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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title
of each class
Trading Symbol(s)
Name of each exchange on which registered
N/A
N/A
N/A
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes ¨iNo☒
The registrant is a voluntary filer and is not subject to the filing requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934. However, the registrant has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). iYes☒ No ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer,""accelerated filer,""smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
¨
Accelerated filer
¨
iNon-accelerated
filer
☒
Smaller reporting company
i¨
Emerging growth company
i¨
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No i☒
Investment
in and advances to non-consolidated affiliates
i744
i832
Deferred
income tax assets
i145
i158
Other
long-term assets
— third parties
i295
i274
—
related parties
i2
i1
Total
assets
$
i14,896
$
i15,096
LIABILITIES
AND SHAREHOLDER'S EQUITY
Current liabilities:
Current portion of long-term debt
$
i63
$
i26
Short-term
borrowings
i858
i529
Accounts payable
—
third parties
i3,242
i3,869
—
related parties
i308
i320
Fair
value of derivative instruments
i310
i959
Accrued
expenses and other current liabilities
i816
i774
Current
liabilities of discontinued operations
i17
i21
Total
current liabilities
i5,614
i6,498
Long-term
debt, net of current portion
i4,850
i4,967
Deferred
income tax liabilities
i353
i158
Accrued
postretirement benefits
i609
i669
Other
long-term liabilities
i320
i295
Total
liabilities
i11,746
i12,587
Commitments
and contingencies
i
i
Shareholder's equity:
Common
stock, no par value; iiUnlimited/ number of shares authorized; iiii1,000///
shares issued and outstanding as of September 30, 2022, and March 31, 2022
i—
i—
Additional
paid-in capital
i1,208
i1,308
Retained
earnings
i2,304
i1,814
Accumulated
other comprehensive loss
(i368)
(i620)
Total
equity of our common shareholder
i3,144
i2,502
Noncontrolling
interests
i6
i7
Total equity
i3,150
i2,509
Total
liabilities and equity
$
i14,896
$
i15,096
____________________
See
accompanying notes to the condensed consolidated financial statements. Refer to Note 4 – Consolidation for information on our consolidated VIE.
6
Novelis Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Six
Months Ended
September 30,
in millions
2022
2021
OPERATING ACTIVITIES
Net income
$
i489
$
i477
Net
loss from discontinued operations
(i2)
(i65)
Net
income from continuing operations
$
i491
$
i542
Adjustments
to determine net cash provided by operating activities:
Depreciation and amortization
i272
i268
Loss
on unrealized derivatives and other realized derivatives in investing activities, net
i18
i36
Loss
on sale of assets, net
i1
i2
Loss
on extinguishment of debt, net
i—
i62
Deferred
income taxes, net
i19
i54
Equity
in net income of non-consolidated affiliates
(i8)
(i1)
(Gain)
loss on foreign exchange remeasurement of debt
(i22)
i1
Amortization
of debt issuance costs and carrying value adjustments
i8
i9
Other,
net
i—
i2
Changes
in assets and liabilities including assets and liabilities held for sale (net of effects from divestitures):
Accounts receivable
i138
(i540)
Inventories
(i485)
(i728)
Accounts
payable
(i309)
i706
Other
assets
i18
(i25)
Other
liabilities
i55
(i49)
Net
cash provided by operating activities – continuing operations
i196
i339
Net
cash used in operating activities – discontinued operations
(i6)
(i5)
Net
cash provided by operating activities
$
i190
$
i334
INVESTING
ACTIVITIES
Capital expenditures
$
(i284)
$
(i194)
Acquisition
of business and other investments, net of cash acquired
(i4)
i—
(Outflows)
proceeds from investment in and advances to non-consolidated affiliates, net
(i15)
i10
Proceeds
(outflows) from the settlement of derivative instruments, net
i2
(i4)
Other
i11
i7
Net
cash used in investing activities
$
(i290)
$
(i181)
FINANCING
ACTIVITIES
Proceeds from issuance of long-term and short-term borrowings
$
i—
$
i1,520
Principal
payments of long-term and short-term borrowings
(i114)
(i1,923)
Revolving
credit facilities and other, net
i450
i14
Debt
issuance costs
(i6)
(i24)
Return
of capital to our common shareholder
(i100)
(i100)
Net
cash provided by (used in) financing activities
$
i230
$
(i513)
Net
increase (decrease) in cash, cash equivalents and restricted cash
i130
(i360)
Effect
of exchange rate changes on cash
(i57)
i6
Cash,
cash equivalents and restricted cash – beginning of period
i1,084
i1,027
Cash,
cash equivalents and restricted cash – end of period
$
i1,157
$
i673
Cash
and cash equivalents
$
i1,145
$
i659
Restricted
cash (included in other long-term assets)
i12
i14
Cash,
cash equivalents and restricted cash – end of period
$
i1,157
$
i673
Supplemental
Disclosures:
Accrued capital expenditures as of September 30
$
i72
$
i57
Leased
assets obtained in exchange for new operating lease liabilities
i27
i25
____________________
See
accompanying notes to the condensed consolidated financial statements.
7
Novelis Inc.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY (unaudited)
See
accompanying notes to the condensed consolidated financial statements.
8
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
i
1. BUSINESS
AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
References herein to "Novelis," the "Company,""we,""our," or "us" refer to Novelis Inc. and its subsidiaries unless the context specifically indicates otherwise. References herein to "Hindalco" refer to Hindalco Industries Limited. Hindalco acquired Novelis in May 2007. Effective September 1, 2022, Novelis Inc. and AV Metals, Inc. (which, prior to such date, was our sole shareholder and a wholly owned subsidiary of AV Minerals (Netherlands) N.V.) completed a plan of arrangement, pursuant to which AV Metals, Inc. merged with and into Novelis Inc., with Novelis Inc. surviving the merger. As of the effectiveness
of the plan of arrangement, we are a direct, wholly owned subsidiary of AV Minerals (Netherlands) N.V. Prior to the effectiveness of the plan of arrangement, AV Metals, Inc. was a holding company, with its assets being comprised solely of its investment in Novelis, and without any operations. The plan of arrangement was a combination of entities under common control and resulted in a change in the reporting entity. The opening balance of additional paid-in capital has been increased and that of retained earnings reduced by $i4 million
in the earliest period presented.
i
Organization and Description of Business
We produce aluminum plate, sheet, and light gauge products for use in the packaging market, which includes beverage and food can and foil products, as well as for use in the automotive, transportation, aerospace, electronics, architectural, and industrial product markets. As of September 30, 2022, we had manufacturing operations in inine
countries on iifour/
continents: North America, South America, Asia, and Europe, through i33 operating facilities, which may include any combination of hot or cold rolling, finishing, casting, or recycling capabilities. We have recycling operations in i15 of our operating
facilities to recycle post-consumer aluminum, such as UBCs, and post-industrial aluminum, such as class scrap.
The condensed consolidated balance sheet data as of March 31, 2022, was derived from the March 31, 2022, audited financial statements but does not include all disclosures required by U.S. GAAP. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements and accompanying notes in our 2022 Form 10-K. Management believes that all adjustments necessary for the fair statement of results, consisting of normally recurring items, have been included in the unaudited condensed consolidated financial statements for the interim periods presented.
Consolidation Policy
Our
condensed consolidated financial statements have been prepared in accordance with U.S. GAAP and include the assets, liabilities, revenues, and expenses of all wholly owned subsidiaries, majority-owned subsidiaries over which we exercise control, and entities in which we have a controlling financial interest or are deemed to be the primary beneficiary. We eliminate intercompany accounts and transactions from our condensed consolidated financial statements.
We use the equity method to account for our investments in entities that we do not control but have the ability to exercise significant influence over operating and financial policies. Consolidated net income attributable to our common shareholder includes our share of the net income (loss)
of these entities. The difference between consolidation and the equity method impacts certain of our financial ratios because of the presentation of the detailed line items reported in the condensed consolidated financial statements for consolidated entities, compared to a two-line presentation of investment in and advances to non-consolidated affiliates and equity in net income of non-consolidated affiliates.
/
iUse of Estimates and Assumptions
The
preparation of our condensed consolidated financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosures of contingent assets and liabilities as of the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. The principal areas of judgment relate to (1) impairment of goodwill; (2) actuarial assumptions related to pension and other postretirement benefit plans; (3) tax uncertainties and valuation allowances; (4) assessment of loss contingencies, including environmental and litigation liabilities; and (5) the fair value of the contingent consideration resulting from the sale of Duffel. Future events and their effects cannot be predicted with certainty, and accordingly, our accounting estimates require the exercise of judgment. The accounting estimates used in the preparation of
our condensed consolidated financial statements may change as new events occur, more experience is acquired, additional information is obtained, and our operating environment changes. We evaluate and update our assumptions and estimates on an ongoing basis and may employ outside experts to assist in our evaluations. Actual results could differ from the estimates we have used.
i
Risks & Uncertainty resulting from COVID-19
Beginning late in the fourth quarter of fiscal 2020 and carrying into the first two
quarters of fiscal 2023, the COVID-19 pandemic and its unprecedented negative economic implications have affected production and sales across a range of industries around the world.
/
9
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Our global operations, similar to those of many other large, multi-national corporations, have encountered higher costs and have felt this impact on customer demand, disruptions to our supply chain, interruptions to our production, and delays of shipments to our customers.
While
much of our customer demand and shipments have recovered in the majority of our end markets, the overall extent of the impact of the COVID-19 pandemic on our operating results, cash flows, liquidity, and financial condition will depend on certain developments, including the duration and spread of the outbreak (including the emergence of variants of the virus) and its impact on our customers, employees, suppliers, and other partners. We believe this will be primarily driven by the severity and duration of the COVID-19 pandemic, the COVID-19 pandemic's impact on the U.S. and global economies, and the timing, scope, and effectiveness of federal, state, and local governmental responses, including the revision of governmental quarantine or other public health measures, medical remedies, and preventative measures.
Although we have made our best estimates based on current information, the effects of the COVID-19 pandemic on our business
may result in future changes to our estimates and assumptions based on its duration. Actual results could materially differ from the estimates and assumptions developed by management. If so, we may be subject to future impairment charges as well as changes to recorded reserves and valuations.
Risks & Uncertainties resulting from Inflation, Supply Chain Disruptions and Geopolitical Instability
The first two quarters of fiscal 2023 were marked by global economic uncertainty, capital markets disruption, and supply chain interruptions, which have been impacted by inflationary cost pressures, the ongoing COVID-19 pandemic, and geopolitical instability due to the ongoing military conflict between Russia and Ukraine. We experienced increased inflationary cost pressures to date in fiscal 2023 resulting from global supply chain disruptions impacting the availability and price of materials
and services including energy, freight, coatings, and alloys, such as magnesium. Rising geopolitical instability exacerbated inflationary cost pressures, which are expected to continue for the foreseeable future. We have not experienced significant direct impacts from the Russia-Ukraine conflict, as we do not have operations nor significant sales in either Russia or Ukraine. However, we have experienced indirect impacts, as the conflict has driven up energy prices globally, beginning in the fourth quarter of fiscal 2022, and we expect these costs will remain elevated until energy prices stabilize. To date, our operations have not been materially impacted by labor shortages, and we remain able to procure the necessary raw materials, parts, and equipment due to our diverse, global supplier network. We believe we are positioned to maintain production levels necessary to service our customers in the near term. However, we cannot predict how long energy prices will remain
inflated, supply chains will continue to experience disruptions, or potential future financial impacts. We have been able to mitigate a portion of the higher inflationary cost impact through a combination of hedging, passing through a meaningful portion of higher costs to customers, favorable pricing environments, and increased recycling benefits. There is no assurance that we will continue to be able to mitigate these higher costs in the future.
The overall extent of the impact of these factors on our operating results, cash flows, liquidity, and financial condition will depend on certain developments, including the duration of the current inflationary environment, supply chain disruptions, and the Russia-Ukraine conflict. Although we have made our best estimates based on the current information, the effects of these factors on our business may result in future changes to our estimates and assumptions based on their duration.
Actual results could materially differ from the estimates and assumptions developed by management. If so, we may be subject to future impairment charges as well as changes to recorded reserves and valuations.
i
Recently Adopted Accounting Standards
We did not adopt any new accounting pronouncements during the six months ended September 30, 2022, that had a material impact on our consolidated financial condition,
results of operations, or cash flows.
In September 2022, the Financial Accounting Standards Board (FASB) issued ASU 2022-04, Liabilities—Supplier Finance Programs (Topic 405-50) - Disclosure of Supplier Finance Program Obligations. This ASU requires quantitative and qualitative disclosures about the key terms of supplier finance programs, an annual rollforward of obligations to finance providers, and interim disclosure of obligations as of each reporting period presented. This ASU is effective for all entities for fiscal years beginning after December 15, 2022, on a retrospective basis, including interim periods within those fiscal years, except for the requirement to disclose rollforward information, which is effective prospectively
for fiscal years beginning after December 15, 2023. Early adoption is permitted. We are currently reviewing the provisions of this ASU but do not expect this guidance will have a material impact on our consolidated financial condition, results of operations, or cash flows.
There are no other recent accounting pronouncements pending adoption that we expect will have a material impact on our consolidated financial condition, results of operations, or cash flows.
10
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (unaudited)
i
2. DISCONTINUED OPERATIONS
On April 14, 2020, we closed the acquisition of Aleris for $i2.8 billion.
As a result of the antitrust review processes in the European Union, the U.S., and China, which were required for approval of the acquisition, we were obligated to divest Aleris' European and North American automotive assets, including the Duffel and Lewisport plants, respectively.
