|
| | | | | | | | | | | | | | | | | | | | | | | |
March 31, 2017 | North America | | Europe | | Asia | | South America | | Eliminations and Other | | Total |
Investment in and advances to non–consolidated affiliates | $ | — |
| | $ | 451 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 451 |
|
Total assets | $ | 2,359 |
| | $ | 2,683 |
| | $ | 1,602 |
| | $ | 1,637 |
| | $ | 93 |
| | $ | 8,374 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
Selected Operating Results Three Months Ended December 31, 2017 | North America | | Europe | | Asia | | South America | | Eliminations and Other | | Total |
Net sales-third party | $ | 985 |
| | $ | 820 |
| | $ | 533 |
| | $ | 542 |
| | $ | 205 |
| | $ | 3,085 |
|
Net sales-intersegment | 1 |
| | 17 |
| | 14 |
| | 25 |
| | (57 | ) | | — |
|
Net sales | $ | 986 |
| | $ | 837 |
| | $ | 547 |
| | $ | 567 |
| | $ | 148 |
| | $ | 3,085 |
|
| | | | | | | | | | | |
Depreciation and amortization | $ | 37 |
| | $ | 29 |
| | $ | 18 |
| | $ | 16 |
| | $ | (14 | ) | | $ | 86 |
|
Income tax (benefit) provision | $ | (11 | ) | | $ | (6 | ) | | $ | 9 |
| | $ | 18 |
| | $ | 10 |
| | $ | 20 |
|
Capital expenditures | $ | 19 |
| | $ | 19 |
| | $ | 7 |
| | $ | 10 |
| | $ | (1 | ) | | $ | 54 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
Selected Operating Results Three Months Ended December 31, 2016 | North America | | Europe | | Asia | | South America | | Eliminations and Other | | Total |
Net sales-third party | $ | 789 |
| | $ | 684 |
| | $ | 409 |
| | $ | 386 |
| | $ | 45 |
| | $ | 2,313 |
|
Net sales-intersegment | — |
| | 9 |
| | 3 |
| | 13 |
| | (25 | ) | | — |
|
Net sales | $ | 789 |
| | $ | 693 |
| | $ | 412 |
| | $ | 399 |
| | $ | 20 |
| | $ | 2,313 |
|
| | | | | | | | | | | |
Depreciation and amortization | $ | 38 |
| | $ | 25 |
| | $ | 14 |
| | $ | 15 |
| | $ | (4 | ) | | $ | 88 |
|
Income tax provision | $ | 8 |
| | $ | 8 |
| | $ | 3 |
| | $ | 19 |
| | $ | 9 |
| | $ | 47 |
|
Capital expenditures | $ | 20 |
| | $ | 16 |
| | $ | 10 |
| | $ | 9 |
| | $ | (7 | ) | | $ | 48 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
Selected Operating Results Nine Months Ended December 31, 2017 | North America | | Europe | | Asia | | South America | | Eliminations and Other | | Total |
Net sales - third party | $ | 2,878 |
| | $ | 2,480 |
| | $ | 1,533 |
| | $ | 1,348 |
| | $ | 309 |
| | $ | 8,548 |
|
Net sales - intersegment | 17 |
| | 39 |
| | 32 |
| | 62 |
| | (150 | ) | | — |
|
Net sales | $ | 2,895 |
| | $ | 2,519 |
| | $ | 1,565 |
| | $ | 1,410 |
| | $ | 159 |
| | $ | 8,548 |
|
| | | | | | | | | | | |
Depreciation and amortization | $ | 112 |
| | $ | 83 |
| | $ | 47 |
| | $ | 48 |
| | $ | (23 | ) | | $ | 267 |
|
Income tax provision | $ | 10 |
| | $ | 5 |
| | $ | 98 |
| | $ | 54 |
| | $ | 12 |
| | $ | 179 |
|
Capital expenditures | $ | 52 |
| | $ | 40 |
| | $ | 19 |
| | $ | 22 |
| | $ | 3 |
| | $ | 136 |
|
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - (Continued)
|
| | | | | | | | | | | | | | | | | | | | | | | |
Selected Operating Results Nine Months Ended December 31, 2016 | North America | | Europe | | Asia | | South America | | Eliminations and Other | | Total |
Net sales - third party | $ | 2,305 |
| | $ | 2,158 |
| | $ | 1,305 |
| | $ | 1,044 |
| | $ | 158 |
| | $ | 6,970 |
|
Net sales - intersegment | 2 |
| | 31 |
| | 9 |
| | 46 |
| | (88 | ) | | — |
|
Net sales | $ | 2,307 |
| | $ | 2,189 |
| | $ | 1,314 |
| | $ | 1,090 |
| | $ | 70 |
| | $ | 6,970 |
|
| | | | | | | | | | | |
Depreciation and amortization | $ | 112 |
| | $ | 79 |
| | $ | 44 |
| | $ | 46 |
| | $ | (14 | ) | | $ | 267 |
|
Income tax provision | $ | 2 |
| | $ | 11 |
| | $ | 16 |
| | $ | 58 |
| | $ | 23 |
| | $ | 110 |
|
Capital expenditures | $ | 47 |
| | $ | 49 |
| | $ | 24 |
| | $ | 28 |
| | $ | (10 | ) | | $ | 138 |
|
The table below reconciles “Netdisplays the reconciliation from net income (loss) attributable to our common shareholder” to segment income from reportable segments for the three and nine months ended December 31, 2017 and 2016 (in millions).Adjusted EBITDA.
|
| | | | | | | | | | | | | | | |
| Three Months Ended December 31, 2017 | | Nine Months Ended December 31, 2017 |
| 2017 | | 2016 | | 2017 | | 2016 |
Net income (loss) attributable to our common shareholder | $ | 121 |
| | $ | 63 |
| | $ | 529 |
| | $ | (2 | ) |
Noncontrolling interests | (16 | ) | | 1 |
| | (16 | ) | | 1 |
|
Income tax provision | 20 |
| | 47 |
| | 179 |
| | 110 |
|
Depreciation and amortization | 86 |
| | 88 |
| | 267 |
| | 267 |
|
Interest expense and amortization of debt issuance costs | 64 |
| | 67 |
| | 192 |
| | 231 |
|
Adjustment to reconcile proportional consolidation | 17 |
| | 4 |
| | 33 |
| | 20 |
|
Unrealized gains on change in fair value of derivative instruments, net | (15 | ) | | (21 | ) | | (13 | ) | | (18 | ) |
Realized losses (gains) on derivative instruments not included in segment income | 1 |
| | (1 | ) | | — |
| | (2 | ) |
Gain on assets held for sale | — |
| | — |
| | — |
| | (2 | ) |
Loss on extinguishment of debt | — |
| | — |
| | — |
| | 112 |
|
Restructuring and impairment, net | 25 |
| | 1 |
| | 33 |
| | 4 |
|
Losses (gains) on sale of fixed assets | 2 |
| | (2 | ) | | 4 |
| | 4 |
|
(Gain) loss on sale of a business (A) | — |
| | — |
| | (318 | ) | | 27 |
|
Metal price lag (B) | (1 | ) | | 4 |
| | 5 |
| | 32 |
|
Other, net | 1 |
| | 4 |
| | 1 |
| | 10 |
|
Total of reportable segments | $ | 305 |
| | $ | 255 |
| | $ | 896 |
| | $ | 794 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Six Months Ended September 30, |
in millions | 2022 | | 2021 | | 2022 | | 2021 |
Net income attributable to our common shareholder | $ | 183 | | | $ | 237 | | | $ | 490 | | | $ | 477 | |
Net loss attributable to noncontrolling interests | — | | | — | | | (1) | | | — | |
Income tax provision | 65 | | | 79 | | | 152 | | | 187 | |
Loss from discontinued operations, net of tax | 1 | | | 2 | | | 2 | | | 65 | |
| | | | | | | |
Income from continuing operations before income tax provision | 249 | | | 318 | | | 643 | | | 729 | |
Depreciation and amortization | 134 | | | 134 | | | 272 | | | 268 | |
Interest expense and amortization of debt issuance costs | 65 | | | 60 | | | 123 | | | 119 | |
Adjustment to reconcile proportional consolidation(1) | 13 | | | 15 | | | 27 | | | 29 | |
Unrealized losses (gains) on change in fair value of derivative instruments, net | 21 | | | 16 | | | (21) | | | 20 | |
Realized gains on derivative instruments not included in Adjusted EBITDA(2) | (1) | | | — | | | (2) | | | (1) | |
| | | | | | | |
| | | | | | | |
Loss on extinguishment of debt, net | — | | | 64 | | | — | | | 62 | |
Restructuring and impairment expenses (reversals), net | 1 | | | — | | | 2 | | | (2) | |
Loss on sale of assets, net | — | | | 2 | | | 1 | | | 2 | |
| | | | | | | |
Metal price lag | 24 | | | (59) | | | 21 | | | (113) | |
| | | | | | | |
Other, net(3) | — | | | 3 | | | 1 | | | (5) | |
Adjusted EBITDA | $ | 506 | | | $ | 553 | | | $ | 1,067 | | | $ | 1,108 | |
_________________________
| |
(A) | In September 2017, Novelis Korea Ltd., a subsidiary of Novelis Inc., sold a portion of its shares in Ulsan Aluminum, Ltd. (UAL) for $314 million, which resulted in a gain on sale of investments. For additional information related to the transaction, see Note 5 — Investment in and Advances to Non-Consolidated Affiliates and Related Party Transactions. |
| |
(B) | Effective in the first quarter of fiscal 2018, management removed the impact of metal price lag from Segment Income in order to enhance the visibility of the underlying operating performance of the Company. The impact of metal price lag is now reported as a separate line item in this reconciliation. This change does not impact our condensed consolidated financial statements. Segment Income for prior periods presented has been updated to reflect this change. For additional information related to metal price lag, see Note 10 — Financial Instruments and Commodity Contracts. |
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - (Continued)
“(1)Adjustment to reconcile proportional consolidation”consolidation relates to depreciation, amortization, and income taxes atof our Aluminium Norf GmbH (Alunorf) and Ulsan Aluminum, Ltd. (UAL) joint ventures.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 “Incomeincome tax provision.”
“(2)Realized losses (gains)gains on derivative instruments not included in segment income”Adjusted EBITDA represents realized gains (losses) on foreign currency derivatives relatedunrelated to capital expenditures.operations.
"Other, net" is related primarily to losses on certain indirect(3)For the six months ended September 30, 2021, other, net includes $29 million of interest income recognized as a result of Brazilian tax expenses in Brazillitigation settlements and interest income.income, partially offset by $18 million from the release of certain outstanding receivables.
