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Table of Contents

 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-Q
 
 
     
(Mark One)    
þ
  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the quarterly period ended June 30, 2010
    Or
o
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the transition period from          to          
 
Commission file number: 001-32312
 
Novelis Inc.
(Exact name of registrant as specified in its charter)
 
 
     
Canada
  98-0442987
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification Number)
     
3399 Peachtree Road NE, Suite 1500
Atlanta, Georgia
(Address of principal executive offices)
  30326
(Zip Code)
 
Telephone: (404) 814-4200
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o
 
Indicate by check mark whether the registrant 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 registrant was required to submit and post such files).  Yes o     No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer o Accelerated filer o Non-accelerated filer þ Smaller reporting company o
(Do not check if a smaller reporting company)
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o     No þ
 
As of July 31, 2010, the registrant had 77,459,658 shares of common stock, no par value, outstanding. All of the registrant’s outstanding shares were held indirectly by Hindalco Industries Ltd., the registrant’s parent company.
 


 

 
TABLE OF CONTENTS
 
                 
PART I. FINANCIAL INFORMATION
  Item 1.     Financial Statements        
        Condensed Consolidated Statements of Operations for the Three Months Ended June 30, 2010 and 2009 (unaudited)     2  
        Condensed Consolidated Balance Sheets as of June 30, 2010 and March 31, 2010 (unaudited)     3  
        Condensed Consolidated Statements of Cash Flows for the Three Months Ended June 30, 2010 and 2009 (unaudited)     4  
        Condensed Consolidated Statement of Shareholder’s Equity for the Three Months Ended June 30, 2010 (unaudited)     5  
        Condensed Consolidated Statements of Comprehensive Income for the Three Months Ended June 30, 2010 and 2009 (unaudited)     6  
        Notes to the Condensed Consolidated Financial Statements (unaudited)     7  
  Item 2.     Management’s Discussion and Analysis of Financial Condition and Results of Operations     34  
  Item 3.     Quantitative and Qualitative Disclosures About Market Risk     47  
  Item 4.     Controls and Procedures     50  
 
PART II. OTHER INFORMATION
  Item 1.     Legal Proceedings     51  
  Item 1A.     Risk Factors     51  
  Item 6.     Exhibits     51  
 EX-31.1
 EX-31.2
 EX-32.1
 EX-32.2


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Table of Contents

 
PART I. FINANCIAL INFORMATION
 
Item 1.   Financial Statements
 
Novelis Inc.
 
 
                 
    Three Months
 
    Ended
 
    June 30,  
    2010     2009  
 
Net sales
  $ 2,533     $ 1,960  
                 
Cost of goods sold (exclusive of depreciation and amortization shown below)
    2,208       1,533  
Selling, general and administrative expenses
    81       78  
Depreciation and amortization
    103       100  
Research and development expenses
    9       8  
Interest expense and amortization of debt issuance costs
    39       43  
Interest income
    (3 )     (3 )
(Gain) loss on change in fair value of derivative instruments, net
    6       (72 )
Restructuring charges, net
    6       3  
Equity in net loss of non-consolidated affiliates
    3       10  
Other (income) expense, net
    7       (13 )
                 
      2,459       1,687  
                 
Income before income taxes
    74       273  
Income tax provision
    15       112  
                 
Net income
    59       161  
Net income attributable to noncontrolling interests
    9       18  
                 
Net income attributable to our common shareholder
  $ 50     $ 143  
                 
 
See accompanying notes to the condensed consolidated financial statements.


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Novelis Inc.
 
 
                 
    June 30,
    March 31,
 
    2010     2010  
 
ASSETS
Current assets
               
Cash and cash equivalents
  $ 419     $ 437  
Accounts receivable (net of allowances of $4 as of June 30, 2010 and March 31, 2010)
               
— third parties
    1,242       1,143  
— related parties
    18       24  
Inventories
    1,075       1,083  
Prepaid expenses and other current assets
    45       39  
Fair value of derivative instruments
    158       197  
Deferred income tax assets
    28       12  
                 
Total current assets
    2,985       2,935  
Property, plant and equipment, net
    2,499       2,632  
Goodwill
    611       611  
Intangible assets, net
    718       749  
Investment in and advances to non-consolidated affiliates
    650       709  
Fair value of derivative instruments, net of current portion
    5       7  
Long-term deferred income tax assets
    6       5  
Other long-term assets
               
— third parties
    93       93  
— related parties
    18       21  
                 
Total assets
  $ 7,585     $ 7,762  
                 
 
LIABILITIES AND SHAREHOLDER’S EQUITY
Current liabilities
               
Current portion of long-term debt
  $ 107     $ 106  
Short-term borrowings
    29       75  
Accounts payable
               
— third parties
    1,084       1,076  
— related parties
    44       53  
Fair value of derivative instruments
    107       110  
Accrued expenses and other current liabilities
    422       436  
Deferred income tax liabilities
    32       34  
                 
Total current liabilities
    1,825       1,890  
Long-term debt, net of current portion
    2,485       2,490  
Long-term deferred income tax liabilities
    495       497  
Accrued postretirement benefits
    486       499  
Other long-term liabilities
    343       376  
                 
Total liabilities
    5,634       5,752  
                 
Commitments and contingencies
               
Shareholder’s equity
               
Common stock, no par value; unlimited number of shares authorized; 77,459,658 shares issued and outstanding as of June 30, 2010 and March 31, 2010
           
Additional paid-in capital
    3,497       3,497  
Accumulated deficit
    (1,475 )     (1,525 )
Accumulated other comprehensive loss
    (213 )     (103 )
                 
Total Novelis shareholder’s equity
    1,809       1,869  
Noncontrolling interests
    142       141  
                 
Total equity
    1,951       2,010  
                 
Total liabilities and shareholder’s equity
  $ 7,585     $ 7,762  
                 
 
See accompanying notes to the condensed consolidated financial statements.


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Table of Contents

Novelis Inc.
 
 
                 
    Three Months Ended
 
    June 30,  
    2010     2009  
 
OPERATING ACTIVITIES
               
Net income
  $ 59     $ 161  
Adjustments to determine net cash provided by (used in) operating activities:
               
Depreciation and amortization
    103       100  
(Gain) loss on change in fair value of derivative instruments, net
    6       (72 )
Deferred income taxes
    (11 )     98  
Write-off and amortization of fair value adjustments, net
    5       (51 )
Equity in net loss of non-consolidated affiliates
    3       10  
Foreign exchange remeasurement of debt
    7       (7 )
Gain on sale of assets
    (13 )     (1 )
Other, net
    3       3  
Changes in assets and liabilities:
               
Accounts receivable
    (146 )     (80 )
Inventories
    (38 )     11  
Accounts payable
    51       29  
Other current assets
    (8 )     3  
Other current liabilities
    16       29  
Other noncurrent assets
    (3 )     (9 )
Other noncurrent liabilities
    (12 )     32  
                 
Net cash provided by operating activities
    22       256  
                 
INVESTING ACTIVITIES
               
Capital expenditures
    (23 )     (24 )
Proceeds from sales of assets
    15       3  
Changes to investment in and advances to non-consolidated affiliates
          3  
Proceeds from related party loans receivable, net
    3       6  
Net proceeds (outflow) from settlement of derivative instruments
    32       (221 )
                 
Net cash provided by (used in) investing activities
    27       (233 )
                 
FINANCING ACTIVITIES
               
Proceeds from issuance of debt, related parties
          3  
Principal payments
    (4 )     (12 )
Short-term borrowings, net
    (41 )     (33 )
Dividends, noncontrolling interest
    (17 )     (1 )
                 
Net cash used in financing activities
    (62 )     (43 )
                 
Net decrease in cash and cash equivalents
    (13 )     (20 )
Effect of exchange rate changes on cash balances held in foreign currencies
    (5 )     9  
Cash and cash equivalents — beginning of period
    437       248  
                 
Cash and cash equivalents — end of period
  $ 419     $ 237  
                 
 
See accompanying notes to the condensed consolidated financial statements.


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Novelis Inc.
 
 
                                                         
    Novelis Inc. Shareholder              
                            Accumulated
             
                            Other
             
                Additional
          Comprehensive
    Non-
       
    Common Stock     Paid-in
    Accumulated
    Loss
    controlling
    Total
 
    Shares     Amount     Capital     Deficit     (AOCI)     Interests     Equity  
 
Balance as of March 31, 2010
    77,459,658     $     $ 3,497     $ (1,525 )   $ (103 )   $ 141     $ 2,010  
Net income attributable to our common shareholder
                      50                   50  
Net income attributable to noncontrolling interests
                                  9       9  
Currency translation adjustment
                            (116 )     (8 )     (124 )
Change in fair value of effective portion of cash flow hedges, net of tax provision of $3 included in AOCI
                            6             6  
                                                         
Balance as of June 30, 2010
    77,459,658     $     $ 3,497     $ (1,475 )   $ (213 )   $ 142     $ 1,951  
                                                         
 
See accompanying notes to the condensed consolidated financial statements.


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Novelis Inc.
 
 
                                                 
    Three Months Ended
    Three Months Ended
 
    June 30, 2010     June 30, 2009  
    Attributable to
    Attributable to
          Attributable to
    Attributable to
       
    Our Common
    Noncontrolling
          Our Common
    Noncontrolling
       
    Shareholder     Interests     Total     Shareholder     Interests     Total  
 
Net income
  $ 50     $ 9     $ 59     $ 143     $ 18     $ 161  
                                                 
Other comprehensive income (loss):
                                               
Currency translation adjustment
    (116 )     (8 )     (124 )     50       7       57  
Net change in fair value of effective portion of cash flow hedges
    9             9       11             11  
Postretirement benefit plans:
                                               
Change in pension and other benefits
                      3             3  
                                                 
Other comprehensive income (loss) before income tax effect
    (107 )     (8 )     (115 )     64       7       71  
Income tax provision related to items of other comprehensive income (loss)
    3             3       2             2  
                                                 
Other comprehensive income (loss), net of tax
    (110 )     (8 )     (118 )     62       7       69  
                                                 
Comprehensive income (loss)
  $ (60 )   $ 1     $ (59 )   $ 205     $ 25     $ 230  
                                                 
 
See accompanying notes to the condensed consolidated financial statements.


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Novelis Inc.
 
 
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. In October 2007, the Rio Tinto Group purchased all the outstanding shares of Alcan, Inc. and became Rio Tinto Alcan Inc. References herein to “Rio Tinto Alcan” refer to Rio Tinto Alcan Inc.
 
Description of Business and Basis of Presentation
 
Novelis Inc., formed in Canada on September 21, 2004, and its subsidiaries, is the world’s leading aluminum rolled products producer based on shipment volume. We produce aluminum sheet and light gauge products where the end-use destination of the products includes the beverage and food can, transportation, construction and industrial, and foil products markets. As of June 30, 2010, we had operations on four continents: North America, Europe, Asia and South America, through 31 operating plants, one research facility and several market-focused innovation centers in 11 countries. In addition to aluminum rolled products plants, our South American businesses include bauxite mining, primary aluminum smelting and power generation facilities.
 
The accompanying unaudited condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements and accompanying notes in our Annual Report on Form 10-K for the year ended March 31, 2010 filed with the United States Securities and Exchange Commission (SEC) on May 27, 2010. Management believes that all adjustments necessary for the fair statement of results, consisting of normally recurring items, have been included in the unaudited condensed consolidated financial statements for the interim periods presented.
 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (US GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The principal areas of judgment relate to (1) the fair value of derivative financial instruments; (2) impairment of goodwill; (3) impairments of long-lived assets, intangible assets and equity investments; (4) actuarial assumptions related to pension and other postretirement benefit plans; (5) income tax reserves and valuation allowances and (6) assessment of loss contingencies, including environmental, litigation and other tax reserves.
 
Acquisition of Novelis Common Stock
 
On May 15, 2007, the Company was acquired by Hindalco through its indirect wholly-owned subsidiary pursuant to a plan of arrangement (the Arrangement) at a price of $44.93 per share. The aggregate purchase price for all of the Company’s common shares was $3.4 billion and Hindalco also assumed $2.8 billion of Novelis’ debt for a total transaction value of $6.2 billion. Subsequent to completion of the Arrangement on May 15, 2007, all of our common shares were indirectly held by Hindalco.
 
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.