On September 30, 2020, we completed the sale of Duffel to Liberty House Group through its subsidiary, ALVANCE, the international aluminum business of the GFG Alliance. Upon closing, we received €i210 million
($i246 million as of September 30, 2020) in cash and a €i100 million
($i117 million as of September 30, 2020) receivable that was deemed to be contingent consideration subject to the results of a binding arbitration proceeding under German law that is currently underway. In June 2022, American Industrial Partners Capital Fund VII, L.P., announced their acquisition of Duffel, which concluded in the same month. There is no assurance as to when we expect the post-closing arbitration process to conclude or whether we will receive any of the contingent consideration.
/
We
elected to account for the contingent consideration at fair value and mark to fair value on a quarterly basis. As of June 30, 2021, Novelis marked all outstanding receivables related to the sale of Duffel to an estimated fair value of €i45 million ($i53 million),
which resulted in a loss of €i51 million ($i61 million)
recorded in loss from discontinued operations, net of tax. As of September 30, 2022, there has been no change to this fair value, and the receivable is included in other long-term assets in our condensed consolidated balance sheet as of September 30, 2022.
11
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
i
4. CONSOLIDATION
Variable Interest Entity
The entity that has a controlling financial interest in a VIE is referred to as the primary beneficiary and consolidates the VIE. An entity is deemed to have a controlling financial interest and is the primary beneficiary of a VIE if it has both the power to direct the activities of the VIE that most significantly impact
the VIE's economic performance and an obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE.
Logan is a consolidated joint venture in which we hold i40% ownership. Our joint venture partner is Tri-Arrows. Logan processes metal received from Novelis and Tri-Arrows and charges the respective partner a fee to cover expenses. Logan is a thinly capitalized VIE that relies on the regular reimbursement of costs and expenses from Novelis and Tri-Arrows to fund its operations.
Novelis is considered the primary beneficiary and consolidates Logan since it has the power to direct activities that most significantly impact Logan's economic performance, an obligation to absorb expected losses, and the right to receive benefits that could potentially be significant to the VIE.
Other than the contractually required reimbursements, we do not provide additional material support to Logan. Logan's creditors do not have recourse to our general credit. There are significant other assets used in the operations of Logan that are not part of the joint venture, as they are directly owned and consolidated by Novelis or Tri-Arrows.
i
The
following table summarizes the carrying value and classification of assets and liabilities owned by the Logan joint venture and consolidated in our condensed consolidated balance sheets.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
i
5. INVESTMENT IN AND ADVANCES TO NON-CONSOLIDATED AFFILIATES AND RELATED PARTY TRANSACTIONS
Included in the accompanying condensed consolidated financial statements are transactions and balances arising from business we conducted with our equity method non-consolidated affiliates.
Alunorf
Alunorf
is a joint venture investment between Novelis Deutschland GmbH, a subsidiary of Novelis, and Speira GmbH. Each of the parties to the joint venture holds a i50% interest in the equity, profits and losses, shareholder voting, management control, and rights to use the production capacity of the facility. Alunorf tolls aluminum and charges the respective partner a fee to cover the associated expenses.
UAL
UAL is a joint venture investment between Novelis Korea Ltd., a subsidiary of Novelis, and
Kobe. UAL is a thinly capitalized VIE that relies on the regular reimbursement of costs and expenses from Novelis and Kobe. UAL is controlled by an equally represented board of directors in which neither entity has sole decision-making ability regarding production operations or other significant decisions. Furthermore, neither entity has the ability to take the majority share of production or associated costs over the life of the joint venture. Our risk of loss is limited to the carrying value of our investment in and inventory-related receivables from UAL. UAL's creditors do not have recourse to our general credit. Therefore, UAL is accounted for as an equity method investment, and Novelis is not considered the primary beneficiary. UAL currently produces flat-rolled aluminum products exclusively for Novelis and Kobe. As of September 30, 2022, Novelis and Kobe both hold a i50%
interest in UAL.
AluInfra
AluInfra is a joint venture investment between Novelis Switzerland SA, a subsidiary of Novelis, and Constellium SE. Each of the parties to the joint venture holds a i50% interest in the equity, profits and losses, shareholder voting, management control, and rights to use the facility.
i
The
following table summarizes the results of operations of our equity method non-consolidated affiliates in the aggregate and the nature and amounts of significant transactions we have with our non-consolidated affiliates. The amounts in the table below are disclosed at 100% of the operating results of these affiliates.
Three Months Ended
September
30,
Six Months Ended
September 30,
in millions
2022
2021
2022
2021
Net sales
$
i447
$
i389
$
i956
$
i774
Costs
and expenses related to net sales
i430
i375
i919
i747
Income
tax provision
i5
i4
i11
i7
Net
income
$
i12
$
i10
$
i26
$
i20
Purchases
of tolling services from Alunorf
$
i87
$
i70
$
i168
$
i139
/i
The
following table describes related party balances in the accompanying condensed consolidated balance sheets. We had no other material related party balances with non-consolidated affiliates.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Transactions with Hindalco
We occasionally have related party transactions with Hindalco. During the six months ended September 30, 2022, and 2021, we recorded net sales of less than $ii1/
million between Novelis and Hindalco related primarily to sales of equipment and other services. As of September 30, 2022, and March 31, 2022, there was $i2 million and $i1
million, respectively, of outstanding accounts receivable, net — related parties net of accounts payable — related parties related to transactions with Hindalco. During the three and six months ended September 30, 2022, Novelis purchased less than $i1 million in raw materials from Hindalco.
Return of Capital
We paid returns of capital to our common shareholder in the amount of $ii100/ million
during each of the second quarters of fiscal 2023 and 2022.
15
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Finance
lease obligations and other debt, due through June 2028
i2.25
%
i26
i—
i26
i30
i—
i30
Total
debt
$
i5,837
$
(i66)
$
i5,771
$
i5,596
$
(i74)
$
i5,522
Less:
Short-term borrowings
(i858)
i—
(i858)
(i529)
i—
(i529)
Less:
Current portion of long-term debt
(i63)
i—
(i63)
(i26)
i—
(i26)
Long-term
debt, net of current portion
$
i4,916
$
(i66)
$
i4,850
$
i5,041
$
(i74)
$
i4,967
____________________
(1)Interest
rates are the stated rates of interest on the debt instrument (not the effective interest rate) as of September 30, 2022, and therefore exclude the effects of accretion and amortization of debt issuance costs related to refinancing transactions and additional borrowings. We present stated rates of interest because they reflect the rate at which cash will be paid for future debt service.
(2)Amounts include unamortized debt issuance costs, fair value adjustments, and debt discounts.
/i
Principal
repayment requirements for our total debt over the next five years and thereafter using exchange rates as of September 30, 2022, for our debt denominated in foreign currencies are as follows (in millions).
Short-term borrowings and current portion of long-term debt due within one year
$
i921
2
years
i51
3 years
i759
4
years
i23
5 years
i775
Thereafter
i3,308
Total
$
i5,837
/
Short-Term
Borrowings
As of September 30, 2022, our short-term borrowings totaled $i858 million, which consisted of $i441 million
of borrowings on our ABL Revolver, $i212 million under our short-term loan due November 2022, $i104 million in short-term China loans (CNY i740
million), $i100 million in short-term Brazil loans and $i1 million in other short-term borrowings.
Term Loan Facility
As
of September 30, 2022, we were in compliance with the covenants of our Term Loan Facility.
/
16
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
ABL Revolver
In October 2021, Novelis amended the ABL Revolver facility. Prior to the USD LIBOR transition date, loans denominated in USD under the ABL Revolver will continue to bear interest at a rate of LIBOR plus a spread of i1.25%
to i1.75% based on excess availability. The amendment provides for replacement reference rates, as applicable based on the currency of the loan, as well as applicable spreads on and after the USD LIBOR transition date. The USD LIBOR transition date is defined as the earlier of (a) when the ICE Benchmark Administration ceases to provide the USD LIBOR and there is no available tenor of USD LIBOR or the Financial Conduct Authority announces all available tenors of USD LIBOR are no longer representative or (b) an early opt-in effective date.
In April
2022, Novelis amended the ABL Revolver facility to increase the limit on committed letters of credit under the facility to $i275 million. There were no material costs incurred or accounting impacts as a result of this amendment.
In August 2022, Novelis amended the ABL Revolver facility to, among other things, increase the commitment under the ABL Revolver by $i500 million
to $i2.0 billion and extend the maturity of the ABL Revolver until August 18, 2027. The amendment provides that new borrowings under the ABL Facility made subsequent to the date of the amendment will incur interest at Term SOFR, EURIBOR, SONIA or SARON, as applicable based on the currency of the loan, plus a spread of i1.10%
to i1.60% based on excess availability. The ABL Facility also permits us to elect to borrow USD loans that accrue interest at a base rate (determined based on the greatest of one month Term SOFR plus i1.00%,
a prime rate or an adjusted federal funds rate) plus a prime spread of i0.10% to i0.60% based on excess availability. As a result of this debt modification, the
Company incurred $i6 million of financing fees, which will be amortized over the term of the loan.
As of September 30, 2022, we had $i441
million in borrowings under the ABL Revolver and were in compliance with debt covenants. We utilized $i36 million of the ABL Revolver for letters of credit. We had availability of $i1.5
billion on the ABL Revolver, including $i239 million of remaining availability that can be utilized for letters of credit.
Senior Notes
The Senior Notes are guaranteed, jointly and severally, on a senior unsecured basis, by Novelis Inc. and certain of its subsidiaries. The Senior Notes contain customary covenants and events of default that will limit
our ability and, in certain instances, the ability of certain of our subsidiaries to incur additional debt and provide additional guarantees; pay dividends or return capital beyond certain amounts and make other restricted payments; create or permit certain liens; make certain asset sales; use the proceeds from the sales of assets and subsidiary stock; create or permit restrictions on the ability of certain of Novelis' subsidiaries to pay dividends or make other distributions to Novelis or certain of Novelis' subsidiaries, as applicable; engage in certain transactions with affiliates; enter into sale and leaseback transactions; designate subsidiaries
as unrestricted subsidiaries; and consolidate, merge, or transfer all or substantially all of our assets and the assets of certain of our subsidiaries. During any future period in which either Standard & Poor's Ratings Group, Inc. or Moody's Investors Service, Inc. have assigned an investment grade credit rating to the Senior Notes and no default or event of default under the indenture has occurred and is continuing, certain of the covenants will be suspended. The Senior Notes include customary events of default, including a cross-acceleration event of default. The Senior Notes also contain customary call protection provisions for our bondholders that extend through November 2023 for the i3.25%
Senior Notes due November 2026, through April 2024 for the i3.375% Senior Notes due April 2029, through January 2025 for the i4.75% Senior Notes due January 2030, and through August
2026 for the i3.875% Senior Notes due August 2031.
As of September 30, 2022, we were in compliance with the covenants of our Senior Notes.
17
Novelis Inc.
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
i
7. SHARE-BASED COMPENSATION
During the six months ended September 30, 2022, we granted i4,375,296
Hindalco phantom RSUs and i2,369,538 Hindalco SARs. Total share-based compensation expense was $i6
million and $i4 million for the three and six months ended September 30, 2022, respectively. Total share-based compensation expense was $i12
million and $i24 million for the three and six months ended September 30, 2021, respectively. As of September 30, 2022, the outstanding liability related to share-based compensation was $i16
million.
/
The cash payments made to settle all Hindalco SAR liabilities were $i7 million and $i16
million in the six months ended September 30, 2022, and 2021, respectively. Total cash payments made to settle RSUs were $i15 million and $i16
million in the six months ended September 30, 2022, and 2021, respectively. Unrecognized compensation expense related to the non-vested Hindalco SARs (assuming all future performance criteria are met) was $i7 million, which is expected to be recognized over a weighted
average period of i1.3 years. Unrecognized compensation expense related to the RSUs was $i22
million, which will be recognized over the remaining weighted average vesting period of i2.1 years.
18
Novelis Inc.
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
i
8. POSTRETIREMENT BENEFIT PLANS
The Company recognizes actuarial gains and losses and prior service costs in the condensed consolidated balance sheet and recognizes changes in these amounts during the year in which changes occur through other comprehensive income (loss). The
Company uses various assumptions when computing amounts relating to its defined benefit pension plan obligations and their associated expenses (including the discount rate and the expected rate of return on plan assets).
i
Components of net periodic benefit cost for all of our postretirement benefit plans are shown in the table below.
(1)Service
cost is included within cost of goods sold (exclusive of depreciation and amortization) and selling, general and administrative expenses, while all other cost components are recorded within other expenses (income), net.
/
The average expected long-term rate of return on all plan assets is i4.8%
in fiscal 2023.
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 i15 years or less. We also participate in savings plans in Canada and the U.S., as well as defined contribution pension plans in the U.S., the U.K., Canada, Germany, Italy, Switzerland, and Brazil. iWe
contributed the following amounts to all plans.
Three Months Ended
September 30,
Six Months Ended
September 30,
in
millions
2022
2021
2022
2021
Funded pension plans
$
i6
$
i10
$
i8
$
i17
Unfunded
pension plans
i4
i2
i8
i6
Savings
and defined contribution pension plans
i13
i12
i27
i27
Total
contributions
$
i23
$
i24
$
i43
$
i50
During
the remainder of fiscal 2023, we expect to contribute an additional $i12 million to our funded pension plans, $i8
million to our unfunded pension plans, and $i25 million to our savings and defined contribution pension plans.
/
19
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
i
9. CURRENCY LOSSES (GAINS)
i
The
following currency losses (gains) are included in other expenses (income), net in the accompanying condensed consolidated statements of operations.
Three Months Ended
September 30,
Six Months Ended
September
30,
in millions
2022
2021
2022
2021
Gains on remeasurement of monetary assets and liabilities, net
$
(i35)
$
(i21)
$
(i67)
$
(i8)
Losses
recognized on balance sheet remeasurement currency exchange contracts, net
i41
i16
i78
i8
Currency
losses (gains), net
$
i6
$
(i5)
$
i11
$
i—
/i
The
following currency losses are included in accumulated other comprehensive loss, net of tax and noncontrolling interests in the accompanying condensed consolidated balance sheets.