The following table below displays income fromAdjusted EBITDA by reportable segments for the three months and nine months ended December 31, 2017 and 2016, respectively.segment.
| | | | | | | | | | | | | | | | | | Three Months Ended September 30, | | Six Months Ended September 30, |
| Three Months Ended December 31, 2017 | | Nine Months Ended December 31, 2017 | |
| 2017 |
| 2016 | | 2017 | | 2016 | |
in millions | | in millions | 2022 | | 2021 | | 2022 | | 2021 |
North America | $ | 111 |
|
| $ | 90 |
| | $ | 351 |
| | $ | 276 |
| North America | $ | 191 | | | $ | 227 | | | $ | 418 | | | $ | 399 | |
Europe | 50 |
|
| 44 |
| | 158 |
| | 150 |
| Europe | 73 | | | 78 | | | 157 | | | 180 | |
Asia | 43 |
|
| 40 |
| | 124 |
| | 132 |
| Asia | 113 | | | 92 | | | 207 | | | 180 | |
South America | 107 |
|
| 81 |
| | 269 |
| | 236 |
| South America | 127 | | | 154 | | | 283 | | | 347 | |
Intersegment eliminations | (6 | ) |
| — |
| | (6 | ) | | — |
| |
Total of reportable segments | $ | 305 |
|
| $ | 255 |
| | $ | 896 |
| | $ | 794 |
| |
Eliminations and Other | | Eliminations and Other | 2 | | | 2 | | | 2 | | | 2 | |
Adjusted EBITDA | | Adjusted EBITDA | $ | 506 | | | $ | 553 | | | $ | 1,067 | | | $ | 1,108 | |
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 | $ | 2,314 | | | $ | 2,112 | | | $ | 4,802 | | | $ | 4,052 | |
Automotive | 995 | | | 764 | | | 1,942 | | | 1,510 | |
Aerospace and industrial plate | 199 | | | 122 | | | 363 | | | 236 | |
Specialty | 1,291 | | | 1,121 | | | 2,781 | | | 2,176 | |
Net sales | $ | 4,799 | | | $ | 4,119 | | | $ | 9,888 | | | $ | 7,974 | |
Novelis Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Major Customers
The following table below showsdisplays customers representing 10% or more of our net sales tofor any of the Affiliates of Ball Corporation (Ball), Ford Motor Company (Ford), Crown Holdings Incorporated, formerly Crown Cork & Seal Company (Crown), our three largest customers, as aperiods presented and their respective percentage of total “Netnet sales.”
|
| | | | | | | | | | | |
| Three Months Ended December 31, | | Nine Months Ended December 31, |
| 2017 | | 2016 | | 2017 | | 2016 |
Ball (A) | 21 | % | | 26 | % | | 21 | % | | 27 | % |
Ford | 10 | % | | 11 | % | | 10 | % | | 10 | % |
Crown | 8 | % | | 10 | % | | 9 | % | | 10 | % |
_________________________
| |
(A) | In fiscal 2017, Ball completed the acquisition of Rexam and the divestiture of certain assets to the Ardagh Group (Ardagh). We combined the sales of Ball and Rexam for presentation purposes. For the three and nine months ended December 31, 2017, combined sales to Ball, Rexam, and Ardagh totaled 29% of "Net Sales". |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Six Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Ball | 15 | % | | 16 | % | | 16 | % | | 16 | % |
Primary Supplier
Rio Tinto (RT) is our primary supplier of metal inputs, including prime and sheet ingot. The table below shows our purchases from RTRio Tinto as a percentage of our total combined metal purchases.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Six Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Purchases from Rio Tinto as a percentage of total combined metal purchases | 7 | % | | 8 | % | | 7 | % | | 8 | % |
|
| | | | | | | | | | | |
| Three Months Ended December 31, | | Nine Months Ended December 31, |
| 2017 | | 2016 | | 2017 | | 2016 |
Purchases from RT as a percentage of total combined metal purchases | 9 | % | | 11 | % | | 10 | % | | 11 | % |
Item 2. Management’sManagement's Discussion and Analysis of Financial Condition and Results of OperationsOperations.
FORWARD-LOOKING STATEMENTS
The following information should be read together with our unaudited condensed consolidated financial statements and accompanying notes included elsewhere in this Quarterly ReportForm 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 “SPECIALSPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS AND MARKET DATA.”DATA. OVERVIEW AND REFERENCES
Novelis is the world's leading aluminum rolled products producer based on shipment volume in fiscal 2017. We produce aluminum sheet and light gauge products for use in the packaging market, which includes beverage and food can and foil products, as well as for use in the automotive, transportation, electronics, architectural and industrial product markets. We are also the world's largest recycler of aluminum and have recycling operations in many of our plants to recycle both post-consumer aluminum and post-industrial aluminum. As of December 31, 2017, we had manufacturing operations in ten countries on four continents, which include 24 operating plants, and recycling operations in eleven of these plants.
In this Quarterly Report on Form 10-Q, unless otherwise specified, the terms “we,” “our,” “us,” “Company,”"we," "our," "us," the "Company," and “Novelis”"Novelis" refer to Novelis Inc., a company incorporated in Canada under the Canadian Business Corporations Act, (CBCA) and its subsidiaries. References herein to “Hindalco”"Hindalco" refer to Hindalco Industries Limited, our indirect parent company, which acquired Novelis in May 2007,2007.
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 its indirect wholly-owned subsidiary, AV Metals Inc.,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 direct parent company.operating facilities to recycle post-consumer aluminum, such as UBCs, and post-industrial aluminum, such as class scrap.
As used in this Quarterly Report,Form 10-Q, consolidated “aluminum"aluminum rolled product shipments”shipments," "flat-rolled product shipments," or “flat rolled product shipments”"shipments" refers to aluminum rolled productsproduct shipments to third parties. Regional “aluminum"aluminum rolled product shipments”shipments," "flat-rolled product shipments," or “flat rolled product shipments”"shipments" refers to aluminum rolled productsproduct shipments to third parties and intersegment shipments to other Novelis regions. Shipment amounts also include tolling shipments. References to “total shipments”"total shipments" include aluminum rolled productsproduct shipments as well as certain other non-rolled product shipments, primarily scrap, used beverage cans (UBC), ingot,UBCs, ingots, billets, and primary remelt. The term “aluminum"aluminum rolled products”products" is synonymous with the terms “flat rolled products”"flat-rolled products" and “FRP”"FRP," which are commonly used by manufacturers and third partythird-party analysts in our industry. All tonnages are stated in metric tonnes. One metric tonne (mt) is equivalent to 2,204.6 pounds. One kilotonne (kt)kt is 1,000 metric tonnes.
References to our Form 10-K made throughout this document refer to our Annual Report on Form 10-K for the year ended March 31, 2017, filed with the United States Securities and Exchange Commission (SEC) on May 10, 2017.
HIGHLIGHTS
We reported "Net income attributable to our common shareholder" of $121 million in the three months ended December 31, 2017, compared with "Net income attributable to our common shareholder" of $63 million in the three months ended December 31, 2016. The increase is primarily due to strong can and automotive demand combined with a focus on driving asset efficiency, strong global operational performance and diligent operating cost management. As a result of this, net sales and shipments were up 33% and 6%, respectively, in the three months ended December 31, 2017 and the three months ended December 31, 2016. Additionally, our focus on optimizing our product portfolio continues to contribute to higher net income.
We achieved record "Segment income" of $305 million (an increase of 20%) for the third quarter of fiscal 2018 compared with "Segment income" of $255 million for the third quarter of fiscal 2017. The increase is primarily due to the factors noted above. Also, as a result of these factors, net cash provided by operating activities was $237 million for the nine months ended December 31, 2017, an improvement of $86 million from the prior comparable period.
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.
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 material substitutionprice 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 drive increasingbe 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 rolled
products. Global can sheet overcapacity,sustainability considerations, including increased competition from Chinese suppliers of flat rolled aluminum products, and customer consolidation are also adding downward pricing pressuresenvironmental awareness around polyethylene terephthalate ("PET") plastics. Disruption in the can sheet market.
Meanwhile, the demand for aluminum inrolled products as a result of the COVID-19 pandemic and semiconductor shortages impacting the automotive industry continuesappears 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 theour recently completed investments we made in our automotive sheet finishing capacity in North America, EuropeGuthrie, Kentucky, and Asia.Changzhou, China. This demand has been primarily driven by the benefits that result from using lighter weight materialslightweight aluminum in the vehicles,vehicle structures and components, as companiesautomakers respond to stricter government regulations which are driving improvedregarding emissions and better fuel economy;economy, while also maintaining or improving vehicle safety and performance.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.
Key SalesWe expect long-term demand for building and Shipmentconstruction 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.
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
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.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions, except shipments which are in kt) | | Three Months Ended | | Year Ended | | Three Months Ended |
| | June 30, 2016 | | Sept 30, 2016 | | Dec 31, 2016 | | March 31, 2017 | | March 31, 2017 | | June 30, 2017 | | Sept 30, 2017 | | Dec 31, 2017 |
Net sales | | $ | 2,296 |
| | $ | 2,361 |
| | $ | 2,313 |
| | $ | 2,621 |
| | $ | 9,591 |
| | $ | 2,669 |
| | $ | 2,794 |
| | $ | 3,085 |
|
Percentage (decrease) increase in net sales versus comparable previous year period | | (13 | )% | | (5 | )% | | (2 | )% | | 9 | % | | (3 | )% | | 16 | % | | 18 | % | | 33 | % |
Rolled product shipments: | | | | | | | | | | | | | | | | |
North America | | 242 |
| | 252 |
| | 247 |
| | 269 |
| | 1,010 |
| | 273 |
| | 274 |
| | 269 |
|
Europe | | 246 |
| | 236 |
| | 226 |
| | 235 |
| | 943 |
| | 235 |
| | 237 |
| | 222 |
|
Asia | | 178 |
| | 176 |
| | 162 |
| | 174 |
| | 690 |
| | 180 |
| | 180 |
| | 177 |
|
South America | | 103 |
| | 121 |
| | 125 |
| | 125 |
| | 474 |
| | 110 |
| | 131 |
| | 146 |
|
Eliminations | | (14 | ) | | (12 | ) | | (10 | ) | | (14 | ) | | (50 | ) | | (13 | ) | | (20 | ) | | (18 | ) |
Total | | 755 |
| | 773 |
| | 750 |
| | 789 |
| | 3,067 |
| | 785 |
| | 802 |
| | 796 |
|
| | | | | | | | | | | | | | | | |
The following summarizes the percentage (decrease) increase in rolled product shipments versus the comparable previous year period: |
North America | | (7 | )% | | (6 | )% | | (2 | )% | | 8 | % | | (2 | )% | | 13 | % | | 9 | % | | 9 | % |
Europe | | (2 | )% | | (6 | )% | | (3 | )% | | (4 | )% | | (4 | )% | | (4 | )% | | — | % | | (2 | )% |
Asia | | (8 | )% | | (6 | )% | | (16 | )% | | (7 | )% | | (9 | )% | | 1 | % | | 2 | % | | 9 | % |
South America | | (4 | )% | | 3 | % | | (5 | )% | | (7 | )% | | (3 | )% | | 7 | % | | 8 | % | | 17 | % |
Total | | (2 | )% | | (2 | )% | | (4 | )% | | — | % | | (2 | )% | | 4 | % | | 4 | % | | 6 | % |
Business Model and Key ConceptsBUSINESS MODEL AND KEY CONCEPTS
Conversion Business Model
A significant amount of our business is conducted under a conversion model, which allows us to pass through increases or decreases in the price of aluminum to our customers. Nearly all of our flat-rolled products have a price structure with three components: (i)(1) a base aluminum price quoted off the LME; (ii)(2) an LMP; and (3) a local market premium; and (iii) a “conversion premium”"conversion premium" to produce the rolled product, which reflects, among other factors, the competitive market conditions for that product. Base aluminum prices are typically driven by macroeconomic factors and global supply and demand offor aluminum. The local market premiumsLMPs tend to vary based on the supply and demand for metal in a particular region and associated transportation costs.