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Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (Continued)
 
Reclassifications and Adjustment
 
Certain reclassifications of prior period amounts and presentation have been made to conform to the presentation adopted for the current period. In order to present the impact of all customer-directed derivatives and associated trading activities as operating activities on the consolidated statement of cash flows, we corrected our presentation by reclassifying this activity from investing activities to operating activities. This resulted in a reduction to operating cash flow and an increase to investing cash flow of approximately $2 million for the three months ended June 30, 2009. This reclassification did not have any impact on total cash or on the balance sheet, income statement or related disclosures.
 
In the condensed consolidated balance sheet as of March 31, 2010, we reclassified $3 million of capitalized software from Property, plant and equipment, net to Intangible assets. The reclassification had no impact on total assets, total liabilities, total equity, net income (loss) or cash flows as previously reported.
 
Recently Adopted Accounting Standards
 
Effective April 1, 2010, we adopted authoritative guidance in the Accounting Standards Update (ASU) No. 2009-17, Consolidations: Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities. ASU No. 2009-17 was intended (1) to address the effects on certain provisions of the accounting standard dealing with consolidation of variable interest entities, as a result of the elimination of the qualifying special-purpose entity concept in ASU No. 2009-16, Transfers and Servicing: Accounting for Transfers of Financial Assets, and (2) to clarify questions about the application of certain key provisions related to consolidation of variable interest entities. This standard had no impact on our consolidated financial position, results of operations and cash flow, but did require certain additional footnote disclosures. These disclosures are included in Note 4 — Consolidation of Variable Interest Entities.
 
Recently Issued Accounting Standards
 
We have determined that recently issued accounting standards will not have a material impact on our consolidated financial position, results of operations and cash flow.
 
2.   RESTRUCTURING PROGRAMS
 
Restructuring charges, net for the three months ended June 30, 2010 is $6 million. The following table summarizes our restructuring accrual activity by region (in millions).
 
                                                 
          North
          South
          Restructuring
 
    Europe     America     Asia     America     Corporate     Reserves  
 
Balance as of March 31, 2010
  $ 28     $ 10     $     $     $     $ 38  
Provisions, net
    1       5                         6  
Cash payments
    (4 )     (5 )                       (9 )
Impact of exchange rate changes
                                   
                                                 
Balance as of June 30, 2010
  $ 25     $ 10     $     $     $     $ 35  
                                                 
 
Europe
 
Restructuring charges for the three months ended June 30, 2010 consist of a net $1 million in additional severance and other environmental costs across our European plants related to restructuring actions initiated in prior years. For the three months ended June 30, 2010, we made $3 million in severance payments and $1 million in payments for environmental remediation.


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Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (Continued)
 
North America
 
We recorded $5 million in restructuring expense in the three months ended June 30, 2010 related to the relocation of our North American headquarters from Cleveland to Atlanta. For the three months ended June 30, 2010 we made $3 million in payments related to the relocation of our North American headquarters and $2 million in payments related to previously announced separation programs.
 
3.   INVENTORIES
 
Inventories consisted of the following (in millions).
 
                 
    June 30,
    March 31,
 
    2010     2010  
 
Finished goods
  $ 227     $ 270  
Work in process
    425       431  
Raw materials
    334       295  
Supplies
    95       93  
                 
      1,081       1,089  
Allowances
    (6 )     (6 )
                 
Inventories
  $ 1,075     $ 1,083  
                 
 
4.   CONSOLIDATION OF 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. Prior to March 31, 2010, the primary beneficiary was the entity that would absorb a majority of the economic risks and rewards of the VIE based on an analysis of projected probability-weighted cash flows. In accordance with the new accounting guidance on consolidation of VIEs effective April 1, 2010 (see Note 1), 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 ARCO Aluminum, Inc. (ARCO). Logan processes metal received from Novelis and ARCO 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 ARCO 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 material support to Logan. Logan’s creditors do not have recourse to our general credit.
 
Novelis has a majority voting right on Logan’s board of directors and has the ability to direct the majority of Logan’s production operations. We also have the ability to take the majority share of production and associated costs. These facts qualify Novelis as Logan’s primary beneficiary and this entity is consolidated for all periods presented. All significant intercompany transactions and balances have been eliminated.


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Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (Continued)
 
The following table summarizes the carrying value and classification of assets and liabilities owned by the Logan joint venture and consolidated on our condensed consolidated balance sheets (in millions). 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 ARCO.
 
                 
    June 30,
    March 31,
 
    2010     2010  
 
Assets
       
Current assets
               
Cash and cash equivalents
  $ 3     $ 3  
Accounts receivable
    31       29  
Inventories, net
    31       31  
Prepaid expenses and other current assets
    1       1  
                 
Total current assets
    66       64  
Property, plant and equipment, net
    9       10  
Goodwill
    12       12  
Deferred income taxes
    42       41  
Other long-term assets
    3       3  
                 
Total assets
  $ 132     $ 130  
                 
Liabilities
       
Current liabilities
               
Accounts payable
  $ 25     $ 23  
Accrued expenses and other current liabilities
    11       12  
                 
Total current liabilities
    36       35  
Accrued postretirement benefits
    98       97  
Other long-term liabilities
    3       3  
                 
Total liabilities
  $ 137     $ 135  
                 
 
5.   INVESTMENT IN AND ADVANCES TO NON-CONSOLIDATED AFFILIATES AND RELATED PARTY TRANSACTIONS
 
The following table summarizes our share of the condensed results of operations of our equity method affiliates. These results include the incremental depreciation and amortization expense that we record in our equity method accounting as a result of fair value adjustments made to our investments in non-consolidated affiliates due to the Arrangement.
 
                 
    Three Months
 
    Ended
 
    June 30,  
    2010     2009  
 
Net sales
  $ 56     $ 56  
Costs, expenses and provisions for taxes on income
    59       66  
                 
Net loss
  $ (3 )   $ (10 )
                 
 
Included in the accompanying condensed consolidated financial statements are transactions and balances arising from business we conduct with these non-consolidated affiliates, which we classify as related party


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Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (Continued)
 
transactions and balances. For the three months ended June 30, 2010 and 2009, we purchased $56 million of tolling services from Aluminium Norf GmbH (Norf). For the same periods, we earned less than $1 million of interest income on a loan due from Norf.
 
The following table describes the period-end account balances that we had with these non-consolidated affiliates, shown as related party balances in the accompanying condensed consolidated balance sheets (in millions). We had no other material related party balances.
 
                 
    June 30,
  March 31,
    2010   2010
 
Accounts receivable
  $ 18     $ 24  
Other long-term receivables
  $ 18     $ 21  
Accounts payable
  $ 44     $ 53  
 
6.   DEBT
 
Debt consists of the following (in millions).
 
                                                         
    June 30, 2010     March 31, 2010  
                Unamortized
                Unamortized
       
    Interest
          Fair Value
    Carrying
          Fair Value
    Carrying
 
    Rates(A)     Principal     Adjustments(B)     Value     Principal     Adjustments(B)     Value  
 
Third party debt:
                                                       
Short term borrowings
    1.84 %   $ 29     $     $ 29     $ 75     $     $ 75  
Novelis Inc.
                                                       
Floating rate Term Loan Facility, due July 2014
    2.36 %(C)     291             291       292             292  
11.5% Senior Notes, due February 2015
    11.50 %     185       (3 )     182       185       (3 )     182  
7.25% Senior Notes, due February 2015
    7.25 %     1,124       38       1,162       1,124       41       1,165  
Novelis Corporation
                                                       
Floating rate Term Loan Facility, due July 2014
    2.30 %(C)     857       (43 )     814       859       (46 )     813  
Novelis Switzerland S.A.
                                                       
Capital lease obligation, due December 2019 (Swiss francs (CHF) 47 million)
    7.50 %     43       (2 )     41       45       (3 )     42  
Capital lease obligation, due August 2011 (CHF 1 million)
    2.49 %     1             1       1             1  
Novelis Korea Limited
                                                       
Bank loan, due October 2010
    1.32 %(C)     100             100       100             100  
Other
                                                       
Other debt, due December 2011 through December 2012
    1.00 %     1             1       1             1  
                                                         
Total debt — third parties
            2,631       (10 )     2,621       2,682       (11 )     2,671  
Less: Short term borrowings
            (29 )           (29 )     (75 )           (75 )
Current portion of long term debt
            (116 )     9       (107 )     (116 )     10       (106 )
                                                         
Long-term debt, net of current portion — third parties:
          $ 2,486     $ (1 )   $ 2,485     $ 2,491     $ (1 )   $ 2,490  
                                                         
 
 
(A) Interest rates are as of June 30, 2010 and exclude the effects of accretion/amortization of fair value adjustments as a result of the Arrangement and the debt exchange completed in fiscal 2009.


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Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (Continued)
 
 
(B) Debt existing at the time of the Arrangement was recorded at fair value. Additional floating rate Term Loan with a face value of $220 million issued in March 2009 was recorded at a fair value of $165 million. Additional 11.5% Senior Notes with a face value of $185 million issued in August 2009 were recorded at fair value of $181 million.
 
(C) Excludes the effect of related interest rate swaps and the effect of accretion of fair value.
 
Principal repayment requirements for our total debt over the next five years and thereafter (excluding unamortized fair value adjustments and using rates of exchange as of June 30, 2010 for our debt denominated in foreign currencies) are as follows (in millions).
 
         
As of June 30, 2010
  Amount  
 
Within one year
  $ 145  
2 years
    16  
3 years
    16  
4 years
    16  
5 years
    2,414  
Thereafter
    24  
         
Total
  $ 2,631  
         
 
Senior Secured Credit Facilities
 
Our senior secured credit facilities consist of (1) a $1.15 billion seven year term loan facility maturing July 2014 (Term Loan facility) and (2) an $800 million five-year multi-currency asset-backed revolving credit line and letter of credit facility (ABL Facility). The senior secured credit facilities include certain affirmative and negative covenants. Under the ABL Facility, if our excess availability, as defined under the borrowing, is less than $80 million, we are required to maintain a minimum fixed charge coverage ratio of 1 to 1. Substantially all of our assets are pledged as collateral under the senior secured credit facilities.
 
Short-Term Borrowings and Lines of Credit
 
As of June 30, 2010, our short-term borrowings were $29 million consisting of (1) $12 million of short-term loans under the ABL Facility and (2) $17 million in bank overdrafts. As of June 30, 2010, $22 million of the ABL Facility was utilized for letters of credit and we had $649 million in remaining availability under this revolving credit facility. The weighted average interest rate on our total short-term borrowings was 1.84% and 1.71% as of June 30, 2010 and March 31, 2010, respectively.
 
As of June 30, 2010, we had $151 million of outstanding letters of credit in Korea which are not related to the ABL Facility.
 
Interest Rate Swaps
 
As of June 30, 2010, we have interest rate swaps to fix the variable LIBOR interest rate on $520 million of our floating rate Term Loan facility. We are still obligated to pay any applicable margin, as defined in our senior secured credit facilities. Interest rate swaps related to $300 million at an effective weighted average interest rate of 1.49% expire March 31, 2011. Interest rate swaps related to the remaining $220 million at an effective weighted average interest rate of 1.97% expire April 30, 2012.
 
We have a cross-currency interest rate swap in Korea to convert our $100 million variable rate bank loan to KRW 92 billion at a fixed rate of 5.44%. The swap expires October 2010, concurrent with the maturity of the loan.


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Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (Continued)
 
As of June 30, 2010 approximately 76% of our debt was fixed rate and approximately 24% was variable rate, after the effect of interest rate swaps.
 
7.   SHARE-BASED COMPENSATION
 
The board of directors authorized the Novelis Long-Term Incentive Plan FY 2010 — FY 2013 (2010 LTIP) in June 2009 and the Novelis Long-Term Incentive Plan FY 2009 — FY 2012 (2009 LTIP) in June 2008. Under both plans, phantom stock appreciation rights (SARs) were granted to certain of our executive officers and key employees. The SARs vest at the rate of 25% per year, subject to performance criteria and expire seven years from their grant date. Each 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. In May 2010, the board of directors authorized the Novelis Long-Term Incentive Plan FY 2011 (2011 LTIP). The 2011 LTIP provides for phantom SARs and restricted stock units (RSUs) to be granted under the plan. The 2011 LTIP SARs will vest similar to the 2010 LTIP and 2009 LTIP. The RSUs will vest three years from the grant date. No expense was recorded during the three months ended June 30, 2010 for the 2011 LTIP because all criteria for determining a grant date had not been met as of June 30, 2010.
 