Total
derivatives not designated as hedging instruments
$
i315
$
i3
$
(i396)
$
(i2)
$
(i80)
Total
derivative fair value
$
i377
$
i17
$
(i959)
$
(i10)
$
(i575)
____________________
(1)The
noncurrent portions of derivative assets and liabilities are included in other long-term assets and other long-term liabilities, respectively, in the accompanying condensed consolidated balance sheets.
//
21
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Metal
We use derivative instruments
to preserve our conversion margins and manage the timing differences associated with metal price lag. We use over-the-counter derivatives indexed to LME (referred to as our "aluminum derivative forward contracts") to reduce our exposure to fluctuating metal prices associated with the period of time between the pricing of our purchases of inventory and the pricing of the sale of that inventory to our customers, which is known as "metal price lag." We also purchase forward LME aluminum contracts simultaneously with our sales contracts with customers that contain fixed metal prices. These LME aluminum forward contracts
directly hedge the economic risk of future metal price fluctuations to better match the selling price of the metal with the purchase price of the metal. The volatility in LMPs also results in metal price lag.
Price risk arises due to fluctuating aluminum prices between the time the sales order is committed and the time the order is shipped. We identify and designate certain LME aluminum forward purchase contracts as cash flow hedges of the metal price risk associated with our future metal purchases that vary based on changes in the price of aluminum. Generally, such exposures do not extendbeyond itwo
years in length. The average duration of undesignated contracts is less than ione year.
Price risk exposure arises due to the timing lag between the LME based pricing of raw material aluminum purchases and the LME based pricing of finished product sales. We identify and designate certain LME aluminum forward sales contracts as cash flow hedges of the metal price risk associated with our future metal
sales that vary based on changes in the price of aluminum. Generally, such exposures do not extend beyond itwo years in length. The average duration of undesignated contracts is less than ione year.
In
addition to aluminum, we entered into LME copper and zinc forward contracts, as well as LMP forward contracts. As of September 30, 2022, and March 31, 2022, the fair value of these contracts represented an asset of less than $i1
million and $i4 million, respectively. These contracts are undesignated with an average duration of ione year.
i
The
following table summarizes our metal notional amount.
We use foreign exchange forward contracts to manage our exposure to changes in exchange rates. These exposures arise from recorded assets and liabilities, firm commitments, and forecasted cash flows denominated in currencies other than the functional currency of certain operations.
We use foreign currency contracts to hedge expected future foreign currency transactions, which include capital expenditures. These contracts cover the same periods as known or expected exposures. We had total notional amounts of $i1.6
billion and $i1.3 billion in outstanding foreign currency forwards designated as cash flow hedges as of September 30, 2022, and March 31, 2022, respectively.
As of September 30, 2022, and March 31, 2022, we had outstanding foreign currency exchange contracts
with a total notional amount of $i1.8 billion and $i1.7 billion, respectively, to primarily hedge balance sheet remeasurement risk, which were not designated as hedges. Contracts
representing the majority of this notional amount will mature by the third and fourth quarters of fiscal 2023 and offset the remeasurement impact.
Energy
We use natural gas forward purchase contracts to manage our exposure to fluctuating energy prices in North America. We had a notional of i8 million MMBtu designated as cash flow hedges as of September 30,
2022, and the fair value was an asset of $i22 million. There was a notional of i10 million MMBtu of natural gas forward contracts
designated as cash flow hedges as of March 31, 2022, and the fair value was an asset of $i25 million. As of September 30, 2022, we had a notional of less than i1
million MMBtu forward contracts that were not designated as hedges, and the fair value was an asset of $i2 million. As of March 31, 2022, we had a notional of i1
million MMBtu and the fair value was an asset of $i2 million. The average duration of undesignated contracts is itwo years in length.
22
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
We use diesel fuel forward purchase contracts to manage our exposure to fluctuating fuel prices in North America and Europe. We had a notional of i2 million gallons designated as cash flow hedges as of September 30, 2022, and the fair value
was an asset of $i2 million. There was a notional of i4 million gallons designated as cash flow hedges as of March 31, 2022,
and the fair value was an asset of $i3 million. As of September 30, 2022, we had a notional of less than i1 million metric tonnes
not designated as hedges, and the fair value was an asset of less than $i1 million. As of March 31, 2022, we had a notional of less than i1
million gallons of forward contracts that were not designated as hedges, and the fair value was an asset of $i1 million. The average duration of those undesignated contracts is less than ione
year in length.
(Gain) Loss Recognition
i
The following table summarizes the (gains) losses associated with the change in fair value of derivative instruments not designated as hedges and the excluded portion of designated derivatives recognized in other expenses (income), net. (Gains) losses recognized in other line items in the condensed consolidated statement of operations are separately disclosed within this footnote.
Loss
(gain) recognized in other expenses (income), net
i49
i1
i129
(i15)
Derivative
instruments designated as hedges
Gain recognized in other expenses (income), net(2)
(i3)
i—
(i5)
i—
Total
loss (gain) recognized in other expenses (income), net
$
i46
$
i1
$
i124
$
(i15)
Losses
recognized on balance sheet remeasurement currency exchange contracts, net
$
i41
$
i16
$
i78
$
i8
Realized
(gains) losses on change in fair value of derivative instruments, net
(i16)
(i31)
i67
(i43)
Unrealized
losses (gains) on change in fair value of derivative instruments, net
i21
i16
(i21)
i20
Total
loss (gain) recognized in other expenses (income), net
$
i46
$
i1
$
i124
$
(i15)
_________________________
(1)Includes
amounts related to natural gas and diesel swaps not designated as hedges and electricity swap settlements.
(2)Amount includes forward market premium/discount excluded from hedging relationship and releases to income from accumulated other comprehensive loss on balance sheet remeasurement contracts.
/i
The
following table summarizes the impact on accumulated other comprehensive loss and earnings of derivative instruments designated as cash flow hedges. Within the next twelve months, we expect to reclassify $i278 million of gains from accumulated other comprehensive loss to earnings, before taxes.
Amount of Gain (Loss)
Recognized in Other comprehensive (loss) income (Effective Portion)
Income
from continuing operations before income tax provision
(i53)
i42
(i32)
i79
Income
tax provision
$
i171
$
(i127)
$
i117
$
(i228)
Net
income from continuing operations
_________________________
(1)Includes amounts related to electricity, natural gas, and diesel swaps.
The was no amount excluded from the assessment of effectiveness recognized in earnings for the periods ended September 30, 2022, and 2021.
24
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
i
11. ACCUMULATED
OTHER COMPREHENSIVE LOSS
i
The following tables summarize the change in the components of accumulated other comprehensive loss, excluding noncontrolling interests, for the periods presented.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
i
12. 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 observable market inputs are not available, our fair value measurements will reflect the assumptions used. We grade the level of the inputs and assumptions used according to a three-tier hierarchy:
Level 1 — Unadjusted quoted prices in active markets for identical, unrestricted assets or liabilities we have the ability to access at the measurement date.
Level 2 — Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.
Level 3 — Unobservable inputs for which there is little
or no market data, which require us to develop our own assumptions based on the best information available as to 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.
For certain derivative contracts with fair values based upon trades in liquid markets, such as aluminum, zinc, copper, foreign exchange, natural gas, and diesel fuel forward contracts
and options, valuation model inputs can generally be verified and valuation techniques do not involve significant judgment. The fair values of such financial instruments are generally classified within Level 2 of the fair value hierarchy.
The majority of our derivative contracts are valued using industry-standard models with observable market inputs as their basis, such as time value, forward interest rates, volatility factors, and current (spot) and forward market prices. We generally classify these instruments within Level 2 of the valuation hierarchy. Such derivatives include interest rate swaps, foreign currency contracts, aluminum, copper, and zinc forward contracts,
and natural gas and diesel fuel forward contracts.
For Level 2 and 3 of the fair value hierarchy, where appropriate, valuations are adjusted for various factors such as liquidity, bid/offer spreads, and credit considerations (nonperformance risk). We regularly monitor these factors along with significant market inputs and assumptions used in our fair value measurements and evaluate the level of the valuation input according to the fair value hierarchy. This may result in a transfer between levels in the hierarchy from period to period. As of September 30, 2022, and March 31, 2022, we did not have any Level 1 or Level 3 derivative contracts. iNo
amounts were transferred between levels in the fair value hierarchy.
All of the Company's derivative instruments are carried at fair value in the statements of financial position prior to considering master netting agreements.
i
The following table presents our derivative assets and liabilities which were measured and
recognized at fair value on a recurring basis classified under the appropriate level of the fair value hierarchy as of September 30, 2022, and March 31, 2022. The table below also discloses the net fair value of the derivative instruments after considering the impact of master netting agreements.
(1)Amounts
represent the impact of legally enforceable master netting agreements that allow the Company to settle positive and negative positions with the same counterparties.
/
26
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
In addition to our derivative assets and liabilities held at fair value, we have a Level 3 receivable related to the contingent consideration for the sale of Duffel to ALVANCE. Upon closing on September
30, 2020, we recorded a receivable at a fair value of €i93 million ($i109 million) measured based on the anticipated outcome, timeline of arbitration of greater than one
year, and a discount rate of i5%. During the first quarter of fiscal 2022, Novelis marked all outstanding receivables related to the sale of Duffel to an estimated fair value of €i45 million
($i53 million), which resulted in a loss of €i51 million ($i61 million)
recorded in loss from discontinued operations, net of tax. See Note 2 – Discontinued Operations for more information. There has been no change to this fair value, and this receivable remains outstanding and is included in other long-term assets in our condensed consolidated balance sheet as of September 30, 2022.
Financial Instruments Not Recorded at Fair Value
i
The
table below presents the estimated fair value of certain financial instruments not recorded at fair value on a recurring basis. The table excludes finance leases and short-term financial assets and liabilities for which we believe carrying value approximates fair value. We value long-term receivables and long-term debt using Level 2 inputs. Valuations are based on either market and/or broker ask prices when available or on a standard credit adjusted discounted cash flow model using market observable inputs.
(4)Represents
net periodic benefit cost, exclusive of service cost for the Company's pension and other post-retirement plans. For further details, refer to Note 8 – Postretirement Benefit Plans.
//
(5)Other, net for the six months ended September 30, 2021, includes $i18 million
from the release of certain outstanding receivables.
28
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
i
14. INCOME TAXES
For the three and six months ended September 30,
2022, we had an effective tax rate of i26% and i24%, respectively. For the three and six months ended September 30,
2021, we had an effective tax rate of i25% and i26%, respectively. The i26%
tax rate for the three months ended September 30, 2022, was primarily driven by the full-year forecasted effective tax rate that takes into account income taxed at rates that differ from the i25% Canadian rate, including withholding taxes and changes to the Brazilian real foreign exchange rate, offset by income not subject to tax and tax credits. The i24%
rate for the six months ended September 30, 2022, was primarily driven by the full year forecasted effective tax rate that takes into account income taxed at rates that differ from the i25% Canadian rate, including withholding taxes, changes to the Brazilian real foreign exchange rate, the availability of tax credits, and the change in valuation allowance. The change in valuation allowance is mainly attributable to the release of the full valuation allowance
on temporary items and tax attributes of legacy Aleris entities in certain separate filer states and unitary filer states that require combined or separate reporting, resulting in a benefit of $i11 million. The i26%
rate for the six months ended September 30, 2021, was primarily driven by the full-year forecasted effective tax rate that takes into account income taxed at rates that differ from the i25% Canadian rate, including withholding taxes, changes to the Brazilian real foreign exchange rate, availability of tax credits, and the enacted rate change in the United Kingdom. The enacted rate change in the United Kingdom provided a benefit of approximately $i8 million.
As of September 30, 2022, we had a net deferred tax liability of $i208 million. This amount included gross deferred tax assets of approximately $i1.4
billion and a valuation allowance of $i723 million. It is reasonably possible that our estimates of future taxable income may change within the next twelve months resulting in a change to the valuation allowance in one or more jurisdictions.
/
29
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
i
15. COMMITMENTS AND CONTINGENCIES
We are party to, and may in the future be involved in or subject to, disputes, claims, and proceedings arising in the ordinary course of our business, including some we assert against others, such as environmental, health and safety, product liability, employee, tax, personal injury, and other matters. For
certain matters in which the Company is involved for which a loss is reasonably possible, we are unable to estimate a loss. For certain other matters for which a loss is reasonably possible and the loss is estimable, we have estimated the aggregated range of loss as $i0 to $i64
million. This estimated aggregate range of reasonably possible losses is based upon currently available information. The Company's estimates involve significant judgment. Therefore, the estimate will change from time to time and actual losses may differ from the current estimate. We review the status of, and estimated liability related to, pending claims and civil actions on a quarterly basis. The evaluation model includes all asserted and unasserted claims that can be reasonably identified, including claims relating to our responsibility for compliance with environmental, health and safety laws and regulations in the jurisdictions in which we operate or formerly operated. The estimated costs in respect of such reported liabilities are not offset by amounts related to insurance or indemnification arrangements unless otherwise noted.
Environmental
Matters
We have established liabilities based on our estimates for currently anticipated costs associated with environmental matters. We estimate that the costs related to our environmental liabilities as of September 30, 2022, and March 31, 2022, were $ii32/
million and $i35 million, respectively. Of the total $ii32/
million as of September 30, 2022, $i15 million is associated with an environmental reserve, $i14
million is associated with undiscounted environmental clean-up costs, and $i3 million is associated with restructuring actions. As of September 30, 2022, $i18
million is included in accrued expenses and other current liabilities and the remainder is within other long-term liabilities in our accompanying condensed consolidated balance sheets.