In North America, Europe, and South America, we pass through local market premiumsLMPs to our customers, which are recorded through "Netnet sales." In Asia, we purchase our metal inputs based on the LME and incur a local market premium; however, manyan 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 local market premium, making it difficult for usmajority of new contracts over the last several quarters, we are able to fully pass through this component of our metal input cost to some of our customers.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 for the three and nine months ended December 31, 2017 and 2016 are as follows:follows.
| | | | | | | | | | | | | | | | Three Months Ended September 30, | | Percent Change | | Six Months Ended September 30, | | Percent Change |
| Three Months Ended December 31, | | Percent | | Nine Months Ended December 31, | | Percent | | 2022 | | 2021 | | 2022 | | 2021 | |
| 2017 | | 2016 | | Change | | 2017 | | 2016 | | Change | |
London Metal Exchange Prices | | | | | | | | | | | | |
Aluminum (per metric tonne, and presented in U.S. dollars): | | | | | | | | | | | | Aluminum (per metric tonne, and presented in U.S. dollars): |
Closing cash price as of beginning of period | $ | 2,111 |
| | $ | 1,659 |
| | 27 | % | | $ | 1,947 |
| | $ | 1,492 |
| | 30 | % | Closing cash price as of beginning of period | $ | 2,397 | | | $ | 2,523 | | | (5) | % | | $ | 3,503 | | | $ | 2,213 | | | 58 | % |
Average cash price during the period | $ | 2,101 |
| | $ | 1,710 |
| | 23 | % | | $ | 2,008 |
| | $ | 1,634 |
| | 23 | % | Average cash price during the period | 2,354 | | | 2,648 | | | (11) | | | 2,618 | | | 2,528 | | | 4 | |
Closing cash price as of end of period | $ | 2,242 |
| | $ | 1,714 |
| | 31 | % | | $ | 2,242 |
| | $ | 1,714 |
| | 31 | % | Closing cash price as of end of period | 2,180 | | | 2,851 | | | (24) | | | 2,180 | | | 2,851 | | | (24) | |
The weighted average local market premium was as follows for the three and nine months ended December 31, 2017 and 2016LMPs are as follows:follows.
|
| | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended December 31, | | Percent | | Nine Months Ended December 31, | | Percent |
| 2017 | | 2016 | | Change | | 2017 | | 2016 | | Change |
Weighted average Local Market Premium (per metric tonne, and presented in U.S. dollars) | $ | 180 |
| | $ | 144 |
| | 25 | % | | $ | 168 |
| | $ | 142 |
| | 18 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 local market premiumsLMPs directly impact “Netnet sales,” “Cost 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 “Netnet sales” and “Costcost 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. TheWe have exposure to multiple regional LMPs, however the derivative marketmarkets for local market premiums isthose LMPs are generally not robust or efficient enough for us to offset the impactshedge all of LMPour exposure to price movements beyond a very 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 local market premiumsLMPs can have a significant impact on our results of operations and cash flows. Reduced volatility of local market premiums reduced the amount of metal price lag for the nine months ended December 31, 2017.
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 “Incomeincome from continuing operations before income taxes”tax provision and “Net income (loss).”net income. Gains and losses on metal derivative contracts are not recognized in “Segment income”Adjusted EBITDA until realized.
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 aswhen we translate the operating results from various functional currencies into our U.S. dollar reporting currency at the current average rates. We also record foreign exchange remeasurement gains and losses when business transactions are denominated in currencies other than the functional currency of that operation. Global economic uncertainty is contributing to higher levels of volatility among the currency pairs in which we conduct business. The following table presents the exchange rates as of the end of each period and the average of the month-end exchange rates for the three and nine months ended December 31, 2017 and 2016:rates.
| | | | | | | | | | | | | | | Exchange Rate as of | | Average Exchange Rate Three Months Ended September 30, | | Average Exchange Rate Six Months Ended September 30, |
| | | | | | September 30, 2022 | | March 31, 2022 | 2022 | | 2021 | | 2022 | | 2021 |
| Exchange Rate as of | | Average Exchange Rate | | Average Exchange Rate | |
| December 31, 2017 | | March 31, 2017 | | Three Months Ended December 31, | | Nine Months Ended December 31, | |
2017 | | 2016 | | 2017 | | 2016 | |
U.S. dollar per Euro | 1.201 |
| | 1.068 |
| | 1.185 |
| | 1.070 |
| | 1.163 |
| | 1.104 |
| |
Euro per U.S. dollar | | Euro per U.S. dollar | 1.021 | | | 0.889 | | | 0.998 | | | 0.851 | | | 0.971 | | | 0.841 | |
Brazilian real per U.S. dollar | 3.308 |
| | 3.168 |
| | 3.282 |
| | 3.279 |
| | 3.227 |
| | 3.313 |
| Brazilian real per U.S. dollar | 5.407 | | | 4.738 | | | 5.258 | | | 5.235 | | | 5.110 | | | 5.224 | |
South Korean won per U.S. dollar | 1,071 |
| | 1,116 |
| | 1,093 |
| | 1,174 |
| | 1,118 |
| | 1,151 |
| South Korean won per U.S. dollar | 1,453 | | | 1,211 | | | 1,362 | | | 1,166 | | | 1,316 | | | 1,142 | |
Canadian dollar per U.S. dollar | 1.254 |
| | 1.329 |
| | 1.278 |
| | 1.343 |
| | 1.288 |
| | 1.313 |
| Canadian dollar per U.S. dollar | 1.374 | | | 1.249 | | | 1.321 | | | 1.260 | | | 1.299 | | | 1.243 | |
Swiss franc per Euro | 1.171 |
| | 1.069 |
| | 1.168 |
| | 1.079 |
| | 1.133 |
| | 1.088 |
| |
Swiss franc per euro | | Swiss franc per euro | 0.964 | | | 1.023 | | | 0.972 | | | 1.079 | | | 0.995 | | | 1.088 | |
Exchange rate movements have an impact on our operating results. In Europe, where we predominantly have predominantly local currency selling prices and operating costs, we benefit as the Euroeuro strengthens but are adversely affected as the Euroeuro 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 and cross-currency swaps to manage our exposure arising from recorded assets and liabilities, firm commitments, and forecasted cash flows denominated in currencies other than the functional currency of certain operations, which include capital expenditures and net investment in foreign subsidiaries. There was no earnings impact of foreign exchange remeasurement, net of related hedges, in the third quarter of fiscal 2018, and a net currency gain of $2 million during the third quarter of fiscal 2017. The movement of currency exchange rates during the third quarter of fiscal 2018 and fiscal 2017 resulted in $4 million of net unrealized gains and less than $4 million of net unrealized losses, respectively, on undesignated foreign currency derivatives.
See Segment Review below for the impact of foreign currency on each of our segments.
Recent Developments
On January 31, 2018, our subsidiary, Novelis Switzerland SA, entered into a framework agreement with a subsidiary of Constellium N.V. (Constellium). Under the agreement, the parties agreed that (i) Novelis will purchase from Constellium all of the real and personal property we lease at our Sierre, Switzerland rolling facility for an aggregate purchase price of €195 million, (ii) Constellium will create a service company that will be jointly owned and operated by the parties to provide certain services to the parties at the Sierre facility, and Novelis will acquire from Constellium a 50% interest in the service company for an aggregate purchase price of €5 million, and (iii) under two commercial arrangements, Constellium will provide ingots to Novelis on a tolling basis and Novelis will provide rolled products to Constellium on a tolling basis, respectively. The parties also agreed to suspend, until the closing of the transactions described in the agreement, the arbitration proceedings currently before the International Chamber of Commerce (ICC) regarding the existing arrangements between them. At the closing of the transactions, the parties will release all of the claims between them, including the claims subject to the ICC arbitration.
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 | June 30, 2021 | | September 30, 2021 | | December 31, 2021 | | March 31, 2022 | | March 31, 2022 | | June 30, 2022 | | September 30, 2022 | | |
Net sales | $ | 3,855 | | | $ | 4,119 | | | $ | 4,326 | | | $ | 4,849 | | | $ | 17,149 | | | $ | 5,089 | | | $ | 4,799 | | | |
Percentage (decrease) increase in net sales versus comparable prior year period | 59 | % | | 38 | % | | 33 | % | | 34 | % | | 40 | % | | 32 | % | | 17 | % | | |
Rolled product shipments: | | | | | | | | | | | | |
North America | 358 | | | 375 | | | 358 | | | 376 | | | 1,467 | | | 386 | | | 386 | | | |
Europe | 279 | | | 260 | | | 254 | | | 274 | | | 1,067 | | | 272 | | | 268 | | | |
Asia | 192 | | | 197 | | | 171 | | | 203 | | | 763 | | | 185 | | | 208 | | | |
South America | 157 | | | 147 | | | 157 | | | 156 | | | 617 | | | 148 | | | 162 | | | |
Eliminations | (13) | | | (11) | | | (10) | | | (22) | | | (56) | | | (29) | | | (40) | | | |
Total | 973 | | | 968 | | | 930 | | | 987 | | | 3,858 | | | 962 | | | 984 | | | |
| | | | | | | | | | | | | | | |
The following summarizes the percentage (decrease) increase in rolled product shipments versus the comparable prior year period: |
North America | 32 | % | | 2 | % | | 3 | % | | 4 | % | | 9 | % | | 8 | % | | 3 | % | | |
Europe | 32 | | | 8 | | | — | | | 1 | | | 9 | | | (3) | | | 3 | % | | |
Asia | 4 | | | 11 | | | (7) | | | 2 | | | 2 | | | (4) | | | 6 | % | | |
South America | 39 | | | (1) | | | (1) | | | (3) | | | 7 | | | (6) | | | 10 | % | | |
Total | 26 | % | | 5 | % | | — | % | | — | % | | 7 | % | | (1) | % | | 2 | % | | |
Three Months Ended December 31, 2017 comparedSeptember 30, 2022, Compared to the Three Months Ended December 31, 2016September 30, 2021
“Net sales” increased $772 million, or 33%, driven by a 23% increase in average base aluminum prices and a 25% increase in average local market premiums. The increasesales was also due to a 6% increase in flat rolled product shipments, including a favorable impact from our strategic shift to higher conversion premium products.
“Cost of goods sold (exclusive of depreciation and amortization)” increased $722 million, or 38%, due to higher average aluminum prices and a 6% increase in flat rolled product shipments. Total metal input costs included in "Cost of goods sold (exclusive of depreciation and amortization)” increased $542 million.
“Income before income taxes”$4.8 billion for the three months ended December 31, 2017 was $125 million, compared toSeptember 30, 2022, an increase of 17% from the comparable prior year period, primarily driven by higher average aluminum prices, as well as a $111 million "Income2% increase in shipments, higher pricing across end markets, and a favorable product mix.
Income from continuing operations before income taxes" intax provision was $249 million for the three months ended December 31, 2016.September 30, 2022, compared to $318 million in the comparable prior year period. In addition to the factors noted above, the following additional items affected “Incomeincome from continuing operations before income taxes”:tax provision.
"RestructuringCost of Goods Sold (Exclusive of Depreciation and impairment, net"Amortization)
Cost of $25goods 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.
Selling, General and Administrative Expenses
SG&A was $181 million for the three months ended December 31, 2017 primarily relatedSeptember 30, 2022, compared to restructuring actions in Europe. We incurred $1$142 million of restructuring for the three months ended December 31, 2016 primarily relatedSeptember 30, 2021. The increase is mainly due to severance charges.higher factoring expense resulting from higher interest rates, as well as higher employment cost, and higher travel expense due to loosened travel restrictions.
Net gains related to changesDepreciation and Amortization
Depreciation and amortization was $134 million in each of the fair valuethree months ended September 30, 2022, and 2021.