Total compensation expense related to the LTIP 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 condensed consolidated statements of operations.
 
                 
    Three Months Ended
 
    June 30,  
    2010     2009  
 
Novelis Long-Term Incentive Plan 2009
  $ 1     $  
Novelis Long-Term Incentive Plan 2010
    1        
                 
Total compensation expense
  $ 2     $  
                 
 
The tables below show the SARs activity under our 2010 LTIP and 2009 LTIP.
 
                                 
          Weighted
    Weighted Average
    Aggregate
 
          Average
    Remaining
    Intrinsic
 
    Number of
    Exercise Price
    Contractual Term
    Value (USD
 
2010 LTIP
  SARs     (in Indian Rupees)     (In years)     in millions)  
 
SARs outstanding as of March 31, 2010
    13,680,431       87.68       6.24     $ 29  
Exercised
    131,336       85.79                  
Forfeited/Cancelled
    306,540       85.79                  
                                 
SARs outstanding as of June 30, 2010
    13,242,555       87.98       6.00     $ 16  
                                 
 
                                 
          Weighted
    Weighted Average
    Aggregate
 
          Average
    Remaining
    Intrinsic
 
    Number of
    Exercise Price
    Contractual Term
    Value (USD
 
2009 LTIP
  SARs     (in Indian Rupees)     (In years)     in millions)  
 
SARs outstanding as of March 31, 2010
    11,371,399       60.50       5.25     $ 18  
Exercised
    1,213,342       60.50                  
Forfeited/Cancelled
    316,266       60.50                  
                                 
SARs outstanding as of June 30, 2010
    9,841,791       60.50       5.00     $ 15  
                                 


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Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (Continued)
 
The fair value of each SAR is 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 Bombay Stock Exchange to determine expected volatility assumptions. The fair value of each SAR under the 2010 LTIP and 2009 LTIP was estimated as of June 30, 2010 using the following assumptions:
 
         
    2010 LTIP   2009 LTIP
 
Risk-free interest rate
  7.34 — 7.61%   7.16% — 7.42%
Dividend yield
  0.93%   0.93%
Volatility
  49.53%   53.12%
Time interval (in years)
  0.004   0.004
 
The fair value of the SARs is being recognized over the requisite performance and service period of each tranche, subject to the achievement of any performance criterion. Since the performance criteria for fiscal years 2012 and 2013 have not yet been established and therefore, measurement periods for SARs relating to those periods have not yet commenced, no compensation expense for those tranches has been recorded for the quarter ended June 30, 2010. As of June 30, 2010, 5,774,246 SARs were exercisable.
 
Unrecognized compensation expense related to the non-vested SARs (assuming all future performance criteria are met) is $17 million which is expected to be realized over a weighted average period of 1.89 years.
 
8.   POSTRETIREMENT BENEFIT PLANS
 
Our pension obligations relate to funded defined benefit pension plans in the U.S., Canada, Switzerland and the U.K.; unfunded pension plans in Germany; unfunded lump sum indemnities in France, Malaysia and Italy; and partially funded lump sum indemnities in South Korea. Our other postretirement obligations (Other Benefits, as shown in certain tables below) include unfunded healthcare and life insurance benefits provided to retired employees in Canada, the U.S. and Brazil.
 
Components of net periodic benefit cost for all of our significant postretirement benefit plans are shown in the tables below (in millions).
 
                                 
    Pension Benefit Plans     Other Benefits  
    Three Months Ended
    Three Months Ended
 
    June 30,     June 30,  
    2010     2009     2010     2009  
 
Service cost
  $ 9     $ 8     $ 2     $ 2  
Interest cost
    16       14       2       3  
Expected return on assets
    (14 )     (10 )            
Amortization — losses
    3       3              
                                 
Net periodic benefit cost
  $ 14     $ 15     $ 4     $ 5  
                                 
 
The expected long-term rate of return on plan assets is 6.8% in fiscal 2011.
 
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


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Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (Continued)
 
U.S., U.K., Canada, Germany, Italy, Switzerland, Malaysia and Brazil. We contributed the following amounts to all plans, including the Rio Tinto Alcan plans that cover our employees (in millions).
 
                 
    Three Months Ended
 
    June 30,  
    2010     2009  
 
Funded pension plans
  $ 9     $ 3  
Unfunded pension plans
    3       4  
Savings and defined contribution pension plans
    5       3  
                 
Total contributions
  $ 17     $ 10  
                 
 
During the remainder of fiscal 2011, we expect to contribute an additional $31 million to our funded pension plans, $9 million to our unfunded pension plans and $12 million to our savings and defined contribution plans.
 
9.   CURRENCY (GAINS) LOSSES
 
The following currency (gains) losses are included in the accompanying condensed consolidated statements of operations (in millions).
 
                 
    Three Months Ended
 
    June 30,  
    2010     2009  
 
Net (gain) on change in fair value of currency derivative instruments(A)
  $ (24 )   $ (22 )
Net (gain) loss on remeasurement of monetary assets and liabilities(B)
    21       (4 )
                 
Net currency gain
  $ (3 )   $ (26 )
                 
 
 
(A) Included in (Gain) loss on change in fair value of derivative instruments, net.
 
(B) Included in Other (income) expense, net.
 
The following currency gains (losses) are included in Accumulated other comprehensive loss (AOCI), net of tax and Noncontrolling interests (in millions).
 
                 
    Three Months Ended
    Year Ended
 
    June 30, 2010     March 31, 2010  
 
Cumulative currency translation adjustment — beginning of period
  $ (3 )   $ (78 )
Effect of changes in exchange rates
    (124 )     75  
                 
Cumulative currency translation adjustment — end of period
  $ (127 )   $ (3 )
                 


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Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (Continued)
 
10.   FINANCIAL INSTRUMENTS AND COMMODITY CONTRACTS
 
The fair values of our financial instruments and commodity contracts as of June 30, 2010 and March 31, 2010 are as follows (in millions):
 
                                         
    June 30, 2010  
    Assets     Liabilities     Net Fair Value
 
    Current     Noncurrent     Current     Noncurrent(A)     Assets/(Liabilities)  
 
Derivatives designated as hedging instruments:
                                       
Interest rate swaps
  $     $     $ (5 )   $ (1 )   $ (6 )
Electricity swap
                (6 )     (20 )     (26 )
                                         
Total derivatives designated as hedging instruments
                (11 )     (21 )     (32 )
                                         
Derivatives not designated as hedging instruments:
                                       
Aluminum contracts
    83       1       (72 )     (6 )     6  
Currency exchange contracts
    75       4       (21 )     (6 )     52  
Energy contracts
                (3 )           (3 )
                                         
Total derivatives not designated as hedging instruments
    158       5       (96 )     (12 )     55  
                                         
Total derivative fair value
  $ 158     $ 5     $ (107 )   $ (33 )   $ 23  
                                         
 
                                         
    March 31, 2010  
    Assets     Liabilities     Net Fair Value
 
    Current     Noncurrent     Current     Noncurrent(A)     Assets/(Liabilities)  
 
Derivatives designated as hedging instruments:
                                       
Currency exchange contracts
  $     $     $     $ (21 )   $ (21 )
Interest rate swaps
                (6 )     (1 )     (7 )
Electricity swap
                (8 )     (27 )     (35 )
                                         
Total derivatives designated as hedging instruments
                (14 )     (49 )     (63 )
                                         
Derivatives not designated as hedging instruments:
                                       
Aluminum contracts
    149       6       (80 )           75  
Currency exchange contracts
    48       1       (10 )     (1 )     38  
Energy contracts
                (6 )           (6 )
                                         
Total derivatives not designated as hedging instruments
    197       7       (96 )     (1 )     107  
                                         
Total derivative fair value
  $ 197     $ 7     $ (110 )   $ (50 )   $ 44  
                                         
 
 
(A) The noncurrent portions of derivative liabilities are included in Other long-term liabilities in the accompanying condensed consolidated balance sheets.


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Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (Continued)
 
 
Net Investment Hedges
 
The effective portion of the change in fair value of the derivative is included in Other comprehensive income (loss) (OCI), and will be reclassified to the condensed consolidated statement of operations when the related investment is disposed. The ineffective portion of gain or loss on derivatives is included in (Gain) loss on change in fair value of derivative instruments, net. In May 2010, we terminated these hedges early and realized a net loss of $3 million which was included in OCI. Net realized and unrealized losses included in OCI for the three months ended June 30, 2010 and March 31, 2010 were $18 million and $16 million, respectively.
 
Cash Flow Hedges
 
We own an interest in an electricity swap which we designated as a cash flow hedge of our exposure to fluctuating electricity prices. The effective portion of gain or loss on the derivative is included in OCI and is reclassified when we recognize the underlying exposure into (Gain) loss on change in fair value of derivatives, net in our accompanying condensed consolidated statements of operations. As of June 30, 2010, the outstanding portion of this swap includes a total of 1.6 million megawatt hours through 2017.
 
We use interest rate swaps to manage our exposure to changes in the benchmark LIBOR interest rate which impacts our variable-rate debt. We have designated these as cash flow hedges. The effective portion of gain or loss on the derivative is included in OCI and reclassified when settled into Interest expense and amortization of debt issuance costs in our accompanying condensed consolidated statements of operations. We had $510 million of outstanding interest rate swaps designated as cash flow hedges as of June 30, 2010 and March 31, 2010.
 
For all derivatives designated as cash flow hedges, gains or losses representing hedge ineffectiveness are recognized in (Gain) loss on change in fair value of derivative instruments, net in our current period earnings. 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. This could occur if the underlying hedged exposure is determined to no longer be probable, or if our ongoing assessment of hedge effectiveness determines that the hedge relationship no longer meets the criteria we established at the inception of the hedge. If the derivative is no longer designated as a cash flow hedge, gains or losses recognized to date in AOCI would remain in AOCI until the underlying exposure is recognized. However, if the underlying exposure is no longer probable, such amounts would be immediately reclassified into current period earnings, along with the subsequent changes in the fair value of the undesignated derivative.
 
During the next twelve months we expect to reclassify $11 million in effective net losses from our cash flow hedges. The maximum period over which we have hedged our exposure to cash flow variability is through 2017.
 
The following table summarizes the impact on AOCI and earnings of derivative instruments designated as cash flow hedges (in millions).
 
                                                 
            Amount of Gain or (Loss)
        Amount of Gain or (Loss)
  Recognized in Income/(Expense) on
    Amount of Gain or (Loss)
  Reclassified from
  Derivative (Ineffective Portion
    Recognized in OCI on Derivative
  AOCI into Income/(Expense)
  and Amount Excluded from
    (Effective Portion)   (Effective Portion)   Effectiveness Testing)
    Three Months
  Three Months
  Three Months
  Three Months
  Three Months
  Three Months
    Ended
  Ended
  Ended
  Ended
  Ended
  Ended
    June 30,
  June 30,
  June 30,
  June 30,
  June 30,
  June 30,
    2010   2009   2010   2009   2010   2009
 
Electricity swap
  $ (10 )   $ 9     $ (1 )   $ (1 )   $     $ 2  
Interest rate swaps
  $     $ 1     $     $     $     $  


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Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (Continued)
 
Derivative Instruments Not Designated as Hedges
 
While each of these derivatives is intended to be effective in helping us manage risk, they have not been designated as hedging instruments. The change in fair value of these derivative instruments is included in (Gain) loss on change in fair value of derivative instruments, net in the accompanying condensed consolidated statement of operations.
 
We use aluminum forward contracts and options to hedge our exposure to changes in the London Metal Exchange (LME) price of aluminum. These exposures arise from firm commitments to sell aluminum in future periods at fixed prices, the forecasted output of our smelter operations in South America and the forecasted metal price lag associated with firm commitments to sell aluminum in future periods at prices based on the LME. As of June 30, 2010 and March 31, 2010, we had 34 kilotonnes (kt) and 55 kt, respectively, of outstanding aluminum contracts not designated as hedges. We classify cash settlement amounts associated with these derivatives as part of investing activities in the condensed consolidated statements of cash flows.
 