Brazilian Tax Litigation
Under a federal tax dispute settlement program established by the Brazilian government, we have settled several disputes with Brazil's tax authorities regarding various forms of manufacturing taxes and social security contributions. In most cases, we are paying the settlement amounts over a period of 180 months, however, in some cases we pay the settlement amounts over a shorter period. Total settlement liabilities as of September 30, 2022, and March 31, 2022, were $i13
million and $i18 million, respectively. As of September 30, 2022, $i6 million is included in accrued expenses and other current
liabilities and the remainder is within other long-term liabilities in our accompanying condensed consolidated balance sheets.
In addition to the disputes we have settled under the federal tax dispute settlement program, we are involved in several other unresolved tax and other legal claims in Brazil. Total liabilities for other disputes and claims were $i33 million as of September 30, 2022, and $i38
million as of March 31, 2022. As of September 30, 2022, $i1 million is included in accrued expenses and other current liabilities and the remainder is within other long-term liabilities in our accompanying condensed consolidated balance sheets. Additionally, we have included in the range of reasonably possible losses disclosed above any unresolved tax disputes or other contingencies for which a loss is reasonably possible and estimable. The interest cost recorded on these settlement liabilities offset
by interest earned on the cash deposits is reported in other expenses (income), net on the condensed consolidated statement of operations.
During prior fiscal years, we received multiple favorable rulings from the Brazilian court that recognized the right to exclude certain taxes from the tax base used to calculate contributions to the social integration program and social security contributions on gross revenues, also known as PIS and COFINS. As a result of these cases, we had the right to apply for tax credits for the amounts overpaid during specified tax years. These credits and corresponding interest could be used to offset various Brazilian federal taxes in future years.
The Brazilian Office of the Attorney General of the National Treasury sought clarification from the Brazilian Supreme Court on certain matters, including the calculation methodology (i.e. gross or net credit
amount) and timing of these credits. Since the Brazilian Supreme Court had not yet confirmed the appropriate methodology when these favorable rulings were received, Novelis recorded this benefit in the corresponding periods based on the net credit amount.
However, during the first quarter of fiscal 2022, the Brazilian Supreme Court ruled that the credit should be calculated using the gross methodology for lawsuits filed prior to March 2017. As such, Novelis recorded additional income of $i76 million
in other expenses (income), net, $i48 million of which is principal and $i29 million is interest, related to
PIS and COFINS for the years 2009 to 2017, net of $i1 million in litigation expense.
The credit amounts, interest calculation, and supporting documentation are subject to further validation and scrutiny by tax authorities for five years after the credits are utilized. Thus, credits recognized may differ from these amounts.
/
30
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
In order to qualify for these credits, the Company is required to compile and present verifiable support validating the credits. During fiscal 2022, Novelis applied for and received official authorization from The Special Department of Federal Revenue of Brazil ("Receita Federal") to use the PIS and COFINS credits related to certain periods. Novelis was able to utilize a majority of these credits to offset taxes to be paid in fiscal 2022 and utilized the remaining credits in the first quarter of fiscal 2023.
31
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
i
16. SEGMENT, GEOGRAPHICAL AREA, MAJOR CUSTOMER AND MAJOR SUPPLIER INFORMATION
Segment Information
Due in part to the regional nature of the supply and demand of aluminum rolled products and to best serve our customers, we manage our activities based on geographical areas and are organized under iifour/
operating segments: North America, Europe, Asia, and South America. All of our segments manufacture aluminum sheet and light gauge products. We also manufacture aluminum plate products in Europe and Asia.
The following is a description of our operating segments.
North America. Headquartered in Atlanta, Georgia, this segment operates i17 plants, including iseven
with recycling operations, in itwo countries.
Europe. Headquartered in Küsnacht, Switzerland, this segment operates i10 plants,
including ifive with recycling operations, in ifour countries.
Asia. Headquartered
in Seoul, South Korea, this segment operates ifour plants, including itwo with recycling operations, in itwo
countries.
South America. Headquartered in São Paulo, Brazil, this segment operates itwo plants in Brazil, including ione
with recycling operations.
Net sales and expenses are measured in accordance with the policies and procedures described in Note 1 – Business and Summary of Significant Accounting Policies within our 2022 Form 10-K.
We measure the profitability and financial performance of our operating segments based on Adjusted EBITDA. Adjusted EBITDA provides a measure of our underlying segment results that is in line with our approach to risk management. We define Adjusted EBITDA as earnings before (a) depreciation and amortization; (b) interest expense and amortization of debt issuance costs; (c) interest income; (d) unrealized gains (losses) on change in fair value of derivative instruments, net, except for foreign currency remeasurement hedging activities, which are included in Adjusted EBITDA; (e) impairment of goodwill; (f) (gain) loss on extinguishment of debt, net; (g) noncontrolling
interests' share; (h) adjustments to reconcile our proportional share of Adjusted EBITDA from non-consolidated affiliates to income as determined on the equity method of accounting; (i) restructuring and impairment expenses (reversals), net; (j) gains or losses on disposals of property, plant and equipment and businesses, net; (k) other costs, net; (l) litigation settlement, net of insurance recoveries; (m) sale transaction fees; (n) income tax provision (benefit); (o) cumulative effect of accounting change, net of tax; (p) metal price lag; (q) business acquisition and other related costs; (r) purchase price accounting adjustments; (s) income (loss) from discontinued operations, net of tax; and (t) loss on sale of discontinued operations, net of tax.
Prior to the three months ended June 30, 2022, we also utilized the term Segment Income to refer to Adjusted EBITDA. Both terms
have the same definition and there is no difference in the composition or calculation of Adjusted EBITDA for the periods presented and Segment Income previously reported. Under ASC 280, Segment Reporting ("ASC 280"), our measure of segment profitability and financial performance of our operating segments is Adjusted EBITDA, and when used in this context, Adjusted EBITDA is a financial measure prepared in accordance with U.S. GAAP.
The tables that follow show selected segment financial information. "Eliminations and Other" includes eliminations and functions that are managed directly from our corporate office that have not been allocated to our operating segments as well as the adjustments for proportional consolidation and eliminations of intersegment net sales. The financial information for our segments includes the results of our affiliates on a proportionately consolidated basis, which is consistent with the
way we manage our business segments. In order to reconcile the financial information for the segments shown in the tables below to the relevant U.S. GAAP based measures, we must adjust proportional consolidation of each line item. The "Eliminations and Other" in net sales – third party includes the net sales attributable to our joint venture party, Tri-Arrows, for our Logan affiliate because we consolidate 100% of the Logan joint venture for U.S. GAAP, but we manage our Logan affiliate on a proportionately consolidated basis. See Note 4 – Consolidation and Note 5 – Investment in and Advances to Non-Consolidated Affiliates and Related Party Transactions for further information about
these affiliates. Additionally, we eliminate intersegment sales and intersegment income for reporting on a consolidated basis.
/
32
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(1)Total
assets includes assets of discontinued operations.
33
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
i
The table below displays the reconciliation from net income attributable to our common shareholder to Adjusted EBITDA.
Three
Months Ended
September 30,
Six Months Ended
September 30,
in millions
2022
2021
2022
2021
Net income attributable to our common shareholder
$
i183
$
i237
$
i490
$
i477
Net
loss attributable to noncontrolling interests
i—
i—
(i1)
i—
Income
tax provision
i65
i79
i152
i187
Loss
from discontinued operations, net of tax
i1
i2
i2
i65
Income
from continuing operations before income tax provision
i249
i318
i643
i729
Depreciation
and amortization
i134
i134
i272
i268
Interest
expense and amortization of debt issuance costs
i65
i60
i123
i119
Adjustment
to reconcile proportional consolidation(1)
i13
i15
i27
i29
Unrealized
losses (gains) on change in fair value of derivative instruments, net
i21
i16
(i21)
i20
Realized
gains on derivative instruments not included in Adjusted EBITDA(2)
(i1)
i—
(i2)
(i1)
Loss
on extinguishment of debt, net
i—
i64
i—
i62
Restructuring
and impairment expenses (reversals), net
i1
i—
i2
(i2)
Loss
on sale of assets, net
i—
i2
i1
i2
Metal
price lag
i24
(i59)
i21
(i113)
Other,
net(3)
i—
i3
i1
(i5)
Adjusted
EBITDA
$
i506
$
i553
$
i1,067
$
i1,108
_________________________
(1)Adjustment
to reconcile proportional consolidation relates to depreciation, amortization, and income taxes of our equity method investments. 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.
(2)Realized gains on derivative instruments not included in Adjusted EBITDA represents foreign currency derivatives unrelated to operations.
(3)For the six months ended September 30, 2021, other, net includes $i29 million
of interest income recognized as a result of Brazilian tax litigation settlements and interest income, partially offset by $i18 million from the release of certain outstanding receivables.
/i
The
following table displays Adjusted EBITDA by reportable segment.
Three Months Ended
September 30,
Six Months Ended
September 30,
in
millions
2022
2021
2022
2021
North America
$
i191
$
i227
$
i418
$
i399
Europe
i73
i78
i157
i180
Asia
i113
i92
i207
i180
South
America
i127
i154
i283
i347
Eliminations
and Other
i2
i2
i2
i2
Adjusted
EBITDA
$
i506
$
i553
$
i1,067
$
i1,108
/
Information
about Product Sales, Major Customers, and Primary Supplier
Product Sales
The following table displays net sales by product end market.
Three Months Ended
September 30,
Six
Months Ended
September 30,
in millions
2022
2021
2022
2021
Can
$
i2,314
$
i2,112
$
i4,802
$
i4,052
Automotive
i995
i764
i1,942
i1,510
Aerospace
and industrial plate
i199
i122
i363
i236
Specialty
i1,291
i1,121
i2,781
i2,176
Net
sales
$
i4,799
$
i4,119
$
i9,888
$
i7,974
34
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Major Customers
i
The following table displays customers representing 10% or more of our net sales for any of the periods presented and their respective percentage of net sales.
Rio Tinto is our primary supplier of metal inputs, including prime and sheet ingot. iThe table below shows our purchases from Rio Tinto as a percentage of our total combined metal purchases.
Purchases from Rio Tinto as a percentage of total combined metal purchases
i7
%
i8
%
i7
%
i8
%
35
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 Form 10-Q 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
In this Form 10-Q, unless otherwise specified, the terms "we,""our,""us," the "Company," and "Novelis" refer to Novelis Inc., a company incorporated in Canada under the Canadian Business Corporations Act, and its subsidiaries. References herein to "Hindalco" refer to Hindalco Industries Limited, which acquired Novelis in May 2007.
Novelis is driven by its purpose of shaping a sustainable world together. We are a global leader in the production of innovative aluminum products
and solutions and the world's largest recycler of aluminum. Our ambition is to be the leading provider of low-carbon, sustainable aluminum solutions and to achieve a fully circular economy by partnering with our suppliers and customers in beverage packaging, automotive, aerospace, and specialties (a diverse market including building and construction; signage; foil and packaging; commercial transportation; and commercial and consumer products, among others) markets throughout North America, Europe, Asia, and South America. Novelis is a subsidiary of Hindalco, an industry leader in aluminum and copper and the metals flagship company of the Aditya Birla Group, a multinational conglomerate based in Mumbai. As of September 30, 2022, we had manufacturing operations in nine countries on four continents: North America, South America, Asia, and Europe, through 33 operating facilities,
which may include any combination of hot or cold rolling, finishing, casting, or recycling capabilities. We have recycling operations in 15 of our operating facilities to recycle post-consumer aluminum, such as UBCs, and post-industrial aluminum, such as class scrap.
As used in this Form 10-Q, consolidated "aluminum rolled product shipments,""flat-rolled product shipments," or "shipments" refers to aluminum rolled product shipments to third parties. Regional "aluminum rolled product shipments,""flat-rolled product shipments," or "shipments" refers to aluminum rolled product shipments to third parties and intersegment shipments to other Novelis regions. Shipment amounts also include tolling shipments. References to "total shipments" include aluminum rolled product shipments as well as certain other non-rolled product shipments, primarily scrap, UBCs, ingots, billets, and primary
remelt. The term "aluminum rolled products" is synonymous with the terms "flat-rolled products" and "FRP," which are commonly used by manufacturers and third-party analysts in our industry. All tonnages are stated in metric tonnes. One metric tonne is equivalent to 2,204.6 pounds. One kt is 1,000 metric tonnes.
BUSINESS AND INDUSTRY CLIMATE
A little over a decade ago, we launched a strategy to transform and improve the profitability of our business through disciplined phases of significant capital investment in new capacity and capabilities. These investments enabled us to increase the amount of recycled content in our products, capitalize on favorable long-term market trends driving increased consumer demand for lightweight, sustainable
aluminum products, and diversify and optimize our product portfolio. As a global leader in the aluminum flat-rolled products industry, we leveraged our new capacity, global footprint, scale, and solid customer relationships to drive volumes and capture favorable supply and demand market dynamics across all our end-use markets. With volume growth combined with improved pricing, a significant increase in scrap inputs, operational efficiencies, acquisition cost synergies, and high-capacity utilization rates, we significantly improved the profitability of our beverage packaging and specialties products and maintained high margins for automotive and aerospace products to deliver a 72% increase in total company Adjusted EBITDA per tonne to $530 and turn a net loss of $38 million into $955 million in net income between fiscal 2016 and fiscal 2022.