Interest Expense and Amortization of other unrealized derivative instrumentsDebt Issuance Costs
Interest expense and amortization of debt issuance costs was $15$65 million compared to $21and $60 million of gains in the same period in the prior year, which is reported as "Other (income) expense, net"; and
An increase in "Selling, general and administrative expenses" primarily related to an increase in fair value of LTIP awards and an increase in factoring expense.
We recognized $20 million of tax expense for the three months ended December 31, 2017,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 16%,26%. The rate was primarily duedriven 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 a non-cashthe Brazilian real foreign exchange rate, offset by the availability of tax credits. We recognized $79 million of income tax benefit of $18 million forin the remeasurement of deferred tax assets and liabilitiescomparable prior year period, which resulted in accordance with the Tax Cuts and Jobs Act offset by the results of operations andan effective tax rate differences in foreign earnings. We recognized $47 million of tax expense for the three months ended December 31, 2016, primarily due to tax rate differences in foreign earnings and tax losses in jurisdictions where we believe it to be more likely than not that we will not be able to utilize those losses and therefore have a valuation allowance recorded.25%.
We reported “Net income attributable to our common shareholder” of $121 million and $63 million for the three months ended December 31, 2017 and 2016, respectively, primarily as a result of the factors discussed above.
Segment Review
Due in part to the regional nature of supply and demand of aluminum rolled products and in order to best serve our customers, we manage our activities on the basis of geographical regions and are organized under four operating segments: North America, Europe, Asia, and South America.
See Note 16 - Segment, Major Customer and Major Supplier information for our definition of segment income, a reconciliation of “Net income (loss) attributable to our common shareholder” to segment income and segment income by region for the three and nine months ended December 31, 2017 and 2016, respectively.
The tables below showillustrate 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.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" adjustsmust 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 eliminateseliminate intersegment shipments (in kt) and intersegment "Net sales.". | | Selected Operating Results Three Months Ended December 31, 2017 | North America | | Europe | | Asia | | South America | | Eliminations and Other | | Total | |
Selected Operating Results Three Months Ended September 30, 2022 | | Selected Operating Results Three Months Ended September 30, 2022 | North America | | Europe | | Asia | | South America | | Eliminations and Other | | Total |
Net sales | $ | 986 |
| | $ | 837 |
| | $ | 547 |
| | $ | 567 |
| | $ | 148 |
| | $ | 3,085 |
| Net sales | $ | 1,958 | | | $ | 1,315 | | | $ | 849 | | | $ | 751 | | | $ | (74) | | | $ | 4,799 | |
Shipments | | | | | | | | | | | | |
Rolled products - third party | 268 |
| | 217 |
| | 173 |
| | 138 |
| | — |
| | 796 |
| |
Rolled products - intersegment | 1 |
| | 5 |
| | 4 |
| | 8 |
| | (18 | ) | | — |
| |
Shipments (in kt): | | Shipments (in kt): | | | | | | | | | | | |
Rolled products – third party | | Rolled products – third party | 386 | | | 257 | | | 190 | | | 151 | | | — | | | 984 | |
Rolled products – intersegment | | Rolled products – intersegment | — | | | 11 | | | 18 | | | 11 | | | (40) | | | — | |
Total rolled products | 269 |
| | 222 |
| | 177 |
| | 146 |
| | (18 | ) | | 796 |
| Total rolled products | 386 | | | 268 | | | 208 | | | 162 | | | (40) | | | 984 | |
Non-rolled products | — |
| | 1 |
| | 2 |
| | 38 |
| | — |
| | 41 |
| Non-rolled products | 3 | | | 31 | | | 7 | | | 35 | | | (8) | | | 68 | |
Total shipments | 269 |
| | 223 |
| | 179 |
| | 184 |
| | (18 | ) | | 837 |
| Total shipments | 389 | | | 299 | | | 215 | | | 197 | | | (48) | | | 1,052 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Selected Operating Results Three Months Ended September 30, 2021 | North America | | Europe | | Asia | | South America | | Eliminations and Other | | Total |
Net sales | $ | 1,671 | | | $ | 1,089 | | | $ | 728 | | | $ | 595 | | | $ | 36 | | | $ | 4,119 | |
Shipments (in kt): | | | | | | | | | | | |
Rolled products – third party | 375 | | | 251 | | | 196 | | | 146 | | | — | | | 968 | |
Rolled products – intersegment | — | | | 9 | | | 1 | | | 1 | | | (11) | | | — | |
Total rolled products | 375 | | | 260 | | | 197 | | | 147 | | | (11) | | | 968 | |
Non-rolled products | 3 | | | 26 | | | 4 | | | 21 | | | (4) | | | 50 | |
Total shipments | 378 | | | 286 | | | 201 | | | 168 | | | (15) | | | 1,018 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
Selected Operating Results Three Months Ended December 31, 2016 | North America | | Europe | | Asia | | South America | | Eliminations and Other | | Total |
Net sales | $ | 789 |
| | $ | 693 |
| | $ | 412 |
| | $ | 399 |
| | $ | 20 |
| | $ | 2,313 |
|
Shipments | | | | | | | | | | | |
Rolled products - third party | 247 |
|
| 222 |
|
| 161 |
|
| 120 |
|
| — |
|
| 750 |
|
Rolled products - intersegment | — |
|
| 4 |
|
| 1 |
|
| 5 |
|
| (10 | ) |
| — |
|
Total rolled products | 247 |
|
| 226 |
|
| 162 |
|
| 125 |
|
| (10 | ) |
| 750 |
|
Non-rolled products | — |
| | 1 |
| | 2 |
| | 28 |
| | — |
| | 31 |
|
Total shipments | 247 |
| | 227 |
| | 164 |
| | 153 |
| | (10 | ) | | 781 |
|
The following table reconciles changes in “Segment income”Adjusted EBITDA for the three months ended December 31, 2016September 30, 2021, to the three months ended December 31, 2017 (in millions).September 30, 2022.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
in millions | North America | | Europe | | Asia | | South America | | Eliminations and Other(1) | | Total |
Adjusted EBITDA - Three Months Ended September 30, 2021 | $ | 227 | | | $ | 78 | | | $ | 92 | | | $ | 154 | | | $ | 2 | | | $ | 553 | |
Volume | 10 | | | 10 | | | 9 | | | 17 | | | (28) | | | 18 | |
Conversion premium and product mix(2) | 70 | | | 71 | | | 37 | | | 10 | | | (13) | | | 175 | |
Conversion costs | (80) | | | (69) | | | (13) | | | (43) | | | 41 | | | (164) | |
Foreign exchange | (1) | | | (14) | | | (3) | | | (4) | | | — | | | (22) | |
Selling, general & administrative and research & development costs(3) | (22) | | | (7) | | | (8) | | | (9) | | | 1 | | | (45) | |
Other changes | (13) | | | 4 | | | (1) | | | 2 | | | (1) | | | (9) | |
Adjusted EBITDA - Three Months Ended September 30, 2022 | $ | 191 | | | $ | 73 | | | $ | 113 | | | $ | 127 | | | $ | 2 | | | $ | 506 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
Changes in Segment income | | North America | | Europe | | Asia | | South America | | Eliminations (A) | | Total |
Segment income - Three Months Ended December 31, 2016 (B) | | $ | 90 |
| | $ | 44 |
| | $ | 40 |
| | $ | 81 |
| | $ | — |
| | $ | 255 |
|
Volume | | 23 |
| | (3 | ) | | 11 |
| | 23 |
| | (8 | ) | | 46 |
|
Conversion premium and product mix | | 7 |
| | 2 |
| | (9 | ) | | (2 | ) | | 3 |
| | 1 |
|
Conversion costs (C) | | (2 | ) | | 3 |
| | 1 |
| | 9 |
| | 4 |
| | 15 |
|
Foreign exchange | | — |
| | 6 |
| | — |
| | (3 | ) | | — |
| | 3 |
|
Selling, general & administrative and research & development costs (D) | | (11 | ) | | (2 | ) | | — |
| | (8 | ) | | (4 | ) | | (25 | ) |
Other changes (E) | | 4 |
| | — |
| | — |
| | 7 |
| | (1 | ) | | 10 |
|
Segment income - Three Months Ended December 31, 2017 | | $ | 111 |
| | $ | 50 |
| | $ | 43 |
| | $ | 107 |
| | $ | (6 | ) | | $ | 305 |
|
__________________________________________________ | |
(A) | The recognition of "Segment income" by a region on an intersegment shipment could occur in a period prior to the recognition of "Segment income" on a consolidated basis, depending on the timing of when the inventory is sold to the |
third party(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""Eliminations and Other" column adjusts regional "Segment income"Adjusted EBITDA for intersegment shipments that occur in a period prior to recognition of "Segment income"Adjusted EBITDA on a consolidated basis. The "Eliminations""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.
| |
(B) | Effective in the first quarter of fiscal 2018, management removed the impact of metal price lag from Segment Income in order to enhance the visibility of the underlying operating performance of the Company. This change does not impact our condensed consolidated financial statements. Segment information for prior periods presented has been updated to reflect this change. |
| |
(C) | Conversion costs include expenses incurred in production such as direct and indirect labor, energy, freight, scrap usage, alloys and hardeners, coatings, alumina, melt loss, the benefit of utilizing scrap and other metal costs. Fluctuations in this component reflect cost efficiencies (inefficiencies) during the period as well as cost (inflation) deflation. |
| |
(D) | Selling, general & administrative costs and research & development costs include costs incurred directly by each segment and all corporate related costs. |
| |
(E) | The State of Espirito Santo grants an indirect tax incentive (ICMS) for companies who fulfill certain requirements. According to this incentive, the Company can recognize a presumed ICMS credit, thus reducing the amounts due to the State. The mentioned incentive is recorded in our consolidated results of operations. |
(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”sales increased $197$287 million, or 25%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 automotiveNorth 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 customer demand.
“Segment income”portfolio optimization in a capacity constrained system. Adjusted EBITDA was $111$113 million, an increase of 23%, primarily due todriven by higher automotive and can volumesvolume, higher product prices, and favorable product mix as a result of our portfolio optimization efforts,metal benefit, partially offset by higher selling, generalenergy and administrative expenses.other operating costs due to inflation, geopolitical instability, and global supply chain disruptions.
“South America
Net sales”sales increased $144$156 million, or 21%, due to higher average aluminum prices and higher automotive shipments partially offset by lower can and specialties shipments.
“Segment income” was $50 million, an increase of 14%26%, primarily reflecting foreign currency benefits and favorable product mix as a result of automotive shipment growth and other portfolio optimization efforts. These benefits were partially offsetdriven by lower can and specialty volumes.
Asia
“Net sales” increased $135 million, or 33%, due to higher average aluminum prices and higher can and automotive shipments partially offset by lower can pricing.
“Segment income”across the Americas. Adjusted EBITDA was $43$127 million, a increasedecrease of 8%18%, primarily driven by operating costs due to higher caninflation, geopolitical instability, and auto shipments. This was partially offset by lower can pricing.
South America
“Net sales” increased $168 million, or 42%, due to higher can and specialties shipments offset by unfavorable pricing due to higher exports.
“Segment income” was $107 million, an increase of 32%, primarily due to higher can and specialties volumesglobal supply chain disruptions, as well as lower metal input costs and favorable indirect tax incentives offset by higher selling, general and administrative costs.
RESULTS OF OPERATIONS
Nine Months Ended December 31, 2017 compared to the Nine Months Ended December 31, 2016
“Net sales” increased $1,578 million or 23%, driven by a 23% increase in average base aluminum prices and an 18% increase in average local market premiums. The increase was also due to a 5% increase in flat rolled product shipments, including a favorable impact from our strategic shift to higher conversion premium products.
