Novelis do Brasil Ltda. and Marco Antonio Palmieri dated August 8, 2011 (incorporated by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q filed on November 9, 2011 (File No. 001-32312)) |
| |
10.41* | | Employment Agreement between Novelis Inc. and Shashi Maudgal dated February 23, 2012 ((incorporated by reference to Exhibit 10.32 to our Annual Report on Form 10-K filed on May 24, 2012 (File No. 001-32312)) |
| |
10.42* | | Employment Agreement between Novelis Inc. and Leslie J. Parrette, Jr., dated September 21, 2009 ((incorporated by reference to Exhibit 10.46 to our Annual Report on Form 10-K filed on May 12, 2015 (File No. 001-32312)) |
| | |
10.43* | | Retention Award Letter to Steven Fisher, dated July 1, 2014 ((incorporated by reference to Exhibit 10.47 to our Annual Report on Form 10-K filed on May 12, 2015 (File No. 001-32312)) |
| |
10.44* | | Retention Award Letter to Marco Palmieri, dated July 1, 2014 ((incorporated by reference to Exhibit 10.48 to our Annual Report on Form 10-K filed on May 12, 2015 (File No. 001-32312)) |
| |
10.45* | | Retention Award Letter to Erwin Mayr, dated July 1, 2014 ((incorporated by reference to Exhibit 10.49 to our Annual Report on Form 10-K filed on May 12, 2015 (File No. 001-32312)) |
| |
10.46* | | Retention Award Letter to Leslie J. Parrette, dated July 1, 2014 ((incorporated by reference to Exhibit 10.50 to our Annual Report on Form 10-K filed on May 12, 2015 (File No. 001-32312)) |
| | |
10.47* | | Retention Award Letter to Marco Palmieri, dated June 2015 |
| | |
10.48*
| | Retention Award Letter to Erwin Mayr, dated June 2015 |
| | |
10.49* | | Retention Award Letter to Leslie J. Parrette, Jr. dated June 2015 |
|
| | |
| | |
10.50* | | Recognition Award Letter to Steven E. Pohl, dated June 18, 2015 |
| | |
10.51* | | Retention Award Letter to Steven E. Pohl dated June 2015 |
| |
21.1 | | List of Subsidiaries of Novelis Inc. |
| |
31.1 | | Section 302 Certification of Principal Executive Officer |
| |
| 31.2 | | |
| | |
| 32.1 | | |
| | |
| 32.2 | | |
| | |
| 101.INS | | XBRL Instance Document |
| | |
| 101.SCH | | XBRL Taxonomy Extension Schema Document |
| | |
| 101.CAL | | XBRL Taxonomy Extension Calculation Linkbase |
| | |
| 101.DEF | | XBRL Taxonomy Extension Definition Linkbase |
| | |
| 101.LAB | | XBRL Taxonomy Extension Label Linkbase |
| | |
| 101.PRE | | XBRL Taxonomy Extension Presentation Linkbase |
|
| |
| * | Indicates a management contract or compensatory plan or arrangement. |
|
| |
** | Confidential treatment requested for certain portions of this Exhibit, which portions have been omitted and filed separately with the Securities and Exchange Commission. |
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: | | /s/ Steven Fisher |
| | Name: | | Steven Fisher |
| | Title: | | President and Chief Executive Officer |
Date: May 10, 20168, 2018
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/ Steven Fisher | | (Principal Executive Officer) | | Date May 10, 20165/8/2018 |
| Steven Fisher | | | | |
| | | |
/s/ Steven E. PohlDevinder Ahuja | | (Principal Financial Officer) | | Date May 10, 20165/8/2018 |
Steven E. PohlDevinder Ahuja | | | | |
| | | |
| /s/ Stephanie Rauls | | (Principal Accounting Officer) | | Date May 10, 20165/8/2018 |
| Stephanie Rauls | | | | |
| | | |
| /s/ Kumar Mangalam Birla | | (Chairman of the Board of Directors) | | Date May 10, 20165/8/2018 |
| Kumar Mangalam Birla | | | | |
| | | |
| /s/ Askaran Agarwala | | (Director) | | Date May 10, 20165/8/2018 |
| Askaran Agarwala | | | | |
| | | |
| /s/ Debnarayan Bhattacharya | | (Director) | | Date May 10, 20165/8/2018 |
| Debnarayan Bhattacharya | | | | |
| | | |
| /s/ Clarence J. Chandran | | (Director) | | Date May 10, 20165/8/2018 |
| Clarence J. Chandran | | | | |
| | | |
| /s/ Donald A. Stewart | | (Director) | | Date May 10, 20165/8/2018 |
| Donald A. Stewart | | | | |
| | | | | |
| /s/ Satish Pai | | (Director) | | Date May 10, 20165/8/2018 |
| Satish Pai | | | | |
EXHIBIT INDEX
|
| | |
Exhibit No. | | Description |
| | |
| 2.1 | | |
| | |
| 3.1 | | |
| | |
| 3.2 | |
|
| | |
| 3.3 | | |
| | |
| 4.1 | | |
| | |
| 4.2 | | Indenture relating to the 8.375%6.25% Senior Notes due 2017,2024, dated as of December 17, 2010,August 29, 2016, between Novelis Corporation, as issuer, Novelis Inc., as guarantor, the subsidiary guarantors names on the signature page thereto and Regions Bank, as trustee (incorporated by reference to Exhibit 4.3 to our Current Report on Form 8-K filed on September 19, 2016 (File No. 001-32312))
|
| |
| 4.3 | | Indenture relating to the 5.875% Senior Notes due 2026, dated September 14, 2016, between Novelis Corporation, as issuer, Novelis Inc., as guarantor, the subsidiary guarantors named on the signature pagespage thereto and TheRegions Bank, of New York Mellon Trust Company, N.A., as trustee (incorporated by reference to Exhibit 4.1 to our Current Report on Form 8-K filed on December 17, 2010September 19, 2016 (File No. 001-32312))