36
This
improvement in profitability is despite increased inflationary cost pressures that began in early fiscal 2022 resulting from global supply chain disruptions impacting the availability and price of materials and services including freight, energy, coatings, and alloys, such as magnesium. Rising geopolitical instability and interest rates exacerbated inflationary cost pressures, mainly energy, beginning in the fourth quarter of fiscal 2022 and are expected to continue for the foreseeable future. We have not experienced significant direct impacts from the Russia-Ukraine conflict, as we do not have operations nor significant sales in either Russia or Ukraine. However, beginning in the fourth quarter of fiscal 2022, we have experienced indirect impacts as the conflict has driven up energy prices globally, and especially in Europe, where the conflict's negative impact on energy prices and raw materials has also caused reduced manufacturing and industrial demand. We expect
such elevated costs and reduced demand until energy prices stabilize. To date, our operations have not been materially impacted by labor shortages, and we remain able to procure the necessary raw materials, parts, and equipment due to our diverse global supplier network. We believe we are positioned to maintain production levels necessary to service our customers in the near term. However, we cannot predict how long supply chain disruptions will last or potential future financial impacts. While our near-term results are being negatively impacted by these higher costs, we have been able to mitigate a portion of the higher inflationary cost impact through a combination of hedging, passing through a meaningful portion of higher costs to customers, favorable pricing environments, and increased recycling benefits. There is no assurance that we will continue to be able to mitigate these higher costs in the future.
Our management
administers an Enterprise Risk Management ("ERM") program, which is a comprehensive risk assessment and mitigation process that identifies and addresses all known current and potential material risks to Novelis' global operations, including legal and regulatory risks. The ERM team is led by an executive officer who delivers an ERM report to the Audit Committee of our board at least quarterly. The ERM team meets with or interviews approximately 80 employees each quarter to stay abreast of the latest risks we face. Throughout the escalation of the Russia-Ukraine conflict, our ERM team has monitored developments and gathered information about Novelis contacts with Russian businesses. Novelis' direct exposure to the conflict has been limited, as we have no operations, assets, or employees in either Russia or Ukraine, and we have only immaterial customer relationships in these countries historically. Sanctions, tariffs, a ban or similar actions impacting the supply
of Russian aluminum could disrupt global aluminum supply. While one of our suppliers of metal is UC Rusal PLC ("Rusal"), a Russian aluminum company, we purchase metal from a diverse global portfolio of metal suppliers and are not dependent on Rusal for a significant portion of our metal supply. The ERM team also monitors other potential impacts of Russia's invasion of Ukraine, including impacts on the reliability of energy supplies to our European manufacturing sites and supply chain disruptions. This information is presented to, and discussed with, the Audit Committee of our board at least quarterly, with interim updates from our executive leadership as our board may require. In addition, we manage sanctions compliance through a global sanctions screening program, and our Information Security team monitors cybersecurity matters and makes periodic reports at meetings of our board.
We believe that global long-term demand
for aluminum rolled products remains strong, driven by anticipated economic growth, material substitution, and sustainability considerations, including increased environmental awareness around polyethylene terephthalate ("PET") plastics. Disruption in demand for aluminum rolled products as a result of the COVID-19 pandemic and semiconductor shortages impacting the automotive industry appears to be moderating. However, we believe the challenging inflationary and geopolitical environment has increased economic uncertainty and may negatively impact near-term demand in some end markets. The building and construction end market is where we see the most uncertainty, as it is more sensitive to inflation and interest rates.
Despite current market uncertainty, we believe that long-term demand for aluminum rolled products remains intact. Increasing customer preference for sustainable packaging options, and package mix shift toward
infinitely recyclable aluminum are driving higher demand for aluminum beverage packaging worldwide. In the first half of fiscal 2022, we completed an investment to expand the rolling and recycling capacity, each by 100 kt, in our Pindamonhangaba, Brazil, plant to support this demand. Additionally, more than half of the 600kt capacity of the recently announced greenfield rolling and recycling plant to be built in Bay Minette, Alabama, will be used to serve the growing demand for aluminum beverage can sheet in North America. We continue to evaluate opportunities for additional capacity expansion across regions where local can sheet supply is insufficient to meet the rapid rise in demand.
We believe that long-term demand for aluminum automotive sheet will continue to grow, which drove our recently completed investments in automotive sheet finishing capacity in Guthrie, Kentucky, and Changzhou, China. This demand has been primarily
driven by the benefits that result from using lightweight aluminum in vehicle structures and components, as automakers respond to stricter government regulations regarding emissions and fuel economy, while maintaining or improving vehicle safety and performance, resulting in increased competition with high-strength steel. We are also seeing increased demand for aluminum for electric vehicles, as aluminum's lighter weight can result in extended battery range.
We expect long-term demand for building and construction and other specialty products to grow due to increased customer preference for lightweight, sustainable materials and demand for aluminum plate in Asia to grow driven by the development and expansion of industries serving aerospace, rail, and other technically demanding applications.
37
While
aerospace was muted in fiscal 2022 as air travel was impacted by the COVID-19 pandemic, we expect demand and shipments to improve toward pre-COVID levels by the end of fiscal 2023. In the longer-term, we believe significant aircraft industry order backlogs for key OEMs, including Airbus and Boeing, will translate into growth in the future and that our multi-year supply agreements have positioned us to benefit from future expected demand.
On April 14, 2020, Novelis closed its acquisition of Aleris and continues to integrate the two companies. The acquisition provides a number of strategic benefits, including increasing the Company's footprint as an aluminum rolled products manufacturer and diversifying its product and customer portfolio. In addition, we expect to generate over $220 million
in synergies, through traditional integration cost synergies and strategic synergies created by enhancing and integrating operations in Asia. Since closing the transaction, $114 million of run-rate cost synergies have been achieved through September 30, 2022.
We believe the long-term demand trends for flat-rolled aluminum products remain strong, and we have identified more than $4.5 billion of potential organic capital investment opportunities to grow Novelis' business through debottlenecking, recycling, and new capacity investments through fiscal 2027, focused on increasing capacity and capabilities that meet growing customer demand and align with our sustainability commitments. Of the more than $4.5 billion of potential investment opportunities we have identified, we have already allocated over $3.4 billion to the specific investments outlined below.
In
October 2021, we announced plans to invest approximately $130 million at our Oswego, New York, plant to meet growing customer demand for sustainable, aluminum flat-rolled products. We expect the project to increase hot mill capacity by 124 kt, with a total expected increase of finished goods capacity estimated in the range of 65 kt. The investment also includes enhancements to the plant's batch annealing capabilities for automotive sheet.
In October 2021, we also announced plans to invest approximately $375 million to expand cold rolling and recycling capacity in Zhenjiang, China, to integrate our automotive business in Asia. This investment will also release rolling capacity at UAL, the Company's joint venture in South Korea, to serve the can and specialty products markets.
In January 2022, we
announced plans to invest approximately $365 million to build a highly advanced recycling center for automotive in the U.S., which will be adjacent to our existing automotive finishing plant in Guthrie, Kentucky. With an expected annual casting capacity of 240 kt of sheet ingot, we expect the facility will reduce the Company's carbon emissions by more than one million tonnes each year. We broke ground for this new recycling center in May 2022.
In February 2022, we announced plans to invest approximately $50 million to build a recycling and casting center at the site of our UAL joint venture in South Korea. Fully funded by Novelis, the Ulsan Recycling Center will have an annual casting capacity of 100 kt of low-carbon sheet ingot. Once online, we expect the recycling center to reduce the
Company's carbon emissions by more than 420,000 tonnes each year. We broke ground on this new recycling and casting center in November 2022.
In March 2022, we announced a $50 million debottlenecking investment at our plant located in Pindamonhangaba, Brazil, to unlock approximately 70kt of rolling capacity.
In May 2022, we announced plans to build an approximately $2.5 billion greenfield, fully integrated rolling and recycling plant in Bay Minette, Alabama. This new U.S. plant will support strong demand for sustainable beverage can and automotive aluminum sheet and advance a more circular economy. We broke ground for this new facility in October 2022.
We expect to fund these organic growth investments from internally generated cash flows.
Environmental, Social & Governance
In
April 2021, we announced that we will further our longstanding sustainability commitment by aiming to become a carbon-neutral company by 2050 or sooner and reducing our carbon footprint by 30% by 2026, from our baseline of fiscal 2016. Carbon goals are inclusive of Scope 1 and 2, as well as Scope 3 emissions in categories 1, 3, and 9, of the Greenhouse Gas Protocol. In addition, we have targets to reduce waste to landfills by 20%, energy intensity by 10%, and water intensity by 10%, each by 2026, from our baseline of fiscal 2016.
We plan to increase the use of recycled content in our products, as appropriate, and engage with customers, suppliers, and industry peers across the value chain as we aim to drive innovation that improves aluminum's overall sustainability. In addition, we intend to evaluate each future expansion project's carbon impact and plan to include an appropriate carbon cost impact as part of our financial
evaluation of future strategic growth investments. We intend to evaluate each future expansion project's carbon impact so that we may appropriately mitigate any negative carbon impacts to meet our goals.
In support of our commitments, we are voluntarily pursuing the certification of all of our plant operations to the Aluminum Stewardship Initiatives' ("ASI") certification program. ASI works together with producers, users, and stakeholders in the aluminum value chain to collaboratively foster responsible production, sourcing, and stewardship of aluminum. Currently, we have 19 plants with the Performance Standard Certification and 12 with the Chain of Custody Certification. In addition, to support our initiatives, in April 2021 we issued €500 million in aggregate principal amount of senior notes. We intend to
38
allocate
an amount equal to the net proceeds of these notes to eligible "green" projects, such as investments in recycling, renewable energy, and pollution prevention and control. Through March 31, 2022, we have allocated $140 million of the net proceeds toward pollution prevention and control.
Our path to a more sustainable and circular future goes beyond our environmental commitments. We have set targets to build a more diverse and inclusive workforce that reflects our local communities. Globally, we are dedicated to increasing the representation of women in senior leadership, as well as in technical roles at Novelis in order to create and foster the next generation of female leaders, scientists, and engineers. To achieve these goals, the Company has established a global Diversity & Inclusion
board, as well as supporting councils in each of our four regions. We will also continue assisting our Employee Resource Groups to help create a more inclusive environment where we seek to provide our employees with a sense of belonging and where different backgrounds and perspectives are embraced and valued.
We are also committed to supporting the communities in which our employees live and work. With firmly established community engagement programs, the Company is committed to advancing its corporate social responsibility efforts by further investing in the Novelis Neighbor program, which gives back to communities through financial contributions and employee volunteer service. The program will continue emphasizing Science, Technology, Engineering, and Math ("STEM") education, raising recycling awareness, and fostering better overall
community health and well-being.
COVID-19 Response
With our primary focus being the health and well-being of our employees, we continue to monitor the changing landscape with respect to COVID-19 and take actions to manage our business and support our customers. We have bolstered our own Environmental, Health, and Safety protocols and aligned them with guidance from global health authorities and government agencies across our operations to help ensure the safety of our employees, customers, suppliers, communities, and other stakeholders.
Liquidity Position
We believe we have adequate liquidity to manage the business with dynamic metal prices. Our cash and cash equivalents and availability under committed credit facilities aggregated to $2.8 billion of liquidity as of September 30,
2022.
We maintain a disciplined approach to capital spending, prioritizing maintenance capital for our operations, as well as organic strategic capacity expansion projects. We are rephasing the pace of spending of some strategic capital, such that we now expect capital expenditures for fiscal 2023 to be between approximately $900 million and $1 billion, as compared to the previously guided range to be on the low end of a range between $1.3 billion and $1.6 billion. This current guidance includes approximately $300 million for expected maintenance spend.
Market Trends
Beverage Packaging. According to CRU, the global mining, metals, and fertilizer business intelligence company, global demand for can stock, which represents the largest percentage of our total rolled product shipments, is forecasted to increase
at a compound annual growth rate of approximately 4% from calendar year 2021 to 2028 mainly driven by sustainability trends, growth in beverage markets that are increasingly released in aluminum packaging, and substitution against plastic, glass, and steel.
Automotive. We believe aluminum utilization is positioned for long-term growth through increased adoption of electric vehicles, which require higher amounts of aluminum. We estimate global automotive aluminum sheet demand is expected to grow at an 11% compound annual growth rate between calendar year 2021 and 2028. While chip supply has been improving, the recent global semiconductor shortage impacting the automotive industry may continue to impact automotive build rates and reduce near-term demand for automotive aluminum sheet.
Aerospace.Passenger air travel
is increasing, as loosening COVID-19 restrictions have facilitated a faster than anticipated recovery for the industry. We expect demand for aerospace aluminum to recover to pre-COVID-19 levels by the end of fiscal 2023.
Specialties. Specialties includes diverse markets, including building and construction, commercial transportation, foil and packaging, and commercial and consumer products. These industries continue to increase aluminum material adoption due to its many desirable characteristics. We believe these trends will keep demand high in the long-term, despite the near-term headwinds.
39
BUSINESS
MODEL AND KEY CONCEPTS
Conversion Business Model
A significant amount of our business is conducted under a conversion model, which allows us to pass through increases or decreases in the price of aluminum to our customers. Nearly all of our flat-rolled products have a price structure with three components: (1) a base aluminum price quoted off the LME; (2) an LMP; and (3) a "conversion premium" to produce the rolled product, which reflects, among other factors, the competitive market conditions for that product. Base aluminum prices are typically driven by macroeconomic factors and global supply and demand for aluminum. LMPs tend to vary based on the supply and demand for metal in a particular region and associated transportation costs.
In North America, Europe, and South America, we pass through LMPs to our customers, which are
recorded through net sales. In Asia, we purchase our metal inputs based on the LME and incur an LMP. Many of our competitors in this region price their metal off the Shanghai Futures Exchange, which does not include an LMP. However, in a majority of new contracts over the last several quarters, we are able to fully pass through the LMPs.
LME Base Aluminum Prices and Local Market Premiums
The average (based on the simple average of the monthly averages) and closing prices for aluminum set on the LME are as follows.
Three
Months Ended
September 30,
Percent Change
Six Months Ended
September 30,
Percent Change
2022
2021
2022
2021
Aluminum
(per metric tonne, and presented in U.S. dollars):
Closing cash price as of beginning of period
$
2,397
$
2,523
(5)
%
$
3,503
$
2,213
58
%
Average
cash price during the period
2,354
2,648
(11)
2,618
2,528
4
Closing cash price as of end of period
2,180
2,851
(24)
2,180
2,851
(24)
The
weighted average LMPs are as follows.