“Cost of goods sold (exclusive of depreciation and amortization)” increased $1,434 million, or 25%,SG&A due to an increase in flat rolled product shipmentsfactoring expense resulting from higher interest rates, less favorable metal benefit, and unfavorable foreign exchange, partially offset by higher products prices.
Six Months Ended September 30, 2022, Compared to the Six Months Ended September 30, 2021
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 metal input costs includedshipments were in "Cost of goods sold (exclusive of depreciation and amortization)” increased $1,263 million.line with the comparable prior year period.
“Income from continuing operations before income taxes”tax provision was $643 million for the ninesix months ended December 31, 2017 was $692 million,September 30, 2022, compared to a $109$729 million "Income before income taxes" in the nine months ended December 31, 2016.comparable prior year period. In addition to the factors noted above, the following additional items affected “Incomeincome from continuing operations before income taxes:”tax provision.
Cost of Goods Sold (Exclusive of Depreciation and Amortization)
A pre-tax gain on saleCost of a businessgoods sold (exclusive of $318depreciation 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 related tofor the purchase of shares of UAL by Kobe and the deconsolidation of the remaining assets to form the equity method investment insix months ended September 201730, 2022, compared to a$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 of $27 million recognized on the sale of our interest in Aluminium Company of Malaysia Berhad in the prior year, which was report within (Gain) loss on sale of a business, net
"Loss on extinguishment of debt" indebt, net for the prior year of $112 millionsix months ended September 30, 2021. This primarily relates to the extinguishmentwrite-off of unamortized debt issuance costs and a $51 million cash payment of a redemption premium for the redemption of our 2017 and 20205.875% Senior Notes, due September 2026. We did not incur similar charges in fiscal 2017;the current period.
A decline in interest expense of $39 million primarily due to lower interest rates resulting from the refinancing of the 2017 Notes, 2020 NotesRestructuring and Term Loan in fiscal 2017;Impairment Expenses, Net
"Restructuring and impairment net" for the nine months ended December 31, 2017expenses (reversals), net was $33a net expense of $2 million compared to $4 millionand a net reversal of expenses in the same period of the prior year;
An increase in "Selling, general and administrative expenses " primarily related to an increase in fair value of LTIP awards and an increase in factoring expense; and
Increased stability in local market premiums which we are unable to hedge economically resulted in a $5 million metal price lag loss in the first nine months of this fiscal year compared to a $32 million loss in the prior year.
We recognized $179 million of tax expense for the nine months ended December 31, 2017, primarily due to a non-cash tax benefit of $18 million for the remeasurement of deferred tax assets and liabilities in accordance with the Tax Cuts and Jobs Act offset by the results of operations and tax rate differences in foreign earnings. We recognized $110 million of tax expense for the nine months ended December 31, 2016, primarily due to tax losses in jurisdictions where we believe it more likely than not that we will not be able to utilize those losses and therefore have a valuation allowance recorded and unfavorable foreign exchange translation and remeasurement of deferred income taxes, offset by dividends not subject to tax.
We reported “Net income attributable to our common shareholder” of $529 million for the nine months ended December 31, 2017 as compared to "Net loss attributable to our common shareholder" of $2 million for the ninesix months ended December 31, 2016,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 a resultwell as higher losses on the change in fair value of derivative instruments, net, in the factors discussed above.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%.
Segment Review
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Selected Operating Results Six Months Ended September 30, 2022 | North America | | Europe | | Asia | | South America | | Eliminations and Other | | Total |
Net sales | $ | 4,054 | | | $ | 2,709 | | | $ | 1,707 | | | $ | 1,577 | | | $ | (159) | | | $ | 9,888 | |
Shipments | | | | | | | | | | | |
Rolled products – third party | 772 | | | 522 | | | 354 | | | 298 | | | — | | | 1,946 | |
Rolled products – intersegment | — | | | 18 | | | 39 | | | 12 | | | (69) | | | — | |
Total rolled products | 772 | | | 540 | | | 393 | | | 310 | | | (69) | | | 1,946 | |
Non-rolled products | 6 | | | 59 | | | 13 | | | 72 | | | (21) | | | 129 | |
Total shipments | 778 | | | 599 | | | 406 | | | 382 | | | (90) | | | 2,075 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Selected Operating Results Six Months Ended September 30, 2021 | North America | | Europe | | Asia | | South America | | Eliminations and Other | | Total |
Net sales | $ | 3,127 | | | $ | 2,209 | | | $ | 1,400 | | | $ | 1,171 | | | $ | 67 | | | $ | 7,974 | |
Shipments | | | | | | | | | | | |
Rolled products – third party | 733 | | | 519 | | | 386 | | | 303 | | | — | | | 1,941 | |
Rolled products – intersegment | — | | | 20 | | | 3 | | | 1 | | | (24) | | | — | |
Total rolled products | 733 | | | 539 | | | 389 | | | 304 | | | (24) | | | 1,941 | |
Non-rolled products | 6 | | | 58 | | | 6 | | | 42 | | | (9) | | | 103 | |
Total shipments | 739 | | | 597 | | | 395 | | | 346 | | | (33) | | | 2,044 | |
The tables below show selected segment financial information (in millions, except shipments which arefollowing table reconciles changes in kt). For additional financial information related to our operating segments, see Note 16 — Segment, Major Customer and Major Supplier Information. In order to reconcile the financial informationAdjusted EBITDA for the segments shown in the tables belowsix months ended September 30, 2021, to the relevant U.S. GAAP-based measures,six months ended September 30, 2022.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
in millions | North America | | Europe | | Asia | | South America | | Eliminations and Other(1) | | Total |
Adjusted EBITDA - Six Months Ended September 30, 2021 | $ | 399 | | | $ | 180 | | | $ | 180 | | | $ | 347 | | | $ | 2 | | | $ | 1,108 | |
Volume | 41 | | | 1 | | | 3 | | | 7 | | | (47) | | | 5 | |
Conversion premium and product mix(2) | 136 | | | 114 | | | 83 | | | 32 | | | (28) | | | 337 | |
Conversion costs | (103) | | | (97) | | | (34) | | | (48) | | | 75 | | | (207) | |
Foreign exchange | — | | | (27) | | | (7) | | | 5 | | | — | | | (29) | |
Selling, general & administrative and research & development costs(3) | (22) | | | (9) | | | (13) | | | (14) | | | 2 | | | (56) | |
Other changes | (33) | | | (5) | | | (5) | | | (46) | | | (2) | | | (91) | |
Adjusted EBITDA - Six Months Ended September 30, 2022 | $ | 418 | | | $ | 157 | | | $ | 207 | | | $ | 283 | | | $ | 2 | | | $ | 1,067 | |
_________________________
(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 eliminates intersegment shipments (in kt) and intersegment "Net sales."
|
| | | | | | | | | | | | | | | | | | | | | | | |
Selected Operating Results Nine Months Ended December 31, 2017 | North America | | Europe | | Asia | | South America | | Eliminations and Other | | Total |
Net sales | $ | 2,895 |
| | $ | 2,519 |
| | $ | 1,565 |
| | $ | 1,410 |
| | $ | 159 |
| | $ | 8,548 |
|
Shipments | | | | | | | | | | | |
Rolled products - third party | 809 |
| | 682 |
| | 527 |
| | 365 |
| | — |
| | 2,383 |
|
Rolled products - intersegment | 7 |
| | 12 |
| | 10 |
| | 22 |
| | (51 | ) | | — |
|
Total rolled products | 816 |
| | 694 |
| | 537 |
| | 387 |
| | (51 | ) | | 2,383 |
|
Non-rolled products | — |
| | 5 |
| | 6 |
| | 97 |
| | — |
| | 108 |
|
Total shipments | 816 |
| | 699 |
| | 543 |
| | 484 |
| | (51 | ) | | 2,491 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
Selected Operating Results Nine Months Ended December 31, 2016 | North America | | Europe | | Asia | | South America | | Eliminations and Other | | Total |
Net sales | $ | 2,307 |
| | $ | 2,189 |
| | $ | 1,314 |
| | $ | 1,090 |
| | $ | 70 |
| | $ | 6,970 |
|
Shipments | | | | | | | | | | | |
Rolled products - third party | 740 |
| | 695 |
| | 512 |
| | 331 |
| | — |
| | 2,278 |
|
Rolled products - intersegment | 1 |
| | 13 |
| | 4 |
| | 18 |
| | (36 | ) | | — |
|
Total rolled products | 741 |
| | 708 |
| | 516 |
| | 349 |
| | (36 | ) | | 2,278 |
|
Non-rolled products | 3 |
| | 6 |
| | 6 |
| | 61 |
| | — |
| | 76 |
|
Total shipments | 744 |
| | 714 |
| | 522 |
| | 410 |
| | (36 | ) | | 2,354 |
|
The following table reconciles changesproduct mix in “Segment income” forEurope includes a $20 million customer contractual obligation benefit recognized during the ninesix months ended December 31, 2016 to the nine months ended December 31, 2017 (in millions).September 30, 2022.
|
| | | | | | | | | | | | | | | | | | | | | | | | |
Changes in Segment income | | North America | | Europe | | Asia | | South America | | Eliminations (A) | | Total |
Segment income - Nine Months Ended December 31, 2016 (B) | | $ | 276 |
| | $ | 150 |
| | $ | 132 |
| | $ | 236 |
| | $ | — |
| | $ | 794 |
|
Volume | | 80 |
| | (14 | ) | | 25 |
| | 44 |
| | (14 | ) | | 121 |
|
Conversion premium and product mix | | 8 |
| | 12 |
| | (27 | ) | | (25 | ) | | 10 |
| | (22 | ) |
Conversion costs (C) | | (7 | ) | | 10 |
| | 2 |
| | 17 |
| | 3 |
| | 25 |
|
Foreign exchange | | 2 |
| | 14 |
| | (2 | ) | | (4 | ) | | — |
| | 10 |
|
Selling, general & administrative and research & development costs (D) | | (21 | ) | | (13 | ) | | (4 | ) | | (17 | ) | | (5 | ) | | (60 | ) |
Other changes (E) | | 13 |
| | (1 | ) | | (2 | ) | | 18 |
| | — |
| | 28 |
|
Segment income - Nine Months Ended December 31, 2017 | | $ | 351 |
| | $ | 158 |
| | $ | 124 |
| | $ | 269 |
| | $ | (6 | ) | | $ | 896 |
|
_________________________
| |
(A) | The recognition of "Segment income" by a region on an intersegment shipment could occur in a period prior to the recognition of "Segment income" on a consolidated basis, depending on the timing of when the inventory is sold to the third party customer. The "Eliminations" column adjusts regional "Segment income" for intersegment shipments that occur in a period prior to recognition of "Segment income" on a consolidated basis. The "Eliminations" column also reflects adjustments for changes in regional volume, conversion premium and product mix, and conversion costs related to intersegment shipments for consolidation. |
| |
(B) | Effective in the first quarter of fiscal 2018, management removed the impact of metal price lag from Segment Income in order to enhance the visibility of the underlying operating performance of the Company. This change does not impact our condensed consolidated financial statements. Segment information for prior periods presented has been updated to reflect this change. |
| |
(C) | Conversion costs include expenses incurred in production such as direct and indirect labor, energy, freight, scrap usage, alloys and hardeners, coatings, alumina, melt loss, the benefit of utilizing scrap and other metal costs. Fluctuations in this component reflect cost efficiencies (inefficiencies) during the period as well as cost (inflation) deflation. |
| |
(D) | Selling, general & administrative costs and research & development costs include costs incurred directly by each segment and all corporate related costs. |
| |
(E) | The State of Espirito Santo grants an indirect tax incentive (ICMS) for companies who fulfill certain requirements. According to this incentive, the Company can recognize a presumed ICMS credit, thus reducing the amounts due to the State. The mentioned incentive is recorded in our consolidated results of operations. |
(3)Selling, general & administrative and research & development costs include costs incurred directly by each segment and all corporate related costs.
