NVL Q4 2016 10-Q

Novelis Inc (NVL) SEC Annual Report (10-K) for 2017

NVL Q2 2017 10-Q
NVL Q4 2016 10-Q NVL Q2 2017 10-Q


UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

Form 10-K

ý

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended

March 31, 2017

Or

¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             .

Commission file number 001-32312

Novelis Inc.

(Exact name of registrant as specified in its charter)

Canada

98-0442987

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification Number)

3560 Lenox Road, Suite 2000,

Atlanta, GA

30326

(Address of principal executive offices)

(Zip Code)

(404) 760-4000

(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act of 1933.    Yes    ¨     No   ý

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act").    Yes   ý     No   ¨

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   ¨     No   ý

The registrant is a voluntary filer and is not subject to the filing requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934. However, the registrant has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months.

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   ý     No   ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ý

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging grown company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer

¨

Accelerated filer

¨

Non-accelerated filer

x   (Do not check if a smaller reporting company)

Smaller reporting company

¨

Emerging growth company

¨

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   ¨     No   ý

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   ¨

As of May 9, 2017 , the Registrant had 1,000 common shares outstanding. All of the Registrant's outstanding shares were held indirectly by Hindalco Industries Ltd., the Registrant's parent company. 

DOCUMENTS INCORPORATED BY REFERENCE: None






TABLE OF CONTENTS

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS AND MARKET DATA

PART I

Item 1. Business

4

Item 1A. Risk Factors

14

Item 1B. Unresolved Staff Comments

23

Item 2. Properties

23

Item 3. Legal Proceedings

26

Item 4. Mine Safety Disclosures

26

PART II

Item  5. Market for Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities

27

Item 6. Selected Financial Data

27

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

28

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

61

Item 8. Financial Statements and Supplementary Data

64

Item 9. Changes In and Disagreements With Accountants On Accounting and Financial Disclosure

137

Item 9A. Controls and Procedures

137

Item 9B. Other Information

137

PART III

Item 10. Directors, Executive Officers and Corporate Governance

138

Item 11. Executive Compensation

143

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters

158

Item 13. Certain Relationships and Related Transactions and Director Independence

159

Item 14. Principal Accountant Fees and Services

160

PART IV

Item 15. Exhibits and Financial Statement Schedules

161

Item 16. Form 10-K Summary

170



2


SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS AND MARKET DATA

This document contains forward-looking statements that are based on current expectations, estimates, forecasts and projections about the industry in which we operate, and beliefs and assumptions made by our management. Such statements include, in particular, statements about our plans, strategies and prospects under the headings "Item 1. Business," "Item 1A. Risk Factors" and "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations." Words such as "expect," "anticipate," "intend," "plan," "believe," "seek," "estimate" and variations of such words and similar expressions are intended to identify such forward-looking statements. Examples of forward-looking statements in this Annual Report on Form 10-K include, but are not limited to, our expectations with respect to the impact of metal price movements on our financial performance; the effectiveness of our hedging programs and controls; and our future borrowing availability. These statements are based on beliefs and assumptions of Novelis' management, which in turn are based on currently available information. These statements are not guarantees of future performance and involve assumptions and risks and uncertainties that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed, implied or forecasted in such forward-looking statements. We do not intend, and we disclaim any obligation, to update any forward-looking statements, whether as a result of new information, future events or otherwise.

This document also contains information concerning our markets and products generally, which is forward-looking in nature and is based on a variety of assumptions regarding the ways in which these markets and product categories will develop. These assumptions have been derived from information currently available to us and to the third party industry analysts quoted herein. This information includes, but is not limited to, product shipments and share of production. Actual market results may differ from those predicted. We do not know what impact any of these differences may have on our business, our results of operations, financial condition, and cash flow. Factors that could cause actual results or outcomes to differ from the results expressed or implied by forward-looking statements include, among other things:

relationships with, and financial and operating conditions 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;

our indebtedness and our ability to generate cash to service our indebtedness;

lowering of our ratings by a credit rating agency;

changes in the relative values of various currencies and the effectiveness of our currency hedging activities;

union disputes and other employee relations issues;

factors affecting our operations, such as litigation (including product liability claims), environmental remediation and clean-up costs, breakdown of equipment and other events;

changes in general economic conditions, including deterioration in the global economy;

the capacity and effectiveness of our hedging activities;

impairment of our goodwill, other intangible assets, and long-lived assets;

loss of key management and other personnel, or an inability to attract such management and other personnel;

risks relating to future acquisitions or divestitures;

our inability to successfully implement our growth initiatives;

changes in interest rates that have the effect of increasing the amounts we pay under our senior secured credit facilities, other financing agreements and our defined benefit pension plans;

risks relating to certain joint ventures and subsidiaries that we do not entirely control;

the effect of derivatives legislation on our ability to hedge risks associated with our business;

competition from other aluminum rolled products producers as well as from substitute materials such as steel, glass, plastic and composite materials;

demand and pricing within the principal markets for our products as well as seasonality in certain of our customers' industries;

economic, regulatory and political factors within the countries in which we operate or sell our products, including changes in duties or tariffs; and

changes in government regulations, particularly those affecting taxes and tax rates, health care reform, climate change, environmental, health or safety compliance.

The above list of factors is not exhaustive. These and other factors are discussed in more detail under "Item 1. Business," "Item 1A. Risk Factors" and "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations."

In this Annual Report on Form 10-K, unless otherwise specified, the terms "we," "our," "us," "Company," and "Novelis" refer to Novelis Inc., a company incorporated in Canada under the Canadian Business Corporations Act and its subsidiaries. References herein to "Hindalco" refer to Hindalco Industries Limited, which acquired Novelis in May 2007. In October 2007, Rio Tinto Group purchased all of the outstanding shares of Alcan Inc. References herein to "RT" refer to Rio Tinto Inc.

Exchange Rate Data

We report our financial statements in United States (U.S.) dollars. The following table sets forth exchange rate information expressed in terms of Canadian dollars per U.S. dollar based on exchange data published daily from Citibank as of 16:00 Greenwich Mean Time (GMT) (11:00 A.M. Eastern Standard Time). The rates set forth below may differ from the actual rates used in our accounting processes and in the preparation of our consolidated financial statements.

Period

At Period End

Average Rate(A)

High

Low

Year Ended March 31, 2013

1.0160


1.0030


1.0334


0.9601


Year Ended March 31, 2014

1.1044


1.0577


1.1127


1.0074


Year Ended March 31, 2015

1.2666


1.1467


1.2681


1.0665


Year Ended March 31, 2016

1.2978


1.3115


1.4015


1.2065


Year Ended March 31, 2017

1.3289


1.3137


1.3439


1.2542


(A)

This represents the average of the 16:00 GMT buying rates on the last day of each month during the period.


All dollar figures herein are in U.S. dollars unless otherwise indicated.

Commonly Referenced Data

As used in this Annual Report, consolidated "aluminum rolled product shipments," "flat rolled product shipments," or "shipments" refers to aluminum rolled products shipments to third parties. "Aluminum rolled product shipments," "flat rolled product shipments," or "shipments" associated with the regions refers to aluminum rolled product shipments to third parties and intersegment shipments to other Novelis regions. Shipment amounts also include tolling shipments. References to "total shipments" include aluminum rolled products shipments as well as certain other non-rolled products shipments, primarily scrap, used beverage cans (UBCs), ingot, billets, and primary remelt. The term "aluminum rolled products" is synonymous with the terms "flat rolled products" and "FRP" which are commonly used by manufacturers and third party analysts in our industry. All tonnages are stated in metric tonnes. One metric tonne is equivalent to 2,204.6 pounds. One kilotonne (kt) is 1,000 metric tonnes.

A significant amount of our business is conducted under a conversion model, which allows us to pass through increases or decreases in the price of aluminum to our customers. Nearly all of our flat-rolled products have a price structure with three components: (i) a base aluminum price quoted off the London Metal Exchange (LME); (ii) a local market premium; and (iii) a "conversion premium" to produce the rolled product which reflects, among other factors, the competitive market conditions for that product. The use of the term "conversion premium" in this Annual Report, refers to the conversion costs plus a margin we charge our customers to produce the rolled product which reflects, among other factors, the competitive market conditions for that product, exclusive of the pass through aluminum price.


3


PART I

Item 1. Business

Overview

We are the world's leading aluminum rolled products producer, based on shipment volume of 3,067 kt in fiscal 2017 . We are also the global leader in the recycling of aluminum. We are the only known company of our size and scope focused solely on aluminum rolled products markets and capable of local supply of technologically sophisticated aluminum products in all four major industrialized continents: North America, South America, Europe and Asia. We had "Net sales" of $10 billion for the year ended March 31, 2017 .

Our History

Organization and Description of Business

All of the common shares of Novelis are owned directly by AV Metals Inc. and indirectly by Hindalco Industries Limited. We produce aluminum sheet and light gauge products primarily for use in the beverage can, automotive, specialty products (including consumer electronics, architecture, and other transportation) and foil markets. We also have recycling operations in many of our plants to recycle aluminum. As of March 31, 2017 , we had manufacturing operations in ten countries on four continents: North America, South America, Europe and Asia, through 24 operating facilities, including recycling operations in eleven of these plants.

Our Industry

The aluminum rolled products market represents the global supply of, and demand for, aluminum sheet, plate and foil produced either from sheet ingot or continuously cast roll-stock in rolling mills operated by both independent aluminum rolled products producers and integrated aluminum companies.

Aluminum rolled products are semi-finished aluminum products that constitute the raw material for the manufacture of finished goods ranging from automotive structures and body panels to food and beverage cans. There are two major types of manufacturing processes for aluminum rolled products differing mainly in the process used to achieve the initial stage of processing:

hot mills - which require sheet ingot, a rectangular slab of aluminum, as starter material; and

continuous casting mills - which can convert molten metal directly into semi-finished sheet.


Both processes require subsequent rolling, which we refer to as cold rolling, and finishing steps such as annealing, coating, leveling or slitting to achieve the desired thickness, width and metal properties. Most customers receive shipments in the form of aluminum coil, a large roll of metal, which can be utilized in their fabrication processes.


Industry Sources of Metal

There are two sources of input material: (1) recycled aluminum, produced by remelting post-industrial and post-consumer scraps; and (2) primary aluminum, produced from bauxite processed in a smelter.

Primary aluminum and sheet ingot can generally be purchased at prices set on the LME, plus a local market premium that varies by geographic region of delivery, alloying material, form (ingot or molten metal) and purity.

Recycled aluminum is generally purchased at a discount compared to the price of primary aluminum depending on type and quality of the scrap, geographic region, and other market factors.

Industry End-use Markets

Aluminum rolled products companies produce and sell a wide range of products, which can be grouped into five end-use markets: (1) packaging; (2) transportation; (3) architectural; (4) industrial; and (5) consumer durables and other. Within each end-use market, aluminum rolled products are manufactured with a variety of alloy mixtures; a range of tempers (hardness), gauges (thickness) and widths; and various coatings and finishes. Large customers typically have customized needs resulting in the development of close relationships, including technical development relationships, with their supplying mills.

Aluminum, because of its light weight, recyclability and formability, has a wide variety of uses in packaging and other end-use markets. The recyclability of aluminum enables it to be used, collected, melted and returned to the original product form an unlimited number of times, unlike paper and polyethylene terephthalate (PET) plastic, which deteriorate with every iteration of recycling.


4


Packaging. Aluminum is used in beverage cans and bottles, food cans, beverage screw caps and foil, among others. Packaging is the largest aluminum rolled products application, according to market data from Commodity Research Unit International Limited (CRU), an independent business analysis and consultancy group. Beverage cans are one of the largest aluminum rolled products applications. In addition to their recyclability, aluminum beverage cans offer advantages in fabricating efficiency and product shelf life. Fabricators are able to produce and fill beverage cans at very high speeds, and non-porous aluminum cans provide longer shelf life than PET plastic containers. Additionally, the use of aluminum to package beverages such as craft beer is increasing, as aluminum blocks sunlight and therefore maintains the quality and taste of the product longer. Aluminum cans are light, stackable and use space efficiently, making them convenient and cost-efficient to ship.

Beverage can sheet is sold in coil form for the production of can bodies, ends and tabs. The material can be ordered as rolled, degreased, pre-lubricated, pre-treated and/or lacquered. Typically, can makers define their own specifications for material to be delivered in terms of alloy, gauge, width and surface finish.

Foil wrap or packaging foil is another packaging application and it includes household and institutional aluminum foil. Container foil is used to produce semi-rigid containers such as pie plates and take-out food trays.

Transportation. Aluminum rolled products are used in vehicle structures (also known as "body-in-white") as well as automotive body panel applications, including hoods, deck lids, fenders and lift gates. These uses typically result from cooperative efforts between aluminum rolled products manufacturers and their customers that yield solutions for specific requirements in alloy selection, fabrication procedure, surface quality and joining. There has been recent growth in certain geographic markets in passenger and commercial vehicle applications due to the lighter weight, better fuel economy and improved emissions performance associated with these applications. We expect increased growth in this end-use market driven by government regulations requiring improved emissions and better fuel economy; while also maintaining or improving vehicle performance and safety.

Heat exchangers, such as radiators and air conditioners, are an important application for aluminum rolled products in the transportation end-use market. Original equipment manufacturers also use aluminum sheet with specially treated surfaces and other specific properties for interior and exterior applications. Newly developed alloys are being used in transportation tanks and rigid containers allowing for safer and more economical transportation of hazardous and corrosive materials.

Aluminum is also used in aerospace applications, as well as in the construction of ships' hulls, superstructures and passenger rail cars because of its strength, light weight, formability and corrosion resistance.

Architectural. Construction is the largest application within this end-use market. Aluminum rolled products developed for the construction industry are often decorative and non-flammable, offer insulating properties, are durable and corrosion resistant, and have a high strength-to-weight ratio. Aluminum siding, gutters, and downspouts comprise a significant amount of construction volume. Other applications include doors, windows, awnings, canopies, facades, roofs and ceilings.

Industrial. Industrial applications include heat exchangers, process and electrical machinery, lighting fixtures, furniture and insulation.

Consumer Durables and Other. Aluminum's lightweight characteristics, high formability, ability to conduct electricity and dissipate heat and its corrosion resistance makes it useful in a wide variety of electronic applications. Uses of aluminum rolled products in electronics include flat screen televisions, personal computers, laptops, mobile devices, and digital music players. Other uses of aluminum rolled products in consumer durables include microwaves, coffee makers, air conditioners and cooking utensils.


5


Market Structure and Competition

The aluminum rolled products market is highly competitive and is characterized by economies of scale; and significant capital investments are required to achieve and maintain technological capabilities and demanding customer qualification standards. Our primary competitors are as follows:

North America

Asia

Alcoa, Inc. (Alcoa)

Arconic

Aleris International, Inc. (Aleris)

Binzhou Weiqiao Aluminium Science & Technology Co., Ltd

Arconic Inc. (Arconic)

China Zhongwang Holdings Limited

Constellium N.V. (Constellium)

Chinalco Group

Granges

Henan Mingtai Aluminum Industrial Co., Ltd

UACJ Corporation/ Tri-Arrows Aluminum Inc. (Tri-Arrows)

Henan Zhongfu Industrial Co., Ltd

Kobe Steel Ltd.

Europe

Shandong Nanshan Aluminum Co., Ltd

Aleris

Southwest Aluminum (Group) Co., Ltd.

Arconic

UACJ Corporation

Constellium

Norsk Hydro A.S.A.

South America

Arconic

Companhia Brasileira de Alumínio

The factors influencing competition vary by region and end-use market, but generally we compete on the basis of our value proposition; which includes price, product quality, the ability to meet customers' specifications, range of products offered, lead times, technical support and customer service. In some end-use markets, competition is also affected by fabricators' requirements that suppliers complete a qualification process to supply their plants. This process can be rigorous and may take many months to complete. As a result, obtaining business from these customers can be a lengthy and expensive process. However, the ability to obtain and maintain these qualifications can represent a competitive advantage.

In addition to competition from others within the aluminum rolled products industry, we also face competition from non-aluminum material producers. In the packaging end-use market (primarily beverage and food cans), aluminum rolled products compete mainly with glass, PET plastic, and in some regions, steel. In the transportation end-use market, aluminum rolled products compete mainly with steel and composites. Aluminum competes with wood, plastic, cement and steel in building products applications. In the consumer durables end-use market, aluminum rolled products compete mainly with plastic, steel, and magnesium. Additionally, aluminum competes with steel, cooper, plastic, and glass in industrial applications. Factors affecting competition with substitute materials include price, ease to manufacture, consumer preference and performance characteristics.


6


Key Factors Affecting Supply and Demand

The following factors have historically affected the supply of aluminum rolled products:

Production Capacity and Alternative Technology. The addition of rolling capacity requires large capital investments and significant plant construction or expansion, and typically requires long lead-time equipment orders. Advances in technological capabilities allow aluminum rolled products producers to better align product portfolios and supply with industry demand. There are lower cost ways to enter the industry such as continuous casting, which offers the ability to increase capacity in smaller increments than is possible with hot mill additions; however, the continuous casting process results in a more limited range of products.

Trade. Some trade flows occur between regions despite shipping costs, import duties and the lack of localized customer support. Higher value-added products are more likely to be traded internationally, especially if demand in certain markets exceeds local supply. With respect to less technically demanding applications, emerging markets with low cost inputs may export commodity aluminum rolled products to larger, more mature markets, as we have seen with China.


The following factors have historically affected the demand for aluminum rolled products:

Economic Growth. We believe that economic growth is a significant driver of aluminum rolled products demand. In mature markets, growth in demand has typically correlated closely with industrial production growth. In many emerging markets, growth in demand typically exceeds industrial production growth largely because of expanding infrastructures, capital investments and rising incomes that often accompany economic growth in these markets.

Substitution Trends. Manufacturers' willingness to substitute other materials for aluminum in their products and competition from substitution materials suppliers also affect demand. There has been a strong substitution trend toward aluminum in the use of vehicles as automobile manufacturers look for ways to meet fuel efficiency regulations, improve performance and reduce carbon emissions in a cost-efficient manner. As a result of aluminum's durability, strength and light weight, automobile manufacturers are substituting heavier alternatives such as steel and iron with aluminum. Carbon fiber is another lightweight material option, but its relatively high cost and limited end-of-life recyclability reduce its competitiveness as a widespread material substitute today. Consequently, demand for flat rolled aluminum products has increased. We also see strong substitution trends toward aluminum and away from steel in the beverage can market in certain regions.