Three Months Ended
September 30,
Percent
Change
Six Months Ended
September 30,
Percent Change
2022
2021
2022
2021
Weighted average LMP (per metric tonne and presented in U.S. dollars)
$
360
$
510
(29)
%
$
442
$
454
(3)
%
Metal
Price Lag and Related Hedging Activities
Increases or decreases in the price of aluminum based on the average LME base aluminum prices and LMPs directly impact net sales, cost of goods sold (exclusive of depreciation and amortization), and working capital. The timing of these impacts varies based on contractual arrangements with customers and metal suppliers in each region. These timing impacts are referred to as metal price lag. Metal price lag exists due to: (i) the period of time between the pricing of our purchases of metal, holding and processing the metal, and the pricing of the sale of finished inventory to our customers and (ii) certain customer contracts containing fixed forward price commitments, which result in exposure to changes in metal prices for the period of time between when our sales price fixes and the sale actually
occurs.
We use LME aluminum forward contracts to preserve our conversion margins and manage the timing differences associated with the LME base metal component of net sales and cost of goods sold (exclusive of depreciation and amortization). These derivatives directly hedge the economic risk of future LME base metal price fluctuations to better match the purchase price of metal with the sales price of metal. We have exposure to multiple regional LMPs, however the derivative markets for those LMPs are generally not robust or efficient enough for us to hedge all of our exposure to price movements beyond a small volume. From time to time, we take advantage of short-term market conditions to hedge a small percentage of our exposure. As a consequence, volatility in LMPs can have a significant impact on our results of operations and cash
flows.
We elect to apply hedge accounting to better match the recognition of gains or losses on certain derivative instruments with the recognition of the underlying exposure being hedged in the statement of operations. For undesignated metal derivatives, there are timing differences between the recognition of unrealized gains or losses on the derivatives and the recognition of the underlying exposure in the statement of operations. The recognition of unrealized gains and losses on undesignated metal derivative positions typically precedes inventory cost recognition, customer delivery, and revenue recognition. The timing difference between the recognition of unrealized gains and losses on undesignated metal derivatives and cost or revenue recognition impacts income from continuing operations before income tax provision and net income. Gains and losses on metal derivative contracts
are not recognized in Adjusted EBITDA until realized.
40
Foreign Currency and Related Hedging Activities
We operate a global business and conduct business in various currencies around the world. We have exposure to foreign currency risk as fluctuations in foreign exchange rates impact our operating results when we translate the operating results from various functional currencies into our U.S. dollar reporting currency at current average rates. We also record foreign exchange remeasurement gains and losses when business transactions are denominated in currencies other than the functional currency of that operation. Global economic uncertainty is contributing to higher levels of volatility among the currency pairs in which we conduct business.
The following table presents the exchange rates as of the end of each period and the average of the month-end exchange rates.
Exchange rate movements have an impact on our operating results. In Europe, where we predominantly have local currency selling prices and operating costs, we benefit as the euro strengthens but are adversely affected as the euro weakens.
For our Swiss operations, where operating costs are incurred primarily in the Swiss franc and a large portion of revenues are denominated in the euro, we benefit as the Swiss franc weakens but are adversely affected as the franc strengthens. In South Korea, where we have local currency operating costs and U.S. dollar denominated selling prices for exports, we benefit as the South Korean won weakens but are adversely affected as the won strengthens. In Brazil, where we have predominately U.S. dollar selling prices and local currency manufacturing costs, we benefit as the Brazilian real weakens but are adversely affected as the real strengthens. We use foreign exchange forward contracts to manage our exposure arising from recorded assets and liabilities, firm commitments, and forecasted cash flows denominated in currencies other than the functional currency of certain operations,
which include capital expenditures and net investment in foreign subsidiaries.
See Segment Review below for the impact of foreign currency on each of our segments.
41
RESULTS OF CONSOLIDATED OPERATIONS
For the three months ended September 30, 2022, we reported net income
attributable to our common shareholder of $183 million, a decrease of 23% compared to $237 million in the comparable prior year period. Total Adjusted EBITDA of $506 million, decreased 8% compared to $553 million in the comparable prior year period. The decrease in total Adjusted EBITDA compared to the comparable prior year period is primarily driven by significantly higher inflationary operating and energy costs as a result of geopolitical instability, supply chain disruptions, and rising interest rates, as well as unfavorable foreign exchange rates, less favorable metal benefit, and higher SG&A, partially offset by favorable product mix, and higher pricing including some cost pass-through to customers.
For the six months ended September 30, 2022,
we reported net income attributable to our common shareholder of $490 million, an increase of 3% compared to $477 million in the comparable prior year period, and total Adjusted EBITDA of $1,067 million, a decrease of 4% compared to $1,108 million in the comparable prior year period. The decrease in total Adjusted EBITDA was primarily driven by a $47 million gain from the principal amount, net of litigation expenses, from favorable outcomes in a Brazilian tax litigation in the comparable prior year period, significantly higher inflationary operating, energy and metal costs as a result of geopolitical instability, supply chain disruptions, rising interest rates, higher SG&A, and unfavorable foreign exchange rates. These unfavorable factors were mostly offset by higher pricing, including some higher cost pass-through to customers, favorable product mix, and improved recycling performance.
Key Sales and Shipment Trends
Three
Months Ended
Fiscal Year Ended
Three Months Ended
in millions, except percentages and shipments, which are in kt
Net sales was $4.8 billion for the three months ended September 30, 2022, an increase of 17% from the comparable prior year period, primarily driven by higher average aluminum prices, as well as a 2% increase in shipments, higher pricing across end markets, and a favorable product mix.
Income from continuing operations before income tax provision was $249 million for the three months ended September 30, 2022, compared to $318 million in the comparable prior year period. In addition to the factors noted above, the following items affected income from continuing operations before income tax provision.
Cost of Goods Sold (Exclusive of Depreciation and Amortization)
Cost of goods sold (exclusive of depreciation and amortization) was $4.1 billion for the three months ended September 30, 2022, an increase of 22% from the comparable prior year period, primarily due to higher average aluminum prices and cost inflation. Total metal input costs included in cost of goods sold (exclusive of depreciation and amortization) increased $627 million over the comparable prior year period.
42
Selling, General and Administrative Expenses
SG&A was $181 million for the three months ended September 30,
2022, compared to $142 million for the three months ended September 30, 2021. The increase is mainly due to higher factoring expense resulting from higher interest rates, as well as higher employment cost, and higher travel expense due to loosened travel restrictions.
Depreciation and Amortization
Depreciation and amortization was $134 million in each of the three months ended September 30, 2022, and 2021.
Interest Expense and Amortization of Debt Issuance Costs
Interest expense and amortization of debt issuance costs was $65 million and $60 million for the three months ended September 30, 2022,
and 2021, respectively. The increase is primarily due to higher average interest rates on variable interest rate borrowings.
Loss on Extinguishment of Debt, Net
We recorded $64 million in loss on extinguishment of debt, net for the three months ended September 30, 2021. This primarily relates to the write-off of unamortized debt issuance costs and a $51 million cash payment of a redemption premium for the redemption of our 5.875% Senior Notes, due September 2026. We did not incur similar charges in the current period.
Restructuring and Impairment Expenses (Reversals), Net
Restructuring and impairment expenses (reversals), net was a net expense of $1 million for the three months ended September 30,
2022, with no such activity in the comparable prior year period.
Other Expenses (Income), Net
Other expenses (income), net was an expense of $10 million and income of $20 million for the three months ended September 30, 2022, and 2021, respectively. The change primarily relates to higher losses on the change in fair value of derivative instruments, net in the current period.
Taxes
We recognized $65 million of income tax provision for the three months ended September 30, 2022, which resulted in an effective tax rate of 26%. The rate was primarily driven by the full-year forecasted effective tax rate that takes into account income taxed at rates
that differ from the 25% Canadian rate, including withholding taxes, and changes to the Brazilian real foreign exchange rate, offset by the availability of tax credits. We recognized $79 million of income tax benefit in the comparable prior year period, which resulted in an effective tax rate of 25%.
43
Segment Review
Due in part to the regional nature of supply and demand of aluminum rolled products and in order to best serve our customers, we manage our activities on the basis of geographical regions and are organized under four operating segments: North America, Europe, Asia, and South America.
The tables below illustrate selected segment financial information
(in millions, except shipments, which are in kt). For additional financial information related to our operating segments including the reconciliation of net income attributable to our common shareholder to Adjusted EBITDA, see Note 16 – Segment, Geographical Area, Major Customer and Major Supplier Information. In order to reconcile the financial information for the segments shown in the tables below to the relevant U.S. GAAP-based measures, "Eliminations and Other" must adjust for proportional consolidation of each line item for our Logan affiliate because we consolidate 100% of the Logan joint venture for U.S. GAAP purposes. However, we manage our Logan affiliate on a proportionately consolidated basis and eliminate intersegment shipments (in kt).
(1)The
recognition of Adjusted EBITDA by a region on an intersegment shipment could occur in a period prior to the recognition of Adjusted EBITDA on a consolidated basis, depending on the timing of when the inventory is sold to the third-party customer. The "Eliminations and Other" column adjusts regional Adjusted EBITDA for intersegment shipments that occur in a period prior to recognition of Adjusted EBITDA on a consolidated basis. The "Eliminations and Other" column also reflects adjustments for changes in regional volume, conversion premium and product mix, and conversion costs related to intersegment shipments for consolidation. "Eliminations and Other" must adjust for proportional consolidation of each line item for our Logan affiliate because we consolidate 100% of the Logan joint venture for U.S. GAAP, but we manage our Logan affiliate on a proportionately consolidated basis.
(2)Conversion
premium and product mix in Europe includes a $20 million customer contractual obligation benefit recognized during the three months ended September 30, 2022.
(3)Selling, general & administrative and research & development costs include costs incurred directly by each segment and all corporate related costs.
North America
Net sales increased $287 million, or 17%, primarily driven by higher average aluminum prices, higher automotive shipments as the semiconductor shortages impacting the automotive industry for more than the past year begin to ease, and slightly higher can shipments on resilient local demand, partially offset by lower specialty shipments, mainly in building and construction and light gauge products due to
unplanned downtime at some of our facilities. Adjusted EBITDA was $191 million, a decrease of 16%, primarily driven by higher operating costs due to inflation, geopolitical instability, global supply chain disruptions, and less favorable metal benefit. In addition, SG&A and Other increased versus the comparable prior year period mainly due to an increase in factoring expense resulting from higher interest rates, as well as higher employment cost. These unfavorable factors were partially offset by higher volume, favorable product mix due to higher automotive shipments and higher product prices.
Europe
Net sales increased $226 million, or 21%, primarily driven by higher average aluminum prices, higher automotive shipments as semiconductor challenges ease, and higher aerospace shipments as some recovery in air travel continues to improve demand for aerospace plate and sheet. This
was partially offset by lower specialty shipments, mainly thick gauge sheet, which saw strong demand recovery in the comparable prior year period as the impact of the COVID-19 pandemic started to ease. Adjusted EBITDA was $73 million, a decrease of 6%, primarily driven by unfavorable foreign exchange translation, higher energy and other operating costs due to inflation, geopolitical instability, and global supply chain disruptions. These factors were partially offset by higher volume, higher product prices and favorable product mix due to higher automotive and aerospace shipments. The current period also includes a $20 million customer contractual obligation benefit.
Asia
Net sales increased $121 million, or 17%, primarily driven by higher average aluminum prices, higher can shipments on strong local and North America export demand and higher production compared to the prior year
period which was impacted by a labor strike, and slightly higher aerospace shipments as some recovery in air travel improves demand for aerospace plate and sheet. Partially offsetting this was lower specialty shipments due to portfolio optimization in a capacity constrained system. Adjusted EBITDA was $113 million, an increase of 23%, primarily driven by higher volume, higher product prices, and favorable metal benefit, partially offset by higher energy and other operating costs due to inflation, geopolitical instability, and global supply chain disruptions.
45
South America
Net sales increased $156 million, or 26%, primarily driven by higher average aluminum prices and higher can shipments across the Americas. Adjusted EBITDA
was $127 million, a decrease of 18%, primarily driven by operating costs due to inflation, geopolitical instability, and global supply chain disruptions, as well as higher SG&A due to an increase in factoring expense resulting from higher interest rates, less favorable metal benefit, and unfavorable foreign exchange, partially offset by higher products prices.
Net sales were $9.9 billion for the six months ended September 30, 2022, an increase of 24% from the comparable prior year period, primarily driven by higher average
aluminum prices. Total shipments were in line with the comparable prior year period.
Income from continuing operations before income tax provision was $643 million for the six months ended September 30, 2022, compared to $729 million in the comparable prior year period. In addition to the factors noted above, the following items affected income from continuing operations before income tax provision.
Cost of Goods Sold (Exclusive of Depreciation and Amortization)
Cost of goods sold (exclusive of depreciation and amortization) was $8.4 billion for the six months ended September 30, 2022, an increase of 29% from the comparable prior year period, driven primarily by higher average aluminum prices and cost inflation. Total metal input costs
included in cost of goods sold (exclusive of depreciation and amortization) increased $1.6 billion over the comparable prior year period.
Selling, General and Administrative Expenses
SG&A was $345 million for the six months ended September 30, 2022, compared to $301 million for the six months ended September 30, 2021. The increase is mainly due to higher factoring expense resulting from higher interest rates, as well as higher travel expense due to loosened travel restrictions.
Depreciation and Amortization
Depreciation and amortization was $272 million for the six months ended September 30, 2022, compared to $268 million for the six months
ended September 30, 2021.
Interest Expense and Amortization of Debt Issuance Costs
Interest expense and amortization of debt issuance costs was $123 million and $119 million for the six months ended September 30, 2022, and 2021, respectively. This increase is primarily due to higher average interest rates on variable interest rate borrowings.