North America
“Net sales”sales increased $588$927 million, or 25%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 and automotive shipments.
“Segment income”shipments across the Americas due to strong demand. Adjusted EBITDA was $351$283 million, an increasea decrease of 27%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
recur in the current period, as well as higher automotiveenergy and can volumesother operating costs due to inflation, geopolitical instability, and favorable product mixglobal supply chain disruptions as a result of automotive growth.well as higher SG&A due to an increase in factoring expense resulting from higher interest rates. These positive factors were partially offset by cost inflationhigher volume, higher product prices, favorable metal benefit, and unfavorable selling, general, and administrative costs resulting from increased factoring costs.
Europe
“Net sales” increased $330 million or 15%, primarily due to higher average aluminum prices and higher automotive shipments; partially offset by lower can and specialty shipments.
“Segment income” was $158 million, an increase of 5%, primarily due to favorable foreign currency impactexchange rates.
LIQUIDITY AND CAPITAL RESOURCES
We believe we maintain adequate liquidity levels through a combination of cash and favorable product mixavailability under committed credit facilities. Our cash and cash equivalents and availability under committed credit facilities aggregated to $2.8 billion of liquidity as a result of September 30, 2022. Our primary liquidity sources are cash flows from operations, working capital management, cash, and liquidity under our portfolio optimization efforts, higher automotive volumes and favorable cost absorption. These positive factors were partially offset by lower can and specialties volumes, and higher selling, general and administrative costs.
Asia
“Net sales” increased $251 million, or 19%, due to higher average aluminum prices and higher can and automotive shipments; partially offset by lower can pricing and lower specialties shipments.
“Segment income” was $124 million, a decrease of 6%, primarily due to lower can pricing and lower specialties volumes. These negative factors were partially offset by increased can and automotive volumes, and favorable automotive mix.
South America
“Net sales” increased $320 million, or 29%, due to higher average aluminum prices and higher specialties and can shipments; partially offset by unfavorable mix within specialties products and lower can pricing.
“Segment income” was $269 million, an increase of 14%, primarily due to higher can and specialties volumes and lower metal input costs. These positive factors were partially offset by unfavorable price and product mix and higher selling, general and administrative costs.
Liquidity and Capital Resources
debt agreements. Our significantrecent business investments in the business wereare being funded through cash flows generated by our operations and a
combination of local financing and our senior secured credit facilities. Our expansion projects are currently generating additional operating cash flows. We have the abilityexpect to be able to fund both our potentialshort- and long-term liquidity needs, such as our continued expansions, serviceservicing our debt obligations, and provideproviding sufficient liquidity to operate our business, through one or more of the following: the generation of operating cash flows;flows, working capital management, our existing debt facilities including refinancing;(including refinancing), and new debt issuances, as necessary.
Debt Refinancing
For more information on our most recent debt refinancing activities, please refer to Note 6 - Debt.
As of December 31, 2017, the Company’s subsidiaries that are not guarantors represented the following approximate percentages of (a) net sales, (b) Adjusted EBITDA, and (c) total assets of the Company, on a consolidated basis (including intercompany balances):
|
| | |
Item Description | Ratio |
Consolidated net sales represented by net sales to third parties by non-guarantor subsidiaries (for the nine months ended December 31, 2017) | 22 | % |
Consolidated Adjusted EBITDA represented by non-guarantor subsidiaries (for the nine months ended December 31, 2017) | 16 | % |
Consolidated assets owned by non-guarantor subsidiaries (as of December 31, 2017) | 19 | % |
In addition, for the nine months ended December 31, 2017 and 2016, the Company’s subsidiaries that are not guarantors had net sales of $2.1 billion and $1.7 billion, respectively, and, as of December 31, 2017, those subsidiaries had assets of $2.3 billion and debt and other liabilities of $1.6 billion (including inter-company balances).
Available Liquidity
Our available liquidity as of December 31, 2017September 30, 2022, and March 31, 20172022, is as follows (in millions):follows.
| | | | | | | | | | | |
in millions | September 30, 2022 | | March 31, 2022 |
Cash and cash equivalents | $ | 1,145 | | | $ | 1,070 | |
Availability under committed credit facilities | 1,642 | | | 1,499 | |
Total available liquidity | $ | 2,787 | | | $ | 2,569 | |
|
| | | | | | | |
| December 31, 2017 | | March 31, 2017 |
Cash and cash equivalents | $ | 757 |
| | $ | 594 |
|
Availability under committed credit facilities | 967 |
| | 701 |
|
Total liquidity | $ | 1,724 |
| | $ | 1,295 |
|
We reported liquidity of $1.7 billion as of December 31, 2017, which represents an increase compared to $1.3 billion reported as of March 31, 2017. The increase isin total available liquidity primarily attributablerelates to $314 millionthe increase in proceedsavailability under our ABL Revolver facility, offset by additional borrowings this fiscal year from the sale of shares in UAL and other assets, an increase insame facility. In August 2022, we amended the ABL borrowing base of $178Revolver facility to, among other things, increase availability by $500 million and positive free cash flow of $103 million. These increases were partially offset by net payments on short-term and long-term borrowings of $162 million, a reduction in availability of credit facilities of $34 million, and other changes of $40 million. As of December 31, 2017,to $2 billion. See Note 6 – Debt for more details about our availability under committed credit facilities of $967 million was comprised of $739 million under our ABL Revolver and $228 million under our Korea, China, and Middle East loan facilities.The “CashCash and cash equivalents” balance aboveequivalents includes cash held in foreign countries in which we operate. As of December 31, 2017,September 30, 2022, we held $2$4 million of "Cashcash and cash equivalents"equivalents in Canada, wherein which we are incorporated, with the rest held in other countries in which we operate. As of December 31, 2017,September 30, 2022, we held $356$601 million of cash in jurisdictions for which we have asserted that earnings are indefinitelypermanently reinvested, and we plan to continue to fund operations and local expansions with cash held in those jurisdictions. Our significant future uses of cash include funding our expansion projects globally, which we plan to fund with cash flows from operating activities and local financing, and servicing our debt obligations domestically, which we plan to fund with cash flows from operating activities and, if necessary, by repatriating cash from jurisdictions for which we have not asserted that earnings are indefinitely reinvested. Cash held outside of Canada is free from significant restrictions that would prevent the cash from being accessed to meet the Company's liquidity needs, including, if necessary, to fund operations and service debt obligations in Canada. Upon the repatriation of any earnings to Canada, in the form of dividends or otherwise, we could be subject to Canadian income taxes (subject to adjustment for foreign taxes paid and the utilization of the large cumulative net operating losses we have in Canada) and withholding taxes payable to the various foreign jurisdictions. As of December 31, 2017,September 30, 2022, we do not believe adverse tax consequences exist that restrict our use of “Cash or cash equivalents”and cash equivalents in a material manner.
Obligations
Free Cash Flow
We define “FreeOur material cash flow” (which is a non-GAAP measure) as: (a) “net cash provided by (used in) operating activities,” (b) plus "net cash provided by (used in) investing activities” and (c) less “proceeds from sales of assets, net of transaction fees, cash income taxes and hedging.” Management believes “Free cash flow” is relevant to investors as it provides a measure of the cash generated internally that is available for debt servicerequirements include future contractual and other value creation opportunities. However, “Free cash flow” does not necessarily represent cash available for discretionary activities, as certain debt service obligations must be funded out of “Free cash flow.” Our method of calculating “Free cash flow” may not be consistent with that of other companies.
Effectivearising in the second quarternormal course of fiscal 2018, management clarified the definition of “Free cash flow” (a non-GAAP measure) to reduce "Proceeds on the sale of assets, net of transaction fees and hedging" by cash income taxes to further enable users of the financial statements to understand cash generated internally by the Company. This change does not impact the condensed consolidated financial statements or significantly impact prior periods.
The following table shows “Free cash flow” for the nine months ended December 31, 2017 and 2016, the change between periods, and the ending balances of cash and cash equivalents (in millions).
|
| | | | | | | | | | | |
| Nine Months Ended December 31, | | |
| 2017 | | 2016 | | Change |
Net cash provided by operating activities | $ | 237 |
| | $ | 151 |
| | $ | 86 |
|
Net cash provided by (used in) investing activities | 170 |
| | (122 | ) | | 292 |
|
Less: Proceeds from the sale of a business, net of transaction fees, cash income taxes and hedging (A) | (304 | ) | | — |
| | (304 | ) |
Free cash flow | $ | 103 |
| | $ | 29 |
| | $ | 74 |
|
Ending cash and cash equivalents | $ | 757 |
| | $ | 505 |
| | $ | 252 |
|
_________________________
| |
(A) | This line item includes the proceeds from the sale of shares in Ulsan Aluminum Ltd., to Kobe Steel Ltd. during the three months ended December 31, 2017 in the amount of $314 million. This line item also includes "Outflows from the sale of a business, net of transaction fees," which is comprised of cash of $13 million held by ALCOM, which was a consolidated entity sold during the nine months ended September 30, 2016. We expect additional cash taxes and transaction fees related to Ulsan Aluminum Ltd. of approximately $41 million and $2 million, respectively, to be paid during the remainder of fiscal 2018. |
Operating Activities
Net cash provided by operating activities was $237 million for the nine months ended December 31, 2017, which was favorable compared to net cash provided by operating activities of $151 million for the nine months ended December 31, 2016. The favorable variancebusiness. These obligations primarily relates to higher "Segment income". The following summarizes changes in working capital accounts (in millions).
|
| | | | | | | | | | | |
| Nine Months Ended December 31, | | |
| 2017 | | 2016 | | Change |
Net cash used in operating activities due to changes in working capital: | | | | | |
Accounts receivable | $ | (403 | ) | | $ | (108 | ) | | $ | (295 | ) |
Inventories | (175 | ) | | (200 | ) | | 25 |
|
Accounts payable | 221 |
| | 59 |
| | 162 |
|
Other current assets and liabilities | 36 |
| | (58 | ) | | 94 |
|
Net change in working capital | $ | (321 | ) | | $ | (307 | ) | | $ | (14 | ) |
Nine Months Ended December 31, 2017
"Accounts receivable, net" increased due to the timing of cash collections on certain customerinclude debt and related party receivables balances coupled with an 33% increase in sales. To manage the timing of cash collections, we determine the need to factor our receivables based on local cash needs including the need to fund our strategic investments, as well as attempting to
balance the timing of cash flows of trade payables and receivables. "Inventories" were higher due to higher quantities on hand and higher average metal costs. The higher quantities of inventory on hand at December 31, 2017 is the result of recent capacity expansions, as well as longer supply chains to support the automotive sector and expand our scrap procurement network. "Accounts payable" increased $221 million in the nine months ended December 31, 2017 due primarily to higher metal input costs.
Included in cash flows from operating activities for the nine months ended December 31, 2017 were $197 million of interest payments, $107 million of cash paid for income taxes, $5 million of payments on restructuring programs, and $73 million of contributions to our pension plans. As of December 31, 2017, we had $36 million of outstanding restructuring liabilities, of which $31 million we estimate will result in cash outflows within the next twelve months.