Seasonality. During our third fiscal quarter, we typically experience seasonal slowdowns resulting in lower shipment volumes. This is a result of declines in overall production output due primarily to holidays and cooler weather in North America and Europe, our two largest operating regions.  We also experience downtime at our mills and customers' mills due to scheduled plant maintenance and are impacted to a lesser extent by the seasonal downturn in construction activity.

Sustainability. Growing awareness of environmentalism and demand for recyclable products has increased the demand for aluminum rolled products. Unlike other commonly recycled materials such as paper or PET plastic, aluminum can be infinitely recycled without affecting the quality of the product. Additionally, the recycling process uses 95% less energy than is required to produce primary aluminum from mining and smelting, with an equivalent reduction in greenhouse gas emissions.

Our Business Strategy

Following the successful completion of significant multi-year capital investments to increase our capacity, reshape our product portfolio and expand our recycling capacity, our primary objective as the world's largest aluminum rolling and recycling company is to increase shareholder value by delivering best in class customer service and high-quality, innovative solutions. In addition, we will maximize shareholder value through free cash flow generation and increasing return on capital employed. We intend to achieve these objectives through the following areas of focus:


Focus on Manufacturing Excellence

We are driving our business forward by focusing on manufacturing excellence. This includes a commitment to employee safety, customer service, product quality and system reliability.

As a manufacturing organization, our primary concern is the health and safety of our employees. We are committed to building a culture of safety across all levels of the organization. We are focused on optimizing our manufacturing and recycling operations to increase asset utilization and productivity. We continue to pursue a standardization of our manufacturing processes where possible; while still allowing the flexibility to respond to local market demands. We are focused on maintaining a competitive cost structure by managing metal inputs and employing initiatives to improve operational efficiencies across our plants globally.

Our customers demand consistent, high-quality products. We are committed to producing the best quality products and providing reliable on-time delivery and be a true partner in innovation and sustainable supply solutions. We are focused on building and maintaining strong, positive relationships with all of our customers.


7



Operate as an Integrated Global Company

We intend to continue operating as a globally integrated company to leverage our manufacturing excellence, risk management expertise, value-added conversion premium-based pricing and global assets according to a single, company-wide vision. We believe this integrated approach is the foundation for the effective execution of our strategy across the Novelis system.

We strive to service our customers in a consistent, global manner through seamless alignment of goals, methods and metrics across the organization, while still allowing for local flexibility.


Focus on Premium Products

We focus on capturing global growth in beverage can, automotive and specialty products markets. Our management approach helps us to systematically identify opportunities to improve the profitability of our operations through product portfolio analysis. This ensures that we grow in attractive market segments, while also taking actions to exit unattractive ones. We will continue to focus on these core products to drive enhanced profitability. In the recent past, we have taken steps to exit certain non-core operations, including aluminum smelting operations and hydroelectric facilities in Brazil, and consumer foil operations in North America and Europe.

Over the past several years, we invested in world-class assets and technical capabilities to position ourselves to meet increasing global demand for aluminum from the automotive market. We now have automotive finishing lines in North America, Europe, and Asia. Additionally, we believe there are opportunities to capture growth in other areas (e.g., beverage cans) driven by metal substitution and urbanization trends in emerging markets such as South America.


Utilize Recycled Metal Inputs

Utilizing recycled material allows us to diversify our metal supply, helps to control metal costs and provides environmental benefits. Since fiscal year 2011, our recycled inputs have increased from 33% to 55% in fiscal year 2017.

Novelis is working closely with our customers on innovation to drive more sustainable products for society. Novelis is the only company of its size offering independently certified, high-recycled content aluminum sheet for our beverage and specialty product customers. We are also working closely with our automotive customers to redesign automotive alloys to be made with more recycled inputs, as well as seeking to purchase the aluminum scrap resulting from our automotive customers' production processes.

Raw Materials and Suppliers

The input materials we use in manufacturing include primary aluminum, recycled aluminum, sheet ingot, alloying elements and grain refiners. These raw materials are generally available from several sources and are not generally subject to supply constraints in normal market conditions. We also consume considerable amounts of energy in the operation of our facilities.

Aluminum

We obtain aluminum from a number of sources, including the following:

Primary Aluminum Sourcing. We purchased or tolled approximately 1,490 kt of primary aluminum in fiscal 2017 in the form of sheet ingot, standard ingot and molten metal, approximately 21% of which we purchased from RT.

Aluminum Products Recycling. We operate facilities in several plants to recycle post-consumer aluminum, such as UBCs collected through recycling programs. In addition, we have agreements with several of our large customers where we have a closed-looped system whereby we take production scrap material from their fabricating activity and re-melt, cast and roll it to re-supply these customers with aluminum sheet. Other sources of recycled material include lithographic plates, and products with longer lifespans, like vehicles and buildings, which are starting to become high volume sources of recycled material. We purchased or tolled approximately 1,700 kt of recycled material inputs in fiscal 2017 and have made recycling investments in all of our operating regions to increase the amount of recycled material we use as raw materials.

The materials that we recycle are remelted, cast and then used in our operations. The net effect of all recycling activities was that on average approximately 55% of our total aluminum rolled products shipments in fiscal 2017 were made from recycled inputs. The overall benefit we receive from utilizing recycled metal is influenced by: 1) the overall price levels of the LME and local market premiums, 2) the spread between the price for recycled aluminum and the LME primary aluminum price and 3) our consumption levels of the recycled material inputs.


8


Our recycled content performance and methodology are detailed in our annual sustainability report, which can be found at www.novelis.com/sustainability. Information in our sustainability report does not constitute part of this Annual Report on Form 10-K.

Energy

We use several sources of energy in the manufacture and delivery of our aluminum rolled products. In fiscal 2017 , natural gas and electricity represented approximately 98% of our energy consumption by cost. We also use fuel oil and transport fuel. The majority of energy usage occurs at our casting centers and during the hot rolling process. Our cold rolling facilities require relatively less energy. We purchase our natural gas on the open market, which subjects us to market pricing fluctuations. We have in the past and may continue to seek to stabilize our future exposure to natural gas prices through the use of derivative instruments. Natural gas prices in Europe and South America have historically been more stable than in the United States. A portion of our electricity requirements are purchased pursuant to long-term contracts in the local regions in which we operate. A number of our facilities are located in regions with regulated prices, which affords relatively stable costs. We have fixed pricing on some of our energy supply arrangements.

Our Operating Segments

Due in part to the regional nature of supply and demand of aluminum rolled products and in order to best serve our customers, we manage our activities on the basis of geographical areas and are organized under four operating segments: North America, Europe, Asia and South America. Each segment manufactures aluminum sheet and light gauge products, and recycles aluminum.

The table below shows "Net sales" and total shipments by segment. For additional financial information related to our operating segments, see Note 21 - Segment, Geographical Area, Major Customer and Major Supplier Information to our accompanying audited consolidated financial statements.

Net sales in millions

Year Ended March 31,

Shipments in kilotonnes

2017

2016

2015

Consolidated

Net sales

$

9,591


$

9,872


$

11,147


Total shipments

3,176


3,325


3,374


North America(A)

Net sales

$

3,228


$

3,266


$

3,483


Total shipments

1,014


1,049


1,030


Europe(A)

Net sales

$

2,968


$

3,223


$

3,783


Total shipments

951


1,076


1,153


Asia(A)

Net sales

$

1,791


$

1,992


$

2,340


Total shipments

699


770


770


South America(A)

Net sales

$

1,510


$

1,575


$

1,850


Total shipments

562


569


583


(A)

"Net sales" and "Total shipments" by segment include intersegment sales and the results of our affiliates on a proportionately consolidated basis, which is consistent with the way we manage our business segments.


The following is a description of our operating segments as of March 31, 2017 :

North America

Headquartered in Atlanta, Georgia, Novelis North America operates eight aluminum rolled products facilities. This includes two fully dedicated recycling facilities and one facility with recycling operations. These sites manufacture a broad range of aluminum sheet and light gauge products. End-use markets for this segment include beverage and food cans, containers and packaging, automotive and other transportation applications, architectural and other industrial applications. The majority of North America's volumes are currently directed toward the beverage can sheet market.


9


Recycling is important in the manufacturing process and we have three facilities in North America that re-melt post-consumer aluminum and recycled process material. Most of the recycled material is from UBCs and automotive scrap, and the material is cast into sheet ingot at our plants in Greensboro, Georgia; Berea, Kentucky; and Oswego, New York. Additionally, our Logan Aluminum joint venture facility ("Logan") in Russellville, Kentucky is a manufacturer of aluminum sheet products for the can stock market and operates modern and high-speed equipment for ingot casting, hot-rolling, cold-rolling and finishing.

In response to the lightweighting trend in the automotive industry, we have expanded our Oswego, New York facility by constructing three automotive finishing lines and supporting automotive scrap recycling capabilities.

Europe

Headquartered in Küsnacht, Switzerland, Novelis Europe operates ten aluminum rolled product facilities. This includes two fully dedicated recycling facilities and two facilities with recycling operations. These sites manufacture a broad range of sheet and foil products. We also have distribution centers in Italy and sales offices in several European countries. End-use markets for this segment include beverage and food can, automotive, architectural and industrial products, foil and technical products and lithographic sheet. Beverage and food can represent the largest end-use market in terms of shipment volume for Europe. Operations include our 50% joint venture interest in Aluminium Norf GmbH (Alunorf), which is the world's largest aluminum rolling and remelt facility. Alunorf supplies high quality can stock, foilstock and feeder stock for finishing at our other European operations.

We have built a fully integrated recycling facility at our Nachterstedt, Germany plant, which commissioned in fiscal 2015 and is the largest aluminum recycling facility in the world. Additionally, a second automotive finishing line at our Nachterstedt, Germany facility was commissioned in fiscal 2016, to further expand our production of aluminum automotive sheet products in Europe.

Asia

Headquartered in Seoul, South Korea, Novelis Asia operates four aluminum rolled product facilities. This includes three facilities with recycling operations. These sites manufacture a broad range of aluminum sheet and light gauge products. End-use markets include beverage and food cans, electronics, architectural, automotive, foil, industrial and other products. The beverage can market represents the largest end-use market in terms of volume. Recycling is an important part of our operations with recycling facilities at both the Ulsan and Yeongju, South Korea plants. Additionally, we have a facility in Binh Duong, Vietnam, which handles the collection and processing of UBCs.

We built an aluminum automotive sheet finishing plant in Changzhou, China, which was commissioned in fiscal 2015.

South America

Headquartered in Sao Paulo, Brazil, Novelis South America operates two aluminum rolled product facilities. This includes one facility with recycling operations. These sites manufacture a broad range of can sheet, industrial sheet and light gauge products. The main markets are beverage and food can, specialty, industrial, foil and other packaging and transportation end-use applications. Beverage can represents the largest end-use application in terms of shipment volume.

During fiscal 2015, we closed the Ouro Preto smelter facility and we sold the majority of our hydroelectric generation operations in Brazil.

Financial Information About Geographic Areas

Certain financial information about geographic areas is contained in Note 21- Segment, Geographical Area, Major Customer and Major Supplier Information to our accompanying audited consolidated financial statements.



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Our Customers

We focus significant efforts on developing and maintaining close working relationships with our customers and end-users. Our major customers include:

Beverage and Food Cans

Automotive

Anheuser-Busch LLC

BMW Group

Ardagh Group

Daimler Group

Ball Corporation

Fiat Chrysler Automobiles N.V.

Can-Pack S.A.

Ford Motor Company

Crown Cork & Seal Company

General Motors LLC

Various bottlers of the Coca-Cola System

Jaguar Land Rover Limited

Volkswagen Group

Construction, Industrial and Other

Agfa Graphics

Electronics

Lotte Aluminum Co. Ltd.

LG International Corporation

Prefa

Samsung Electronics Co., Ltd

Reynolds Consumer Products LLC

Ryerson Inc.

Our single largest end-use product is beverage can sheet. We sell can sheet directly to beverage makers and bottlers as well as to can fabricators that sell the cans they produce to bottlers. In certain cases, we operate under umbrella agreements with beverage makers and bottlers under which they direct their can fabricators to source their requirements for beverage can body, end and tab stock from us.

Additional information related to our top customers is contained in Note 21 - Segment, Geographical Area, Major Customer and Major Supplier Information to our accompanying audited consolidated financial statements.


Distribution and Backlog

We have two principal distribution channels for the end-use markets in which we operate: direct sales to our customers and sales to distributors.

Year Ended March 31,

2017

2016

2015

Direct sales as a percentage of total "Net sales"

94

%

95

%

92

%

Distributor sales as a percentage of total "Net sales"

6

%

5

%

8

%

Direct Sales

We supply various end-use markets all over the world through a direct sales force operating from individual facilities or sales offices, as well as from regional sales offices in 10 countries. The direct sales channel typically serves very large, sophisticated fabricators and original equipment manufacturers. Longstanding relationships are maintained with leading companies in industries using aluminum rolled products. Supply contracts for large global customers generally range from one to five years in length and historically there has been a high degree of renewal business with these customers. Given the customized nature of products and in some cases, large order sizes, switching costs are significant, thus adding to the overall consistency of the customer base.

We also use third party agents or traders in some regions to complement our own sales force. These agents provide service to our customers in countries where we do not have local expertise.

Distributors

We also sell our products through third party aluminum distributors. Customers of distributors are widely dispersed, and sales through this channel are highly fragmented. Distributors sell mostly commodity or less specialized products into many end-use markets in small quantities, including the architectural and industrial markets. We collaborate with our distributors to develop new end-use products and improve the supply chain and order efficiencies.


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Backlog

We believe order backlog is not a material aspect of our business.

Research and Development

The table below summarizes our "Research and development expenses", which include mini-scale production lines equipped with hot mills, can lines and continuous casters (in millions).

Year Ended March 31,

2017

2016

2015

Research and development expenses

$

58


$

54


$

50


We conduct research and development activities in order to satisfy current and future customer requirements, improve our products and reduce our conversion costs. Our customers work closely with our research and development professionals to improve their production processes and market options. We have approximately 350 employees dedicated to research and development. We have a global research and technology center in Kennesaw, Georgia, which offers state of the art research and development capabilities to help Novelis meet the global long-term demand for aluminum used for the automotive, beverage can and specialty markets.


Our Employees

The table below summarizes our approximate number of employees by region, including our proportionate share of those employed by less than wholly owned affiliates.

Employees

North

America

Europe

Asia

South

America

Total

March 31, 2017

3,310


4,880


1,670


1,590


11,450


March 31, 2016

3,430


4,970


2,020


1,550


11,970


We consider our employee relations to be satisfactory. A substantial portion of our employees are represented by labor unions and their employment conditions are governed by collective bargaining agreements. Collective bargaining agreements are negotiated on a site, regional or national level, and are of varying durations. As of March 31, 2017 , approximately 1,800 of our employees were covered under collective bargaining agreements that expire within one year.

Intellectual Property

We actively review intellectual property arising from our operations and our research and development activities and, when appropriate, we apply for patents in appropriate jurisdictions. We currently hold patents and patent applications on approximately 204 different items of intellectual property. While these patents and patent applications are important to our business on an aggregate basis, no single patent or patent application is deemed to be material to our business.

We have applied for, or received registrations for, the "Novelis" word trademark and the Novelis logo trademark in approximately 50 countries where we have significant sales or operations. Novelis uses the Aditya Birla logo under license from Aditya Birla Management Corporation Private Limited.

We have also registered the word "Novelis" and several derivations thereof as domain names in numerous top level domains around the world to protect our presence on the world wide web.

Environment, Health and Safety

We own and operate numerous manufacturing and other facilities in various countries around the world. Our operations are subject to environmental laws and regulations from various jurisdictions, which govern, among other things, air emissions, wastewater discharges, the handling, storage and disposal of hazardous substances and wastes, the remediation of contaminated sites, post-mining reclamation and restoration of natural resources, and employee health and safety. Future environmental regulations may impose stricter compliance requirements on the industries in which we operate. Additional equipment or process changes at some of our facilities may be needed to meet future requirements. The cost of meeting these requirements may be significant. Failure to comply with such laws and regulations could subject us to administrative, civil or criminal penalties, obligations to pay damages or other costs, and injunctions and other orders, including orders to cease operations.


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We are involved in proceedings under the U.S. Comprehensive Environmental Response, Compensation, and Liability Act, also known as CERCLA or Superfund, or analogous state provisions regarding our liability arising from the usage, storage, treatment or disposal of hazardous substances and wastes at a number of sites in the United States, as well as similar proceedings under the laws and regulations of the other jurisdictions in which we have operations, including Brazil and certain countries in the European Union. Many of these jurisdictions have laws that impose joint and several liability, without regard to fault or the legality of the original conduct, for the costs of environmental remediation, natural resource damages, third party claims, and other expenses. In addition, we are, from time to time, subject to environmental reviews and investigations by relevant governmental authorities.

We have established procedures for regularly evaluating environmental loss contingencies, including those arising from environmental reviews and investigations and any other environmental remediation or compliance matters. We believe we have a reasonable basis for evaluating these environmental loss contingencies, and we also believe we have made reasonable estimates for the costs that are reasonably possible for these environmental loss contingencies. Accordingly, we have established liabilities based on our estimates for the currently anticipated costs that are deemed probable associated with these environmental matters. Management has determined the currently anticipated costs associated with these environmental matters will not, individually or in the aggregate, materially impair our operations or materially adversely affect our financial condition.


Available Information

We are a voluntary filer and not subject to the reporting and information requirements of the Securities Exchange Act of 1934, as amended (Exchange Act). However, we file periodic reports and other information with the Securities and Exchange Commission (SEC). We make these filings available on our website free of charge, the URL of which is http://www.novelis.com, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. The SEC maintains a website (http://www.sec.gov) that contains our annual, quarterly and current reports and other information we file electronically with the SEC. You can read and copy any materials we file with the SEC at the SEC's Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Information on our website does not constitute part of this Annual Report on Form 10-K.


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Item 1A. Risk Factors

In addition to the factors discussed elsewhere in this report, you should consider the following factors, which could materially affect our business, financial condition or results of operations in the future. The following factors, among others, could cause our actual results to differ from those projected in any forward looking statements we make.


Certain of our customers are significant to our revenues, and we could be adversely affected by changes in the business or financial condition of these significant customers or by the loss of their business.