Loss on Extinguishment of Debt, Net
We recorded $62 million in loss on extinguishment of debt, net for the six months ended September 30, 2021. This primarily relates to the write-off of unamortized debt issuance costs and a $51 million cash payment of a redemption
premium for the redemption of our 5.875% Senior Notes, due September 2026. We did not incur similar charges in the current period.
Restructuring and Impairment Expenses, Net
Restructuring and impairment expenses (reversals), net was a net expense of $2 million and a net reversal of expense of $2 million for the six months ended September 30, 2022, and 2021, respectively.
Other (Income) Expenses, Net
Other expenses (income), net was an expense of $60 million and income of $84 million for the six months ended September 30, 2022, and 2021, respectively. This change primarily relates to a gain in the
comparable prior year period of $76 million on a Brazilian tax litigation related to favorable decisions that did not recur in the current period, as well as higher losses on the change in fair value of derivative instruments, net, in the current period.
Taxes
We recognized $152 million of income tax provision for the six months ended September 30, 2022, which resulted in an effective tax rate of 24%. This rate was primarily driven by the full year forecasted effective tax rate that takes into account income taxed at rates that differ from the 25% Canadian rate, including withholding taxes, the Brazilian real foreign exchange rate, the change in valuation allowance, and the availability of tax credits, offset by the US base erosion and anti-abuse tax and the Korea accumulated earnings tax. We recognized $187 million of income tax
provision in the prior comparable period which resulted in an effective tax rate of 26%.
(1)The
recognition of Adjusted EBITDA by a region on an intersegment shipment could occur in a period prior to the recognition of Adjusted EBITDA on a consolidated basis, depending on the timing of when the inventory is sold to the third-party customer. The "Eliminations and Other" column adjusts regional Adjusted EBITDA for intersegment shipments that occur in a period prior to recognition of Adjusted EBITDA on a consolidated basis. The "Eliminations and Other" column also reflects adjustments for changes in regional volume, conversion premium and product mix, and conversion costs related to intersegment shipments for consolidation. "Eliminations and Other" must adjust for proportional consolidation of each line item for our Logan affiliate because we consolidate 100% of the Logan joint venture for U.S. GAAP, but we manage our Logan affiliate on a proportionately consolidated basis.
(2)Conversion
premium and product mix in Europe includes a $20 million customer contractual obligation benefit recognized during the six months ended September 30, 2022.
(3)Selling, general & administrative and research & development costs include costs incurred directly by each segment and all corporate related costs.
North America
Net sales increased $927 million, or 30%, driven by higher average aluminum prices, as well as higher automotive shipments as semiconductor shortages that impacted the automotive industry in the prior year ease, and higher can shipments. Adjusted EBITDA was $418 million, an increase of 5%, primarily driven by higher volume, favorable product mix, and higher product prices partially offset by higher operating costs due to inflation, geopolitical
instability, global supply chain disruptions, and less favorable metal benefit. In addition, SG&A and Other increased versus the comparable prior year period mainly due to an increase in factoring expense resulting from higher interest rates, higher employment cost, and the resumption of travel due to loosened travel restrictions.
Europe
Net sales increased $500 million, or 23%, driven by higher average aluminum prices and higher automotive and aerospace shipments as semiconductor challenges ease and air travel demand recovers, partially offset by lower specialty shipments, mainly thick gauge sheet which saw strong demand recovery in the prior year as the impact of the COVID-19 pandemic started to ease. Adjusted EBITDA was $157 million, a decrease of 13%, primarily driven by unfavorable foreign exchange rates, higher energy and other operating costs due to inflation, geopolitical
instability, and global supply chain disruptions, partially offset by favorable product mix on improving automotive and aerospace shipments, higher product prices, and a $20 million customer contractual obligation benefit in the current period.
Asia
Net sales increased $307 million, or 22%, driven primarily by higher average aluminum prices, higher can shipments on strong local and export demand, and higher aerospace shipments as some recovery in air travel improves demand for aerospace plate and sheet, partially offset by lower specialty shipments due to portfolio optimization in a capacity constrained system and lower automotive shipments impacted by COVID-19 pandemic-related lockdowns in China early in the current fiscal year. Adjusted EBITDA was $207 million, an increase of 15%, primarily due to higher volume, higher product prices and favorable metal benefit, partially offset
by higher energy and other operating costs due to inflation, geopolitical instability, and global supply chain disruptions.
South America
Net sales increased $406 million, or 35%, driven by higher average aluminum prices and higher can shipments across the Americas due to strong demand. Adjusted EBITDA was $283 million, a decrease of 18%, primarily due to $47 million in prior year gains from the principal amount net of litigation expenses from favorable outcomes of Brazil tax litigation that did not
48
recur in the current period, as well as higher energy and other operating costs due to inflation, geopolitical instability, and global supply chain disruptions as well as higher SG&A
due to an increase in factoring expense resulting from higher interest rates. These factors were partially offset by higher volume, higher product prices, favorable metal benefit, and favorable foreign exchange rates.
LIQUIDITY AND CAPITAL RESOURCES
We believe we maintain adequate liquidity levels through a combination of cash and availability under committed credit facilities. Our cash and cash equivalents and availability under committed credit facilities aggregated to $2.8 billion of liquidity as of September 30, 2022. Our primary liquidity sources are cash flows from operations, working capital management, cash, and liquidity under our debt agreements. Our recent business investments are being funded through
cash flows generated by our operations and a combination of local financing and our senior secured credit facilities. We expect to be able to fund both our short- and long-term liquidity needs, such as our continued expansions, servicing our debt obligations, and providing sufficient liquidity to operate our business, through one or more of the following: the generation of operating cash flows, working capital management, our existing debt facilities (including refinancing), and new debt issuances, as necessary.
The increase in total available liquidity primarily relates to the increase in availability under our ABL Revolver facility, offset by additional borrowings this fiscal year from the same facility. In August 2022, we amended the ABL Revolver facility to, among other things, increase availability by $500 million to $2 billion. See Note 6 – Debt for more details about our availability under committed credit facilities.
Cash and cash equivalents includes
cash held in foreign countries in which we operate. As of September 30, 2022, we held $4 million of cash and cash equivalents in Canada, in which we are incorporated, with the rest held in other countries in which we operate. As of September 30, 2022, we held $601 million of cash in jurisdictions for which we have asserted that earnings are permanently reinvested, and we plan to continue to fund operations and local expansions with cash held in those jurisdictions. Cash held outside of Canada is free from significant restrictions that would prevent the cash from being accessed to meet the Company's liquidity needs, including, if necessary, to fund operations and service debt obligations in Canada. Upon the repatriation of any earnings to Canada, in the form of dividends or otherwise,
we could be subject to Canadian income taxes (subject to adjustment for foreign taxes paid and the utilization of the large cumulative net operating losses we have in Canada) and withholding taxes payable to the various foreign jurisdictions. As of September 30, 2022, we do not believe adverse tax consequences exist that restrict our use of cash and cash equivalents in a material manner.
Obligations
Our material cash requirements include future contractual and other obligations arising in the normal course of business. These obligations primarily include debt and related interest payments, finance and operating lease obligations, postretirement benefit plan obligations, and purchase obligations. See Note 6 – Debt
to our accompanying condensed consolidated financial statements and "Liquidity and Capital Resources" within Part II. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in our 2022 Form 10-K for more details.
There are no additional material off-balance sheet arrangements.
The following table displays the Adjusted Free Cash Flow, the change between
periods, as well as the ending balances of cash and cash equivalents.
Six Months Ended September 30,
in millions
2022
2021
Change
Net
cash provided by operating activities – continuing operations
$
196
$
339
$
(143)
Net cash used in investing activities – continuing operations
(290)
(181)
(109)
Plus:
Cash used in the acquisition of business and other investments, net of cash acquired
4
—
4
Adjusted Free Cash Flow from continuing operations
(90)
158
(248)
Net
cash used in operating activities – discontinued operations
(6)
(5)
(1)
Adjusted Free Cash Flow
$
(96)
$
153
$
(249)
Ending
cash and cash equivalents
$
1,145
$
659
$
486
Cash Flow Summary
Six
Months Ended September 30,
in millions
2022
2021
Change
Net cash provided by operating activities
$
190
$
334
$
(144)
Net cash
used in investing activities
(290)
(181)
(109)
Net cash provided by (used in) financing activities
230
(513)
743
Operating Activities
The decrease in net cash provided by operating activities primarily relates to less favorable metal price
lag and lower Adjusted EBITDA, partially offset by changes in working capital.
Investing Activities
Net cash used in investing activities was primarily attributable to capital expenditures of $284 million and outflows from investment in and advances to non-consolidated affiliates, net during the six months ended September 30, 2022.
Financing Activities
There were no proceeds from the issuance of long-term and short-term borrowings during the six months ended September 30, 2022. The following represents proceeds from the issuance of long-term and short-term borrowings during the six months ended September 30, 2021.
Proceeds
from issuance of long-term and short-term borrowings
$
1,520
_________________________
(1)The proceeds from the issuance of the 3.25% Senior Notes, due November 2026 and the 3.875% Senior Notes, due August 2031 were used to redeem the $1.5 billion principal amount outstanding on the 5.875% Senior Notes, due September 2026.
50
The
following represents principal payments of long-term and short-term borrowings during the six months ended September 30, 2022, and 2021.
Principal payments of long-term and short-term borrowings
$
(1,923)
________________________
(1)This
represents the $1.5 billion principal on the 5.875% Senior Notes, due September 2026 that was redeemed during the period through the issuance of the 3.25% Senior Notes, due November 2026 and the 3.875% Senior Notes, due August 2031. An additional $51 million payment was made using cash on hand for the resulting redemption premium.
The following represents inflows (outflows) from revolving credit facilities and other, net during the six months ended September 30, 2022, and 2021.
In
addition to the activities shown in the tables above, we paid debt issuance costs of $6 million and $24 million during the six months ended September 30, 2022, and 2021, respectively. We also paid returns of capital to our common shareholder in the amount of $100 million during each of the six-month periods ended September 30, 2022, and 2021.
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Non-Guarantor Information
As of September 30, 2022, the Company's
subsidiaries that are not guarantors represented the following approximate percentages of (a) net sales (including intercompany sales), (b) Adjusted EBITDA, and (c) total assets of the Company, on a consolidated basis (including intercompany balances).
In
addition, for the six months ended September 30, 2022, and 2021, the Company's subsidiaries that are not guarantors had net sales (including intercompany sales) of $2.3 billion and $1.8 billion, respectively, and as of September 30, 2022, those subsidiaries had assets of $3.1 billion and debt and other liabilities of $1.8 billion (including intercompany balances).
CAPITAL ALLOCATION FRAMEWORK
In
May 2021, Novelis announced a capital allocation framework that laid out the general guidelines for use of post-maintenance capital expenditure Adjusted Free Cash Flow for the next five years. The priority at that time was to reduce long-term debt by $2.6 billion from its recent peak in the first quarter of fiscal 2021 after the Aleris acquisition and to target a net leverage ratio of approximately 2.5x. Having achieved both targets by the end of fiscal 2022, the priority has now shifted to organic growth capital expenditures, estimated to be more than $4.5 billion over the next five years, while maintaining a medium-term net leverage ratio below 2.5x and continuing to guide approximately 8%-10% of post-maintenance capital expenditure Adjusted Free Cash Flow to be returned to our common shareholder. Payments to our common shareholder are at the discretion of our board of directors. Any such payments depend on, among other things, our financial resources, cash flows generated
by our business, our cash requirements, restrictions under the instruments governing our indebtedness, being in compliance with the appropriate indentures and covenants under the instruments that govern our indebtedness, and other relevant factors.
We paid returns of capital to our common shareholder in the amount of $100 million during each of the second quarters of fiscal 2023 and 2022. Past payment of returns of capital should not be construed as a guarantee of future returns of capital in the same amounts or at all.
See Note 1 – Business and Summary of Significant Accounting Policies to our accompanying condensed consolidated financial statements for a full description of recent accounting pronouncements, if applicable, including the respective expected dates of adoption and expected effects on
results of operations and financial condition.
NON-GAAP FINANCIAL MEASURES
Total Adjusted EBITDA presents the sum of the results of our four operating segments on a consolidated basis. We believe that total Adjusted EBITDA is an operating performance measure that measures operating results unaffected by differences in capital structures, capital investment cycles, and ages of related assets among otherwise comparable companies. In reviewing our corporate operating results, we also believe it is important to review the aggregate consolidated performance of all of our segments on the same basis we review the performance of each of our regions and draw comparisons between periods based on the same measure of consolidated performance.
Management
believes investors' understanding of our performance is enhanced by including this non-GAAP financial measure as a reasonable basis for comparing our ongoing results of operations. Many investors are interested in understanding the performance of our business by comparing our results from ongoing operations from one period to the next and would ordinarily add back items that are not part of normal day-to-day operations of our business. By providing total Adjusted EBITDA, together with reconciliations, we believe we are enhancing investors' understanding of our business and our results of operations, as well as assisting investors in evaluating how well we are executing strategic initiatives.
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However, total Adjusted EBITDA is not a measurement of financial performance under
U.S. GAAP, and our total Adjusted EBITDA may not be comparable to similarly titled measures of other companies. Total Adjusted EBITDA has important limitations as an analytical tool and should not be considered in isolation or as a substitute for analysis of our results as reported under U.S. GAAP. For example, total Adjusted EBITDA:
•does not reflect the Company's cash expenditures or requirements for capital expenditures or capital commitments;
•does not reflect changes in, or cash requirements for, the Company's working capital needs; and
•does not reflect any costs related to the current or
future replacement of assets being depreciated or amortized.