For certain customers, we enter into contractual relationships that entitle us to pass-through the economic effect of trading positions that we take with other third parties on our customers’ behalf. We recognize a derivative position with both the customer and the third party for these types of contracts and we classify cash settlement amounts associated with these derivatives as part of operating activities in the condensed consolidated statements of cash flows.
 
We use foreign exchange forward contracts and cross-currency swaps 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. As of June 30, 2010 and March 31, 2010, we had outstanding currency exchange contracts with a total notional amount of $1.7 billion and $1.4 billion, respectively, that were not designated as hedges.
 
We use interest rate swaps to manage our exposure to fluctuating interest rates associated with variable-rate debt. As of June 30, 2010 and March 31, 2010, we had $10 million of outstanding interest rate swaps that were not designated as hedges in each period.
 
We use natural gas swaps to manage our exposure to fluctuating energy prices in North America. As of June 30, 2010 and March 31, 2010, we had 3.9 million MMBTUs and 4.2 million MMBTUs, respectively, of natural gas swaps that were not designated as hedges. One MMBTU is the equivalent of one decatherm, or one million British Thermal Units.
 
The following table summarizes the gains (losses) associated with the change in fair value of derivative instruments recognized in earnings (in millions).
 
                 
    Three Months
 
    Ended
 
    June 30,  
    2010     2009  
 
Derivative Instruments Not Designated as Hedges
               
Aluminum contracts
  $ (33 )   $ 48  
Currency exchange contracts
    24       22  
Energy contracts
    1        
                 
Gain (loss) recognized
    (8 )     70  
Derivative Instruments Designated as Cash Flow Hedges
               
Electricity swap
    2       2  
                 
Gain (loss) on change in fair value of derivative instruments, net
  $ (6 )   $ 72  
                 


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Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (Continued)
 
The following table summarizes realized and unrealized gains (losses) associated with the change in fair value of derivative instruments recognized in earnings.
 
                 
    Three Months
 
    Ended
 
    June 30,  
    2010     2009  
 
Realized gains (losses) included in segment income
  $ 41     $ (228 )
Realized gains (losses) on corporate derivative instruments
          1  
Unrealized gains (losses)
    (47 )     299  
                 
Gain (loss) on change in fair value of derivative instruments, net
  $ (6 )   $ 72  
                 
 
We recognize realized gains (losses) in earnings when derivate instruments settle or when the final cash price is determined. We recognize an unrealized gain (loss) in earnings when derivative positions are marked to market. Unrealized gains (losses) arise from market movements impacting the value of our derivative positions and from the reversal that occurs when derivatives are settled and the position is realized.
 
The timing of gains (losses) realized in earnings approximates the timing of income recognized related to the underlying hedged exposures.
 
11.   FAIR VALUE MEASUREMENTS
 
We record certain assets and liabilities, primarily derivative instruments, on our condensed 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 that 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 that 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 of our derivative contracts that have fair values based upon trades in liquid markets, such as aluminum 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 that use observable market inputs as their basis, such as time value, forward interest rates, volatility factors, and current (spot) and


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Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (Continued)
 
forward market prices for foreign exchange rates. We generally classify these instruments within Level 2 of the valuation hierarchy. Such derivatives include interest rate swaps, cross-currency swaps, foreign currency forward contracts and certain energy-related forward contracts (e.g., natural gas).
 
We classify derivative contracts that are valued based on models with significant unobservable market inputs as Level 3 of the valuation hierarchy. These derivatives include certain of our energy-related forward contracts (e.g., electricity), certain foreign currency forward contracts and commodity location premium contracts. Models for these fair value measurements include inputs based on estimated future prices for periods beyond the term of the quoted prices.
 
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).
 
As of June 30, 2010 and March 31, 2010, we did not have any Level 1 financial instruments.
 
The following tables present our derivative assets and liabilities which are measured and recognized at fair value on a recurring basis classified under the appropriate level of the fair value hierarchy as of June 30, 2010 and March 31, 2010 (in millions).
 
                                 
    June 30, 2010     March 31, 2010  
    Assets     Liabilities     Assets     Liabilities  
 
Level 2
                               
Aluminum contracts
  $ 80     $ (74 )   $ 151     $ (76 )
Currency exchange contracts
    79       (27 )     49       (32 )
Energy contracts
          (3 )           (6 )
Interest rate swaps
          (6 )           (7 )
                                 
Total Level 2 Instruments
    159       (110 )     200       (121 )
                                 
Level 3
                               
Aluminum contracts
    4       (4 )     4       (4 )
Electricity swap
          (26 )           (35 )
                                 
Total Level 3 Instruments
    4       (30 )     4       (39 )
                                 
Total
  $ 163     $ (140 )   $ 204     $ (160 )
                                 
 
We recognized unrealized losses of $5 million related to Level 3 financial instruments that were still held as of June 30, 2010. These unrealized gains are included in (Gain) loss on change in fair value of derivative instruments, net.
 
The following table presents a reconciliation of fair value activity for Level 3 derivative contracts on a net basis (in millions).
 
         
    Level 3
 
    Derivative
 
    Instruments(A)  
 
Balance as of March 31, 2010
  $ (35 )
Net realized/unrealized (losses) included in earnings(B)
    2  
Net realized/unrealized (losses) included in Other comprehensive income (loss)(C)
    9  
Net purchases, issuances and settlements
    (2 )
Net transfers from Level 3 to Level 2
     
         
Balance as of June 30, 2010
  $ (26 )
         


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Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (Continued)
 
 
(A) Represents derivative assets net of derivative liabilities.
 
(B) Included in (Gain) loss on change in fair value of derivative instruments, net.
 
(C) Included in Change in fair value of effective portion of hedges, net.
 
Financial Instruments Not Recorded at Fair Value
 
The table below presents the estimated fair value of certain financial instruments that are 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.
 
                                 
    June 30, 2010   March 31, 2010
    Carrying
  Fair
  Carrying
  Fair
    Value   Value   Value   Value
 
Assets
                               
Long-term receivables from related parties
  $ 18     $ 18     $ 21     $ 21  
Liabilities
                               
Total debt — third parties (excluding short term borrowings)
    2,592       2,413       2,596       2,432  
 
12.   OTHER (INCOME) EXPENSE, NET
 
Other (income) expense, net is comprised of the following (in millions).
 
                 
    Three Months Ended
 
    June 30,  
    2010     2009  
 
Exchange (gains) losses, net
  $ 21     $ (4 )
Gain on sale of assets
    (13 )     (1 )
Gain on tax litigation settlement in Brazil
          (6 )
Other, net
    (1 )     (2 )
                 
Other (income) expense, net
  $ 7     $ (13 )
                 


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Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (Continued)
 
13.   INCOME TAXES
 
A reconciliation of the Canadian statutory tax rates to our effective tax rates is as follows (in millions, except percentages).
 
                 
    Three Months Ended
 
    June 30,  
    2010     2009  
 
Pre-tax income before equity in net income of non-consolidated affiliates and noncontrolling interests
  $ 77     $ 283  
                 
Canadian statutory tax rate
    29 %     30 %
                 
Provision at the Canadian statutory rate
    22       85  
Increase (decrease) for taxes on income (loss) resulting from:
               
Exchange translation items
    (2 )     12  
Exchange remeasurement of deferred income taxes
    (2 )     23  
Change in valuation allowances
    3       1  
Expense (income) items not subject to tax
    (1 )     1  
Tax rate differences on foreign earnings
    (5 )     (11 )
Uncertain tax positions, net
    1       1  
Other — net
    (1 )      
                 
Income tax provision
  $ 15     $ 112  
                 
Effective tax rate
    19 %     40 %
                 
 
As of June 30, 2010, we had a net deferred tax liability of $493 million. This amount includes gross deferred tax assets of approximately $734 million and a valuation allowance as of $242 million.
 
14.   COMMITMENTS AND CONTINGENCIES
 
In connection with our spin-off from Alcan Inc., we assumed a number of liabilities, commitments and contingencies mainly related to our historical rolled products operations, including liabilities in respect of legal claims and environmental matters. As a result, we may be required to indemnify Rio Tinto Alcan for claims successfully brought against Alcan or for the defense of legal actions that arise from time to time in the normal course of our rolled products business including commercial and contract disputes, employee-related claims and tax disputes (including several disputes with Brazil’s Ministry of Treasury regarding various forms of manufacturing taxes and social security contributions). In addition to these assumed liabilities and contingencies, we may, in the future, be involved in, or subject to, other disputes, claims and proceedings that arise in the ordinary course of our business, including some that we assert against others, such as environmental, health and safety, product liability, employee, tax, personal injury and other matters. Where appropriate, we have established reserves in respect of these matters (or, if required, we have posted cash guarantees). While the ultimate resolution of, and liability and costs related to, these matters cannot be determined with certainty due to the considerable uncertainties that exist, we do not believe that any of these pending actions, individually or in the aggregate, will materially impair our operations or materially affect our financial condition or liquidity. The following describes certain legal proceedings relating to our business, including those for which we assumed liability as a result of our spin-off from Alcan Inc.


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Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (Continued)
 
Legal Proceedings
 
Coca-Cola Lawsuit.  On July 8, 2010, a Georgia state court granted Novelis Corporation’s motion for summary judgment, effectively dismissing a lawsuit brought by Coca-Cola Bottler’s Sales and Services Company LLC (CCBSS) against Novelis Corporation. In the lawsuit, which was filed on February 15, 2007, CCBSS alleged that Novelis Corporation breached the “most favored nations” provision regarding certain pricing matters under an aluminum can stock supply agreement between the parties, and sought monetary damages and other relief. On August 6, 2010, CCBSS filed a notice of appeal with the court, reserving its right to appeal the summary judgment ruling. However, we have concluded that a loss from the litigation is not probable and therefore have not recorded an accrual. In addition, we do not believe there is a reasonable possibility of a loss from the lawsuit.
 
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 be expected to 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.
 
With respect to environmental loss contingencies, we record a loss contingency whenever such contingency is probable and reasonably estimable. The evaluation model includes all asserted and unasserted claims that can be reasonably identified. Under this evaluation model, the liability and the related costs are quantified based upon the best available evidence regarding actual liability loss and cost estimates. Except for those loss contingencies where no estimate can reasonably be made, the evaluation model is fact-driven and attempts to estimate the full costs of each claim. Management reviews the status of, and estimated liability related to, pending claims and civil actions on a quarterly basis. The estimated costs in respect of such reported liabilities are not offset by amounts related to cost-sharing between parties, insurance, indemnification arrangements or contribution from other potentially responsible parties (PRPs) unless otherwise noted.
 
We have established procedures for regularly evaluating environmental loss contingencies, including those arising from such environmental reviews and investigations and any other environmental remediation or compliance matters. We believe we have a reasonable basis for evaluating these environmental loss contingencies, and we believe we have made reasonable estimates of the costs that are likely to be borne by us for these environmental loss contingencies. Accordingly, we have established reserves based on our reasonable estimates for the currently anticipated costs associated with these environmental matters. We estimate that the undiscounted remaining clean-up costs related to all of our known environmental matters as of June 30, 2010


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Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (Continued)
 
will be approximately $53 million. Of this amount, $38 million is included in Other long-term liabilities, with the remaining $15 million included in Accrued expenses and other current liabilities in our consolidated balance sheet as of June 30, 2010. 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 this review, 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.
 
Brazil Tax Matters
 
Primarily as a result of legal proceedings with Brazil’s Ministry of Treasury regarding certain taxes in South America, as of June 30, 2010 and March 31, 2010, we had cash deposits aggregating approximately $47 million and $45 million, respectively, in judicial depository accounts pending finalization of the related cases. The depository accounts are in the name of the Brazilian government and will be expended towards these legal proceedings or released to us, depending on the outcome of the legal cases. These deposits are included in Other long-term assets — third parties in our accompanying condensed consolidated balance sheets. In addition, we are involved in several disputes with Brazil’s Ministry of Treasury about various forms of manufacturing taxes and social security contributions, for which we have made no judicial deposits but for which we have established reserves ranging from $19 million to $123 million as of June 30, 2010. In total, these reserves approximate $148 million and $149 million as of June 30 and March 31, 2010, respectively, and are included in Other long-term liabilities in our accompanying consolidated balance sheets.
 