Our ten largest customers accounted for approximately 63% , 60% , and 55% of our total "Net sales" for the year ended March 31, 2017, 2016 and 2015, respectively. A significant downturn in the business or financial condition of our significant customers could materially adversely affect our results of operations and cash flows. In addition, some of our customer contracts are subject to renewal, renegotiation or re-pricing at periodic intervals or upon changes in competitive supply conditions. Our failure to successfully renew, renegotiate or re-price such agreements could result in a reduction or loss in customer purchase volume or revenue, and if we are not successful in replacing business lost from such customers, our results of operations and cash flows could be adversely affected. Additionally, in the event of further consolidation among our customers, our customers may be able to use increased leverage in negotiating prices and other contract terms. Consolidation in our customer base may also lead to reduced demand for our products or cancellations of sales orders, which could adversely affect our results of operations and cash flows. We also factor and forfait certain trade receivables from time to time to manage working capital.  As a result, any deterioration of the financial condition or downgrade of the credit rating of certain of our customers may make it more difficult or costly for us to engage in these activities, which could negatively impact our cash flows and liquidity.


We face significant price and other forms of competition from other aluminum rolled products producers, which could hurt our results of operations and cash flows.


Generally, the markets in which we operate are highly competitive. We compete primarily on the basis of our value proposition, including price, product quality, ability to meet customers' specifications, range of products offered, lead times, technical support and customer service. Some of our competitors may benefit from greater capital resources, more efficient technologies, lower raw material and energy costs and may be able to sustain longer periods of price competition. In particular, we face increased competition from producers in China, which have significantly lower production costs and pricing. For example, the price gap for aluminum between the Shanghai Futures Exchange ("SHFE") and the LME may make our products manufactured in Asia based on LME prices less competitive compared to products manufactured by competitors in China based on SHFE prices. Lower pricing by Chinese competitors has eroded the market prices of our products in the Chinese market and elsewhere in Asia and could further erode prices in the future.


In addition, our competitive position within the global aluminum rolled products industry may be affected by, among other things, consolidation among our competitors, exchange rate fluctuations that may make our products less competitive in relation to the products of companies based in other countries (despite the U.S. dollar-based input cost and the marginal costs of shipping) and economies of scale in purchasing, production and sales, which accrue to the benefit of some of our competitors.


Increased competition could cause a reduction in our shipment volumes and profitability, which could have a material adverse effect on our financial results and cash flows.


The end-use markets for certain of our products are highly competitive and customers may choose substitutes for our products.


The end-use markets for certain aluminum rolled products are highly competitive. Aluminum competes with other materials, such as steel, plastics, composite materials and glass, among others, for various applications, including in packaging, automotive, architectural, industrial, and consumer durables end-use markets. Our customers may choose materials other than aluminum to achieve desired attributes for their products. For example, customers in the automotive industry seeking to reduce vehicle weight may increase their use of high-strength steel and other materials rather than aluminum for certain applications. The willingness of customers to accept substitutes for aluminum products could have a material adverse effect on our financial results and cash flows.



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If we are unable to obtain sufficient quantities of primary aluminum, recycled aluminum, sheet ingot and other raw materials used in the production of our products, our ability to produce and deliver products or to manufacture products using the desired mix of metal inputs could be adversely affected.


If we are unable to obtain sufficient quantities of primary aluminum, recycled aluminum, sheet ingot and other raw materials used in the production of our products, our ability to produce and deliver products or to manufacture products using the desired mix of metal inputs could be adversely affected.


The supply risks relating to our metal inputs vary by input type. For example, we produce sheet ingot internally and source the remainder of our requirements from multiple third parties in various jurisdictions, usually under contracts having a duration of at least one year. If our suppliers are unable to deliver sufficient quantities of aluminum on a timely basis, our production could be disrupted and our net sales, profitability and cash flows could be adversely affected. Although aluminum is traded on the world markets, developing alternative suppliers of sheet ingot could be time consuming and expensive.


Our operations consume energy and our profitability and cash flows may decline if energy costs were to rise, or if our energy supplies were interrupted.


We consume substantial amounts of energy in our rolling and casting operations. The factors affecting our energy costs and supply reliability tend to be specific to each of our facilities. A number of factors could materially affect our energy position adversely including:


    increases in costs of natural gas;

    increases in costs of supplied electricity;

increases in fuel oil related to transportation;

    interruptions in energy supply due to equipment failure or other causes; and

    the inability to extend energy supply contracts upon expiration on economical terms.


If energy costs were to rise, or if energy supplies or supply arrangements were disrupted, our profitability and cash flows could decline.


Our results and short term liquidity can be negatively impacted by timing differences between the prices we pay under purchase contracts and metal prices we charge our customers.


Our purchase and sales contracts for primary aluminum are based on the LME price plus a regional market premium, which is a surcharge in addition to the LME price. There are typically timing differences between the pricing periods for purchases and sales where purchase prices we pay tend to be fixed and paid earlier than sales prices we charge our customers. This creates a price exposure we call "metal price lag." We use derivative instruments to manage the timing differences related to LME associated with metal price lag. However, the derivative market for local market premiums is not robust or efficient enough for us to offset the impacts of LMP price movements beyond a very small volume. The timing difference associated with metal price lag could positively or negatively impact our operating results and short term liquidity position.


A deterioration of our financial condition or a downgrade of our ratings by a credit rating agency could limit our ability or increase our costs to enter into hedging and financing transactions, and our business relationships and financial condition could be adversely affected.


A deterioration of our financial condition or a downgrade of our credit ratings for any reason could increase our borrowing costs, limit our access to the capital or credit markets or liquidity facilities, adversely affect our ability to obtain new financing on favorable terms or at all, result in more restrictive covenants for future indebtedness incurrences and have an adverse effect on our business relationships with customers, suppliers and hedging counterparties. We enter into various forms of hedging activities against currency, interest rate, energy and metal price fluctuations. Financial strength and credit ratings are important to the availability and terms of these hedging activities. As a result, any deterioration of our financial condition or downgrade of our credit ratings may make it more difficult or costly for us to engage in these activities in the future.


Adverse changes in currency exchange rates could negatively affect our financial results or cash flows and the competitiveness of our aluminum rolled products relative to other materials.


Our businesses and operations are exposed to the effects of changes in the exchange rates of the U.S. dollar, the Euro, the British pound, the Brazilian real, the Korean won, the Swiss franc and other currencies. We have implemented a hedging policy that attempts to manage currency exchange rate risks to an acceptable level based on management's judgment of the


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appropriate trade-off between risk, opportunity and cost; however, this hedging policy may not successfully or completely eliminate the effects of currency exchange rate fluctuations which could have a material adverse effect on our financial results and cash flows.


We prepare our consolidated financial statements in U.S. dollars, but a portion of our earnings and expenditures are denominated in other currencies, primarily the Euro, the Korean won and the Brazilian real. Changes in exchange rates will result in increases or decreases in our operating results and may also affect the book value of our assets located outside the U.S.


Most of our facilities are staffed by a unionized workforce, and union disputes and other employee relations issues could materially adversely affect our financial results.


A substantial portion of our employees are represented by labor unions under a large number of collective bargaining agreements with varying durations and expiration dates. We may not be able to satisfactorily renegotiate our collective bargaining agreements when they expire. In addition, existing collective bargaining agreements may not prevent a strike or work stoppage at our facilities in the future.


Loss of our key management and other personnel, or an inability to attract and retain such management and other personnel, could adversely impact our business.


We employ all of our senior executive officers and other highly-skilled key employees on an at-will basis, and their employment can be terminated by us or them at any time, for any reason and without notice, subject, in certain cases, to severance payment obligations. Competition for qualified employees among companies that rely heavily on engineering and technology is intense, and if our highly skilled key employees leave us, we may be unable to promptly attract and retain qualified replacement personnel, which could result in our inability to improve manufacturing operations, conduct research activities successfully, develop marketable products and compete effectively for our share of the growth in key markets.


We could be adversely affected by disruptions of our operations.


Breakdown of equipment or other events, including catastrophic events such as war or natural disasters, leading to production interruptions at our plants could have a material adverse effect on our financial results and cash flows. Further, because many of our customers are, to varying degrees, dependent on planned deliveries from our plants, any customers that have to reschedule their own production due to our missed deliveries could pursue claims against us and reduce their future business with us. We may incur costs to correct any of these problems, in addition to facing claims from customers. Further, our reputation among actual and potential customers may be harmed, resulting in loss of business. While we maintain insurance policies covering, among other things, physical damage, business interruptions and product liability, these policies would not cover all of our losses.


Our operations have been and will continue to be exposed to various business and other risks, changes in conditions and events beyond our control in countries where we have operations or sell products.


We are, and will continue to be, subject to financial, political, economic and business risks in connection with our global operations. We have made investments and carry on production activities in various emerging markets, including China and Brazil, and we market our products in these countries, as well as certain other countries in Asia, Africa, the Middle East and South America. While we anticipate higher growth or attractive production opportunities from these emerging markets, they also present a higher degree of risk than more developed markets.


In addition to the business risks inherent in developing and servicing new markets, economic conditions may be more volatile, legal and regulatory systems less developed and predictable, and the possibility of various types of adverse governmental action more pronounced. In addition, inflation, fluctuations in currency and interest rates, competitive factors, civil unrest and labor problems could affect our revenues, expenses and results of operations. Our operations could also be adversely affected by acts of war, terrorism or the threat of any of these events as well as government actions such as controls on imports, exports and prices, tariffs, new forms of taxation, or changes in fiscal regimes and increased government regulation in the countries in which we operate or service customers.


Global uncertainty about the direction of US trade policy and the rising threat of changes in tariffs and trade barriers in countries where we do business could cause our customers to delay or reduce spending on our products. In addition, changes in trade policies could cause our costs to rise and negatively impact our ability to plan for future periods.


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Unexpected or uncontrollable events or circumstances in any of these markets could have a material adverse effect on our financial results and cash flows.



We face risks relating to certain joint ventures, subsidiaries and assets that we do not entirely control.


Some of our activities are, and will in the future be, conducted through entities that we do not entirely control or wholly-own. These entities include our Alunorf, Germany and Logan, Kentucky joint ventures and our Sierre, Switzerland facility, the property and equipment of which we lease from a third party. Under the governing documents, agreements or securities laws applicable to certain of these entities, our ability to fully control certain operational matters may be limited. Further, in some cases we do not have rights to prevent a joint venture partner from selling its joint venture interests to a third party.


Derivatives legislation could have an adverse impact on our ability to hedge risks associated with our business and on the cost of our hedging activities.


We use over-the-counter (OTC) derivative products to hedge against currency, interest rate, energy and metal price fluctuations. The Commodity Futures Trading Commission and the SEC have enacted certain rules and regulations to increase regulatory oversight of the OTC markets and the entities that participate in those markets. The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) includes extensive provisions regulating the derivatives market, and many of the regulations implementing the derivatives provisions have become effective and additional requirements will become effective in the future. As such, we have become and could continue to become subject to additional regulatory costs, both directly and indirectly, through increased costs of doing business with more market intermediaries that are now subject to extensive regulation pursuant to the Dodd-Frank Act. Other regulations implementing the Dodd-Frank Act remain to be finalized or implemented and it is not possible to predict when this will be accomplished or what impact these regulations will have on our ability to hedge our business risks, or the costs of doing so.


In addition, the European Market Infrastructure Regulation (EMIR) and the Financial Market Infrastructure Act (FMIA), which became effective in 2012 and 2016, respectively, include regulations related to the trading, reporting and clearing of derivatives. We have entities and counterparties located in jurisdictions subject to EMIR and FMIA. Our efforts to comply with EMIR and FMIA, and EMIR and FMIA's effects on the derivatives markets and their participants, create similar risks and could have similar adverse impacts as those under the Dodd-Frank Act.


If future regulations subject us to additional capital or margin requirements or other restrictions on our trading and commodity positions, they could have an adverse effect on our ability to hedge risks associated with our business and on the cost of our hedging activities. It is also possible that additional similar regulations may be imposed in other jurisdictions where we conduct business and any such regulations could pose risks and have adverse effects on our operations and profitability.


We may not be able to successfully develop and implement new technology initiatives.


We have invested in, and are involved with, a number of technology and process initiatives. Several technical aspects of these initiatives are still unproven, and the eventual commercial outcomes cannot be assessed with any certainty. Even if we are successful with these initiatives, we may not be able to deploy them in a timely fashion. Accordingly, the costs and benefits from our investments in new technologies and the consequent effects on our financial results may vary from present expectations.



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Security breaches and other disruptions to our information technology networks and systems could interfere with our operations, and could compromise the confidentiality of our proprietary information.


We rely upon information technology networks and systems, some of which are managed by third parties, to process, transmit and store electronic information, and to manage or support a variety of business and manufacturing processes and activities. Additionally, we collect and store sensitive data, including intellectual property, proprietary business information, as well as personally identifiable information of our employees, in data centers and on information technology networks. The secure operation of these information technology networks, and the processing and maintenance of this information is important to our business operations and strategy. Despite security measures and business continuity plans, our information technology networks and systems may be vulnerable to damage, disruptions or shutdowns due to attacks by hackers or breaches due to errors or malfeasance by employees, contractors and others who have access to our networks and systems, or other disruptions during the process of upgrading or replacing computer software or hardware, power outages, computer viruses, telecommunication or utility failures or natural disasters or other catastrophic events. The occurrence of any of these events could compromise our networks and the information stored there could be accessed, publicly disclosed, lost or stolen. Any such access, disclosure or other loss of information could result in legal claims or proceedings, liability or regulatory penalties under laws protecting the privacy of personal information, disrupt operations and reduce the competitive advantage we hope to derive from our investment in new or proprietary business initiatives.


Future acquisitions, divestitures or restructuring actions may adversely affect our financial results.


As part of our strategy for growth, we may pursue acquisitions, divestitures or strategic alliances, which may not be completed or, if completed, may not be ultimately beneficial to us. There are numerous risks commonly encountered in strategic transactions, including the risk that we may not be able to complete a transaction that has been announced, effectively integrate businesses acquired or generate the cost savings and synergies anticipated. Failure to do so could have a material adverse effect on our financial results.


Any additional restructuring efforts we may undertake in the future could result in significant severance-related costs, environmental remediation expenses, impairment charges, restructuring charges and related costs and expenses, which could adversely affect our profitability and cash flows.


Capital investments in organic growth initiatives may not produce the returns we anticipate.


A significant element of our strategy has been to invest in opportunities to increase the production capacity of our operating facilities through modifications of and investments in existing facilities and equipment and to evaluate other investments in organic growth in our target markets. In particular, over the past several years we have invested substantial resources into projects intended to increase our global automotive finishing capacity and raise the recycled content of our products. These projects involve numerous risks and uncertainties, including the risk that our forecasted demand levels prove to be inaccurate and the risk that aluminum price trends diminish the benefits we anticipate from our recycling investments.

Demand for our automotive products is dependent on vehicle production cycles and material preferences of our customers. Although certain automotive companies have increased their use of aluminum in recent years, there is no assurance that our automotive customers will not turn to steel or other materials in the future, due to the price of aluminum or other factors.


If our capital investments do not produce the benefits we anticipate, our financial condition and results of operations could be adversely affected.


Our goodwill, other intangible assets and other long-lived assets could become impaired, which could require us to take non-cash charges against earnings.


We assess, at least annually and potentially more frequently, whether the value of our goodwill has been impaired. We assess the recoverability of finite-lived other intangible assets and other long-lived assets whenever events or changes in circumstances indicate we may not be able to recover the asset's carrying amount. Any impairment of goodwill, other intangible assets, or long-lived assets as a result of such analysis would result in a non-cash charge against earnings, which could materially adversely affect our reported results of operations. A significant and sustained decline in our future cash flows, a significant adverse change in the economic environment or slower growth rates could result in the need to perform additional impairment analysis in future periods.



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Economic conditions could negatively affect our financial condition and results of operations.


Our financial condition and results of operations depend significantly on worldwide economic conditions. Uncertainty about current or future global economic conditions poses a risk as our customers may postpone purchases in response to tighter credit and negative financial news, which could adversely impact demand for our products. In addition, there can be no assurance that actions we may take in response to economic conditions will be sufficient to counter any continuation or any downturn or disruption.


We have significant operations in Europe, including operations in the United Kingdom, and material portion of our revenues are generated in Europe. The June 2016 vote in the United Kingdom to withdraw from the European Union (Brexit) could result in legal uncertainty and influence the economic outlook of the European Union. In addition, elections in other European countries this year, including France and Germany, may also fuel economic uncertainty in the European Union. Any disruptions in the European financial markets or instability of the euro could have negative implications for global economic conditions. A significant global economic downturn or disruption in the financial markets could have a material adverse effect on our financial condition and results of operations.


A significant global economic downturn or disruption in the financial markets could have a material adverse effect on our financial condition and results of operations.


Our results of operations, cash flows and liquidity could be adversely affected if we were unable to transact in derivative instruments or if counterparties to our derivative instruments fail to honor their agreements.


We use various derivative instruments to manage the risks arising from fluctuations in aluminum prices, exchange rates, energy prices and interest rates. If for any reason we were unable to transact in derivative instruments to manage these risks, our results of operations, cash flows and liquidity could be adversely affected. In addition, we may be exposed to losses in the future if the counterparties to our derivative instruments fail to honor their agreements. In particular, deterioration in the financial condition of our counterparties and any resulting failure to pay amounts owed to us or to perform obligations or services owed to us could have a negative effect on our business and financial condition. Further, if major financial institutions consolidate and are forced to operate under more restrictive capital constraints and regulations, there could be less liquidity in the derivative markets, which could have a negative effect on our ability to hedge and transact with creditworthy counterparties.


We could be required to make unexpected contributions to our defined benefit pension plans as a result of adverse changes in interest rates and the capital markets.


Most of our pension obligations relate to funded defined benefit pension plans for our employees in the U.S., the U.K. Switzerland, and Canada, unfunded pension benefits in Germany and lump sum indemnities payable to our employees in France, Italy, Korea and Malaysia upon retirement or termination. Our pension plan assets consist primarily of funds invested in listed stocks and bonds. Our estimates of liabilities and expenses for pensions and other postretirement benefits incorporate a number of assumptions, including expected long-term rates of return on plan assets and interest rates used to discount future benefits. Our results of operations, liquidity or shareholder's (deficit) equity in a particular period could be adversely affected by capital market returns that are less than their assumed long-term rate of return or a decline of the rate used to discount future benefits. These factors or others may require us to make unexpected cash contributions to the pension plans in the future, preventing the use of such cash for other purposes.


We are subject to a broad range of environmental, health and safety laws and regulations, and we may be exposed to substantial environmental, health and safety costs and liabilities.