|
| | |
4.310.1 | | Indenture, relatingAmendment No. 1 to the 8.75% Senior Notes due 2020,Second Amended and Restated Credit Agreement dated as of December 17, 2010,September 14, 2017, between Novelis Inc., as the guarantors named onParent Borrower, and the signature pagesother Borrowers and Loan Parties party thereto, AV Metals Inc., the Third Party Security Provider, the Lenders party thereto, the Issuing Banks party thereto, Wells Fargo Bank, National Association, as Administrative Agent and TheCollateral Agent, and Wells Fargo Bank, of New York Mellon Trust Company, N.A. (London Branch), as trusteeEuropean Swingline Lender (incorporated by reference to Exhibit 4.210.1 to our Quarterly Report on Form 10-Q filed on November 2, 2017) |
| |
| 10.2 | | Amendment No. 1 to Credit Agreement, dated as of September 14, 2017, between Novelis Inc., as Borrower, AV Metals Inc., as Holdings, the other Loan Parties party thereto, the Third Party Security Provider, and Standard Chartered Bank, as Administrative Agent for the Lenders (incorporated by reference to Exhibit 10.2 to our Quarterly Report on Form 10-Q filed on November 2, 2017) |
| | |
10.3*
| |
|
| | |
4.410.4* | | |
| |
4.5 | | Form of 8.75% Senior Note due 2020 (incorporated by reference to Exhibit 4.4 to our Current Report on Form 8-K filed on December 17, 2010 (File No. 001-32312)) |
| |
4.6 | | Supplemental Indenture, relating to the 8.375% Senior Notes due 2017, among the Company, the guarantor named on the signature page thereto and The Bank of New York Mellon Trust Company, N.A., as trustee, dated as of December 7, 2011 (incorporated by reference to Exhibit 4.1 to our Quarterly Report on Form 10-Q filed on February 8, 2012 (File No. 001-32312))
|
| |
4.7 | | Supplemental Indenture, relating to the 8.75% Senior Notes due 2017, among the Company, the guarantor named on the signature page thereto and The Bank of New York Mellon Trust Company, N.A., as trustee, dated as of December 7, 2011 (incorporated by reference to Exhibit 4.2 to our Quarterly Report on Form 10-Q filed on February 8, 2012 (File No. 001-32312))
|
| |
4.8 | | Supplemental Indenture, relating to the 8.375% Senior Notes due 2017, among Novelis Inc., Novelis Delaware LLC, and The Bank of New York Mellon Trust Company, N.A., as Trustee, dated as of March 27, 2012 (incorporated by reference into Exhibit 4.2010.19 to our Annual Report on Form 10-K filed on May 24, 201210, 2016 (File No. 001-32312))
|
| | |
4.910.5* | | Supplemental Indenture, relating to the 8.75% Senior Notes due 2020, among Novelis Inc., Novelis Delaware LLC, and The BankForm of New York Mellon Trust Company, N.A., as Trustee, dated as of March 27, 2012Severance Agreement (incorporated by reference intoto Exhibit 4.2110.4 to our AnnualCurrent Report on Form 10-K8-K filed on May 24, 2012July 1, 2009 (File No. 001-32312))
|
|
| | |
| | |
4.1010.6* | | Supplemental Indenture, relating to the 8.375% Senior Notes due 2017, among Novelis Inc., 8018243 Canada Limited, and The Bank of New York Mellon Trust Company, N.A., as Trustee, dated as of March 27, 2012 Fiscal Year 2014 Long-Term Incentive Plan (incorporated by reference intoto Exhibit 4.2210.42 to our Annual Report on Form 10-K filed on May 24, 201215, 2013 (File No. 001-32312))
|
| | |
4.1110.7* | | Supplemental Indenture, relating to the 8.75% Senior Notes due 2020, among Novelis Inc., 8018243 Canada Limited, and The Bank of New York Mellon Trust Company, N.A., as Trustee, dated as of March 27, 2012 Fiscal Year 2015 Long-Term Incentive Plan (incorporated by reference intoto Exhibit 4.2310.30 to our Annual Report on Form 10-K filed on May 24, 201216, 2014 (File No. 001-32312))
|
| | |
4.1210.8* | |
|
| | |
4.13
10.9* | | Supplemental Indenture, relating to the 8.375% Senior Notes due |
| | |
10.1 | | $800 million asset-based lending credit facility dated as of December 17, 2010 among Novelis Inc., as Parent Borrower, Novelis Corporation, Novelis PAE Corporation, Novelis Brand LLC, Novelis South America Holdings LLC, Aluminum Upstream Holdings LLC, as U.S. Borrowers, Novelis UK Limited, AV Metals Inc., and the other loan parties from time to time party thereto, the lenders from time to time party thereto, the Collateral Agent, Bank of America, N.A., as Issuing Bank, U.S. Swingline Lender and Administrative Agent, The Royal Bank of Scotland plc, as European Swingline Lender, and the other parties from time to time party thereto (incorporated by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q filed on February 8, 2011 (File No. 001-32312)) |