Nine Months Ended December 31, 2016
"Accounts receivable, net" increased due to the timing of cash collections on certain customer receivables balances offset by 2% lower sales and higher factoring balances. As of December 31, 2016 and March 31, 2016, we had factored, without recourse, certain trade receivables aggregating $846 million and $626 million, respectively, which had a favorable impact to net cash provided by operating activities of $220 million for the nine months ended December 31, 2016. We determine the need to factor our receivables based on local cash needs including the need to fund our strategic investments, as well as attempting to balance the timing of cash flows of trade payables and receivables. "Inventories" were higher due to higher quantities on hand partially offset by lower average metal costs. The higher quantities of inventory on hand at December 31, 2016 is the result of recent capacity expansions, as well as longer supply chains to support the automotive sector and expand our scrap procurement network. As of December 31, 2016, we had sold certain inventories to third parties and have agreed to repurchase the same or similar inventory back from the third parties at market prices subsequent to December 31, 2016. Our estimated repurchase obligation for this inventory as of December 31, 2016 is $16 million, based on market prices as of this date. We sell and repurchase inventory with third parties in an attempt to better manage inventory levels and to better match the purchasing of inventory with the demand for our products. "Accounts payable" increased $59 million in the nine months ended December 31, 2016 due primarily to the timing of payments to vendors.
Included in cash flows from operating activities for the nine months ended December 31, 2016 were $236 million of interest payments, $70 million of cash paid for income taxes, $10 million of payments on restructuring programs, and $48 million of contributions to our pension plans. As of December 31, 2016, we had $23 million of outstanding restructuring liabilities, of which $15 million we estimate will result in cash outflows within the next twelve months. We also expect to incur restructuring charges in future periods as we dismantle the smelter site in South America.
Hedging Activities
We use derivative contracts to manage risk as well as liquidity. Under our terms of credit with counterparties to our derivative contracts, we do not have any material margin call exposure. No material amounts have been posted by Novelis nor do we hold any material amounts of margin posted by our counterparties. We settle derivative contracts in advance of billing on the underlying physical inventory and collecting payment from our customers, which temporarily impacts our liquidity position. The lag between derivative settlement and customer collection typically ranges from 30 to 90 days.
More details on our operating activities can be found above in “Results of operations for the nine months ended December 31, 2017 compared to the nine months ended December 31, 2016."
Investing Activities
The following table presents information regarding our “Net cash provided by (used in) investing activities” (in millions).
|
| | | | | | | | | | | |
| Nine Months Ended December 31, | | |
| 2017 | | 2016 | | Change |
Capital expenditures | $ | (136 | ) | | $ | (138 | ) | | $ | 2 |
|
(Outflows) proceeds from the settlement of derivative instruments, net | (18 | ) | | 7 |
| | (25 | ) |
Proceeds from sales of assets, third party, net of transaction fees and hedging | 1 |
| | 2 |
| | (1 | ) |
Proceeds (outflows) from the sale of a business | 314 |
| | (2 | ) | | 316 |
|
Proceeds from investment in and advances to non-consolidated affiliates, net | 9 |
| | 12 |
| | (3 | ) |
Net cash provided by (used in) investing activities | $ | 170 |
| | $ | (122 | ) | | $ | 292 |
|
For the nine months ended December 31, 2017 and December 31, 2016, our "Capital expenditures" were primarily attributable to maintenance of existing property, plant, and equipment.
"Proceeds from the sale of a business, net of certain transaction fees" for the nine months ended December 31, 2017 was primarily due to the sale of shares in Ulsan Aluminum Ltd.
As of December 31, 2017, we had $47 million of outstanding accounts payable and accrued liabilities related to capital expenditures in which the cash outflows will occur subsequent to December 31, 2017. We expect capital expenditures for fiscal 2018 to be approximately $250 million.
The settlement of undesignated derivative instruments resulted in cash outflow of $18 million and cash inflow of $7 million, in the nine months ended December 31, 2017 and 2016, respectively. The variance in these cash flows related primarily to changes in average aluminum prices and foreign currency rates which impact gains or losses we realize on the settlement of derivatives.
“Proceeds from investments in and advances to non–consolidated affiliates, net" for nine months ended December 31, 2017 and 2016 were primarily comprised of loan repayments and advances made to our non-consolidated affiliate, Alunorf, to fund capital expenditures.
Financing Activities
The following table presents information regarding our “Net cash used in financing activities” (in millions).
|
| | | | | | | | | | | |
| Nine Months Ended December 31, | | |
| 2017 | | 2016 | | Change |
Proceeds from issuance of long-term and short-term borrowings | $ | — |
| | $ | 2,770 |
| | $ | (2,770 | ) |
Principal payments of long-term and short-term borrowings | (138 | ) | | (2,676 | ) | | 2,538 |
|
Revolving credit facilities and other, net | (140 | ) | | (20 | ) | | (120 | ) |
Debt issuance costs | (5 | ) | | (139 | ) | | 134 |
|
Net cash used in financing activities | $ | (283 | ) | | $ | (65 | ) | | $ | (218 | ) |
Nine Months Ended December 31, 2017
During the nine months ended December 31, 2017, there were no issuances of long or short-term borrowings. We made principal repayments of $50 million on short-term loans in Brazil, $14 million on our Term Loan Facility, $68 million on Korean long-term debt and $6 million on capital leases. The net cash repayments from our credit facilities balance is related to payments of $119 million on our ABL Revolver and $21 million on our China credit facilities.
Nine Months Ended December 31, 2016
During the nine months ended December 31, 2016, we received proceeds of $1.15 billion and $1.5 billion, related to the issuance of our new 2024 and 2026 Notes, respectively. We also received proceeds related to the issuance of new short term loans in Brazil and Vietnam of $81 million and $40 million, respectively. Additionally, we made principal repayments of $1.1 billion and $1.4 billion on our 2017 Notes and 2020 Notes, respectively, $87 million on short-term loans in Brazil, $49 million on Novelis Vietnam loan repayments, $42 million on Korean loan repayments, $14 million on the Term Loan, $7 million on capital leases and $3 million in other principal repayments. The net cash repayments from our credit facilities balance is related to $12 million net repayments on our Middle East and Africa (MEA) facilities offset by net proceeds of $17 million in our China credit facilities.
As of December 31, 2016, our short-term borrowings were $517 million consisting of $367 million of loans under our ABL Revolver, $71 million in Novelis Brazil loans, $58 million in Novelis China loans, $11 million in Novelis Korea bank loans and $10 million of other short-term borrowings. The weighted average interest rate on our total short-term borrowings was 2.65% as of December 31, 2016.
OFF-BALANCE SHEET ARRANGEMENTS
In accordance with SEC rules, the following qualify as off-balance sheet arrangements:
any obligation under certain derivative instruments;
any obligation under certain guarantees or contracts;
a retained or contingent interest in assets transferred to an unconsolidated entity or similar entity or similar arrangement that serves as credit, liquidity or market risk support to that entity for such assets; and
any obligation under a material variable interest held by the registrant in an unconsolidated entity that provides financing, liquidity, market risk or credit risk support to the registrant, or engages in leasing, hedging or research and development services with the registrant.
The following discussion addresses the applicable off-balance sheet items for our Company.
Derivative Instruments
See Note 10 — Financial Instruments and Commodity Contracts to our accompanying unaudited condensed consolidated financial statements for a description of derivative instruments.
Guarantees of Indebtedness
We have issued guarantees on behalf of certain of our subsidiaries. The indebtedness guaranteed is for trade accounts payable to third parties. Some of the guarantees have annual terms while others have no expiration and have termination notice requirements. Neither we nor any of our subsidiaries holds any assets of any third parties as collateral to offset the potential settlement of these guarantees. Since we consolidate wholly-owned and majority-owned subsidiaries in our condensed consolidated financial statements, all liabilities associated with trade payables and short-term debt facilities for these entities are already included in our condensed consolidated balance sheets.
See Note 5 — Investment in and Advances to Non-Consolidated Affiliates and Related Party Transactions for details on our guarantee of indebtedness to Alunorf, our non-consolidated affiliate.
Other Arrangements
Factoring of Trade Receivables
We factor and forfait trade receivables (collectively, we refer to these as "factoring" programs) based on local cash needs, as well as attempting to balance the timing of cash flows of trade payables and receivables, fund strategic investments, and fund other business needs. Factored invoices are not included in our condensed consolidated balance sheets when we do not retain a financial or legal interest. If a financial or legal interest is retained, we classify these factorings as secured borrowings. However, no such financial or legal interests are currently retained.
Other
As part of our ongoing business, we do not participate in transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as special purpose entities (SPEs), which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As of December 31, 2017 and March 31, 2017, we are not involved in any unconsolidated SPE transactions.
CONTRACTUAL OBLIGATIONS
We have future obligations under various contracts relating to debt and interest payments, capitalfinance and operating leases, long-term purchaselease obligations, postretirement benefit plansplan obligations, and uncertain tax positions.purchase obligations. See Note 6 —– Debt to our accompanying condensed consolidated financial statements and "Contractual Obligations" in"Liquidity and Capital Resources" within Part II. Item 7. See Management’sManagement's Discussion and Analysis of Financial Condition and Results of Operations inour Annual Report on2022 Form 10-K for the year ended March 31, 2017 for more details.There are no additional material off-balance sheet arrangements.
Adjusted Free Cash Flow
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.
| | | | | | | | |
| | Six Months Ended |
in millions | | September 30, 2021 |
3.25% Senior Notes, due November 2026(1) | | $ | 750 | |
3.875% Senior Notes, due August 2031(1) | | 750 | |
Floating rate Term Loans, due March 2028 | | 20 | |
| | |
| | |
| | |
| | |
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.
The following represents principal payments of long-term and short-term borrowings during the six months ended September 30, 2022, and 2021.
| | | | | | | | |
| | Six Months Ended |
in millions | | September 30, 2022 |
| | |
Short-term loans due November 2022 | | $ | (102) | |
Floating rate Term Loans, due January 2025 | | (4) | |
Floating rate Term Loans, due March 2028 | | (3) | |
China Bank Loans, due August 2027 | | (3) | |
| | |
| | |
Finance leases and other repayments | | (2) | |
Principal payments of long-term and short-term borrowings | | $ | (114) | |
| | |
| | |
| | | | | | | | |
| | Six Months Ended |
in millions | | September 30, 2021 |
5.875% Senior Notes, due September 2026(1) | | $ | (1,551) | |
Floating rate Term Loans, due June 2022 | | (229) | |
Zhenjiang Term Loans, due May 2024 | | (129) | |
Finance leases and other repayments | | (5) | |
Floating rate Term Loans, due January 2025 | | (4) | |
Short-term borrowings in Brazil | | (3) | |
Floating rate Term Loans, due March 2028 | | (2) | |
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.
| | | | | | | | |
| | Six Months Ended |
in millions | | September 30, 2022 |
ABL Revolver | | $ | 426 | |
China credit facility | | 16 | |
Korea credit facility and Other revolving facilities | | 8 | |
| | |
Revolving credit facilities and other, net | | $ | 450 | |
| | |
| | |
| | | | | | | | |
| | Six Months Ended |
in millions | | September 30, 2021 |
| | |
China credit facility | | $ | 22 | |
ABL Revolver | | 9 | |
Korea credit facility | | (17) | |
| | |
Revolving credit facilities and other, net | | $ | 14 | |
| | |
| | |
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.