We are subject to a broad range of environmental, health and safety laws and regulations in the jurisdictions in which we operate. These laws and regulations impose stringent environmental, health and safety protection standards and permitting requirements regarding, among other things, air emissions, wastewater storage, treatment and discharges, the use and handling of hazardous or toxic materials, waste disposal practices, the remediation of environmental contamination, post-mining reclamation and working conditions for our employees. Some environmental laws, such as Superfund and comparable laws in the U.S. and other jurisdictions worldwide, impose joint and several liability for the cost of environmental remediation, natural resource damages, third party claims, and other expenses, without regard to the fault or the legality of the original conduct.


The costs of complying with these laws and regulations, including participation in assessments and remediation of contaminated sites and installation of pollution control facilities, have been, and in the future could be, significant. In addition, these laws and regulations may also result in substantial environmental liabilities associated with divested assets, third party locations and past activities. In certain instances, these costs and liabilities, as well as related action to be taken by us, could be


19


accelerated or increased if we were to close, divest of or change the principal use of certain facilities with respect to which we may have environmental liabilities or remediation obligations. Currently, we are involved in a number of compliance efforts, remediation activities and legal proceedings concerning environmental matters, including certain activities and proceedings arising under Superfund and comparable laws in the U.S. and other jurisdictions worldwide in which we have operations.


We have established liabilities for environmental remediation activities where appropriate. However, the cost of addressing environmental matters (including the timing of any charges related thereto) cannot be predicted with certainty, and these liabilities may not ultimately be adequate, especially in light of changing interpretations of laws and regulations by regulators and courts, the discovery of previously unknown environmental conditions, the risk of governmental orders to carry out additional compliance on certain sites not initially included in remediation in progress, our potential liability to remediate sites for which provisions have not been previously established and the adoption of more stringent environmental laws including, for example, the possibility of increased regulation of the use of bisphenol-A, a chemical component commonly used in the coating of aluminum cans. Such future developments could result in increased environmental costs and liabilities, which could have a material adverse effect on our financial condition, results or cash flows. Furthermore, the failure to comply with our obligations under the environmental laws and regulations could subject us to administrative, civil or criminal penalties, obligations to pay damages or other costs, and injunctions or other orders, including orders to cease operations. In addition, the presence of environmental contamination at our properties could adversely affect our ability to sell the property, receive full value for a property or use a property as collateral for a loan.


Some of our current and potential operations are located or could be located in or near communities that may regard such operations as having a detrimental effect on their social and economic circumstances. Community objections could have a material adverse impact upon the profitability or, in extreme cases, the viability of an operation.


We use a variety of hazardous materials and chemicals in our rolling processes and in connection with maintenance work on our manufacturing facilities. Because of the nature of these substances or related residues, we may be liable for certain costs, including, among others, costs for health-related claims or removal or re-treatment of such substances. Certain of our current and former facilities incorporate asbestos-containing materials, a hazardous substance that has been the subject of health-related claims for occupational exposure. In addition, although we have developed environmental, health and safety programs for our employees, including measures to reduce employee exposure to hazardous substances, and conduct regular assessments at our facilities, we are currently, and in the future may be, involved in claims and litigation filed on behalf of persons alleging injury predominantly as a result of occupational exposure to substances or other hazards at our current or former facilities. It is not possible to predict the ultimate outcome of these claims and lawsuits due to the unpredictable nature of personal injury litigation. If these claims and lawsuits, individually or in the aggregate, were finally resolved against us, our results of operations and cash flows could be adversely affected.


We may be exposed to significant legal proceedings or investigations.


From time to time, we are involved in, or the subject of, disputes, proceedings and investigations with respect to a variety of matters, including environmental, health and safety, product liability, employee, tax, personal injury, contractual and other matters as well as other disputes and proceedings that arise in the ordinary course of business. Certain of these matters are discussed in the preceding risk factor. Any claims against us or any investigations involving us, whether meritorious or not, could be costly to defend or comply with and could divert management's attention as well as operational resources. Any such dispute, litigation or investigation, whether currently pending or threatened or in the future, may have a material adverse effect on our financial results and cash flows.


In addition, we are sometimes exposed to warranty and product liability claims. There can be no assurance that we will not experience material product liability losses arising from individual suits or class actions alleging product liability defects or related claims in the future and that these will not have a negative impact on us. We generally maintain insurance against many product liability risks, but there can be no assurance that this coverage will be adequate for any liabilities ultimately incurred. In addition, there is no assurance that insurance will continue to be available on terms acceptable to us. A successful claim that exceeds our available insurance coverage could have a material adverse effect on our financial results and cash flows.


We may be affected by global climate change or by legal, regulatory, or market responses to such change.


Increased concern over climate change has led to new and proposed legislative and regulatory initiatives, such as cap-and-trade systems and additional limits on emissions of greenhouse gases. New laws enacted could directly and indirectly affect our customers and suppliers (through an increase in the cost of production or their ability to produce satisfactory products) or our business (through an impact on our inventory availability, cost of sales, operations or demand for the products


20


we sell), which could result in an adverse effect on our financial condition, results of operations and cash flows. Compliance with any new or more stringent laws or regulations, or stricter interpretations of existing laws, could require additional expenditures by us, our customers or our suppliers. Also, we rely on natural gas, electricity, fuel oil and transport fuel to operate our facilities. Any increased costs of these energy sources because of new laws could be passed along to us and our customers and suppliers, which could also have a negative impact on our profitability.


Income tax payments may ultimately differ from amounts currently recorded by the Company. Future tax law changes may materially increase the Company's prospective income tax expense.


We are subject to income taxation in many jurisdictions. Judgment is required in determining our worldwide income tax provision and accordingly there are many transactions and computations for which our final income tax determination is uncertain. We are routinely audited by income tax authorities in many tax jurisdictions. Although we believe the recorded tax estimates are reasonable, the ultimate outcome from any audit (or related litigation) could be materially different from amounts reflected in our income tax provisions and accruals. Future settlements of income tax audits may have a material effect on earnings between the period of initial recognition of tax estimates in the financial statements and the point of ultimate tax audit settlement. Additionally, it is possible that future income tax legislation in any jurisdiction to which we are subject may be enacted that could have a material impact on our worldwide income tax provision beginning with the period that such legislation becomes effective.


Our indebtedness could adversely affect our business.


As of March 31, 2017, we had $4.9 billion of indebtedness outstanding. Our indebtedness and interest expense could have important consequences to our Company and holders of notes, including:


limiting our ability to borrow additional amounts for working capital, capital expenditures or other general corporate purposes;

increasing our vulnerability to general adverse economic and industry conditions, including volatility in LME aluminum prices;

limiting our ability to capitalize on business opportunities and to react to competitive pressures and adverse changes in government regulation; and

limiting our ability or increasing the costs to refinance indebtedness.


The covenants in our senior secured credit facilities and the indentures governing our Senior Notes impose operating and financial restrictions on us.



Our senior secured credit facilities and the indentures governing our Senior Notes impose certain operating and financial restrictions on us. These restrictions limit our ability and the ability of our restricted subsidiaries, among other things, to:

incur additional debt and provide additional guarantees;

pay dividends and make other restricted payments, including certain investments;

create or permit certain liens;

make certain asset sales;

use the proceeds from the sales of assets and subsidiary stock;

create or permit restrictions on the ability of our restricted subsidiaries to pay dividends or make other distributions to us;

engage in certain transactions with affiliates;

enter into sale and leaseback transactions; and

consolidate, merge or transfer all or substantially all of our assets or the assets of our restricted subsidiaries.


See Note 11 - Debt for additional discussion.


Hindalco and its interests as equity holder may conflict with the interests of the holders of our senior notes in the future.


Novelis is an indirectly wholly-owned subsidiary of Hindalco. As a result, Hindalco may exercise control over our decisions to enter into any corporate transaction or capital restructuring and has the ability to approve or prevent any transaction that requires the approval of our shareholder. Hindalco may have an interest in pursuing acquisitions, divestitures, financings or other transactions that, in its judgment, could enhance its equity investment, even though such transactions might involve risks to holders of our Senior Notes.


21



Additionally, Hindalco operates in the aluminum industry and may from time to time acquire and hold interests in businesses that compete, directly or indirectly, with us. Hindalco has no obligation to provide us with financing and is able to sell their equity ownership in us at any time.


22





Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

Our global headquarters are located in Atlanta, Georgia.  Our global research and technology center is located in Kennesaw, Georgia, which contains state-of-the-art research and development capabilities to help us better partner and innovate with our customers. Our regional headquarters are located in the following cities: North America - Atlanta, Georgia; Europe - Küsnacht, Switzerland; Asia - Seoul, South Korea; and South America - Sao Paulo, Brazil. We also have a research facility in Spokane, Washington specializing in molten metal processing.

The total number of operating facilities within our operating segments as of March 31, 2017 is shown in the table below, including operating facilities we jointly own and operate with third parties.

Total

Operating

Facilities

Facilities

with Recycling

Operations

North America

8


3


Europe

10


4


Asia

4


3


South America

2


1


Total

24


11


The following tables provide information, by operating segment, about the plant locations, processes and major end-use markets/applications for the aluminum rolled products, recycling and primary metal facilities we operated during all or part of the year ended March 31, 2017 .

North America

Locations

Plant Processes

Major Products

Berea, Kentucky

Recycling, sheet ingot casting

Sheet ingot from recycled metal

Fairmont, West Virginia

Cold rolling, finishing

Foil, HVAC material

Greensboro, Georgia

Recycling, sheet ingot casting

Sheet ingot from recycled metal

Kingston, Ontario

Cold rolling, finishing

Automotive sheet, construction sheet, industrial sheet

Russellville, Kentucky (A)

Hot rolling, cold rolling, finishing

Can stock

Oswego, New York (B)

Sheet ingot casting, hot rolling, cold rolling, recycling, brazing, finishing, heat treatment

Can stock, automotive sheet,

construction sheet, industrial sheet,

semi-finished coil

Terre Haute, Indiana

Cold rolling, finishing

Foil

Warren, Ohio

Coating

Can stock

(A)

We own 40% of the outstanding common shares of Logan, but we have made equipment investments such that our portion of Logan's total machine hours provides us approximately 55% of Logan's total production.

(B)

In fiscal 2015 and 2016, we began production at three automotive sheet finishing lines and expanded our recycling operations in our Oswego, New York facility.

Our Oswego, New York facility operates modern equipment used for recycling beverage cans and other aluminum scrap, ingot casting, hot rolling, cold rolling and finishing. The Oswego facility produces can stock, automotive sheet, as well as building and industrial products. The facility also provides feedstock to our Kingston, Ontario facility, which produces automotive sheet and products for construction and industrial applications, and to our Fairmont, West Virginia facility, which produces foil and light-gauge sheet.


23


Our Logan facility is a processing joint venture between us and Tri-Arrows Aluminum Inc. (Tri-Arrows). Logan is a dedicated manufacturer of aluminum sheet products for the can stock market and operates modern and high-speed equipment for ingot casting, hot-rolling, cold-rolling and finishing. A portion of the can end stock is coated at North America's Warren, Ohio facility, in addition to Logan's on-site coating assets. Together with Tri-Arrows, we operate Logan as a production cooperative, with each party supplying its own primary metal inputs for conversion at the facility. The converted product is then returned to the supplying party at cost. Logan does not own any of the primary metal inputs or any of the converted products. Most of the fixed assets at Logan are directly owned by us and Tri-Arrows in varying ownership percentages or solely by each party.

Along with our recycling center in Oswego, New York, we own two other fully dedicated recycling facilities in North America, located in Berea, Kentucky and Greensboro, Georgia. Each offers a modern, cost-efficient process to recycle UBCs and other aluminum scrap into sheet ingot to supply our hot mills in Logan and Oswego.


Europe

Locations

Plant Processes

Major Products

Bresso, Italy

Finishing, painting

Painted sheet, construction sheet

Göttingen, Germany

Cold rolling, finishing, painting

Can stock, food can, lithographic, painted sheet, automotive sheet

Latchford, United Kingdom

Recycling

Sheet ingot from recycled metal

Ludenscheid, Germany

Foil rolling, finishing, converting

Foil, packaging

Nachterstedt, Germany

Cold rolling, finishing, painting, recycling, heat treatment

Automotive sheet, can stock, industrial sheet, painted sheet, construction sheet, sheet ingot

Neuss, Germany (A)

Hot rolling, cold rolling, recycling

Can stock, foilstock, feeder

stock for finishing operations

Ohle, Germany

Cold rolling, finishing, converting

Foil, packaging

Pieve, Italy

Continuous casting, cold rolling, finishing, recycling

Coil for finishing operations, industrial sheet

Sierre, Switzerland (B)

Sheet ingot casting, hot rolling, cold rolling, finishing

Automotive sheet, industrial sheet

Crick, United Kingdom (C)

Finishing

Automotive sheet

(A)

Operated as a 50/50 joint venture between us and Hydro Aluminium Deutschland GmbH (Hydro). This joint venture is known as "Alunorf".

(B)

Operated under a long-term lease arrangement with a third party lessor.

(C)

In fiscal year 2016, we moved operations from the Wednesbury, U.K. facility to a facility in Crick, U.K.

Aluminium Norf GmbH (Alunorf) in Germany, a 50/50 production-sharing joint venture between us and Hydro, is a large scale, modern manufacturing hub, located in Neuss, Germany, for several of our operations in Europe, and is the largest aluminum rolling mill and remelting operation in the world. Together with Hydro, we operate Alunorf as a production cooperative, with each party supplying its own primary metal inputs for transformation at the facility. The transformed product is then transferred back to the supplying party on a pre-determined cost-plus basis. Alunorf supplies hot coil for further processing through cold rolling to some of our other plants, including Göttingen and Nachterstedt in Germany and provides foilstock to our plants in Ohle and Lüdenscheid in Germany. The Ohle and Lüdenscheid cold mill and finishing lines produce products for a number of end use applications, such as flexible tubes and bare, container, and converter foil.

Our Göttingen plant has a cold mill and paint line as well as finishing capability for can, food, and automotive sheet. Our Nachterstedt plant cold rolls and finishes automotive, can, industrial, and architectural sheet. In October 2014, we opened the world's largest recycling center at our Nachterstedt, Germany site. It is a fully integrated recycling facility, capable of recycling a wide variety of scrap. The Pieve plant, located near Milan, Italy, produces continuous cast coil that is cold rolled into paintstock and sent to the Bresso, Italy plant for painting and finishing.

The Sierre rolling mill and remelt operation in Switzerland, along with the Nachterstedt and Göttingen plants in Germany, combine to make Novelis Europe's leading producer of automotive sheet in terms of shipments.

We lease a facility in Crick, U.K., that houses a small finishing operation for automotive products.


24


Asia

Locations

Plant Processes

Major Products

Binh Doung, Vietnam

Recycling

Recycled material

Changzhou, China

Heat treatment

Automotive sheet

Ulsan, South Korea

Sheet ingot casting, hot rolling, cold rolling, recycling, finishing

Can stock, construction sheet, industrial sheet, electronics, automotive sheet for finishing operations, foilstock, and recycled material

Yeongju, South Korea

Sheet ingot casting, hot rolling, cold rolling, recycling, finishing

Can stock, construction sheet, industrial sheet, electronics, foilstock and recycled material

In addition to its rolling operations, Novelis Asia operates recycling furnaces at both its Ulsan and Yeongju facilities in South Korea for the conversion of customer and third-party recycled aluminum. We also have an aluminum automotive sheet finishing plant in Changzhou, China. In addition, we have a facility in Binh Duong, Vietnam, which handles the collection and processing of UBCs.

South America

Locations

Plant Processes

Major Products

Pindamonhangaba, Brazil

Sheet ingot casting, hot rolling, cold rolling, recycling, finishing, coating

Can stock, construction sheet, industrial sheet, foilstock, sheet ingot

Santo Andre, Brazil

Foil rolling, finishing

Foil

Our Pinda rolling and recycling facility in Brazil has an integrated process including sheet ingot casting, hot rolling, cold rolling, coating, finishing, and recycling operations. A coating line also produces painted products, including can end stock. Pinda supplies foilstock to our Santo Andre foil plant, which produces converter, household and container foil, among others.

Pinda is the largest aluminum rolling and recycling facility in South America in terms of shipments and is the only facility in South America capable of producing can stock. Pinda recycles primarily UBCs, and is engaged in tolling recycled metal for our customers.

We also own certain hydroelectric power assets that used to supply electricity for our primary aluminum smelting operations closed in December 2014. From 2015 onwards, we sold most of these hydroelectric power assets including one plant in fiscal 2017. Currently, there is one power plant operating, which is held for sale, that supplies energy to Pinda or sells energy on the spot market.



25


Item 3. Legal Proceedings

We are a party to litigation incidental to our business from time to time. For additional information regarding litigation to which we are a party, see Note 20 - Commitments and Contingencies to our accompanying audited consolidated financial statements, which are incorporated by reference into this item.

Item 4. Mine Safety Disclosures

Not applicable.



26


PART II

Item 5. Market for Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities

There is no established public trading market for the Company's common stock. All of the common shares of Novelis are owned directly by AV Metals Inc. and indirectly by Hindalco Industries Limited. None of the equity securities of the Company are authorized for issuance under any equity compensation plan.

Dividends or returns of capital are at the discretion of the board of directors and will depend on, among other things, our financial resources, cash flows generated by our business, our cash requirements, restrictions under and covenant compliance under the instruments governing our indebtedness, being in compliance with the appropriate indentures and covenants under the instruments that govern our indebtedness that would allow us to legally pay dividends or return capital and other relevant factors.

In March 2014, we declared a return of capital to our shareholder, AV Metals Inc., in the amount of $250 million, which we subsequently paid on April 30, 2014.

Item 6. Selected Financial Data

The selected consolidated financial data should be read in conjunction with our consolidated financial statements for the respective periods and the related notes included elsewhere in this Form 10-K.

All of our common shares were indirectly held by Hindalco; thus, earnings per share data are not reported. Amounts in the tables below are in millions.

Year Ended

March 31,

2017

2016

2015

2014

2013

Net sales

$

9,591


$

9,872


$

11,147


$

9,767


$

9,812


Net income (loss) attributable to our common shareholder

$

45


$

(38

)

$

148


$

104


$

202


Return of capital (A)

$

-


$

-


$

-


$

250


$

-


March 31,

2017

2016

2015

2014

2013

Total assets (B)

$

8,344


$

8,280


$

9,102


$

9,114


$

8,522


Long-term debt (including current portion) (B)

$

4,558


$

4,468


$

4,457


$

4,451


$

4,464


Short-term borrowings

$

294


$

579


$

846


$

723


$

468


Cash and cash equivalents

$

594


$

556


$

628


$

509


$

301


Total (deficit) equity

$

(77

)

$

(59

)

$

(70

)

$

268


$

239


(A)

In March 2014, we declared a return of capital to our shareholder in the amount of $250 million, which we subsequently paid on April 30, 2014.