On May 28, 2009, the Brazilian government passed a law allowing taxpayers to settle certain federal tax disputes with the Brazilian tax authorities, including disputes relating to a Brazilian national tax on manufactured products, through an installment program. Under the program, if a company elects to settle a tax dispute and pay the principal amount due over a specified payment period, the company will receive a discount on the interest and penalties owed on the disputed tax amount. Novelis joined the installment program in November of 2009. Pursuant to recently enacted law, we plan to identify to the Brazilian government, in August 2010, those tax disputes that Novelis will settle pursuant to the installment program.
 
Guarantees of Indebtedness
 
We have issued guarantees on behalf of certain of our wholly-owned 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 hold any assets of any third parties as collateral to offset the potential settlement of these guarantees.
 
Since we consolidate wholly-owned subsidiaries in our consolidated financial statements, all liabilities associated with trade payables for these entities are already included in our consolidated balance sheets.
 
The following table discloses information about our obligations under guarantees of indebtedness related to our wholly-owned subsidiaries as of June 30, 2010 (in millions).
 
                 
    Maximum
  Liability
    Potential
  Carrying
Type of Entity
  Future Payment   Value
 
Wholly-owned subsidiaries
  $ 130     $ 37  
 
We have no 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.


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Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (Continued)
 
15.   SEGMENT, MAJOR CUSTOMER AND MAJOR SUPPLIER INFORMATION
 
Segment Information
 
Due in part to the regional nature of supply and demand of aluminum rolled products and in order to best serve our customers, we manage our activities on the basis of geographical areas and are organized under four operating segments: North America, Europe, Asia and South America.
 
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 portfolio 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; (e) impairment of goodwill; (f) impairment charges on long-lived assets (other than goodwill); (g) gain on extinguishment of debt; (h) noncontrolling interests’ share; (i) adjustments to reconcile our proportional share of Segment income from non-consolidated affiliates to income as determined on the equity method of accounting; (j) restructuring charges, net; (k) gains or losses on disposals of property, plant and equipment and businesses, net; (l) other costs, net; (m) litigation settlement, net of insurance recoveries; (n) sale transaction fees; (o) provision or benefit for taxes on income (loss) and (p) cumulative effect of accounting change, net of tax.
 
Adjustment to Eliminate Proportional Consolidation.  The financial information for our segments includes the results of our non-consolidated affiliates on a proportionately consolidated basis, which is consistent with the way we manage our business segments. However, under US GAAP, these non-consolidated affiliates are accounted for using the equity method of accounting. Therefore, in order to reconcile the financial information for the segments shown in the tables below to the relevant US GAAP-based measures, we must remove our proportional share of each line item that we included in the segment amounts. See Note 5 — Investment in and Advances to Non-Consolidated Affiliates and Related Party Transactions for further information about these non-consolidated affiliates.
 
The tables below show selected segment financial information (in millions).
 
Selected Segment Financial Information
 
                                                         
    North
          South
  Corporate
       
Total Assets
  America   Europe   Asia   America   and Other   Eliminations   Total
 
June 30, 2010
  $ 2,747     $ 2,702     $ 949     $ 1,349     $ 51     $ (213 )   $ 7,585  
March 31, 2010
  $ 2,726     $ 2,870     $ 965     $ 1,344     $ 49     $ (192 )   $ 7,762  
 
                                                         
Selected Operating Results
  North
          South
  Corporate
       
Three Months Ended June 30, 2010
  America   Europe   Asia   America   and Other   Eliminations   Total
 
Net sales
  $ 959     $ 842     $ 457     $ 277     $     $ (2 )   $ 2,533  
Depreciation and amortization
    42       33       15       23       2       (12 )     103  
Capital expenditures
    7       8       6       5       3       (6 )     23  
 
                                                         
Selected Operating Results
  North
          South
  Corporate
       
Three Months Ended June 30, 2009
  America   Europe   Asia   America   and Other   Eliminations   Total
 
Net sales
  $ 767     $ 665     $ 326     $ 204     $     $ (2 )   $ 1,960  
Depreciation and amortization
    41       48       11       18       1       (19 )     100  
Capital expenditures
    6       11       3       7             (3 )     24  


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Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (Continued)
 
The following table shows the reconciliation from income from reportable segments to Net income attributable to our common shareholder (in millions).
 
                 
    Three Months Ended
 
    June 30,  
    2010     2009  
 
North America
  $ 101     $ 57  
Europe
    88       33  
Asia
    44       38  
South America
    49       11  
Corporate and other(A)
    (19 )     (15 )
Depreciation and amortization
    (103 )     (100 )
Interest expense and amortization of debt issuance costs
    (39 )     (43 )
Interest income
    3       3  
Unrealized gains (losses) on change in fair value of derivative instruments, net(B)
    (47 )     299  
Adjustment to eliminate proportional consolidation
    (10 )     (16 )
Restructuring charges, net
    (6 )     (3 )
Other income, net
    13       9  
                 
Income before income taxes
    74       273  
Income tax provision
    15       112  
                 
Net income
    59       161  
Net income attributable to noncontrolling interests
    9       18  
                 
Net income attributable to our common shareholder
  $ 50     $ 143  
                 
 
 
(A) Corporate and other includes functions that are managed directly from our corporate office, which focuses on strategy development and oversees governance, policy, legal compliance, human resources and finance matters. These expenses have not been allocated to the regions. It also includes realized gains (losses) on corporate derivative instruments.
 
(B) Unrealized gains (losses) on change in fair value of derivative instruments, net represents the portion of gains (losses) that were not settled in cash during the period. Total realized and unrealized gains (losses) are included in the aggregate each period in (Gain) loss on change in fair value of derivative instruments, net on our condensed consolidated statements of operations. See Note 10 — Financial Instruments and Commodity Contracts for additional discussion.


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Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (Continued)
 
 
Information about Major Customers and Primary Supplier
 
The table below shows our net sales to Rexam Plc (Rexam) and Anheuser-Busch InBev (Anheuser-Busch), our two largest customers, as a percentage of total Net sales.
 
                 
    Three Months Ended
    June 30,
    2010   2009
 
Rexam
    16 %     20 %
Anheuser-Busch
    13 %     12 %
 
Rio Tinto Alcan is our primary supplier of metal inputs, including prime and sheet ingot. During the three months ended June 30, 2010 and 2009, purchases from Rio Tinto Alcan as a percentage of total combined metal purchases (in kt) was 35% and 43%, respectively, in each period.
 
16.   SUPPLEMENTAL INFORMATION
 
Accumulated other comprehensive loss consists of the following (in millions).
 
                 
    June 30,
    March 31,
 
    2010     2010  
 
Currency translation adjustment
  $ (124 )   $ (8 )
Fair value of effective portion of cash flow hedges
    (21 )     (27 )
Pension and other benefits
    (68 )     (68 )
                 
Accumulated other comprehensive loss
  $ (213 )   $ (103 )
                 
 
Supplemental cash flow information (in millions):
 
                 
    Three Months Ended
    June 30,
    2010   2009
 
Interest paid
  $ 9     $ 18  
Income taxes paid (refunded)
  $ 9     $ (7 )
 
17.   SUPPLEMENTAL GUARANTOR INFORMATION
 
In connection with the issuance of our 7.25% Senior Notes and our 11.5% Senior 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. The guarantor subsidiaries (the Guarantors) are comprised of the majority of our businesses in Canada, the U.S., the U.K., Brazil, Portugal, Luxembourg and Switzerland, as well as certain businesses in Germany. Certain Guarantors may be subject to restrictions on their ability to distribute earnings to Novelis Inc. (the Parent). The remaining subsidiaries (the Non-Guarantors) of the Parent are not guarantors of the Senior Notes.
 
The following information presents condensed consolidating statements of operations, balance sheets and statements of cash flows of the Parent, the Guarantors, and the Non-Guarantors. Investments include investment in and advances to non-consolidated affiliates as well as investments in net assets of divisions included in the Parent, and have been presented using the equity method of accounting.


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Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (Continued)
 
NOVELIS INC.
 
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
(In millions)
 
                                         
    Three Months June 30, 2010  
                Non-
             
    Parent     Guarantors     Guarantors     Eliminations     Consolidated  
 
Net sales
  $ 260     $ 2,032     $ 749     $ (508 )   $ 2,533  
                                         
Cost of goods sold (exclusive of depreciation and amortization shown below)
    242       1,804       670       (508 )     2,208  
Selling, general and administrative expenses
    (3 )     69       15             81  
Depreciation and amortization
    2       77       24             103  
Research and development expenses
    6       3                   9  
Interest expense and amortization of debt issuance costs
    29       23       1       (14 )     39  
Interest income
    (14 )     (3 )           14       (3 )
(Gain) loss on change in fair value of derivative instruments, net
    1             5             6  
Restructuring charges, net
          5       1             6  
Equity in net (income) loss of non-consolidated affiliates
    (47 )     3             47       3  
Other (income) expense, net
    (4 )           11             7  
                                         
      212       1,981       727       (461 )     2,459  
                                         
Income (loss) before income taxes
    48       51       22       (47 )     74  
Income tax provision (benefit)
    (2 )     13       4             15  
                                         
Net income (loss)
    50       38       18       (47 )     59  
Net income (loss) attributable to noncontrolling interests
                9             9  
                                         
Net income (loss) attributable to our common shareholder
  $ 50     $ 38     $ 9     $ (47 )   $ 50  
                                         
 


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Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (Continued)
 
                                         
    Three Months Ended June 30, 2009  
                Non-
             
    Parent     Guarantors     Guarantors     Eliminations     Consolidated  
 
Net sales
  $ 168     $ 1,534     $ 551     $ (293 )   $ 1,960  
                                         
Cost of goods sold (exclusive of depreciation and amortization shown below)
    156       1,214       456       (293 )     1,533  
Selling, general and administrative expenses
    10       56       12             78  
Depreciation and amortization
    1       78       21             100  
Research and development expenses
    5       3                   8  
Interest expense and amortization of debt issuance costs
    26       30       3       (16 )     43  
Interest income
    (15 )     (3 )     (1 )     16       (3 )
(Gain) loss on change in fair value of derivative instruments, net
    (2 )     (61 )     (9 )           (72 )
Restructuring charges, net
          3                   3  
Equity in net (income) loss of non-consolidated affiliates
    (147 )     10             147       10  
Other (income) expense, net
    (7 )     7       (13 )           (13 )
                                         
      27       1,337       469       (146 )     1,687  
                                         
Income (loss) before income taxes
    141       197       82       (147 )     273  
Income tax provision (benefit)
    (2 )     101       13             112  
                                         
Net income (loss)
    143       96       69       (147 )     161  
Net income (loss) attributable to noncontrolling interests
                18             18  
                                         
Net income (loss) attributable to our common shareholder
  $ 143     $ 96     $ 51     $ (147 )   $ 143  
                                         

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Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (Continued)
 
NOVELIS INC.
 
CONDENSED CONSOLIDATING BALANCE SHEET
(In millions)
 
                                         
    June 30, 2010  
                Non-
             
    Parent     Guarantors     Guarantors     Eliminations     Consolidated  
 
ASSETS
Current assets
                                       
Cash and cash equivalents
  $ 26     $ 263     $ 130     $     $ 419  
Accounts receivable, net of allowances
                                       
— third parties
    27       809       406             1,242  
— related parties
    724       252       60       (1,018 )     18  
Inventories
    50       759       266             1,075  
Prepaid expenses and other current assets
    2       34       9             45  
Fair value of derivative instruments
    4       116       47       (9 )     158  
Deferred income tax assets
          21       7             28  
                                         
Total current assets
    833       2,254       925       (1,027 )     2,985  
Property, plant and equipment, net
    136       1,891       472             2,499  
Goodwill
          600       11             611  
Intangible assets, net
    5       710       3             718  
Investments in and advances to non-consolidated affiliates
    1,946       649       1       (1,946 )     650  
Fair value of derivative instruments, net of current portion
    1       6       1       (3 )     5  
Deferred income tax assets
    1       3       2             6  
Other long-term assets
    909       195       73       (1,066 )     111  
                                         
Total assets
  $ 3,831     $ 6,308     $ 1,488     $ (4,042 )   $ 7,585  
                                         
 
LIABILITIES AND SHAREHOLDER’S EQUITY
Current liabilities
                                       
Current portion of long-term debt
  $ 3     $ 3     $ 101     $     $ 107  
Short-term borrowings
                                       
— third parties
          12       17             29  
— related parties
    25       460       17       (502 )      
Accounts payable
                                       
— third parties
    68       565       451             1,084  
— related parties
    67       360       132       (515 )     44  
Fair value of derivative instruments
    6       95       16       (10 )     107  
Accrued expenses and other current liabilities
    68       271       84       (1 )     422  
Deferred income tax liabilities
          32                   32  
                                         
Total current liabilities
    237       1,798       818       (1,028 )     1,825  
Long-term debt, net of current portion
                                       
— third parties
    1,632       853                   2,485  
— related parties
    111       865       89       (1,065 )      
Deferred income tax liabilities
          483       12             495  
Accrued postretirement benefits
    33       335       118             486  
Other long-term liabilities
    9       325       12       (3 )     343  
                                         
Total liabilities
    2,022       4,659       1,049       (2,096 )     5,634  
                                         
Commitments and contingencies
                                       
Shareholder’s equity
                                       
Common stock
                             
Additional paid-in capital
    3,497       (694 )     (109 )     803       3,497  
Retained earnings/(accumulated deficit)
    (1,475 )     2,514       464       (2,978 )     (1,475 )
Accumulated other comprehensive income (loss)
    (213 )     (171 )     (58 )     229       (213 )
                                         
Total Novelis shareholder’s equity
    1,809       1,649       297       (1,946 )     1,809  
Noncontrolling interests
                142             142  
                                         
Total equity
    1,809       1,649       439       (1,946 )     1,951  
                                         
Total liabilities and shareholder’s equity
  $ 3,831     $ 6,308     $ 1,488     $ (4,042 )   $ 7,585  
                                         


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Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (Continued)
 
NOVELIS INC.
 