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10.2 | | $1.5 billion term loan facility dated as of December 17, 2010 among Novelis Inc., as Borrower, AV Metals Inc., as Holdings, and the other guarantors party thereto, with the lenders party thereto, Bank of America, N.A., as administrative agent, JPMorgan Chase Bank, N.A., as syndication agent, Citibank, N.A., The Royal Bank of Scotland PLC and UBS AG, Stamford Branch, as co-documentation agents, and Merrill Lynch, Pierce, Fenner and Smith Incorporated and J.P. Morgan Securities LLC, as joint lead arrangers and Merrill Lynch, Pierce, Fenner and Smith Incorporated, J.P. Morgan Securities LLC, Citigroup Global Markets Inc., RBS Securities Inc. and UBS Securities LLC, as joint bookrunners (incorporated by reference to Exhibit 10.2 to our Quarterly Report on Form 10-Q filed on February 8, 2011 (File No. 001-32312)) |
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10.8 | | Security Agreement made by Novelis Inc., as the Borrower and the guarantors from time to time party thereto in favor of Bank of America, N.A., as collateral agent dated as of December 17, 2010 (incorporated by reference to Exhibit 10.5 to our Quarterly Report on Form 10-Q filed on February 8, 2011) (File No. 001-32312)) |
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10.9 | | $225 million Increase Joinder Agreement dated as of December 7, 2011 among Novelis, Inc., AV Metals Inc. The Third Party Security Providers named therein and Bank of America, N.A., as Administrative Agent under the Credit Agreements (incorporated by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q filed on February 8, 2012 (File No. 001-32312)) |
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10.10 | | Increase Joinder Agreement, dated as of October 12, 2012, by and among Novelis Inc., AV Metals Inc., the Subsidiary Guarantors party thereto, Bank of America, N.A., as Administrative Agent and the Lenders Signatory thereto (incorporated by reference to Exhibit 10.1 to our Quarterly Report filed on November 6, 2012 (File No. 001-32312)) |
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10.1110.10* | | |
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| 10.11* | | |
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| 10.12* | | |
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| 10.13* | | |
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| 10.14* | |
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| 10.15* | |
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| 10.16* | | |
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| 10.17* | | |
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| 10.18* | | |
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| 10.19* | | |
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| 10.20* | |
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| 10.21* | | |
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| 10.22* | |
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10.1210.23* | |
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| 10.24* | | |
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| 10.25* | | |
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| 10.26* | | |
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| 10.27* | | |
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| 10.28* | | |
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| 10.29* | | |
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| 10.30* | | |
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| 10.31* | | |
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| 10.32* | | |
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| 10.33 | | Term Loan Credit Agreement dated as of January 10, 2017, among Novelis Inc., as borrower, AV Metals, Inc., and the other guarantors party thereto, the lenders party thereto, and Standard Chartered Bank, as administrative agent and collateral agent (incorporated by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q filed on February 7, 2017 (File No. 001-32312)) |
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| 10.34 | |
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10.13 | | Supplemental Indenture, dated as of July 30, 2013, among Novelis MEA Ltd, Novelis Inc., and The Bank of New York Mellon Trust Company N.A., as Trustee (incorporated by reference to Exhibit 10.2 to our Quarterly Report on Form 10-Q filed on November 10, 2014 (File No. 001-32312))
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10.14 | | Supplemental Indenture, dated as of July 30, 2013, among Novelis MEA Ltd, Novelis Inc., and The Bank of New York Mellon Trust Company N.A., as Trustee (incorporated by reference to Exhibit 10.3 to our Quarterly Report on Form 10-Q filed on November 10, 2014 (File No. 001-32312))
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10.15**
| | Metal Supply Agreement between Novelis Inc., as Purchaser, and Rio Tinto Alcan Inc., as Supplier, for the supply of sheet ingot in North America, dated October 26, 2011(incorporated by reference to Exhibit 10.10 to our Annual Report on Form 10-K filed on May 24, 2012 (File No. 001-32312)) |