(B)

The March 31, 2016 balance above is $30 million lower than the March 31, 2016 balance in the prior year disclosure due to the adoption of ASU 2015-03. Refer to Note 1 - Business and Summary of Significant Accounting Policies for further information.



27


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations


OVERVIEW AND REFERENCES

Novelis is the world's leading aluminum rolled products producer based on shipment volume in fiscal 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 March 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.

The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those discussed below and elsewhere in this Annual Report, particularly in "Special Note Regarding Forward-Looking Statements and Market Data" and "Risk Factors."




28


HIGHLIGHTS

We reported "Segment income" of $1,054 million for the year ended March 31, 2017 , compared to $791 million in the prior year. The increase is primarily due to favorable impacts from strong operational performance globally, our focus on driving asset efficiency, lower metal input costs, record automotive shipments and significant operating cost reductions. The increase is also due to favorable foreign exchange, as well as the lessening of unfavorable metal price lag impacts caused by volatility in local market premiums in the prior year.


We reported "Net income" of $46 million for the year ended March 31, 2017 , compared to "Net loss" of $38 million for the year ended March 31, 2016 . Capital expenditures declined as our larger strategic projects have all been completed. We spent $224 million for the year ended March 31, 2017 compared to $370 million for the year ended March 31, 2016 .    


Additionally, we successfully refinanced a significant portion of our long-term debt through the repayment of our

2017 Notes, 2020 Notes and Term Loan with the new issuance of 2024 Notes, 2026 Notes and new Term Loan during fiscal year 2017. The refinancings resulted in a "Loss on extinguishment of debt" of $134 million, partially offset by interest expense decreasing by $33 million primarily as a result of lower interest rates on the new debt. Furthermore, we will benefit from future annual cash interest savings of $79 million.


Furthermore, effective May 10, 2017, Novelis Korea, a subsidiary of Novelis Inc., entered into definitive agreements with Kobe Steel Ltd. (Kobe) under which Novelis Korea and Kobe will jointly own and operate the Ulsan manufacturing plant currently owned by Novelis Korea. To effect the transaction, Novelis Korea will form a new wholly owned subsidiary, Ulsan Aluminum, Ltd. (UAL) and will contribute the assets of the Ulsan plant to UAL. Kobe will purchase up to 50% of the outstanding shares of UAL for a purchase price of $315 million. The agreements contemplate that each of Novelis Korea and Kobe will supply input metal to UAL and UAL will produce flat-rolled aluminum products exclusively for Novelis Korea and Kobe. The transaction is expected to close in September 2017, subject to customary closing conditions. Upon completion, the transaction will generate cash proceeds to enhance Novelis' strategic flexibility and reduce its net debt.



29


BUSINESS AND INDUSTRY CLIMATE

Economic growth and material substitution continue to drive increasing global demand for aluminum and rolled products. However, slower economic growth in South America has muted beverage can demand in that region. Global can sheet overcapacity, increased competition from Chinese suppliers of flat rolled aluminum products, and customer consolidation are also adding downward pricing pressures in the can sheet market.

Meanwhile, the demand for aluminum in the automotive industry continues to grow. This demand has been primarily driven by the benefits that result from using lighter weight materials in the vehicles, as companies respond to government regulations, which are driving improved emissions and better fuel economy; while also maintaining or improving vehicle safety and performance. We expect the automotive aluminum market to grow significantly through the end of the decade, which has driven the investments we made in our automotive sheet finishing capacity in North America, Europe and Asia.

Key Sales and Shipment Trends

(in millions, except shipments which are in kt)

Three Months Ended

Year Ended

Three Months Ended

Year Ended

Jun 30,
2015

Sept 30, 2015

Dec 31,
2015

Mar 31,
2016

Mar 31,
2016

Jun 30,
2016

Sept 30, 2016

Dec 31,
2016

Mar 31,
2017

Mar 31,
2017

Net sales

$

2,634


$

2,482


$

2,354


$

2,402


$

9,872


$

2,296


$

2,361


$

2,313


$

2,621


$

9,591


Percentage increase (decrease) in net sales versus comparable previous year period

(2

)%

(12

)%

(17

)%

(14

)%

(11

)%

(13

)%

(5

)%

(2

)%

9

 %

(3

)%

Rolled product shipments:

North America

261


269


253


249


1,032


242


252


247


269


1,010


Europe

252


250


232


244


978


246


236


226


235


943


Asia

193


187


193


187


760


178


176


162


174


690


South America

107


117


132


134


490


103


121


125


125


474


Eliminations

(45

)

(35

)

(31

)

(26

)

(137

)

(14

)

(12

)

(10

)

(14

)

(50

)

Total

768


788


779


788


3,123


755


773


750


789


3,067




The following summarizes the percentage increase (decrease) in rolled product shipments versus the comparable previous year period:

North America

5

 %

3

 %

(1

)%

2

 %

2

 %

(7

)%

(6

)%

(2

)%

8

 %

(2

)%

Europe

2

 %

7

 %

6

 %

2

 %

4

 %

(2

)%

(6

)%

(3

)%

(4

)%

(4

)%

Asia

3

 %

1

 %

(3

)%

(5

)%

(1

)%

(8

)%

(6

)%

(16

)%

(7

)%

(9

)%

South America

(6

)%

1

 %

2

 %

2

 %

-

 %

(4

)%

3

 %

(5

)%

(7

)%

(3

)%

Total

-

 %

3

 %

3

 %

4

 %

2

 %

(2

)%

(2

)%

(4

)%

-

 %

(2

)%



Business Model and Key Concepts

Conversion Business Model


A significant amount of our business is conducted under a conversion model, which allows us to pass through increases or decreases in the price of aluminum to our customers. Nearly all of our flat-rolled products have a price structure with three components: (i) a base aluminum price quoted off the LME; (ii) a local market premium; and (iii) a "conversion premium" to produce the rolled product which reflects, among other factors, the competitive market conditions for that product. Base aluminum prices are typically driven by macroeconomic factors and global supply and demand of aluminum. The local market premiums tend to vary based on the supply and demand for metal in a particular region and associated transportation costs.


In North America, Europe and South America, we pass through local market premiums to our customers which are recorded through "Net sales." In Asia we purchase our metal inputs based on the LME and incur a local market premium; however, many of our competitors in this region price their metal off the Shanghai Futures Exchange, which does not include a local market premium, making it difficult for us to fully pass through this component of our metal input cost to some of our customers.


30


LME Base Aluminum Prices and Local Market Premiums

The average (based on the simple average of the monthly averages) and closing prices for aluminum set on the LME for the years ended March 31, 2017, 2016, and 2015 are as follows:

Percent Change

Year Ended March 31,

Year Ended

March 31, 2017

versus

Year Ended

March 31, 2016

versus

2017

2016

2015

March 31, 2016

March 31, 2015

London Metal Exchange Prices

Aluminum (per metric tonne, and presented in U.S. dollars):

Closing cash price as of beginning of period

$

1,492


$

1,789


$

1,731


(17

)%

3

 %

Average cash price during period

$

1,688


$

1,592


$

1,889


6

 %

(16

)%

Closing cash price as of end of period

$

1,947


$

1,492


$

1,789


30

 %

(17

)%


Local market premiums have been fairly stable over the past year, but in the previous year premiums decreased rapidly. The local market premiums in all four of our regions were lower for the year ended March 31, 2017 compared to the year ended March 31, 2016 . The weighted average local market premium was as follows:


Percent Change

Year Ended March 31,

Year Ended
March 31, 2017
versus March 31, 2016

Year Ended
March 31, 2016
versus March 31, 2015

2017

2016

2015

Weighted average Local Market Premium (per metric tonne, and presented in U.S. dollars)

$

151


$

194


$

464


(22

)%

(58

)%

Metal Price Lag and Related Hedging Activities

Increases or decreases in the price of aluminum based on the average LME base aluminum prices and local market premiums directly impact "Net sales," "Cost of goods sold (exclusive of depreciation and amortization)" and working capital. The timing of these impacts varies based on contractual arrangements with customers and metal suppliers in each region. These timing impacts are referred to as metal price lag. Metal price lag exists due to: (i) the period of time between the pricing of our purchases of metal, holding and processing the metal, and the pricing of the sale of finished inventory to our customers, and (ii) certain customer contracts containing fixed forward price commitments which result in exposure to changes in metal prices for the period of time between when our sales price fixes and the sale actually occurs.


We use LME aluminum forward contracts to preserve our conversion margins and manage the timing differences associated with the LME base metal component of "Net sales," and "Cost of goods sold (exclusive of depreciation and amortization)." These derivatives directly hedge the economic risk of future LME base metal price fluctuations to better match the purchase price of metal with the sales price of metal. The derivative market for local market premiums is not robust or efficient enough for us to offset the impacts of LMP price movements beyond a very small volume. As a consequence, volatility in local market premiums can have a significant impact on our results of operations and cash flows.


We elect to apply hedge accounting to better match the recognition of gains or losses on certain derivative instruments with the recognition of the underlying exposure being hedged in the statement of operations. For undesignated metal derivatives, there are timing differences between the recognition of unrealized gains or losses on the derivatives and the recognition of the underlying exposure in the statement of operations. The recognition of unrealized gains and losses on undesignated metal derivative positions typically precedes inventory cost recognition, customer delivery and revenue recognition. The timing difference between the recognition of unrealized gains and losses on undesignated metal derivatives and cost or revenue recognition impacts "Income before income taxes" and "Net income." Gains and losses on metal derivative contracts are not recognized in "Segment income" until realized.

See Segment Review below for the impact of metal price lag on each of our segments.



31


Foreign Currency and Related Hedging Activities

We operate a global business and conduct business in various currencies around the world. We have exposure to foreign currency risk as fluctuations in foreign exchange rates impact our operating results as we translate the operating results from various functional currencies into our U.S. dollar reporting currency at the current average rates. We also record foreign exchange remeasurement gains and losses when business transactions are denominated in currencies other than the functional currency of that operation. Global economic uncertainty is contributing to higher levels of volatility among the currency pairs in which we conduct business. The following table presents the exchange rates as of the end of each period and the average of the month-end exchange rates for the years ended March 31, 2017 , 2016 , and 2015 :

Exchange Rate as of

March 31,

Average Exchange Rate

Year Ended March 31,

2017

2016

2015

2017

2016

2015

U.S. dollar per Euro

1.068


1.139


1.075


1.098


1.102


1.256


Brazilian real per U.S. dollar

3.168


3.559


3.208


3.290


3.624


2.504


South Korean won per U.S. dollar

1,116


1,154


1,105


1,148


1,158


1,059


Canadian dollar per U.S. dollar

1.329


1.298


1.267


1.314


1.312


1.147


Swiss franc per Euro

1.069


1.094


1.045


1.084


1.076


1.170



Exchange rate movements have an impact on our operating results. In Europe, where we have predominantly local currency selling prices and operating costs, we benefit as the Euro strengthens, but are adversely affected as the Euro weakens. In South Korea, where we have local currency operating costs and U.S. dollar denominated selling prices for exports, we benefit as the won weakens but are adversely affected as the won strengthens. In Brazil, where we have predominately U.S. dollar selling prices and local currency manufacturing costs, we benefit as the real weakens, but are adversely affected as the real strengthens.

We use foreign exchange forward contracts and cross-currency swaps to manage our exposure arising from recorded assets and liabilities, firm commitments, and forecasted cash flows denominated in currencies other than the functional currency of certain operations, which include capital expenditures and net investment in foreign subsidiaries.  The impact of foreign exchange remeasurement, net of related hedges, was a net gain of $5 million in fiscal 2017 , a net gain of $2 million in fiscal 2016 , and a net loss of $27 million in fiscal 2015 . The movement of currency exchange rates during fiscal 2017 , fiscal 2016 and fiscal 2015 resulted in less than $8 million of net unrealized losses, less than $8 million of net unrealized gains, and $3 million of net unrealized gains, respectively, on undesignated foreign currency derivatives.

See Segment Review below for the impact of foreign currency on each of our segments.


32



Recent Developments


Sierre Leases


We lease real and personal property at our Sierre, Switzerland rolling facility from a subsidiary of Constellium N.V. (Constellium) as part of a long-term, renewable lease agreement. In January 2017, Constellium submitted to the Company a notice of termination of the lease agreements on the grounds that the Company breached certain terms and failed to remedy the alleged breaches within the cure period of the lease agreements. The Company believes it has not breached the lease agreements and Constellium does not have a right to terminate the leases. Novelis has submitted the dispute to arbitration under the rules of the International Chamber of Commerce as required by the lease agreements, has filed formal challenges to the termination notice, and has requested a stay of execution of the notice of termination at least until the arbitration has concluded.


33


Results of Operations

Year Ended March 31, 2017 Compared with the Year Ended March 31, 2016

"Net sales" were $9.6 billion , a decrease of 3% driven by a 2% decrease in flat rolled product shipments and a 22% decrease in local market premiums, partially offset by a 6% increase in average base aluminum prices and a favorable impact from our strategic shift to higher conversion premium products.

"Cost of goods sold (exclusive of depreciation and amortization)" was $8.0 billion , a decrease of 9%, due to lower flat rolled product shipments and cost improvements which contributed to lower average metal costs. Total metal input costs included in "Cost of goods sold (exclusive of depreciation and amortization)" decreased $638 million .

"Income before income taxes" for the year ended March 31, 2017 was $197 million compared to $8 million in the year ended March 31, 2016 . In addition to the factors noted above, the following items affected "Income before income taxes:"

Increased stability in the current year local market premiums, resulted in a $31 million metal price lag loss during the year ended March 31, 2017 compared to a $172 million metal price lag loss during the year ended March 31, 2016 .

"Restructuring and impairment, net" of $10 million for the year ended March 31, 2017 , includes $5 million of severance charges and $3 million of other charges across our regions. Additionally, there were $2 million of impairment charges related to assets in North America. In the prior year, we incurred $48 million , which related to $21 million of charges related to capitalized software impairments, $14 million of severance and other charges related to restructuring actions at our global headquarters and $10 million of severance and other charges across our regions;

A decline in interest expense of $33 million primarily resulting from the refinancing of the 2017 Notes, 2020 Notes and Term Loan, due to lower interest rates;

"Loss on extinguishment of debt" in the current year of $134 million relates to the extinguishment of the 2017 Notes, 2020 Notes and Term Loan. In the prior year, the loss related to an amendment leading to a partial extinguishment of the Term Loan; and

A loss of $27 million was recognized on the sale of our interest in Aluminium Company of Malaysia Berhad, which was reported in "Other (income) expense, net".

A gain of $10 million was recognized related to the settlement of a business interruption recovery claim due to an outage at the hotmill in the Logan facility in North America for the year ended March 31, 2016 . There were no such gain recorded in the current year.

We recognized $151 million of tax expense for the year ended March 31, 2017 , due to the results of operations at statutory tax rates, as well as due to tax losses in jurisdictions where we believe it is more likely than not that we will not be able to utilize those losses and therefore have a valuation allowance recorded and tax rate differences on foreign earnings, offset by dividends not subject to tax. We recognized $46 million of tax expense for the year ended March 31, 2016 , primarily due to the results of operations at statutory tax rates, tax losses in jurisdictions where we believe it to be more likely than not that we will not be able to utilize those losses and therefore have a valuation allowance recorded and the net impact of foreign exchange translation and remeasurement of deferred income taxes, offset by dividends not subject to tax.    

We reported "Net income attributable to our common shareholder" of $45 million for the year ended March 31, 2017 as compared to "Net loss attributable to our common shareholder" of $38 million for the year ended March 31, 2016 , primarily as a result of the factors discussed above.







34



Segment Review


Due in part to the regional nature of supply and demand of aluminum rolled products and in order to best serve our customers, we manage our activities on the basis of geographical regions and are organized under four operating segments: North America, Europe, Asia and South America.


We measure the profitability and financial performance of our operating segments based on "Segment income." We define "Segment income" as earnings before (a) "depreciation and amortization"; (b) "interest expense and amortization of debt issuance costs"; (c) "interest income"; (d) unrealized gains (losses) on changes in fair value of derivative instruments, net, except for foreign currency remeasurement hedging activities, which are included in segment income; (e) impairment of goodwill; (f) gain or loss on extinguishment of debt; (g) noncontrolling interests' share; (h) adjustments to reconcile our proportional share of "Segment income" from non-consolidated affiliates to income as determined on the equity method of accounting; (i) "restructuring and impairment, net"; (j) gains or losses on disposals of property, plant and equipment and businesses, net; (k) other costs, net; (l) litigation settlement, net of insurance recoveries; (m) sale transaction fees; (n) provision or benefit for taxes on income (loss) and (o) cumulative effect of accounting changes, net of tax. The financial information for our segments includes the results of our affiliates on a proportionately consolidated basis, which is consistent with the way we manage our business segments. See Note 8 - Consolidation and Note 9 - Investment in and Advances to Non-Consolidated Affiliates and Related Party Transactions for further information about these affiliates. Our presentation of "Segment income" on a consolidated basis is a non-GAAP financial measure. See "Non-GAAP Financial Measures" below for additional discussion about our use of "Total segment income."


The tables below show selected segment financial information (in millions, except shipments which are in kt). For additional financial information related to our operating segments, see Note 21 - Segment, Geographical Area, Major Customer and Major Supplier Information. In order to reconcile the financial information for the segments shown in the tables below to the relevant U.S. GAAP-based measures, "Eliminations and other" must adjust for proportional consolidation of each line item, and eliminate intersegment shipments (in kt) and intersegment "Net sales."

Selected Operating Results Year Ended March 31, 2017

North

America

Europe

Asia

South

America

Eliminations and other

Total

Net sales

$

3,228


$

2,968


$

1,791


$

1,510


$

94


$

9,591


Shipments

Rolled products - third party

1,009


927


682


449


-


3,067


Rolled products - intersegment

1


16


8


25


(50

)

-


Total rolled products

1,010


943


690


474


(50

)

3,067


Non-rolled products

4


8


9


88


-


109


Total shipments

1,014


951


699


562


(50

)

3,176


Selected Operating Results Year Ended March 31, 2016

North

America

Europe

Asia

South

America

Eliminations and other

Total

Net sales

$

3,266


$

3,223


$

1,992


$

1,575


$

(184

)

$

9,872


Shipments

Rolled products - third party

1,031


918


718


456


-


3,123


Rolled products - intersegment

1


60


42


34


(137

)

-


Total rolled products

1,032


978


760


490


(137

)

3,123


Non-rolled products

17


98


10


79


(2

)

202


Total shipments

1,049


1,076


770


569


(139

)

3,325







35



The following table reconciles changes in "Segment income" for the year ended March 31, 2016 to the year ended March 31, 2017 (in millions).