CONDENSED CONSOLIDATING BALANCE SHEET
(In millions)
 
                                         
    As of March 31, 2010  
                Non-
             
    Parent     Guarantors     Guarantors     Eliminations     Consolidated  
 
ASSETS
Current assets
                                       
Cash and cash equivalents
  $ 22     $ 266     $ 149     $     $ 437  
Accounts receivable, net of allowances
                                       
— third parties
    24       747       372             1,143  
— related parties
    695       312       62       (1,045 )     24  
Inventories
    47       770       266             1,083  
Prepaid expenses and other current assets
    2       28       9             39  
Fair value of derivative instruments
    5       161       43       (12 )     197  
Deferred income tax assets
          7       5             12  
                                         
Total current assets
    795       2,291       906       (1,057 )     2,935  
Property, plant and equipment, net
    138       1,976       518             2,632  
Goodwill
          600       11             611  
Intangible assets, net
    6       740       3             749  
Investments in and advances to non-consolidated affiliates
    1,998       708       1       (1,998 )     709  
Fair value of derivative instruments, net of current portion
          7       2       (2 )     7  
Deferred income tax assets
    1       3       1             5  
Other long-term assets
    976       199       78       (1,139 )     114  
                                         
Total assets
  $ 3,914     $ 6,524     $ 1,520     $ (4,196 )   $ 7,762  
                                         
 
LIABILITIES AND SHAREHOLDER’S EQUITY
Current liabilities
                                       
Current portion of long-term debt
  $ 3     $ 3     $ 100     $     $ 106  
Short-term borrowings
                                       
— third parties
          61       14             75  
— related parties
    41       457       21       (519 )      
Accounts payable
                                       
— third parties
    58       600       418             1,076  
— related parties
    62       350       166       (525 )     53  
Fair value of derivative instruments
    7       102       13       (12 )     110  
Accrued expenses and other current liabilities
    52       279       106       (1 )     436  
Deferred income tax liabilities
          33       1             34  
                                         
Total current liabilities
    223       1,885       839       (1,057 )     1,890  
Long-term debt, net of current portion
                                       
— third parties
    1,635       854       1             2,490  
— related parties
    115       929       94       (1,138 )      
Deferred income tax liabilities
          485       12             497  
Accrued postretirement benefits
    31       349       119             499  
Other long-term liabilities
    41       333       5       (3 )     376  
                                         
      2,045       4,835       1,070       (2,198 )     5,752  
                                         
Commitments and contingencies
                                       
Shareholder’s equity
                                       
Common stock
                             
Additional paid-in capital
    3,497                         3,497  
Retained earnings (accumulated deficit)
    (1,525 )     1,818       349       (2,167 )     (1,525 )
Accumulated other comprehensive income (loss)
    (103 )     (129 )     (40 )     169       (103 )
                                         
Total equity of our common shareholder
    1,869       1,689       309       (1,998 )     1,869  
Noncontrolling interests
                141             141  
                                         
Total equity
    1,869       1,689       450       (1,998 )     2,010  
                                         
Total liabilities and equity
  $ 3,914     $ 6,524     $ 1,520     $ (4,196 )   $ 7,762  
                                         


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Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (Continued)
 
NOVELIS INC.
 
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
(In millions)
 
                                         
    Three Months Ended June 30, 2010  
                Non-
             
    Parent     Guarantors     Guarantors     Eliminations     Consolidated  
 
OPERATING ACTIVITIES
                                       
Net cash provided by (used in) operating activities
  $ 29     $ (18 )   $ 11     $     $ 22  
                                         
INVESTING ACTIVITIES
                                       
Capital expenditures
    (4 )     (13 )     (6 )           (23 )
Proceeds from sales of assets
          14       1             15  
Proceeds from loans receivable, net — related parties
          3                   3  
Net proceeds from settlement of derivative instruments
    (4 )     36                   32  
                                         
Net cash provided by (used in) investing activities
    (8 )     40       (5 )           27  
                                         
FINANCING ACTIVITIES
                                       
Principal payments
                                       
— third parties
    (1 )     (3 )                 (4 )
— related parties
          22       (8 )     (14 )      
Short-term borrowings, net
                                       
— third parties
          (45 )     4             (41 )
— related parties
    (16 )     4       (2 )     14        
Dividends — noncontrolling interests
                (17 )           (17 )
                                         
Net cash provided by (used in) financing activities
    (17 )     (22 )     (23 )           (62 )
                                         
Net increase (decrease) in cash and cash equivalents
    4             (17 )           (13 )
Effect of exchange rate changes on cash balances held in foreign currencies
          (3 )     (2 )           (5 )
Cash and cash equivalents — beginning of period
    22       266       149             437  
                                         
Cash and cash equivalents — end of period
  $ 26     $ 263     $ 130     $     $ 419  
                                         


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Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (Continued)
 
NOVELIS INC.
 
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
(In millions)
 
                                         
    Three Months Ended June 30, 2009  
                Non-
             
    Parent     Guarantors     Guarantors     Eliminations     Consolidated  
 
OPERATING ACTIVITIES
                                       
Net cash provided by (used in) operating activities
  $ 3     $ 129     $ 151     $ (27 )   $ 256  
                                         
INVESTING ACTIVITIES
                                       
Capital expenditures
    (1 )     (18 )     (5 )           (24 )
Proceeds from sales of assets
                3             3  
Changes to investment in and advances to non-consolidated affiliates
          3                   3  
Proceeds from loans receivable, net — related parties
          6                   6  
Net proceeds from settlement of derivative instruments
    (1 )     (177 )     (43 )           (221 )
                                         
Net cash provided by (used in) investing activities
    (2 )     (186 )     (45 )           (233 )
                                         
FINANCING ACTIVITIES
                                       
Proceeds from issuance of debt — related party
    3                         3  
Principal payments
                                       
— third parties
    (1 )     (3 )     (8 )           (12 )
— related parties
    (9 )     5       (59 )     63        
Short-term borrowings, net
                                       
— third parties
          (8 )     (25 )           (33 )
— related parties
    10       26             (36 )      
Dividends — noncontrolling interests
                (1 )           (1 )
                                         
Net cash provided by (used in) financing activities
    3       20       (93 )     27       (43 )
                                         
Net increase (decrease) in cash and cash equivalents
    4       (37 )     13             (20 )
Effect of exchange rate changes on cash balances held in foreign currencies
          4       5             9  
Cash and cash equivalents — beginning of period
    3       175       70             248  
                                         
Cash and cash equivalents — end of period
  $ 7     $ 142     $ 88     $     $ 237  
                                         


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Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
FORWARD LOOKING STATEMENTS
 
The following information should be read together with our unaudited condensed consolidated financial statements and accompanying notes included elsewhere in this quarterly report for a more complete understanding of our financial condition and results of operations. 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, particularly in “SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS AND MARKET DATA.”
 
OVERVIEW AND REFERENCES
 
Novelis is the world’s leading aluminum rolled products producer based on shipment volume. We produce aluminum sheet and light gauge products for the beverage and food can, transportation, construction and industrial, and foil products markets. As of June 30, 2010, we had operations on four continents: North America; South America; Asia and Europe, through 31 operating plants, one research facility and several market-focused innovation centers in 11 countries. In addition to aluminum rolled products plants, our South American businesses include bauxite mining, primary aluminum smelting and power generation facilities. We are the only company of our size and scope focused solely on aluminum rolled products markets and capable of local supply of technologically sophisticated products in all of these geographic regions.
 
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. In October 2007, the Rio Tinto Group purchased all the outstanding shares of Alcan, Inc. and became Rio Tinto Alcan Inc. References herein to “Rio Tinto Alcan” refer to Rio Tinto Alcan Inc.
 
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. One MMBTU is the equivalent of one decatherm, or one million British Thermal Units.
 
References to our Form 10-K made throughout this document refer to our Annual Report on Form 10-K for the year ended March 31, 2010, filed with the United States Securities and Exchange Commission (SEC) on May 27, 2010.
 
On May 15, 2007, the Company was acquired by Hindalco through its indirect wholly-owned subsidiary pursuant to a plan of arrangement (the Arrangement) at a price of $44.93 per share. The aggregate purchase price for all of the Company’s common shares was $3.4 billion and Hindalco also assumed $2.8 billion of Novelis’ debt for a total transaction value of $6.2 billion. Subsequent to completion of the Arrangement on May 15, 2007, all of our common shares were indirectly held by Hindalco.
 
HIGHLIGHTS
 
Significant factors that impacted our business for each of the three months ended June 30, 2010 and 2009 are presented briefly below. Each is discussed in further detail throughout the Management’s Discussion and Analysis and Segment Review.
 
  •  Net sales for the first quarter of fiscal 2011 were $2.5 billion, an increase of 29% compared to the $2.0 billion reported in the same period a year ago. Shipments of aluminum rolled products totaled 746 kt for the first quarter of fiscal 2011, an increase of 15% compared to shipments of 650 kt in the first quarter of the previous year, driven by stronger end-market demand across all our regions. This represents the second consecutive quarter since the economic downturn that shipments grew in all four regions year-over-year.
 
  •  We reported pre-tax income of $74 million for the three months ended June 30, 2010, as compared to pre-tax income of $273 million for the three months ended June 30, 2009. The prior year quarter includes unrealized gains on derivative instruments of $299 million and the current quarter results include $47 million of unrealized losses on derivatives.


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BUSINESS AND INDUSTRY CLIMATE
 
Global economic trends affect our business, and the economic slowdown of the preceding two years had a negative effect on the demand for our products. During the fourth quarter of fiscal 2010, we saw recovery in all our regions. The increase in demand has continued in the first quarter of fiscal 2011 in all our end-markets.
 
Key Sales and Shipment Trends
 
                                                 
    Three Months Ended     Year Ended
    Three Months Ended  
    June 30,
    September 30,
    December 31,
    March 31,
    March 31,
    June 30,
 
    2009     2009     2009     2010     2010     2010  
          (In millions, excepts shipments which are in kt)  
 
Net sales
  $ 1,960     $ 2,181     $ 2,112     $ 2,420     $ 8,673     $ 2,533  
Percentage increase (decrease) in net sales versus comparable previous year period
    (37 )%     (26 )%     (3 )%     25 %     (15 )%     29 %
Rolled product shipments:
                                               
North America
    254       258       243       274       1,029       278  
Europe
    185       203       188       227       803       232  
Asia
    130       139       134       129       532       146  
South America
    81       93       84       86       344       90  
                                                 
Total
    650       693       649       716       2,708       746  
                                                 
Beverage and food cans
    396       407       371       406       1,580       425  
All other rolled products
    254       286       278       310       1,128       321  
                                                 
Total
    650       693       649       716       2,708       746  
                                                 
Percentage increase (decrease) in rolled products shipments versus comparable previous year period:
                                               
North America
    (11 )%     (12 )%     %     11 %     (4 )%     9 %
Europe
    (32 )%     (20 )%     (5 )%     21 %     (12 )%     25 %
Asia
    (2 )%     14 %     26 %     50 %     19 %     12 %
South America
    (7 )%     7 %     (3 )%     1 %     (1 )%     11 %
                                                 
Total
    (16 )%     (8 )%     3 %     18 %     (2 )%     15 %
                                                 
Beverage and food cans
    (5 )%     (2 )%     2 %     12 %     1 %     7 %
All other rolled products
    (29 )%     (16 )%     3 %     27 %     (7 )%     26 %
                                                 
Total
    (16 )%     (8 )%     3 %     18 %     (2 )%     15 %
                                                 
 
Business Model and Key Concepts
 
Conversion Business Model
 
Most 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 products have a price structure with two components: (i) a pass-through aluminum price based on the London Metal Exchange (LME) plus local market premiums and (ii) a “conversion premium” price on the conversion cost to produce the rolled product which reflects, among other factors, the competitive market conditions for that product.
 