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10.16*
| | Form of Indemnity Agreement between Novelis Inc. and Members of the Board of Directors of Novelis Inc. (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on May 21, 2007 (File No. 001-32312)) |
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10.17*
| | Form of Indemnity Agreement between Novelis Inc. and certain executive officers dated as of June 27, 2007 (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on June 28, 2007 (File No. 001-32312)) |
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10.18* | | Form of Change in Control Agreement between Novelis Inc. and certain executive officers |
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10.19* | | Form of Change in Control Agreement between Novelis Inc. and certain executive officers |
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10.20* | | Form of Severance Agreement (incorporated by reference to Exhibit 10.4 to our Current Report on Form 8-K filed on July 1, 2009 (File No. 001-32312)) |
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10.21* | | Novelis 2012 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on May 26, 2011 (File No. 001-32312)) |
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10.22* | | Novelis Inc. 2013 Long-Term Incentive Plan (incorporated by reference into Exhibit 10.1 to our Current Report on Form 8-K filed on May 25, 2012 (File No. 001-32312)) |
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10.23* | | Novelis Inc. Long-Term Incentive Plans Amendment dated May 13, 2013 (incorporated by reference to Exhibit 10.44 to our Annual Report on Form 10-K filed on May 15, 2013 (File No. 001-32312))
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10.24*21.1 | | |
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10.25*31.1 | | Novelis Inc. Fiscal Year 2015 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.30 to our Annual Report on Form 10-K filed on May 16, 2014 (File No. 001-32312)) |
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10.26*31.2 | | Novelis Inc. Fiscal Year 2016 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.31 to our Annual Report on Form 10-K filed on May 12, 2015 (File No. 001-32312)) |
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10.27*32.1 | | Novelis Inc. Fiscal Year 2017 |
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| 32.2 | | |
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| 101.INS | | XBRL Instance Document |
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10.28* | | Novelis Inc. Fiscal Year 2013 Annual Incentive Plan (incorporated by reference into Exhibit 10.2 to our Current Report on Form 8-K filed on May 25, 2012 (File No. 001-32312)) |
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10.29* | | Novelis Inc. Fiscal Year 2014 Annual Incentive Plan (incorporated by reference to Exhibit 10.43 to our Annual Report on Form 10-K filed on May 15, 2013 (File No. 001-32312))
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10.30* | | Novelis Inc. Fiscal Year 2015 Annual Incentive Plan (incorporated by reference to Exhibit 10.35 to our Annual Report on Form 10-K filed on May 16, 2014 (File No. 001-32312)) |
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10.31* | | Novelis Inc. Fiscal Year 2016 Annual Incentive Plan (incorporated by reference to Exhibit 10.36 to our Annual Report on Form 10-K filed on May 12, 2015 (File No. 001-32312)) |
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10.32* | | Novelis Inc. Fiscal Year 2017 Executive Annual Incentive Plan |
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10.33* | | Novelis Supplementary Pension Plan dated January 1, 2012 ((incorporated by reference to Exhibit 10.31 to our Annual Report on Form 10-K filed on May 24, 2012 (File No. 001-32312))
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10.34* | | Employment Agreement between Philip Martens and Novelis Inc., dated as of April 11, 2009 (incorporated by reference to Exhibit 10.36 to our Annual Report on Form 10-K filed on June 29, 2009 (File No. 001-32312)) |
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10.35* | | Retention Agreement between Novelis Inc. and Philip Martens, dated as of May 13, 2013 (incorporated by reference to Exhibit 10.38 to our Annual Report on Form 10-K filed on May 16, 2014 (File No. 001-32312)) |
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10.36* | | Separation and Release Agreement between Novelis Inc. and Philip Martens, dated April 23, 2015 ((incorporated by reference to Exhibit 10.40 to our Annual Report on Form 10-K filed on May 12, 2015 (File No. 001-32312)) |