Changes in Segment income

North
America

Europe

Asia

South
America

Eliminations (A)

Total

Segment income - Year Ended March 31, 2016

$

258


$

116


$

135


$

282


$

-


$

791


Volume

(22

)

(34

)

(36

)

(18

)

74


(36

)

Conversion premium and product mix

(2

)

12


(10

)

18


-


18


Conversion costs (B)

84


40


50


13


(75

)

112


Metal price lag (C)

84


59


(1

)

(1

)

-


141


Foreign exchange

(4

)

4


11


52


-


63


Primary operations

-


-


-


(1

)

-


(1

)

Selling, general & administrative and research & development costs (D)

(5

)

(11

)

-


(7

)

(2

)

(25

)

Other changes

(9

)

(6

)

4


2


-


(9

)

Segment income - Year Ended March 31, 2017

$

384


$

180


$

153


$

340


$

(3

)

$

1,054


(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)

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.

(C)

Metal price lag impacts on year over year comparisons were primarily driven by local market premium price volatility. The derivative market for local market premiums is not robust or efficient enough for us to offset the impacts of LMP price movements beyond a very small volume.

(D)

Selling, general & administrative costs and research & development costs include costs incurred directly by each segment and all corporate related costs, which are allocated to each of our segments.



North America

"Net sales" decreased $38 million , or 1% , primarily due to lower can shipments partially offset by higher automotive shipments and higher average aluminum prices as we continue to adjust our product mix.

"Segment income" was $384 million , an increase of 49% , due to strong operational performance resulting from lower metal input and conversion costs, favorable metal price lag due to reduced local market premium volatility, operational efficiencies and higher automotive shipments. These positive factors were partially offset by lower volumes associated with can and specialties shipments and higher fixed costs related to the commissioning of our third automotive line.


Europe

"Net sales" decreased $255 million , or 8% , primarily due to lower can and specialties shipments, partially offset by higher automotive shipments and higher average aluminum prices.

"Segment income" was $180 million , an increase of 55% , primarily related to favorable metal price lag, lower metal

input costs resulting from increased production and usage of internally manufactured sheet ingot from our new recycling

facility in Nachterstedt, Germany, and favorable product mix as a result of our portfolio optimization efforts. These benefits

were partially offset by reduced can and specialty volumes.



36


Asia

"Net sales" decreased $201 million , or 10% , due to lower can shipments, lower can pricing, partially offset by higher average aluminum prices.

"Segment income" was $153 million , an increase of 13% , primarily due to lower metal input costs associated with

increased usage of internally manufactured sheet ingot, a decrease in the local market premium which is a cost we incur and are

unable to fully pass along to some of our customers, favorable product mix within can and automotive, and foreign currency

exchange rates. These factors were partially offset by lower can shipments and can pricing.

South America

"Net sales" decreased $65 million , or 4% , due to lower can shipments partially offset by favorable pricing conditions.

"Segment income" was $340 million , an increase of 21% , primarily due to foreign currency benefits, favorable can

pricing, lower metal input costs, and operational efficiencies, which were partially offset by lower can shipments.

Reconciliation of segment results to "Net income (loss) attributable to our common shareholder"

Costs such as depreciation and amortization, interest expense and unrealized gains (losses) on changes in the fair value of derivatives (except for derivatives used to manage our foreign currency remeasurement activities) are not utilized by our chief operating decision maker in evaluating segment performance. The table below reconciles income from reportable segments to "Net income (loss) attributable to our common shareholder" for the years ended March 31, 2017 and 2016 (in millions).

Year ended March 31,

2017

2016

North America

$

384


$

258


Europe

180


116


Asia

153


135


South America

340


282


Intersegment eliminations

(3

)

-


Total segment income

1,054


791


Depreciation and amortization

(360

)

(353

)

Interest expense and amortization of debt issuance costs

(294

)

(327

)

Adjustment to eliminate proportional consolidation

(28

)

(30

)

Unrealized gains (losses) on change in fair value of derivative instruments, net

5


(4

)

Realized gains (losses) on derivative instruments not included in segment income

5


(1

)

Gain on assets held for sale

2


(13

)

Loss on extinguishment of debt

(134

)

-


Restructuring and impairment, net

(10

)

(48

)

Loss on sale of business

(27

)

-


Loss on sale of fixed assets

(6

)

(4

)

Other costs, net

(10

)

(3

)

Income before income taxes

197


8


Income tax provision

151


46


Net income (loss)

46


(38

)

Net income attributable to noncontrolling interests

1


-


Net income (loss) attributable to our common shareholder

$

45


$

(38

)

"Adjustment to eliminate proportional consolidation" relates to depreciation and amortization and income taxes at our Aluminium Norf GmbH (Alunorf) joint venture. Income taxes and depreciation and amortization related to our equity method investments are reflected in the carrying value of the investment and not in our consolidated "Income tax provision" or "Depreciation and amortization."


37


"Realized gains (losses) on derivative instruments not included in segment income" represents realized gains and (losses) on foreign currency derivatives related to asset sales, capital expenditures and net investment.

"Other costs, net" related primarily to losses on certain indirect tax expenses in Brazil, partially offset by interest income.



38



Year Ended March 31, 2016 Compared with the Year Ended March 31, 2015

"Net sales" were $9.9 billion, a decrease of 11% driven by a 16% decrease in average base aluminum prices, and a 58% decrease in local market premiums. This decline in base aluminum prices more than offset a 73 kt increase in flat rolled products shipments to a record level for a fiscal year of 3,123 kt, and a favorable impact from our strategic shift to higher conversion premium products.

"Cost of goods sold (exclusive of depreciation and amortization)" was $8.7 billion, a decrease of 11% due to lower weighted average metal costs, partially offset by an increase in flat rolled products shipments and higher costs related to our strategic expansion projects. Total metal input costs included in "Cost of goods sold (exclusive of depreciation and amortization)" decreased $1.1 billion.

"Income before income taxes" for the year ended March 31, 2016 was $8 million compared to $162 million in the year ended March 31, 2015. In addition to the factors noted above, the following items affected "Income before income taxes:"

Sharp declines in local market premiums in the current period compared to prior year, which we are unable to hedge economically, resulted in significant unfavorable metal price lag of $172 million.

"Selling, general and administrative expenses" decreased $20 million primarily due to tighter cost control in the current year and lower long-term incentive plan costs;

"Restructuring and impairment, net" of $48 million for the year ended March 31, 2016, includes $21 million of charges related to the impairment of certain capitalized software assets, $14 million of severance and other charges related to restructuring actions at our global headquarters and $10 million of severance and other charges across our regions. Additionally, there were $3 million of impairment charges related to certain non-core assets in North America, South America, and Asia. In the prior year, we incurred $37 million, primarily related to $28 million of charges related to ceasing operations of the Ouro Preto smelter in South America, $7 million of severance, contract termination and other restructuring charges in North America, Europe and South America related to past restructuring actions, and $2 million of impairment charges related to certain non-core assets in North America. (See Note 2 - Restructuring and impairment to our accompanying consolidated financial statements for further details on restructuring activities);

"Gain on assets held for sale, net" for the year ended March 31, 2015 includes $23 million from the sale of our share of the joint venture of the Consorcio Candonga joint venture in Brazil, $7 million from the sale of our consumer foil operations in North America and $6 million from property and mining rights sales in South America partially offset by a $14 million loss on the sale of certain hydroelectric assets in South America;

"Loss on extinguishment of debt" includes a $13 million loss on the partial extinguishment of our Term Loan Facility, which was amended during the first quarter of fiscal 2016; and

Foreign currency remeasurement losses primarily due to volatility in European currency markets that resulted in a $27 million loss in fiscal 2015.

For the year ended March 31, 2016, we recognized $46 million of tax expense as a result of the net impact of statutory tax expense, losses in jurisdictions where we believe it is more likely than not that we will not be able to utilize those losses, and the net impact of foreign exchange movement. For the year ended March 31, 2015, we recognized $14 million in tax expense primarily due to losses in jurisdictions where we believe it is more likely than not that we will not be able to utilize those losses, partially offset by favorable foreign exchange movement.

We reported "Net loss attributable to our common shareholder" of $38 million for the year ended March 31, 2016 as compared to "Net income attributable to our common shareholder" of $148 million for the year ended March 31, 2015, primarily as a result of the factors discussed above.










39


Segment Review


Due in part to the regional nature of supply and demand of aluminum rolled products and in order to best serve our customers, we manage our activities on the basis of geographical regions and are organized under four operating segments: North America, Europe, Asia and South America.


We measure the profitability and financial performance of our operating segments based on "Segment income." We define "Segment income" as earnings before (a) "depreciation and amortization"; (b) "interest expense and amortization of debt issuance costs"; (c) "interest income"; (d) unrealized gains (losses) on changes in fair value of derivative instruments, net, except for foreign currency remeasurement hedging activities, which are included in segment income; (e) impairment of goodwill; (f) gain or loss on extinguishment of debt; (g) noncontrolling interests' share; (h) adjustments to reconcile our proportional share of "Segment income" from non-consolidated affiliates to income as determined on the equity method of accounting; (i) "restructuring and impairment, net"; (j) gains or losses on disposals of property, plant and equipment and businesses, net; (k) other costs, net; (l) litigation settlement, net of insurance recoveries; (m) sale transaction fees; (n) provision or benefit for taxes on income (loss) and (o) cumulative effect of accounting changes, net of tax. The financial information for our segments includes the results of our affiliates on a proportionately consolidated basis, which is consistent with the way we manage our business segments. See Note 8 - Consolidation and Note 9 - Investment in and Advances to Non-Consolidated Affiliates and Related Party Transactions for further information about these affiliates. Our presentation of "Segment income" on a consolidated basis is a non-GAAP financial measure. See "Non-GAAP Financial Measures" below for additional discussion about our use of "Total Segment income."


The tables below show selected segment financial information (in millions, except shipments which are in kt). For additional financial information related to our operating segments, see Note 21 - Segment, Geographical Area, Major Customer and Major Supplier Information. In order to reconcile the financial information for the segments shown in the tables below to the relevant U.S. GAAP-based measures, "Eliminations and other" must adjust for proportional consolidation of each line item, and eliminate intersegment shipments (in kt) and intersegment "Net sales."


Selected Operating Results Year Ended March 31, 2016

North

America

Europe

Asia

South

America

Eliminations and other

Total

Net sales

$

3,266


$

3,223


$

1,992


$

1,575


$

(184

)

$

9,872


Shipments

Rolled products - third party

1,031


918


718


456


-


3,123


Rolled products - intersegment

1


60


42


34


(137

)

-


Total rolled products

1,032


978


760


490


(137

)

3,123


Non-rolled products

17


98


10


79


(2

)

202


Total shipments

1,049


1,076


770


569


(139

)

3,325


Selected Operating Results Year Ended March 31, 2015

North

America

Europe

Asia

South

America

Eliminations and other

Total

Net sales

$

3,483


$

3,783


$

2,340


$

1,850


$

(309

)

$

11,147


Shipments

Rolled products - third party

1,002


889


701


458


-


3,050


Rolled products - intersegment

5


49


67


32


(153

)

-


Total rolled products

1,007


938


768


490


(153

)

3,050


Non-rolled products

23


215


2


93


(9

)

324


Total shipments

1,030


1,153


770


583


(162

)

3,374







40


The following table reconciles changes in "Segment income" for the year ended March 31, 2015 to the year ended March 31, 2016 (in millions).

Changes in Segment income

North
America (A)

Europe

Asia

South
America

Eliminations (B)

Total

Segment income - Year Ended March 31, 2015

$

273


$

250


$

141


$

240


$

(2

)

$

902


Volume

21


47


(5

)

-


2


65


Conversion premium and product mix

74


19


9


25


(17

)

110


Conversion costs (C)

(13

)

(111

)

22


(24

)

17


(109

)

Metal price lag

(79

)

(77

)

(21

)

(1

)

-


(178

)

Foreign exchange

1


(32

)

(11

)

64


-


22


Primary operations

-


-


-


(14

)

-


(14

)

Selling, general & administrative and research & development costs (D)

(14

)

11


-


(5

)

-


(8

)

Other changes

(5

)

9


-


(3

)

-


1


Segment income - Year Ended March 31, 2016

$

258


$

116


$

135


$

282


$

-


$

791


(A)

Included in the North America "Segment income" for the year ended March 31, 2016 were the operating results of our consumer foil operations in North America that we sold on June 30, 2014. The change to "Segment income" attributable to these operations for the year ended March 31, 2016 compared to the prior year was unfavorable by $1 million. The following table reconciles changes in "Segment income" for the year ended March 31, 2015 to the year ended March 31, 2016 (in millions), with the impact of the consumer foil operations separately identified.

Changes in Segment income

North America

Total

Segment income - Year Ended March 31, 2015

$

273


$

902


Volume

25


69


Conversion premium and product mix

84


120


Conversion costs

(24

)

(120

)

Metal price lag

(79

)

(178

)

Foreign exchange

1


22


Primary metal production

-


(14

)

Selling, general & administrative and research & development costs

(16

)

(10

)

Other changes

(5

)

1


Net impact of North America consumer foil operations sold in fiscal 2015

(1

)

(1

)

Segment income - Year Ended March 31, 2016

$

258


$

791



(B)

The recognition of "Segment income" by a region on an intersegment shipment could occur in a period prior to the recognition of "Segment income" on a consolidated basis, depending on the timing of when the inventory is sold to the third party customer. The "Eliminations" column adjusts regional "Segment income" for intersegment shipments that occur in a period prior to recognition of "Segment income" on a consolidated basis. The "Eliminations" column also reflects adjustments for changes in regional volume, conversion premium and product mix, and conversion costs related to intersegment shipments for consolidation.

(C)

Conversion costs include expenses incurred in production such as direct and indirect labor, energy, freight, scrap usage, alloys and hardeners, coatings, alumina, melt loss, the benefit of utilizing scrap and other metal costs. Fluctuations in this component reflect cost efficiencies (inefficiencies) during the period as well as cost (inflation) deflation.

(D)

Selling, general & administrative costs and research & development costs include costs incurred directly by each segment and all corporate related costs, which are allocated to each of our segments.




41


North America


"Net sales" decreased $217 million, or 6%, reflecting lower average base aluminum prices, lower local market premiums and a decrease in can and specialty shipments, partially offset by higher automotive shipments. As a result of our continued ramp-up of our new automotive lines in the region and commissioning of our third automotive line during the fourth quarter of fiscal 2016, along with higher demand in the automotive sector, we expect to see positive year over year automotive shipment growth during the next fiscal year.

"Segment income" was $258 million, a decrease of 5%, reflecting significant unfavorable metal price lag of $79 million, higher fixed, variable, and selling, general, and administrative costs associated with the commissioning and support of our new automotive capacity. Partially offsetting these was a significant increase in automotive shipments, which then doubled, as a result of our strategic product portfolio shift to higher premium products and higher conversion premiums from the related product mix shift. Fiscal 2016 was also favorably impacted by strong production whereas in December 2014 we experienced an unscheduled outage at the hot mill in the Logan Aluminum joint venture facility that significantly reduced "Segment income" during the fourth quarter of fiscal 2015.


Europe


"Net sales" decreased $560 million, or 15%, reflecting lower average base aluminum prices, lower local market premiums, and a decrease in specialty and non-flat rolled products shipments, partially offset by higher can and automotive shipments. Shipments in fiscal 2016 were at record levels. As a result of the commissioning of our second automotive line Nachterstedt, Germany during the fourth quarter of fiscal 2016, along with higher demand in the automotive sector, we expect to see positive year over year automotive shipment growth during the next fiscal year.

"Segment income" was $116 million, a decrease of 54%, reflecting significant unfavorable metal price lag of $77 million, unfavorable changes in foreign currency rates, and higher fixed costs associated with increased employment costs, and the ramp-up of our new recycling facility in Nachterstedt, Germany, as well as less favorable metal input costs. Partially offsetting these were favorable higher conversion premiums from the related product mix shift. Fiscal 2016 was also favorably impacted by strong production whereas in fiscal 2015 we experienced an unscheduled outage in a hot mill motor at one of our facilities in Europe leading to reduced "Segment income."

Asia

"Net sales" decreased $348 million, or 15%, reflecting lower average aluminum prices and lower shipments of our specialties products due to increased competition, partially offset by higher can and automotive shipments. The increase in our can volumes was driven by shipments to customers in the Middle East. Intersegment shipments of specialty products declined which was partially offset by an increase of intersegment shipments of automotive products to Novelis Europe and Novelis North America. A portion of the increase in demand for our automotive products was driven by customers in China.

"Segment income" was $135 million, a decrease of 4%, reflecting unfavorable metal price lag of $21 million, an unfavorable impact from changes in foreign currency rates, partially offset by lower metal input costs associated with a decrease in the local market premium which is a cost we incur and are unable to fully pass along to some of our customers, and a favorable shift in product mix towards automotive that more than offset some can and specialty pricing pressures. We continue to experience pricing pressures and competition within the region.

South America

"Net sales" decreased $275 million, or 15%, reflecting lower average aluminum prices as well as lower specialty and non-flat rolled products shipments, partially offset by higher can shipments. Shipments in fiscal 2016 were at record levels. Despite slowing economic conditions and political unrest in Brazil, can shipments were strong; however, shipments of specialty products decreased.

"Segment income" was $282 million, an increase of 18%, reflecting favorable foreign currency changes, customer price adjustments resulting from inflation, and improved product mix shift towards can as demand continues to increase, partially offset by higher utility and employment costs, and an impact related to the closure of our smelting operations in fiscal 2015.


42


Reconciliation of segment results to "Net (loss) income attributable to our common shareholder"

Costs such as depreciation and amortization, interest expense and unrealized gains (losses) on changes in the fair value of derivatives (except for derivatives used to manage our foreign currency remeasurement activities) are not utilized by our chief operating decision maker in evaluating segment performance. The table below reconciles income from reportable segments to "Net (loss) income attributable to our common shareholder" for the years ended March 31, 2016 and 2015 (in millions).