Increases or decreases in the LME price directly impact net sales, cost of goods sold (exclusive of depreciation and amortization) and working capital, albeit on a lag basis. The timing of these impacts on sales revenue and metal purchase costs vary based on contractual arrangements with customers and metal suppliers in each region. Certain of our sales contracts contain fixed metal prices for sales in future periods of time, which exposes us to the risk of changes in LME prices. In addition, we are exposed to fluctuating metal prices


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on our purchases of inventory associated with the period of time between the pricing of our purchases of inventory and the shipment of that inventory to our customers. Timing differences also occur in the flow of metal costs through moving average inventory cost values and cost of goods sold (exclusive of depreciation and amortization). We refer to these timing differences collectively as metal price lag.
 
We also have exposure to foreign currency risk associated with sales made in currencies that differ from those in which we are paying our conversion costs. For example, sales in Brazil are generally priced in US dollars, but the majority of our conversion costs are paid in Brazilian Real. We discuss this foreign currency risk further below.
 
Metal Derivative Instruments
 
We use derivative instruments to preserve our conversion margin and manage the timing differences associated with metal price lag.
 
We enter into forward metal purchases simultaneous with the sales contracts that contain fixed metal prices. These forward metal purchases directly hedge the economic risk of future metal price fluctuation associated with these contracts. The recognition of unrealized gains and losses on metal derivative positions typically precedes customer delivery and revenue recognition under the related fixed forward priced contracts. The timing difference between the recognition of unrealized gains and losses on metal derivatives and revenue recognition impacts income (loss) before income taxes and net income (loss). Gains and losses on metal derivative contracts are not recognized in segment income until realized.
 
Additionally, we sell short-term LME futures contracts to reduce our exposure to fluctuating LME prices during the period of time for which we are responsible for the price of inventory we physically hold and to manage the metal price lag. The majority of our metal purchases are based on average prices for a period of time prior to the period at which we order the metal. Additionally, there is a period of time between when we place an order for metal, when we receive the metal and when we ship the metal to our customers. The fluctuations in LME futures during that time period directly hedge the economic risk of metal price fluctuations on our inventory.
 
We settle derivative contracts in advance of billing and collecting from our customers, which temporarily impacts our liquidity position. The lag between derivative settlement and customer collection typically ranges from 30 to 60 days.
 
Metal Price Ceilings
 
Since the spin-off from Alcan Inc. in 2005, we had contracts which contained a ceiling over which metal prices could not be contractually passed through to certain customers. The last of these contracts expired on December 31, 2009. During the first quarter of fiscal 2010, LME prices were below the metal price ceiling. Therefore, the metal price ceiling contracts did not have an effect on the first quarter 2010 results of operations. We also held derivatives to hedge our exposure to metal price movements related to these contracts which resulted in a $13 million gain during the first quarter of fiscal 2010.
 
In connection with the allocation of purchase price (i.e., total consideration) paid by Hindalco, we established reserves totaling $655 million as of May 15, 2007 to record these sales contracts with metal price ceilings at fair value. These reserves were accreted into net sales over the term of the underlying contracts. This accretion had no impact on cash flow. For the three months ended June 30, 2009, we recorded accretion of $55 million. With the expiration of the last contract with a price ceiling, the balance of the reserve was zero at December 31, 2009, so there was no accretion in the three months ended June 30, 2010.


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LME
 
The average (based on the simple average of the monthly averages) and closing prices based upon the LME for aluminum for the three months ended June 30, 2010 and 2009 are as follows:
 
                         
    Three Months Ended
       
    June 30,     Percent
 
    2010     2009     Change  
 
London Metal Exchange Prices
                       
Aluminum (per metric tonne, and presented in U.S. dollars):
                       
Closing cash price as of beginning of period
  $ 2,288     $ 1,366       67 %
Average cash price during the period
  $ 2,096     $ 1,484       41 %
Closing cash price as of end of period
  $ 1,924     $ 1,616       19 %
 
Prices increased from March 31, 2010 until approximately mid-April and then steadily declined through the end of the first quarter of fiscal 2011, which resulted in $66 million of unrealized losses on metal derivatives. The increase in the LME during the first quarter of fiscal 2010 resulted in $55 million of unrealized gains on metal derivatives.
 
Foreign Exchange
 
We operate a global business and conduct business in various currencies around the world. Fluctuations in foreign exchange rates impact our operating results. We recognize foreign exchange gains and losses when business transactions are denominated in currencies other than the functional currency of that operation. The following table presents the exchange rate as of month-end and the average of the month-end exchange rates for the three months ended June 30, 2010 and 2009:
 
                                 
                Average Exchange Rate  
    Exchange Rate as of     Three Months Ended
 
    June 30,
    March 31,
    June 30,  
    2010     2010     2010     2009  
 
U.S. dollar per Euro
    1.225       1.353       1.285       1.379  
Brazilian real per U.S. dollar
    1.801       1.784       1.785       2.036  
South Korean won per U.S. dollar
    1,210       1,131       1,164       1,302  
Canadian dollar per U.S. dollar
    1.063       1.014       1.035       1.149  
 
The U.S. dollar strengthened during the first quarter of fiscal 2011. In Europe and Asia, the strengthening of the U.S. dollar resulted in foreign exchange losses as these operations are recorded in local currency. In North America and Brazil, where the U.S. dollar is the functional currency due to predominantly U.S. dollar selling prices and local currency operating costs, foreign exchange results were relatively flat.
 
We use foreign exchange forward contracts and cross-currency swaps 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. The strengthening dollar during the first quarter of fiscal 2011 resulted in $24 million of gains on foreign currency derivatives, as compared to $22 million of gains on foreign exchange derivatives during the first quarter of fiscal 2010.
 
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2010 COMPARED TO THE THREE MONTHS ENDED JUNE 30, 2009
 
Net sales for the three months ended June 30, 2010 increased 29% as compared to the three months ended June 30, 2009, primarily as a result of a 15% increase in volume, a 41% increase in average LME prices and higher conversion premiums. This increase was partially offset by $55 million of accretion of the metal price ceiling contract reserves recorded in the first quarter of 2010, which did not affect the first quarter


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of 2011 because the contract expired December 31, 2009. We have experienced a rapid increase in demand across all our regions over the past two quarters, and are at or near capacity in all regions.
 
Cost of goods sold (exclusive of depreciation and amortization) increased $675 million, or 44%, which reflects the increased volume and higher average LME prices, offset by our prior cost cutting measures. See the Segment Review for further discussion of the fluctuations in the results of operations by region.
 
We reported net income attributable to our common shareholder of $50 million for the first quarter of fiscal 2011 as compared to $143 for the first quarter of fiscal 2010. The three months ended June 30, 2010 was impacted by $49 million in unrealized losses on derivative instruments, as compared to gains of $299 million in the three months ended June 30, 2009. Net income for the first quarter of fiscal 2011 includes a gain on the sale of land in Brazil of $13 million, and net income for the first quarter of fiscal 2010 includes a gain on the settlement of certain tax litigation in South America of $6 million. We also recorded an income tax provision of $15 million in the three months ended June 30, 2010, as compared to a $112 million income tax provision in the same period of the prior year.
 
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 areas 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. Segment income provides a measure of our underlying segment results that is in line with our portfolio 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; (e) impairment of goodwill; (f) impairment charges on long-lived assets (other than goodwill); (g) gain on extinguishment of debt; (h) noncontrolling interests’ share; (i) adjustments to reconcile our proportional share of Segment income from non-consolidated affiliates to income as determined on the equity method of accounting; (j) restructuring charges, net; (k) gains or losses on disposals of property, plant and equipment and businesses, net; (l) other costs, net; (m) litigation settlement, net of insurance recoveries; (n) sale transaction fees; (o) provision or benefit for taxes on income (loss) and (p) cumulative effect of accounting change, net of tax.
 
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 15 — Segment, Major Customer and Major Supplier Information.
 
                                                 
Selected Operating Results
  North
                South
             
Three Months Ended June 30, 2010
  America     Europe     Asia     America     Eliminations     Total  
 
Net sales
  $ 959     $ 842     $ 457     $ 277     $ (2 )   $ 2,533  
Shipments (kt)
                                               
Rolled products
    278       232       146       90             746  
Ingot products
    5       17       1       10             33  
                                                 
Total shipments
    283       249       147       100             779  
                                                 
 
                                                 
Selected Operating Results
  North
                South
             
Three Months Ended June 30, 2009
  America     Europe     Asia     America     Eliminations     Total  
 
Net sales
  $ 767     $ 665     $ 326     $ 204     $ (2 )   $ 1,960  
Shipments (kt)
                                               
Rolled products
    254       185       130       81             650  
Ingot products
    7       27             7             41  
                                                 
Total shipments
    261       212       130       88             691  
                                                 


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The following table reconciles changes in Segment income for the three months ended June 30, 2009 to three months ended June 30, 2010 (in millions). Variances include the related realized derivative gain or loss.
 
                                 
    North
                South
 
Changes in Segment income
  America     Europe     Asia     America  
 
Segment income — three months ended June 30, 2009
  $ 57     $ 33     $ 38     $ 11  
Volume
    16       32       9       6  
Conversion premium and product mix
    15       1       7       7  
Conversion costs(A)
    27       (15 )     (1 )     4  
Metal price lag
    (6 )     30       8       8  
Foreign exchange
    (7 )     (11 )     (13 )     1  
Primary metal production
                      15  
Other changes(B)
    (1 )     18       (4 )     (3 )
                                 
Segment income — three months ended June 30, 2010
  $ 101     $ 88     $ 44     $ 49  
                                 
 
 
(A) 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 incremental benefit of used beverage cans (UBCs) and other metal costs. Fluctuations in this component reflect cost efficiencies during the period as well as cost inflation (deflation).
 
(B) Other changes include selling, general & administrative costs and research and development for all segments and certain other items which impact one or more regions, including such items as the impact of purchase accounting and metal price ceiling contracts. Significant fluctuations in these items are discussed below.
 
North America
 
As of June 30, 2010, North America manufactured aluminum sheet and light gauge products through 11 plants, including two dedicated recycling facilities. Important end-use applications include beverage cans, containers and packaging, automotive and other transportation applications, building products and other industrial applications.
 
North America continued its recovery in volumes as demand remained strong in all industry sectors, continuing the general recovery experienced in the second half of 2010. Shipments in the first quarter of fiscal 2011 increased as compared to a year ago, and as compared to the fourth quarter of fiscal 2010 as the region operated at or near capacity during the first quarter of fiscal 2011. Net sales for the first quarter of fiscal 2011 were up $192 million, or 25%, as compared to the first quarter of fiscal 2010 reflecting the increase in demand previously mentioned as well as higher LME prices and improved conversion premiums.
 
Segment income for the first quarter of fiscal 2011 was $101 million, up $44 million as compared to the prior year period. Favorable volume, conversion premiums and conversion costs were partially offset by the negative impact of foreign exchange rate changes and metal price lag.
 
Europe
 
As of June 30, 2010, our European segment provided European markets with value-added sheet and light gauge products through 12 aluminum rolled products facilities and one dedicated recycling facility. Europe serves a broad range of aluminum rolled product end-use markets in various applications including can, automotive, lithographic, foil products and painted products.
 