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10.37* | | Employment Agreement between Novelis Inc. and Steven Fisher (incorporated by reference to our Current Report on Form 8-K filed on May 21, 2007 and our Current Report on Form 8-K/A filed on August 15, 2007 (File No. 001-32312)) |
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10.38* | | Employment Agreement between Novelis Inc. and Antonio Tadeu Coelho Nardocci dated September 4, 2009 (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K/A filed on September 9, 2009 (File No. 001-32312)) |
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10.39* | | Employment Agreement between Novelis Inc. and Erwin Mayr, dated as of September 17, 2009 (incorporated by reference in Exhibit 10.29 of our Annual Report on Form 10-K filed May 26, 2011) File No. 001-32312)) |
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10.40* | | Employment Agreement between Novelis do Brasil Ltda. and Marco Antonio Palmieri dated August 8, 2011 (incorporated by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q filed on November 9, 2011 (File No. 001-32312)) |
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10.41* | | Employment Agreement between Novelis Inc. and Shashi Maudgal dated February 23, 2012 ((incorporated by reference to Exhibit 10.32 to our Annual Report on Form 10-K filed on May 24, 2012 (File No. 001-32312))
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10.42* | | Employment Agreement between Novelis Inc. and Leslie J. Parrette, dated September 21, 2009 ((incorporated by reference to Exhibit 10.46 to our Annual Report on Form 10-K filed on May 12, 2015 (File No. 001-32312)) |
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10.43* | | Retention Award Letter to Steven Fisher, dated July 1, 2014 ((incorporated by reference to Exhibit 10.47 to our Annual Report on Form 10-K filed on May 12, 2015 (File No. 001-32312)) |
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10.44* | | Retention Award Letter to Marco Palmieri, dated July 1, 2014 ((incorporated by reference to Exhibit 10.48 to our Annual Report on Form 10-K filed on May 12, 2015 (File No. 001-32312)) |
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10.45* | | Retention Award Letter to Erwin Mayr, dated July 1, 2014 ((incorporated by reference to Exhibit 10.49 to our Annual Report on Form 10-K filed on May 12, 2015 (File No. 001-32312)) |
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10.46* | | Retention Award Letter to Leslie J. Parrette, dated July 1, 2014 ((incorporated by reference to Exhibit 10.50 to our Annual Report on Form 10-K filed on May 12, 2015 (File No. 001-32312)) |
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10.47* | | Retention Award Letter to Marco Palmieri, dated June 2015 |
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10.48* | | Retention Award Letter to Erwin Mayr, dated June 2015 |
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10.49* | | Retention Award Letter to Leslie J. Parrette, Jr., dated June 2015 |
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10.50* | | Recognition Award Letter to Steven E. Pohl, dated June 18, 2015 |
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10.51* | | Retention Award Letter to Steven E. Pohl, dated June 2015
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21.1 | | List of Subsidiaries of Novelis Inc. |
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31.1 | | Section 302 Certification of Principal Executive Officer |
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31.2 | | Section 302 Certification of Principal Financial Officer |
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32.1 | | Section 906 Certification of Principal Executive Officer |
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32.2 | | Section 906 Certification of Principal Financial Officer |
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101.INS | | XBRL Instance Document |
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| 101.SCH | | XBRL Taxonomy Extension Schema Document |
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| 101.CAL | | XBRL Taxonomy Extension Calculation Linkbase |
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| 101.DEF | | XBRL Taxonomy Extension Definition Linkbase |
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| 101.LAB | | XBRL Taxonomy Extension Label Linkbase |
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| 101.PRE | | XBRL Taxonomy Extension Presentation Linkbase |
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| * | Indicates a management contract or compensatory plan or arrangement. |
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** | Confidential treatment requested for certain portions of this Exhibit, which portions have been omitted and filed separately with the Securities and Exchange Commission. |
Item 16. Form 10-K SummaryNone.