Year ended March 31,

2016

2015

North America

$

258


$

273


Europe

116


250


Asia

135


141


South America

282


240


Intersegment eliminations

-


(2

)

Total segment income

791


902


Depreciation and amortization

(353

)

(352

)

Interest expense and amortization of debt issuance costs

(327

)

(326

)

Adjustment to eliminate proportional consolidation

(30

)

(33

)

Unrealized losses on change in fair value of derivative instruments, net

(4

)

-


Realized (losses) gains on derivative instruments not included in segment income

(1

)

(6

)

Restructuring and impairment, net

(48

)

(37

)

Gain on assets held for sale

-


22


Loss on extinguishment of debt

(13

)

-


Loss on sale of fixed assets

(4

)

(5

)

Other costs, net

(3

)

(3

)

Income before income taxes

8


162


Income tax provision

46


14


Net (loss) income

(38

)

148


Net income attributable to noncontrolling interests

-


-


Net (loss) income attributable to our common shareholder

$

(38

)

$

148



"Adjustment to eliminate proportional consolidation" relates to depreciation and amortization and income taxes at our Aluminium Norf GmbH (Alunorf) joint venture. Income taxes and depreciation and amortization related to our equity method investments are reflected in the carrying value of the investment and not in our consolidated "Income tax provision" or "Depreciation and amortization."

"Realized (losses) gains on derivative instruments not included in segment income" represents realized gains on foreign currency derivatives related to asset sales, capital expenditures and net investment.

"Other costs, net" related primarily to losses on certain indirect tax expenses in Brazil, partially offset by interest income.


43


Liquidity and Capital Resources


Our significant investments in the business were funded through cash flows generated by our operations and a combination of local financing and our senior secured credit facilities.  Most of our expansion projects are currently ramping up operations and will generate additional operating cash flows. We expect to be able to fund our continued expansions, service our debt obligations, and provide sufficient liquidity to operate our business through one or more of the following: the generation of operating cash flows; our existing debt facilities, including refinancing; and new debt issuances, as necessary.

Debt Refinancing

In January 2017, we entered into a new Term Loan Credit Agreement. The Agreement provided Novelis with $1.8 billion, and the proceeds were used to extinguish the existing Term Loan agreement originally maturing on June 2, 2022 and fund related transaction expenses. The Term Loan Credit Agreement matures on June 2, 2022, subject to 0.25% quarterly amortization payments. The Term Loan Credit Agreement also requires customary mandatory prepayments with excess cash flow, asset sale and condemnation proceeds and proceeds of prohibited indebtedness, all subject to customary exceptions. The Term Loan may be prepaid, in full or in part, at any time at the Company's election without penalty or premium; provided that any optional prepayment in connection with a repricing amendment or refinancing through the issuance of lower priced debt made within six-months after the earlier of (i) completion of the initial syndication of the Term Loan and (ii) April 13, 2017, will be subject to a 1.00% prepayment premium. The Term Loan Credit Agreement allows for additional term loans to be issued in an amount not to exceed $300 million (or its equivalent in other currencies) if, after giving effect to such incurrence on a pro forma basis, the senior secured net leverage ratio does not exceed 3.50 to 1.00, plus an unlimited amount if, after giving effect to such incurrence on a pro forma basis, the senior secured net leverage ratio does not exceed 3.00 to 1.00. The lenders under the Term Loan Credit Agreement have not committed to provide any such additional term loans.

On August 15, 2016, we commenced a cash tender offer to purchase any and all of our $1.1 billion aggregate principal amount of outstanding 8.375% Senior Notes due 2017 (the 2017 Notes). Approximately $636 million of the $1.1 billion outstanding 2017 Notes, which represents approximately 58% of the outstanding 2017 Notes, were tendered in the tender offer. On August 29, 2016, Novelis Corporation, an indirect wholly-owned subsidiary of Novelis Inc., issued and sold $1.15 billion principal amount of the 2024 Notes. Using proceeds from the sales of the 2024 Notes, we paid approximately $660 million to purchase the 2017 Notes tendered in the tender offer. Also on August 29, 2016, we irrevocably deposited with the trustee for the 2017 Notes funds sufficient to fund the redemption of the remaining outstanding 2017 Notes that were not tendered in the tender offer, which included payment of accrued and unpaid interest through, but not including, the December 15, 2016 redemption date. As a result, we were released from our obligations under the 2017 Notes and the indenture governing the 2017 Notes pursuant to the satisfaction and discharge provisions thereunder.

On September 7, 2016, we commenced a cash tender offer to purchase any and all of our $1.4 billion aggregate principal amount of 8.75% Senior Notes due 2020 (the 2020 Notes). Approximately $1.1 billion of the $1.4 billion outstanding 2020 Notes, which represented approximately 79% of the outstanding 2020 Notes, were tendered in the tender offer. On September 16, 2016, Novelis Corporation issued and sold $1.5 billion principal amount of 2026 Notes. Using proceeds from the sale of the 2026 Notes, we paid approximately $1.2 billion to purchase the 2020 Notes tendered in the tender offer. Also on September 16, 2016, we irrevocably deposited with the trustee for the 2020 Notes funds sufficient to fund the redemption of the remaining outstanding 2020 Notes that were not tendered in the tender offer, which included payment of accrued and unpaid interest through the October 14, 2016 redemption date. As a result, we were released from our obligations under the 2020 Notes and the indenture governing the 2020 Notes pursuant to the satisfaction and discharge provisions thereunder.

See the "Highlights" section for details regarding the anticipated interest savings due to the new issuances.

The 2024 and 2026 Notes issued by Novelis Corporation as part of the refinancing transactions are fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis, by Novelis Inc. and all of Novelis Inc.'s existing and future Canadian and U.S. restricted subsidiaries (other than Novelis Corporation), certain of its existing foreign restricted subsidiaries and other restricted subsidiaries that guarantee debt in the future under any credit facilities, subject to certain exceptions. The 2024 Notes and the 2026 Notes contain customer covenants and events of default. See Note 7 - Debt - Senior Notes to our accompanying consolidated financial statements for additional information. In addition, pursuant to the indentures governing the 2024 and 2026 Notes, the Company is required to provide the following financial information regarding its subsidiaries:


As of March 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):


44



Item Description

Ratio

Consolidated net sales represented by net sales to third parties by non-guarantor subsidiaries (for the year ended March 31, 2017)

20

%

Consolidated Adjusted EBITDA represented by non-guarantor subsidiaries (for the year ended March 31, 2017)

16

%

Consolidated assets are owned by non-guarantor subsidiaries (as of March 31, 2017)

17

%


In addition, for the years ended March 31, 2017 and March 31, 2016 , the Company's subsidiaries that are not guarantors had net sales of $2.2 billion and $2.4 billion , respectively, and, as of March 31, 2017 , those subsidiaries had assets of $2.0 billion and debt and other liabilities of $1.3 billion (including inter-company balances).

Available Liquidity

Our available liquidity as of March 31, 2017 and 2016 is as follows (in millions):

March 31,

2017

2016

Cash and cash equivalents

$

594


$

556


Availability under committed credit facilities

701


640


Total liquidity

$

1,295


$

1,196



We reported available liquidity of $1,295 million as of March 31, 2017 , which represents an increase compared to $1,196 million reported as of March 31, 2016 . The increase is primarily attributable positive free cash flow of $361 million , net proceeds under our debt instruments of $86 million , an increase in the ABL borrowing base of $42 million and other increases of $1 million ; partially offset by the extinguishment of the $200 million Subordinated Lien Revolver and debt issuance costs of $191 million . As of March 31, 2017 , our availability under committed credit facilities of $701 million was comprised of $448 million under our ABL Revolver and $253 million under our Korea, China, and Middle East loan facilities.


The "Cash and cash equivalents" balance above includes cash held in foreign countries in which we operate. As of March 31, 2017 , we held $2 million of "Cash and cash equivalents" in Canada, in which we are incorporated, with the rest held in other countries in which we operate. As of March 31, 2017 , we held $276 million of cash in jurisdictions for which we have asserted that earnings are permanently reinvested and we plan to continue to fund operations and local expansions with cash held in those jurisdictions. Our significant future uses of cash include servicing our debt obligations domestically, which we plan to fund with cash flows from operating activities and, if necessary, by repatriating cash from jurisdictions for which we have not asserted that earnings are indefinitely reinvested. Cash held outside of Canada is free from significant restrictions that would prevent the cash from being accessed to meet the Company's liquidity needs including, if necessary, to fund operations and service debt obligations in Canada. Upon the repatriation of any earnings to Canada, in the form of dividends or otherwise, we could be subject to Canadian income taxes (subject to adjustment for foreign taxes paid and the utilization of the large cumulative net operating losses we have in Canada) and withholding taxes payable to the various foreign jurisdictions. As of March 31, 2017 , we do not believe adverse tax consequences exist that restrict our use of "Cash or cash equivalents" in a material manner.







45


Free Cash Flow

We define "Free cash flow" (which is a non-GAAP measure) as: (a) "net cash provided by (used in) operating activities," (b) plus "net cash provided by (used in) investing activities" and (c) less "net proceeds from sales of assets, net of transaction fees and hedging." Management believes "Free cash flow" is relevant to investors as it provides a measure of the cash generated internally that is available for debt service and other value creation opportunities. However, "Free cash flow" does not necessarily represent cash available for discretionary activities, as certain debt service obligations must be funded out of "Free cash flow." Our method of calculating "Free cash flow" may not be consistent with that of other companies.

The following table shows the "Free cash flow" for the year ended March 31, 2017 , 2016 and 2015 , the change between periods, as well as the ending balances of cash and cash equivalents (in millions).

Change

Year Ended March 31,

2017
versus

2016

versus

2017

2016

2015

2016

2015

Net cash provided by operating activities

$

575


$

541


$

604


$

34


$

(63

)

Net cash used in investing activities

(212

)

(378

)

(416

)

166


38


Less: Proceeds from sales of assets and business, net of transactions fees and hedging

(2

)

(3

)

(117

)

1


114


Free cash flow

$

361


$

160


$

71


$

201


$

89


Ending cash and cash equivalents

$

594


$

556


$

628


$

38


$

(72

)

"Free cash flow" was $361 million in fiscal 2017 , an increase of $201 million as compared to fiscal 2016 . "Free cash flow" was positive $160 million in fiscal 2016 , an increase of $89 million as compared to fiscal 2015 . The changes in "Free cash flow" are described in greater detail below.

Operating Activities

Net cash provided by operating activities was $575 million for the year ended March 31, 2017 , which compares favorably to $541 million in the year ended March 31, 2016 . The increase in net cash provided by operating activities was primarily related to higher "Segment income", driven by favorable impacts from metal price lag and lower metal input costs. The following summarizes changes in working capital accounts (in millions).

Change

Year Ended March 31,

2017
versus

2016
versus

2017

2016

2015

2016

2015

Net cash provided by (used in) operating activities due to changes in working capital:

Accounts receivable

$

(154

)

$

336


$

(54

)

$

(490

)

$

390


Inventories

(193

)

268


(390

)

(461

)

658


Accounts payable

253


(327

)

578


580


(905

)

Other current assets and liabilities

19


(5

)

39


24


(44

)

Net change in working capital

$

(75

)

$

272


$

173


$

(347

)

$

99



46


Year Ended March 31, 2017

"Accounts receivable, net" increased due to the timing of cash collections on certain customer receivables balances offset by 3% lower sales and higher factoring balances. As of March 31, 2017 and 2016 , we had factored, without recourse, certain trade receivable aggregating $679 million and $626 million , respectively, which had a favorable impact to net cash provided by operating activities of $53 million for the year ended March 31, 2017 . We determine the need to factor our receivables based on local cash needs including the need to fund our strategic investments, as well as attempting to balance the timing of cash flows of trade payables and receivables. "Inventories" were higher due to higher quantities on hand partially offset by lower average metal costs. The higher quantities of inventory on hand at March 31, 2017 is the result of recent capacity expansions as well as longer supply chains to support the automotive sector and expand our scrap procurement network. As of March 31, 2017 , we had sold certain inventories to third parties and have agreed to repurchase the same or similar inventory back from the third parties subsequent to March 31, 2017 . Our estimated repurchase obligation for this inventory as of March 31, 2017 is $12 million , based on market prices as of this date. We sell and repurchase inventory with third parties in an attempt to better manage inventory levels and to better match the purchasing of inventory with the demand for our products. We experienced an increase in "Accounts payable" primarily due to the timing of payments to vendors.


Included in cash flows from operating activities for the year ended March 31, 2017 were $288 million of interest payments, $128 million of cash paid for income taxes, $13 million of payments on restructuring programs, and $66 million of contributions to our pension plans. As of March 31, 2017 , we had $24 million of outstanding restructuring liabilities, of which $16 million we estimate will result in cash outflows within the next twelve months.


Year Ended March 31, 2016

We experienced a decrease in "Accounts receivable, net" due to lower base aluminum prices and local market premiums compared to the end of the fourth quarter of prior year, and the timing of cash collections on certain customer receivables balances; partially offset by higher shipments and higher factoring of accounts receivable. As of March 31, 2016 and 2015, we had factored, without recourse, certain trade receivable aggregating $626 million and $591 million, respectively, which had a favorable impact to net cash provided by operating activities of $35 million for the year ended March 31, 2016. We determine the need to factor our receivables based on local cash needs including the need to fund our strategic investments, as well as attempting to balance the timing of cash flows of trade payables and receivables. "Inventories" were lower due to lower base aluminum prices and local market premiums when compared to the fourth quarter of fiscal 2015. As of March 31, 2016, we had sold certain inventories to third parties and have agreed to repurchase the same or similar inventory back from the third parties subsequent to March 31, 2016. Our estimated repurchase obligation for this inventory as of March 31, 2016 is $22 million, based on market prices as of this date. We sell and repurchase inventory with third parties in an attempt to better manage inventory levels and to better match the purchasing of inventory with the demand for our products. We experienced a decrease in "Accounts payable" due to lower base aluminum prices and lower local market premiums when compared to the end of the fourth quarter of fiscal 2015, partially offset by the timing of payments on vendor payables outstanding as of March 31, 2016 and obtaining longer payment terms with certain vendors.


Included in cash flows from operating activities for the year ended March 31, 2016 were $308 million of interest payments, $123 million of cash paid for income taxes, $22 million of payments on restructuring programs, and $64 million of contributions to our pension plans. As of March 31, 2016, we had $27 million of outstanding restructuring liabilities, of which $23 million we estimate will result in cash outflows within the next twelve months.



47


Year Ended March 31, 2015

We experienced an increase in "Accounts receivable, net" due to an increase in shipments, as well as higher base aluminum prices and local market premiums compared to the end of the fourth quarter of fiscal 2014, partially offset by higher factoring of accounts receivable. As of March 31, 2015 and March 31, 2014, we had factored, without recourse, certain trade receivable aggregating $591 million and $245 million, respectively, which had a favorable impact to net cash provided by operating activities of $346 million for the year ended March 31, 2015. "Inventories" were higher due to an increase in quantities on hand, as well as higher base aluminum prices and local market premiums when compared to the fourth quarter of fiscal 2014. The higher quantities of inventory on hand at March 31, 2015 is the result of capacity expansions, as well as longer supply chains to support the automotive sector and expand our scrap procurement network. As of March 31, 2015, we had sold certain inventories to third parties and have agreed to repurchase the same or similar inventory back from the third parties subsequent to March 31, 2015. Our estimated repurchase obligation for this inventory as of March 31, 2015 is $218 million, based on market prices as of this date. We experienced an increase in "Accounts payable" due to higher purchases of inventory, higher base aluminum prices and higher local market premiums when compared to the end of the fourth quarter of fiscal 2014, the timing of payments on vendor payables outstanding as of March 31, 2015, and obtaining longer payment terms with certain vendors.


Included in cash flows from operating activities for the year ended March 31, 2015 were $303 million of interest payments, $131 million of cash paid for income taxes, $32 million of payments on restructuring programs, and $59 million of contributions to our pension plans.


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 year ended March 31, 2017 compared with the year ended March 31, 2016 ."


Investing Activities

The following table presents information regarding our "Net cash used in investing activities" (in millions).

Change

Year Ended March 31,

2017
versus

2016
versus

2017

2016

2015

2016

2015

Capital expenditures

$

(224

)

$

(370

)

$

(518

)

$

146


$

148


Proceeds (outflows) from settlement of other undesignated derivative instruments, net

8


(9

)

5


17


(14

)

Proceeds from sales of assets, third party, net of transaction fees and hedging

4


3


117


1


(114

)

Outflows from the sale of business, net of transaction fees

(2

)

-


-


(2

)

-


Proceeds (outflows) from investment in and advances to non-consolidated affiliates, net

2


(2

)

(20

)

4


18


Net cash used in investing activities

$

(212

)

$

(378

)

$

(416

)

$

166


$

38



We had $224 million of cash outflows for "Capital expenditures" for the year ended March 31, 2017 , compared to $370 million for the year ended March 31, 2016 and $518 million for the year ended March 31, 2015 . For the year ended March 31, 2017 , our "Capital expenditures" were primarily attributable to the maintenance of existing property, plant and equipment. For the year ended March 31, 2016 , our "Capital expenditures" were primarily attributable to our automotive sheet finishing expansions in the U.S. and Germany. For the year ended March 31, 2015, our "Capital expenditures" were primarily attributable to our automotive sheet finishing expansions in the U.S., China and Germany, our recycling expansion in Germany, and expenditures related to our ERP implementation.


48


As of March 31, 2017 , we had $42 million of outstanding accounts payable and accrued liabilities related to capital expenditures in which the cash outflows will occur subsequent to March 31, 2017 .


The settlement of undesignated derivative instruments resulted in cash inflow of $8 million for the year ended March 31, 2017 , and cash outflows of $9 million and proceeds of $5 million for the years ended 2016 and 2015, respectively. The variance in these cash flows related primarily to changes in average aluminum prices and foreign currency rates which impact gains or losses we realize on the settlement of derivatives.    


The net proceeds from asset sales for the year ended March 31, 2017 were $4 million which primarily related to the sale of fixed assets in North America and our sale of one hydroelectric power generation facility in South America. During the year ended March 31, 2016, net proceeds from the asset sales were $3 million which primarily related to the sale of fixed assets at the Ouro Preto smelter in South America. During the year ended March 31, 2015, net proceeds from the sale of assets were $29 million related to the sale of our consumer foil operations in North America and $63 million for the sale of our joint venture of the Consorcio Candonga in Brazil, net of related gains on currency derivatives and transaction fees, and proceeds of $17 million from the sale of the majority of our hydroelectric power generation operations in South America.