Our European operations have experienced a strong recovery in demand in all industry sectors with flat rolled shipments and net sales up 25% and 27%, respectively, compared to the prior year. Flat rolled shipments were up 2% as compared to the fourth quarter of fiscal 2010.


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Segment income for the first quarter of fiscal 2011 was $88 million, up $55 million compared to the same period of the prior year. Favorable volumes and metal price lag mainly contributed to the increase and were slightly offset by higher input costs related primarily to metal premiums; maintenance and other fixed costs; and a negative impact from foreign currency fluctuations. Other changes reflect a favorable impact of $18 million from fixed forward price sales contracts.
 
Asia
 
As of June 30, 2010, Asia operated three manufacturing facilities with production balanced between foil, construction and industrial, and beverage and food can end-use applications.
 
In the first quarter of fiscal 2011, the Asian markets continued the growth experienced in fiscal 2010, particularly in can and electronics end markets. We expect growth in China’s economy to benefit export-oriented neighboring countries as they participate in demand for finished goods and infrastructure projects in China. Flat rolled product shipments are up 12% as compared to the prior year period and 13% as compared to the fourth quarter of fiscal 2010. We expect customer demand to continue at these levels for the near term. Net sales increased $131 million, or 40%, as compared to the first quarter of fiscal 2010, reflecting the higher volume and higher LME prices.
 
Segment income increased from $38 million in the first quarter of fiscal 2010 to $44 million for the first quarter of fiscal 2011 due to increased volumes, conversion premiums and the positive impact of metal price lag, partially offset by unfavorable exchange rate fluctuations.
 
South America
 
Our operations in South America manufacture various aluminum rolled products for the beverage and food can, construction and industrial and transportation end-use markets. Our South American operations included two rolling plants in Brazil along with two smelters and power generation facilities as of June 30, 2010.
 
Total shipments increased as compared to the prior year period, with rolled products shipments up 11%, while net sales increased 36% as compared to the prior year due to continued growth in volumes and higher LME prices. Flat rolled shipments in South America for the first quarter of fiscal 2011 were up 5% as compared to the fourth quarter of fiscal 2010 due to continued growth in can market demand.
 
Segment income for South America increased $38 million as compared to the prior year period. This increase in segment income is due to a $15 million increase in the smelter benefit compared to the prior year period as well as increases in volumes, conversion premiums and a favorable increase in metal price lag.


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Reconciliation of segment results to Net income
 
Costs such as depreciation and amortization, interest expense and unrealized gains (losses) on changes in the fair value of derivatives are not utilized by our chief operating decision maker in evaluating segment performance. The table below reconciles income from reportable segments to Net income attributable to our common shareholder for the three months ended June 30, 2010 and 2009 (in millions).
 
                 
    Three Months
 
    Ended
 
    June 30,  
    2010     2009  
 
North America
  $ 101     $ 57  
Europe
    88       33  
Asia
    44       38  
South America
    49       11  
Corporate and other
    (19 )     (15 )
Depreciation and amortization
    (103 )     (100 )
Interest expense and amortization of debt issuance costs
    (39 )     (43 )
Interest income
    3       3  
Unrealized gains (losses) on change in fair value of derivative instruments, net
    (47 )     299  
Adjustment to eliminate proportional consolidation
    (10 )     (16 )
Restructuring charges, net
    (6 )     (3 )
Other income, net
    13       9  
                 
Income before income taxes
    74       273  
Income tax provision
    15       112  
                 
Net income
    59       161  
Net income attributable to noncontrolling interests
    9       18  
                 
Net income attributable to our common shareholder
  $ 50     $ 143  
                 
 
Corporate and other includes functions that are managed directly from our corporate office, which focuses on strategy development and oversees governance, policy, legal compliance, human resources and finance matters. These expenses have not been allocated to the regions. Corporate and other costs increased from $15 million to $19 million primarily due to increases in employee costs and professional fees.
 
Interest expense and amortization of debt issuance costs decreased primarily due to lower average interest rates on our variable rate debt. Approximately 24% of our debt was variable rate as of June 30, 2010 after taking into account the effect of interest rate swaps.
 
Unrealized gains on the change in fair value of derivative instruments represent the mark to market accounting for changes in the fair value of our derivatives that do not receive hedge accounting treatment. For the first quarter of fiscal 2011, the $47 million of unrealized losses consists of (1) $3 million reversal of previously recognized gains upon settlement of derivatives and (2) $44 million of unrealized losses relating to mark to market losses on metal derivatives and gains on currency derivatives. We recorded $299 million of unrealized losses for the first quarter of fiscal 2010.
 
Adjustment to eliminate proportional consolidation was $10 million of loss for the first quarter of fiscal 2011 as compared to a $16 million loss in the first quarter of fiscal 2010. This adjustment typically relates to depreciation and amortization and income taxes at our Aluminium Norf GmbH (Norf) joint venture. Income taxes related to our equity method investments are reflected in the carrying value of the investment and not in our consolidated income tax provision.
 
Restructuring charges in the first quarter of fiscal 2011 primarily related to the move of our North American headquarters to Atlanta, GA. See Note 2 — Restructuring Programs.


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Other income, net includes a gain on the sale of unused land in South America of $13 million for the first quarter of fiscal 2011. The land had previously been used as a bauxite mine until all bauxite was removed from the site. The first quarter of fiscal 2010 includes a gain of $6 million on the settlement of certain tax litigation in Brazil.
 
We have experienced significant fluctuations in income tax expense and the corresponding effective tax rate. The primary factors contributing to the effective tax rate differing from the statutory Canadian rate include:
 
  •  Our functional currency in Brazil is the U.S. dollar where the company holds significant U.S. dollar denominated debt. As the value of the local currency strengthens and weakens against the U.S. dollar, unrealized gains or losses are created for tax purposes, while the underlying gains or losses are not recorded in our income statement.
 
  •  We have significant net deferred tax liabilities in Brazil that are remeasured to account for currency fluctuations as the taxes are payable in local currency.
 
  •  Our income is taxed at various statutory tax rates in varying jurisdictions. Applying the corresponding amounts of income and loss to the various tax rates results in differences when compared to our Canadian statutory tax rate.
 
  •  We record increases and decreases to valuation allowances primarily related to tax losses in certain jurisdictions where we believe it is more likely than not that we will not be able to utilize those losses.
 
For the three months ended June 30, 2010, we recorded a $15 million income tax provision on our pre-tax income of $77 million, before our equity in net income of non-consolidated affiliates, which represented an effective tax rate of 19%. Our effective tax rate differs from the expense at the Canadian statutory rate primarily due to the following factors: (1) $2 million benefit for 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, (2) a $2 million benefit for exchange remeasurement of deferred income taxes, (3) a $3 million increase in valuation allowances primarily related to tax losses in certain jurisdictions where we believe it is more likely than not that we will not be able to utilize those losses , and (4) a $5 million benefit from differences between the Canadian statutory and foreign effective tax rates applied to entities in different jurisdictions.
 
For the three months ended June 30, 2009, we recorded a $112 million income tax provision on our pre-tax loss of $283 million, before our equity in net (income) loss of non-consolidated affiliates, which represented an effective tax rate of 40%. Our effective tax rate differs from the benefit at the Canadian statutory rate primarily due to the following factors: (1) a $12 million expense for 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, (2) a $23 million expense for exchange remeasurement of deferred income taxes, and (3) an $11 million benefit from differences between the Canadian statutory and foreign effective tax rates applied to entities in different jurisdictions.
 
LIQUIDITY AND CAPITAL RESOURCES
 
We believe we have adequate liquidity to meet our operational and capital requirements for the foreseeable future. Our primary sources of liquidity are cash and cash equivalents, borrowing availability under our revolving credit facility and cash generated by operating activities.
 
As of June 30, 2010, we have available liquidity of $1.05 billion. This reflects our continued efforts to preserve liquidity through cost and capital spending controls and effective management of working capital, which we believe are sustainable. Our available liquidity allows us to make strategic investments in our business as opportunities are identified that are aligned with our strategic plan.


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Available Liquidity
 
Our estimated liquidity as of June 30, 2010 and March 31, 2010 is as follows (in millions):
 
                 
    June 30,
    March 31,
 
    2010     2010  
 
Cash and cash equivalents
  $ 419     $ 437  
Overdrafts
    (17 )     (14 )
Availability under the ABL facility
    649       603  
                 
Total estimated liquidity
  $ 1,051     $ 1,026  
                 
 
The cash and cash equivalents balance above includes cash held in foreign countries in which we operate. These amounts are generally available on a short-term basis, subject to regulatory requirements, in the form of a dividend or inter-company loan. Borrowings under the ABL Facility are generally based on 85% of eligible accounts receivable and 64 to 70% of eligible inventories.
 
Free Cash Flow
 
Free cash flow (which is a non-US GAAP measure) consists of: (a) net cash provided by (used in) operating activities; (b) plus net cash provided by (used in) investing activities, less (c) proceeds from sales of assets. Management believes that 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.
 
The following table shows the Free cash flow for the three months ended June 30, 2010 and 2009, the change between periods as well as the ending balances of cash and cash equivalents (in millions).
 
                         
    Three Months Ended
       
    June 30,        
    2010     2009     Change  
 
Net cash provided by operating activities
  $ 22     $ 256     $ (234 )
Net cash provided by (used in) investing activities
    27       (233 )     260  
Less: Proceeds from sales of assets
    (15 )     (3 )     (12 )
                         
Free cash flow
  $ 34     $ 20     $ 14  
                         
Ending cash and cash equivalents
  $ 419     $ 237     $ 182  
                         
 
Free cash flow increased $14 million in the first quarter of fiscal 2011 as compared to the first quarter of fiscal 2010. The changes in free cash flow are described in greater detail below.
 
Operating Activities
 
Overall operating results were strong for the first quarter of fiscal 2011, reflecting the increase in volumes and our lower fixed cost structure as a result of our prior cost cutting measures. Additionally, cash flow from operations for the quarter ended June 30, 2010 benefitted from cash receipts of $30 million related to customer-directed derivatives, as compared to $24 million of cash outflows for the quarter ended June 30, 2009. Cash flow from operations was negatively affected by $76 million as a result of our decision to change how we finance working capital in Asia and South America, which we determined to be the best use of cash during the quarter. Additionally, higher working capital balances as a result of LME prices, which were 41% higher on average in the first quarter of fiscal 2011 as compared to the first quarter of fiscal 2010, had a negative effect on cash flows from operations.


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Investing Activities
 
The following table presents information regarding our Net cash provided by (used in) investing activities (in millions).
 
                         
    Three Months Ended
       
    June 30,        
    2010     2009     Change  
 
Capital expenditures
  $ (23 )   $ (24 )   $ 1  
Net proceeds (outflow) from settlement of derivative instruments
    32       (221 )     253  
Proceeds from sales of assets
    15       3       12  
Changes to investment in and advances to non-consolidated affiliates
          3       (3 )
Proceeds from related parties loans receivable, net
    3       6       (3 )
                         
Net cash provided by (used in) investing activities
  $ 27     $ (233 )   $ 260  
                         
 
The majority of our capital expenditures in fiscal 2010 and the first quarter of fiscal 2011 related to projects devoted to product quality, technology, productivity enhancement and increased capacity. In response to the economic downturn, we reduced our capital spending in the second half of fiscal 2009, with a focus on preserving maintenance and safety and maintained that level of spending throughout fiscal 2010 with an annual capital expenditure of approximately $100 million. As our liquidity position has improved, we have increased our capital expenditure plan to include certain strategic investments. We expect that our total annual capital expenditures for fiscal 2011 to be between $240 and $250 million, including approximately $66 million related to our previously announced expansion in South America.
 
The settlement of derivative instruments resulted in an inflow of $32 million in the three months ended June 30, 2010 as compared to $221 million in cash outflow in the prior year period. The net inflow in the first quarter of fiscal 2011 was primarily related to metal derivatives. Based on forward curves for metal, foreign currencies, interest rates and energy as of June 30, 2010, we forecast approximately $50 million of cash inflows related to the settlement of derivative instruments in the second quarter.
 
The majority of proceeds from asset sales in the three months ended June 30, 2010 relate to asset sales in South America.
 
Proceeds from loans receivable, net during all periods are primarily comprised of payments we received related to a loan due from our non-consolidated affiliate, Aluminium Norf GmbH.