We also use total Adjusted EBITDA:
•as a measure of operating performance to assist us in comparing our operating performance on a consistent basis because it removes the impact of items not directly resulting from our core operations;
•for planning purposes, including the preparation of our internal annual operating budgets and financial projections;
•to evaluate the performance and effectiveness of our operational strategies; and
•as a basis to calculate incentive compensation payments for our key employees.
Adjusted EBITDA per tonne is calculated
by dividing Adjusted EBITDA by aluminum rolled product shipments (in tonnes) for the corresponding period, both on a consolidated basis and at a segment level. The term "aluminum rolled products" is synonymous with the terms "flat-rolled products" and "FRP," which are commonly used by manufacturers and third-party analysts in our industry. Shipment amounts also include tolling shipments. All tonnages are stated in metric tonnes. One metric tonne is equivalent to 2,204.6 pounds. One kt is 1,000 metric tonnes.
Management believes Adjusted EBITDA per tonne is relevant to investors as it provides a measure of aluminum rolled product shipments to third parties rather than aluminum rolled product shipments as well as certain other non-rolled product shipments, primarily scrap, UBCs, ingots, billets, and primary remelt. This is useful to investors because the incremental impact of non-rolled products shipments
on our Adjusted EBITDA is marginal since the price of these products is generally set to cover the costs of raw materials not utilized in manufacturing products sold to beverage packaging customers, specialties and aerospace customers in our regions, and these non-rolled products are not part of our core operating business.
Please see Note 16 – Segment, Geographical Area, Major Customer and Major Supplier Information for our definition of Adjusted EBITDA. Under ASC 280, Adjusted EBITDA is our measure of segment profitability and financial performance of our operating segments, and when used in this context, the term Adjusted EBITDA is a financial measure prepared in accordance with U.S. GAAP. Adjusted EBITDA reported for the
Company on a consolidated basis is a non-U.S. GAAP financial measure. Prior to the three months ended June 30, 2022, we also utilized the term Segment Income to refer to Adjusted EBITDA. Both terms have the same definition and there is no difference in the composition or calculation of Adjusted EBITDA for the periods presented and Segment Income previously reported.
Adjusted Free Cash Flow consists of (a) net cash provided by (used in) operating activities – continuing operations, (b) plus net cash provided by (used in) investing activities – continuing operations, (c) plus net cash provided by (used in) operating activities – discontinued operations, (d) plus net cash provided by (used in) investing activities – discontinued operations, (e) plus cash used in the acquisition of assets under a finance lease, (f) plus cash used in the acquisition of business and other investments,
net of cash acquired, (g) plus accrued merger consideration, (h) less proceeds from sales of assets and business, net of transaction fees, cash income taxes and hedging, and (i) less proceeds from sales of assets and business, net of transaction fees, cash income taxes and hedging – discontinued operations. Management believes Adjusted 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, Adjusted Free Cash Flow does not necessarily represent cash available for discretionary activities as certain debt service obligations must be funded out of Adjusted Free Cash Flow. Our method of calculating Adjusted Free Cash Flow may not be consistent with that of other companies.
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SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS AND MARKET DATA
This Quarterly Report on Form 10-Q contains forward-looking statements that are based on current expectations, estimates, forecasts and projections about the industry in which we operate, and beliefs and assumptions made by our management. Such statements include, in particular, statements about our plans, strategies, and prospects under the heading "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations," under the Notes to the Condensed Consolidated Financial Statements, and elsewhere in this Quarterly Report. Words such as "believes,""expects,""anticipates,""plans,""estimates,""projects,""forecasts,""intends," and variations of such words and similar expressions are intended to identify such forward-looking statements. Examples of forward-looking statements
in this Quarterly Report on Form 10-Q include, but are not limited to, our belief that, as a result of the Aleris acquisition, we can more efficiently serve the automotive market and unlock synergies; the expected timing and results from investments in certain operating facilities, including our recently announced greenfield, fully-integrated rolling and recycling mill to be built in Bay Minette, Alabama; our projections regarding financial performance, liquidity, capital expenditures, and investments; the possible future impacts of the ongoing COVID-19 pandemic and the actions taken against it, including expectations about the impact of any changes in demand as well as volatility and uncertainty in general economic conditions; the possible future impacts of geopolitical instability due in part to Russia's invasion of Ukraine; statements about our belief that long-term demand for aluminum automotive sheet will continue to grow; statements about our expectation that aerospace
demand and shipments will improve toward pre-COVID levels by the end of fiscal 2023; statements about our belief that significant aircraft industry order backlogs for key OEMS, including Airbus and Boeing, will translate into growth in the future and that our multi-year supply agreements have positioned us to benefit from future expected demand; statements about our belief that long term demand for flat-rolled aluminum remains strong; and statements about our expectation that long-term demand for building and construction and other specialty products will grow. These statements are based on beliefs and assumptions of Novelis' management, which in turn are based on currently available information. These statements are not guarantees of future performance and involve assumptions and risks and uncertainties that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed, implied, or forecasted in such forward-looking statements.
We do not intend, and we disclaim any obligation, to update any forward-looking statements, whether as a result of new information, future events, or otherwise.
Factors that could cause actual results or outcomes to differ from the results expressed or implied by forward-looking statements include, among other things: changes in the prices and availability of aluminum (or premiums associated with such prices) or other materials and raw materials we use; inflationary pressures impacting the price of energy, labor, freight, coatings, and alloys, such as magnesium; the capacity and effectiveness of our hedging activities; inflationary pressures affecting end market demand for our aluminum products in the building and construction market; relationships with, and financial and operating conditions of, our customers, suppliers, and other stakeholders; fluctuations in the supply of, and prices for, energy in the areas in which we
maintain production facilities; our ability to access financing including in connection with potential acquisitions and investments; continued risks stemming from the Aleris acquisition, including uncertainties inherent in the acquisition method of accounting; disruption to our global aluminum production and supply chain as a result of COVID-19, rising interest rates, or geopolitical factors, such as Russia's war in Ukraine; changes in the relative values of various currencies and the effectiveness of our currency hedging activities; decrease in demand for our aluminum products due to macroeconomic headwinds due in part to rising interest rates and geopolitical factors, such as Russia's war in Ukraine; risks related to sanctions, tariffs, a ban or similar actions impacting the supply of Russian aluminum and the global aluminum supply; factors affecting our operations, such as litigation, environmental remediation and clean-up costs, breakdown of equipment, and other
events; economic, regulatory, and political factors within the countries in which we operate or sell our products, including changes in duties or tariffs; risks related to cybersecurity and data breaches; our potential inability to protect our intellectual property and the confidentiality of our know-how, trade secrets, technology, and other proprietary information; competition from other aluminum rolled products producers as well as from substitute materials such as steel, glass, plastic, and composite materials; downturns in consumer demand for our products or changes in consumer preferences as it relates to our products; the impact of the global semiconductor shortage on automotive production and demand for automotive aluminum sheet; changes in general economic conditions, including deterioration in the global economy; the risks of pandemics or other public health emergencies, including the continued spread and impact of, and the governmental and third-party response
to, the COVID-19 pandemic; the impact of climate change or the legal, regulatory, or market response to climate change; changes in government regulations, particularly those affecting taxes, derivative instruments, and environmental, health, or safety compliance; risks that production levels and margins of our recent capital expenditures do not grow in line with our current expectations and that we may not realize returns commensurate with our investments; changes in interest rates that have the effect of increasing the amounts we pay under our credit facilities and other financing agreements; and our ability to generate cash. The above list of factors is not exhaustive.
This document also contains information concerning our markets and products generally, which is forward-looking in nature and is based on a variety of assumptions regarding the ways in which these markets and product categories will develop. These assumptions
have been derived from information currently available to us and to the third-party industry analysts quoted herein. This information includes, but is not limited to, product shipments and share of production. Actual market results may differ
54
from those predicted. We do not know what impact any of these differences may have on our business, our results of operations, financial condition, and cash flow. For a discussion of some of the specific factors that may cause Novelis' actual results or outcomes to differ materially from those projected in any forward-looking statements, refer to our 2022 Form 10-K and see the following sections of the report: Part I. Item 1A. Risk Factors and Part II. Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
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Item 3.Quantitative and Qualitative Disclosures About Market Risk.
We are exposed to certain market risks as part of our ongoing business operations, including risks from changes in metal prices (primarily aluminum, copper, zinc, and LMPs), energy prices (electricity, natural gas, and diesel fuel), foreign currency exchange rates, and interest rates that could impact our results of operations and financial condition. We partially manage our exposure to energy prices by entering into fixed forward purchase contracts
with energy providers, predominantly in Europe. We generally apply the normal purchase and normal sale scope exception to these contracts and do not record the contracts at fair value. These energy supply contracts are not derivatives but function as a risk management tool for fluctuating energy prices. We manage our exposure to other market risks through regular operating and financing activities and derivative financial instruments. We use derivative financial instruments as risk management tools only and not for speculative purposes.
Commodity Price Risks
Metal
The following
table presents the estimated potential negative effect on the fair values of these derivative instruments as of September 30, 2022, given a 10% change in prices. Direction of the change in price corresponds with the direction that would cause a negative impact on the fair value of these derivative instruments.
in millions
Change in Price
Change in Fair Value
Aluminum
10
%
$
(203)
Copper
(10)
(1)
Zinc
(10)
(1)
Energy
The
following table presents the estimated potential negative effect on the fair values of these derivative instruments as of September 30, 2022, given a 10% decline in prices for energy contracts.
in millions
Change in Price
Change in Fair Value
Natural gas
(10)
%
$
(5)
Diesel
fuel
(10)
(1)
Foreign Currency Exchange Risks
The following table presents the estimated potential negative effect on the fair values of these derivative instruments as of September 30, 2022, given a 10% change in rates. Direction of the change in exchange rate corresponds with the direction that would cause the change in exchange rate to negatively impact the fair value of these derivative instruments.
$
in millions
Change in Exchange Rate
Change in Fair Value
Currency measured against the U.S. dollar
Brazilian real
(10)
%
$
(27)
Euro
(10)
(37)
Korean
won
(10)
(77)
Canadian dollar
(10)
(3)
British pound
(10)
(26)
Swiss franc
(10)
(49)
Chinese
yuan
10
—
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Item 4.Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act
is recorded, processed, summarized, and reported within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, include controls and procedures designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including the Principal Executive Officer and the Principal Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Any system of controls, however well-designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system are met.
We have carried out an evaluation, with the participation of our Principal Executive Officer and Principal Financial Officer, of the effectiveness of the
Company's disclosure controls and procedures pursuant to Rule 13a-15 of the Exchange Act. Based upon such evaluation, management has concluded that the Company's disclosure controls and procedures were effective as of September 30, 2022.
Changes in Internal Control over Financial Reporting
During the second quarter of fiscal 2023, we implemented a new consolidation and reporting application, which required changes to certain processes, procedures, and controls in the Company’s internal control over financial reporting. We are updating and will continue to update our internal control over financial reporting, as necessary, to accommodate modifications to our
processes and procedures.
There have been no other changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II—OTHER INFORMATION
Item 1.Legal Proceedings.
We
are a party to litigation incidental to our business from time to time. While the outcomes of these matters are uncertain, management does not expect that the ultimate costs to resolve these matters will have a material adverse effect on our consolidated financial position, results of operations, or cash flows. For additional information regarding litigation to which we are a party, see Note 15 – Commitments and Contingencies to our accompanying condensed consolidated financial statements.
Item 1A.Risk Factors.
See Part I. Item 1A. Risk Factors in our 2022 Form 10-K. Except
as discussed below, there have been no material changes from the risk factors described in our 2022 Form 10-K.
We are currently operating in a period of economic uncertainty, capital markets disruption, and supply chain interruptions, which have been significantly impacted by geopolitical instability due to the ongoing military conflict between Russia and Ukraine. Our business may be materially adversely affected by any negative impact on the global economy, capital markets, or supply chain resulting from the conflict in Ukraine, any other geopolitical tensions, or otherwise.
On February 24, 2022, a full-scale military invasion of Ukraine by Russian troops began. Global markets are experiencing volatility and disruption following the escalation of geopolitical tensions and the start of the military conflict between Russia and Ukraine.
Although the length and impact of the ongoing military conflict is unpredictable, the conflict in Ukraine could lead to market disruptions, including significant volatility in commodity prices, credit and capital markets, as well as supply chain interruptions, shipping and trade route restrictions, inflationary pressures on raw materials, rising interest rates, and lack of availability of energy. The conflict in Ukraine has led to sanctions and other penalties being levied by the United States, the European Union (the "EU"), and other countries against Russia. Additional potential sanctions, penalties, tariffs and bans have also been proposed and/or threatened. Russian military actions and the resulting sanctions could adversely affect the global economy, national economies in which we operate and financial markets and lead to instability and lack of liquidity in capital markets, potentially making it more difficult for us to obtain additional funds, as well as
further disrupting the supply chain. One of our suppliers of metal is Rusal, a Russian aluminum company. Although we source metal from a diverse global portfolio of metal suppliers and are not dependent on Rusal for a significant portion of our metal supply, sanctions, tariffs, a ban or similar actions impacting Rusal or the supply of Russian aluminum could disrupt global aluminum supply. Any of the foregoing factors could have a material adverse effect on our business, prospects, financial condition, results of operations, and cash flows. The extent and duration of the military action, sanctions, and resulting market and/or supply disruptions are impossible to predict but could be substantial. Any such disruptions may also magnify the impact of other risks described herein.
Our board of directors oversees the management of risks related to the Russia-Ukraine conflict. Our Enterprise Risk Management team monitors developments
and potential impacts of the conflict and reports them to the Audit Committee of our board at least quarterly. Despite this monitoring process, there can be no assurance that the conflict will not have a material adverse effect on our business, including as it relates to the risks outlined above, as well as potential impacts on our relationship with Russian-based suppliers, potential impacts on the reliability of energy supplies to our European manufacturing sites, and potential supply chain disruptions related to the conflict.
Cover
Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