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).
| | | | | | | | |
Item Description | | Ratio |
Net sales represented by non-guarantor subsidiaries (for the six months ended September 30, 2022) | | 20 | % |
Adjusted EBITDA represented by non-guarantor subsidiaries (for the six months ended September 30, 2022) | | 17 | % |
Assets owned by non-guarantor subsidiaries (as of September 30, 2022) | | 14 | % |
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 theour board of directors and willdirectors. 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. CRITICAL ACCOUNTING POLICIES AND ESTIMATES
During the nine months ended December 31, 2017, thereThere were no significant changes to our critical accounting policies and estimates as reported in our Annual Report on2022 Form 10-K for the year ended March 31, 2017.
RECENTLY ISSUED ACCOUNTING STANDARDS
RECENTLY ISSUED ACCOUNTING STANDARDS
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 “Segment income”Adjusted EBITDA presents the sum of the results of our four operating segments on a consolidated basis. We believe that total “Segment income”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 to draw comparisons between periods based on the same measure of consolidated performance.
Management believes investors’investors' understanding of our performance is enhanced by including this non-GAAP financial measure as a reasonable basis for comparing our ongoing results of operations. Many investors are interested in understanding the performance of our business by comparing our results from ongoing operations from one period to the next and would ordinarily add back items that are not part of normal day-to-day operations of our business. By providing total “Segment income,”Adjusted EBITDA, together with reconciliations, we believe we are enhancing investors’investors' understanding of our business and our results of operations, as well as assisting investors in evaluating how well we are executing strategic initiatives.
However, total “Segment income”Adjusted EBITDA is not a measurement of financial performance under U.S. GAAP, and our total “Segment income”Adjusted EBITDA may not be comparable to similarly titled measures of other companies. Total “Segment income”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 “Segment income”:Adjusted EBITDA:
•does not reflect the company’sCompany's cash expenditures or requirements for capital expenditures or capital commitments;
•does not reflect changes in, or cash requirements for, the company’sCompany's working capital needs; and
•does not reflect any costs related to the current or future replacement of assets being depreciated andor amortized.
We also use total “Segment income”: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.
Total “Segment income”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 which we referis 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 earnings announcementsregions, and other external presentations to analyststhese non-rolled products are not part of our core operating business.
See Liquidity and Capital Resources sectionMajor Supplier Information for our definition of "FreeAdjusted 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 flow".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.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS AND MARKET DATA
This documentQuarterly 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.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 “expect,” “anticipate,” “intend,” “plan,” “believe,” “seek,” “estimate”"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 with respect toabout the impact of metal price movements onany 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 financial performance,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 effectivenessend of fiscal 2023; statements about our hedging programsbelief that significant aircraft industry order backlogs for key OEMS, including Airbus and controls,Boeing, will translate into growth in the future and that our multi-year supply agreements have positioned us to benefit from future borrowing availability.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’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 partythird-party industry analysts quoted herein. This information includes, but is not limited to, product shipments and share of production. Actual market results may differ
from those predicted. We do not know what impact any of these differences may have on our business, our results of operations, financial condition, and cash flow. FactorsFor a discussion of some of the specific factors that couldmay cause Novelis' actual results or outcomes to differ materially from the results expressed or implied bythose projected in any forward-looking statements, include, among other things:
relationships with,refer to our 2022 Form 10-K and financial and operating conditionssee the following sections of our customers, suppliers and other stakeholders;
changes in the prices and availability of aluminum (or premiums associated with aluminum prices) or other materials and raw materials we use;
fluctuations in the supply of, and prices for, energy in the areas in which we maintain production facilities;
our ability to access financing, repay existing debt or refinance existing debt to fund current operations and for future capital requirements;
the level of our indebtedness and our ability to generate cash to service our indebtedness;
lowering of our ratings by a credit rating agency;
changes in the relative values of various currencies and the effectiveness of our currency hedging activities;
union disputes and other employee relations issues;
factors affecting our operations, such as litigation (including product liability claims), environmental remediation and clean-up costs, breakdown of equipment and other events;
changes in general economic conditions, including deterioration in the global economy;
the capacity and effectiveness of our hedging activities;
impairment of our goodwill, other intangible assets, and long-lived assets;
loss of key management and other personnel, or an inability to attract such management and other personnel;
risks relating to future acquisitions or divestitures;
our inability to successfully implement our growth initiatives;
changes in interest rates that have the effect of increasing the amounts we pay under our senior secured credit facilities, other financing agreements and our defined benefit pension plans;
risks relating to certain joint ventures and subsidiaries that we do not entirely control;
the effect of derivatives legislation on our ability to hedge risks associated with our business;
competition from other aluminum rolled products producers as well as from substitute materials such as steel, glass, plastic and composite materials;
demand and pricing within the principal markets for our products as well as seasonality in certain of our customers’ industries;
economic, regulatory and political factors within the countries in which we operate or sell our products, including changes in duties or tariffs; and
changes in government regulations, particularly those affecting taxes and tax rates, health care reform, climate change, environmental, health or safety compliance.
The above list of factors is not exhaustive. These and other factors are discussed in more detail under “Itemreport: Part I. Item 1A. Risk Factors”Factors and “ItemPart II. Item 7. Management’sManagement's Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended March 31, 2017.
Operations.
Item 3.Quantitative and Qualitative Disclosures About Market RiskRisk.
We are exposed to certain market risks as part of our ongoing business operations, including risks from changes in commoditymetal prices (primarily the London Metals Exchange ("LME") aluminum, copper, zinc, and LMPs), energy prices (electricity, natural gas, and natural gas)diesel fuel), local market premiums, electricity rates, 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
AluminumMetal
The following table presents the estimated potential negative effect on the fair values of these derivative instruments as of December 31, 2017,September 30, 2022, given a 10% increasechange in prices ($prices. Direction of the change in millions).price corresponds with the direction that would cause a negative impact on the fair value of these derivative instruments.
|
| | | | | | |
| Change in Price | | Change in Fair Value |
LME aluminum | 10 | % | | $ | (106 | ) |
| | | | | | | | | | | |
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 December 31, 2017,September 30, 2022, given a 10% decline in spot prices for energy contracts ($ in millions).contracts.
|
| | | | | | |
| Change in Price | | Change in Fair Value |
Electricity | (10 | )% | | $ | (4 | ) |
Natural Gas | (10 | )% | | (6 | ) |
Diesel Fuel | (10 | )% | | (1 | ) |
| | | | | | | | | | | |
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 December 31, 2017,September 30, 2022, given a 10% change in rates ($rates. Direction of the change in millions).
|
| | | | | | |
| Change in Exchange Rate | | Change in Fair Value |
Currency measured against the U.S. dollar | | | |
Brazilian real | (10 | )% | | $ | (22 | ) |
Euro | 10 | % | | (39 | ) |
Korean won | (10 | )% | | (31 | ) |
Canadian dollar | (10 | )% | | (4 | ) |
British pound | (10 | )% | | (19 | ) |
Swiss franc | (10 | )% | | (40 | ) |
Chinese yuan | 10 | % | | (8 | ) |
Interest Rate Risks
The following table presentsexchange rate corresponds with the estimated potential effect ondirection that would cause the change in exchange rate to negatively impact the fair valuesvalue of these derivative instruments as of December 31, 2017, given a 100 bps decrease in the benchmark interest rate ($ in millions).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 | | | — | |
|
| | | | | | | | |
| Change in
Rate
| | | Change in
Fair Value
|
Interest Rate Contracts | | | | |
Asia - KRW-CD-3200 | (100 | ) | bps | — |
| $ | — |
|
Item 4.Controls and ProceduresProcedures.
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized, and reported within the time periods specified in the SEC’sSEC'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 designedwell-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’sCompany's disclosure controls and procedures pursuant to Rule 13a-15 of the Exchange Act. Based upon such evaluation, management has concluded that the Company’sCompany's disclosure controls and procedures were effective as of December 31, 2017.September 30, 2022.
Changes in Internal Control Overover 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.
PART II. II—OTHER INFORMATION
Item 1.Legal ProceedingsProceedings.
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
Factors.
See "Risk Factors" in Part I,I. Item 1A1A. Risk Factors in our Annual Report2022 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 Form 10-Kthe 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 year ended March 31, 2017.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.
Item 6.Exhibits
|
| | | | | | | |
Exhibit No.
| | Description |
2.1 | | |
2.1 |
| | |
3.1 | | |
3.1 |
| | |
3.2 | | |
3.2 |
| | |
3.3 | | |
3.3 |
| |
|
10.1 | | Amendment No. 10 to Second Amended and Restated Credit Agreement, dated as of August 18, 2022, among Novelis Inc., Novelis Corporation, the other U.S. Subsidiaries of Canadian Borrower party thereto, Novelis UK Ltd, Novelis AG, Novelis Deutschland GMBH, the other Guarantors party thereto, the Third Party Security Provider, the Lenders party thereto, Wells Fargo Banks, National Association, as Administrative Agent, and as Collateral Agent. |
31.1 |
| |
31.1 | | |
31.2 | | |
31.2 |
| | |
32.1 | | |
32.1 |
| | |
32.2 | | |
32.2 |
| | |
101.INS | | |
101.INS |
| | XBRL Instance Document |
101.SCH | | |
101.SCH |
| | Inline XBRL Taxonomy Extension Schema Document |
101.CAL | | |
101.CAL |
| | Inline XBRL Taxonomy Extension Calculation Linkbase |
101.DEF | | |
101.DEF |
| | Inline XBRL Taxonomy Extension Definition Linkbase |
101.LAB | | |
101.LAB |
| | Inline XBRL Taxonomy Extension Label Linkbase |
101.PRE | | |
101.PRE |
| | Inline XBRL Taxonomy Extension Presentation Linkbase |
104 | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
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.
| | | | | | | | | | | |
| NOVELIS INC. | | |
| By: | | /s/ Devinder Ahuja |
| | | Devinder Ahuja |
| | | Chief Financial Officer |
| | | (Principal Financial Officer and Authorized Officer) |
| | | |
| NOVELIS INC.By: | | |
| By: | | /s/ Devinder Ahuja |
| | | Devinder Ahuja |
| | | Chief Financial Officer |
| | | (Principal Financial Officer and Authorized Officer) |
| | | |
| By: | | /s/ Stephanie Rauls |
| | | Stephanie Rauls |
| | | Vice President Finance and Controller |
| | | (Principal Accounting Officer) |
Date: February 1, 2018
EXHIBIT INDEX
|
| | | Stephanie Rauls |
Exhibit
No.
| | Description | Senior Vice President, Deputy Chief Financial Officer and Chief Accounting Officer |
| | |
2.1 |
| | |
| | |
3.1 |
| | |
| | |
3.2 |
| |
|
| | |
3.3 |
| |
|
| | |
31.1 |
| | |
| | |
31.2 |
| | |
| | |
32.1 |
| | |
| | |
32.2 |
| |
|
| | |
101.INS |
| | XBRL Instance Document |
| | |
101.SCH |
| | XBRL Taxonomy Extension Schema Document |
| | |
101.CAL |
| | XBRL Taxonomy Extension Calculation Linkbase |
| | |
101.DEF |
| | XBRL Taxonomy Extension Definition Linkbase |
| | |
101.LAB |
| | XBRL Taxonomy Extension Label Linkbase |
| | |
101.PRE |
| | XBRL Taxonomy Extension Presentation LinkbaseAccounting Officer) |
Date: November 8, 2022