"Outflows from the sale of a business, net of transaction fees" is comprised of cash formerly held by ALCOM, which was a consolidated entity sold during the three months ended September 30, 2016, offset by additional proceeds of $12 million received during the three months ended December 31, 2016. Refer to Note 14 - Other Expense (Income), Net for further details.

"Proceeds (outflows) from investments in and advances to non-consolidated affiliates, net" for the years ended March 31, 2017, 2016, and 2015 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).

Change

Year Ended March 31,

2017
versus

2016
versus

2017

2016

2015

2016

2015

Proceeds from issuance of long-term and short-term borrowings

$

4,572


$

174


$

362


$

4,398


$

(188

)

Principal payments of long-term and short-term borrowings

(4,477

)

(216

)

(324

)

(4,261

)

108


Revolving credit facilities and other, net

(229

)

(187

)

160


(42

)

(347

)

Return of capital to our common shareholder

-


-


(250

)

-


250


Dividends, noncontrolling interest

-


(1

)

(1

)

1


-


Debt issuance costs

(191

)

(15

)

(3

)

(176

)

(12

)

Net cash used in financing activities

$

(325

)

$

(245

)

$

(56

)

$

(80

)

$

(189

)


Year Ended March 31, 2017

During the year ended March 31, 2017 , we received proceeds of $4.5 billion related to the refinancing of the Term Loan, 2017 and 2020 Notes as well as issuances of new loans in Brazil and Vietnam, and other locations of $81 million , $40 million , and $2 million , respectively. Additionally, we made principal repayments of $1.8 billion on our Term Loan Facility related to the refinancing, $1.1 billion and $1.4 billion on our 2017 and 2020 Notes, respectively, $108 million on short-term loans in Brazil, $49 million on Vietnam principal repayments, $17 million in Korean loan repayments, $10 million on capital leases, and $5 million in other principal repayments. The change in our credit facilities balance is related to net incremental repayments of $196 million on our ABL Revolver partially offset by net proceeds of $16 million in our China credit facilities.


As of March 31, 2017 , our short-term borrowings were $294 million consisting of $184 million of loans under our ABL Revolver, $50 million in Novelis Brazil loans, $59 million in Novelis China loans, and $1 million in other short-term borrowings. The weighted average interest rate on our total short-term borrowings was 2.92% as of March 31, 2017 . As of March 31, 2017 , $20 million of the ABL Revolver was utilized for letters of credit, reducing our availability under that facility.


49



During the year ended March 31, 2017 , we incurred costs of $191 million related to the refinancing of our Term Loan and Senior Notes facilities.


Year Ended March 31, 2016

During the year ended March 31, 2016, we received proceeds of $60 million related to the refinancing of the Term Loan as well as issuances of new loans in Brazil, Korea, Vietnam, and other locations of $45 million, $39 million. $28 million, and $2 million, respectively. We made principal repayments of $134 million on short-term loans in Brazil, $30 million on Vietnam principal repayments, $14 million on our Term Loan Facility, $9 million on capital leases, $26 million on long-term loans in Korea and $3 million in other principal repayments. The change in our credit facilities balance is related to net incremental repayments of $227 million on our ABL Revolver partially offset by an increase in other borrowings of $40 million.


Year Ended March 31, 2015

During the year ended March 31, 2015, we received proceeds related to the issuance of new short-term loans in Brazil, Korea, Vietnam, and other locations of $315 million, $27 million, $19 million, and $1 million, respectively. We made principal repayments of $253 million on short-term loans in Brazil, $30 million on Vietnam principal repayments, $18 million on our Term Loan Facility, $9 million on capital leases, $7 million on long-term loans in Korea and $7 million in other principal repayments. The change in our credit facilities balance is related to net incremental borrowings of $124 million on our ABL Revolver and a net increase of $29 million on our Korea facilities, and an increase in other borrowings of $7 million. On April 30, 2014, we made a return of capital payment to our direct shareholder, AV Metals Inc., in the amount of $250 million.




50


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 15 - Financial Instruments and Commodity Contracts to our accompanying audited consolidated financial statements for a full description of derivative instruments.


Guarantees of Indebtedness


We have issued guarantees on behalf of certain of our subsidiaries. The indebtedness guaranteed is for trade accounts payable to third parties. Some of the guarantees have annual terms while others have no expiration and have termination notice requirements. Neither we nor any of our subsidiaries holds any assets of any third parties as collateral to offset the potential settlement of these guarantees. Since we consolidate wholly-owned and majority-owned subsidiaries in our consolidated financial statements, all liabilities associated with trade payables and short-term debt facilities for these entities are already included in our consolidated balance sheets. 


We have guaranteed the indebtedness for a credit facility and loan on behalf of Alunorf.  The guarantee is limited to 50% of the outstanding debt, not to exceed 6 million euros. As of March 31, 2017 , there were no amounts outstanding under our guarantee with Alunorf. We have also guaranteed the payment of early retirement benefits on behalf of Alunorf. As of March 31, 2017 , this guarantee totaled $2 million .

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 and fund other business needs. Factored invoices are not included in our consolidated balance sheets when we do not retain a financial or legal interest. If a financial or legal interest is retained, we classify these factorings as secured borrowings.

Summary of Disclosures of Factored Financial Amounts

The following tables summarize our factoring amounts (in millions).

Year Ended March 31,

2017

2016

2015

Receivables factored

$

5,149


$

3,314


$

1,796


Factoring expense

$

16


$

19


$

10


March 31,

2017

2016

Factored receivables outstanding

$

679


$

626





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Other

As part of our ongoing business, we do not participate in transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as special purpose entities (SPEs), which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As of March 31, 2017 and 2016 , we were not involved in any unconsolidated SPE transactions.


CONTRACTUAL OBLIGATIONS

We have future obligations under various contracts relating to debt and interest payments, capital and operating leases, long-term purchase obligations, and postretirement benefit plans. The following table presents our estimated future payments under contractual obligations that exist as of March 31, 2017 , based on undiscounted amounts (in millions). The future cash flow commitments we may have related to derivative contracts are excluded from our contractual obligations table as these are fair value measurements determined at an interim date within the contractual term of the arrangement and, accordingly, do not represent the ultimate contractual obligation (which could ultimately become a receivable). As a result, the timing and amount of the ultimate future cash flows related to our derivative contracts, including the $164 million of derivative liabilities recorded on our balance sheet as of March 31, 2017 , are uncertain. Furthermore, due to the difficulty in determining the timing of settlements, the table excludes $36 million of uncertain tax positions. See Note 19 - Income Taxes to our accompanying audited consolidated financial statements.

Less Than 1 Year

1-3 Years

3-5 Years

More Than

5 Years

Total

Debt (A)

$

406


$

127


$

39


$

4,355


$

4,927


Interest on long-term debt (B)

207


412


410


561


1,590


Capital leases (C)

9


12


-


-


21


Operating leases (D)

30


39


26


33


128


Purchase obligations (E)

2,460


1,577


1,039


297


5,373


Unfunded pension plan benefits (F)

16


29


31


88


164


Other post-employment benefits (F)

6


13


17


52


88


Funded pension plans (F)

55


127


142


427


751


Total

$

3,189


$

2,336


$

1,704


$

5,813


$

13,042


(A)

Includes only principal payments on our Senior Notes, term loans, revolving credit facilities and notes payable to banks and others. These amounts exclude payments under capital lease obligations.

(B)

Interest on our fixed rate debt is estimated using the stated interest rate. Interest on our variable-rate debt is estimated using the rate in effect as of March 31, 2017 . Actual future interest payments may differ from these amounts based on changes in floating interest rates or other factors or events. Excluded from these amounts are interest related to capital lease obligations, the amortization of debt issuance and other costs related to indebtedness.

(C)

Includes both principal and interest components of future minimum capital lease payments. Excluded from these amounts are insurance, taxes and maintenance associated with the property.

(D)

Includes the minimum lease payments for non-cancelable leases for property and equipment used in our operations. We do not have any operating leases with contingent rents. Excluded from these amounts are insurance, taxes and maintenance associated with the properties and equipment.

(E)

Includes agreements to purchase goods (including raw materials, inventory repurchase obligations, and capital expenditures) and services that are enforceable and legally binding on us, and that specify all significant terms. Some of our raw material purchase contracts have minimum annual volume requirements. In these cases, we estimate our future purchase obligations using annual minimum volumes and costs per unit that are in effect as of March 31, 2017 . Due to volatility in the cost of our raw materials, actual amounts paid in the future may differ from these amounts. Excluded from these amounts are the impact of any derivative instruments and any early contract termination fees, such as those typically present in energy contracts.

(F)

Obligations for postretirement benefit plans are estimated based on actuarial estimates using benefit assumptions for, among other factors, discount rates, rates of compensation increases and health care cost trends. Payments for unfunded pension plan benefits and other post-employment benefits are estimated through 2026. For funded pension plans, estimating the requirements beyond fiscal 2017 is not practical, as it depends on the performance of the plans' investments, among other factors.




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RETURN OF CAPITAL

Payments to our shareholder are at the discretion of the board of directors and will depend on, among other things, our financial resources, cash flows generated by our business, our cash requirements, restrictions under the instruments governing our indebtedness, being in compliance with the appropriate indentures and covenants under the instruments that govern our indebtedness and other relevant factors.

In March 2014, we declared a return of capital to our direct shareholder, AV Metals Inc., in the amount of $250 million, which we subsequently paid on April 30, 2014.


ENVIRONMENT, HEALTH AND SAFETY

We strive to be a leader in environment, health and safety (EHS). Our EHS system is aligned with ISO 14001, an international environmental management standard, and OHSAS 18001, an international occupational health and safety management standard. As of March 31, 2017 and March 31, 2016 , 23 and 24 of our established manufacturing facilities worldwide were ISO 14001 certified and OHSAS 18001 certified, respectively, and all have dedicated quality improvement management systems.

Our expenditures for environmental protection (including estimated and probable environmental remediation costs as well as general environmental protection costs at our facilities) and the betterment of working conditions in our facilities were $13 million in fiscal 2017 , of which $11 million was expensed and $2 million capitalized. We expect these expenditures will be approximately $17 million in fiscal 2018 , of which we estimate $10 million will be expensed and $7 million capitalized. Generally, expenses for environmental protection are recorded in "Cost of goods sold (exclusive of depreciation and amortization)." However, significant remediation costs that are not associated with on-going operations are recorded in "Restructuring and impairment, net."



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CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our discussion and analysis of our results of operations, liquidity and capital resources are based on our consolidated financial statements which have been prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP). In connection with the preparation of our consolidated financial statements, we are required to make assumptions and estimates about future events, and apply judgments that affect the reported amounts of assets, liabilities, revenue, expenses, and the related disclosures. We base our assumptions, estimates and judgments on historical experience, current trends and other factors we believe to be relevant at the time we prepare our consolidated financial statements. On a regular basis, we review the accounting policies, assumptions, estimates and judgments to ensure that our consolidated financial statements are presented fairly and in accordance with U.S. GAAP. However, because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such differences could be material.

Our significant accounting policies are discussed in Note 1 - Business and Summary of Significant Accounting Policies to our accompanying consolidated financial statements. We believe the following accounting policies are the most critical to aid in fully understanding and evaluating our reported financial results, as they require management to make difficult, subjective or complex judgments, and to make estimates about the effect of matters that are inherently uncertain. Although management believes that the estimates and judgments discussed herein are reasonable, actual results could differ, which could result in gains or losses that could be material. We have reviewed these critical accounting policies and related disclosures with the Audit Committee of our board of directors.

Derivative Financial Instruments

We hold derivatives for risk management purposes and not for trading. We use derivatives to mitigate uncertainty and volatility caused by underlying exposures to aluminum prices, foreign exchange rates, interest rates, and energy prices. The fair values of all derivative instruments are recognized as assets or liabilities at the balance sheet date and are reported gross.

The majority of our derivative contracts are valued using industry-standard models that use observable market inputs as their basis, such as time value, forward interest rates, volatility factors, and current (spot) and forward market prices for foreign exchange rates. See Note 15 - Financial Instruments and Commodity Contracts and Note 17 - Fair Value Measurements to our accompanying consolidated audited financial statements for discussion on fair value of derivative instruments.

We may be exposed to losses in the future if the counterparties to our derivative contracts fail to perform. We are satisfied that the risk of such non-performance is remote due to our monitoring of credit exposures. Additionally, we enter into master netting agreements with contractual provisions that allow for netting of counterparty positions in case of default, and we do not face credit contingent provisions that would result in the posting of collateral.

For derivatives designated as fair value hedges, we assess hedge effectiveness by formally evaluating the high correlation of changes in the fair value of the hedged item and the derivative hedging instrument. The changes in the fair values of the underlying hedged items are reported in other current and noncurrent assets and liabilities in the consolidated balance sheets. Changes in the fair values of these derivatives and underlying hedged items generally offset and the effective portion is recorded in "Net sales" consistent with the underlying hedged item and the net ineffectiveness is recorded in "Other (income) expense, net."

For derivatives designated as cash flow hedges or net investment hedges, we assess hedge effectiveness by formally evaluating the high correlation of the expected future cash flows of the hedged item and the derivative hedging instrument. The effective portion of gain or loss on the derivative is included in Other Comprehensive Income (Loss) and reclassified to earnings in the period in which earnings are impacted by the hedged items or in the period that the transaction becomes probable of not occurring. Gains or losses representing reclassifications of OCI to earnings are recognized in the line item most reflective of the underlying risk exposure. We exclude the time value component of foreign currency and aluminum price risk hedges when measuring and assessing ineffectiveness to align our accounting policy with risk management objectives when it is necessary. If at any time during the life of a cash flow hedge relationship we determine that the relationship is no longer effective, the derivative will no longer be designated as a cash flow hedge and future gains or losses on the derivative will be recognized in "Other (income) expense, net."

For all derivatives designated in hedging relationships, gains or losses representing hedge ineffectiveness or amounts excluded from effectiveness testing are recognized in "Other (income) expense, net" in our current period earnings. If no hedging relationship is designated, gains or losses are recognized in "Other (income) expense, net" in our current period earnings.


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Consistent with the cash flows from the underlying risk exposure, we classify cash settlement amounts associated with designated derivatives as part of either operating or investing activities in the consolidated statements of cash flows. If no hedging relationship is designated, we classify cash settlement amounts as part of investing activities in the consolidated statement of cash flows.

Impairment of Goodwill

Goodwill represents the excess of the purchase price over the fair value of the identifiable net assets of acquired companies. As a result of Hindalco's indirect purchase of Novelis, we estimated fair value of the identifiable net assets using a number of factors, including the application of multiples and discounted cash flow estimates. The carrying value of goodwill for each of our reporting units, which is tested for impairment annually, is as follows (in millions):

As of March 31, 2017

North America

$

285


Europe

181


South America

141


$

607


Goodwill is not amortized; instead, it is tested for impairment annually or more frequently if indicators of impairment exist. On an ongoing basis, absent any impairment indicators, we perform our goodwill impairment testing as of the last day of February of each fiscal year. We do not aggregate components of operating segments to arrive at our reporting units, and as such our reporting units are the same as our operating segments.

The accounting guidance provides an entity the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the estimated fair value of a reporting unit is less than its carrying amount. If an entity elects to perform a qualitative assessment and determines that an impairment is more likely than not, the entity is then required to perform the existing two-step quantitative impairment test, otherwise no further analysis is required. An entity also may elect not to perform the qualitative assessment and, instead, proceed directly to the two-step quantitative impairment test. The ultimate outcome of the goodwill impairment review for a reporting unit should be the same whether an entity chooses to perform the qualitative assessment or proceeds directly to the two-step quantitative impairment test.


For our fiscal year 2017 test, we elected to perform the two-step quantitative impairment test, where step one compares the fair value of each reporting unit to its carrying amount, and if step one indicates that the carrying value of a reporting unit exceeds the fair value, step two is performed to measure the amount of impairment, if any. For purposes of our step one analysis, our estimate of fair value for each reporting unit is based on discounted cash flows (the income approach). When available and as appropriate, we use quoted market prices/relationships (the market approach) to corroborate the estimated fair value. The approach to determining fair value for all reporting units is consistent given the similarity of our operations in each region.

Under the income approach, the fair value of each reporting unit is based on the present value of estimated future cash flows. The income approach is dependent on a number of significant management assumptions including markets and market share, sales volumes and prices, costs to produce, capital spending, working capital changes and the discount rate. We estimate future cash flows for each of our reporting units based on our projections for the respective reporting unit. These projected cash flows are discounted to the present value using a weighted average cost of capital (discount rate). The discount rate is commensurate with the risk inherent in the projected cash flows and reflects the rate of return required by an investor in the current economic conditions. For our annual impairment test, we used a discount rate of 9% for all reporting units. An increase or decrease of 0.5% in the discount rate would have impacted the estimated fair value of each reporting unit by approximately $75-$275 million, depending on the relative size of the reporting unit. Additionally, an increase or decrease of 0.5% in the terminal year growth rate assumption would have impacted the estimated fair value of each reporting unit by approximately $50-$200 million, depending on the relative size of the reporting unit. The projections are based on both past performance and the expectations of future performance and assumptions used in our current operating plan. We use specific revenue growth assumptions for each reporting unit based on history and economic conditions, and the terminal year revenue growth assumptions were approximately 2.0%.

Under the market approach, the fair value of each reporting unit is determined based upon comparisons to public companies engaged in similar businesses.


55


As a result of our annual goodwill impairment test for the year ended March 31, 2017 , no goodwill impairment was identified. The fair values of the reporting units exceeded their respective carrying amounts as of the last day of February in fiscal 2017 by 171% for North America, by 54% for Europe and by 154% for South America.

Equity Investments

We invest in certain joint ventures and consortiums. We use the equity method to account for our investments in entities that we do not control, but where we have the ability to exercise significant influence over operating and financial policies. We exercise judgment to determine which investments should be accounted for using the equity method and which investments should be consolidated.

As a result of Hindalco's indirect purchase of Novelis, investments in and advances to equity method affiliates were adjusted to reflect fair value as of May 16, 2007. We review these investments for impairment whenever certain indicators are present suggesting that the carrying value of an investment is not recoverable. This analysis requires a significant amount of judgment to identify events or circumstances indicating that an investment may be impaired. Once an impairment indicator is identified, we must determine if an impairment exists, and if so, whether the impairment is other than temporary, in which case the investment would be written down to its estimated fair value.

Impairment of Long Lived Assets and Other Intangible Assets

We assess the recoverability of long-lived assets and finite-lived intangible assets whenever events or changes in circumstances indicate that we may not be able to recover the asset's carrying amount. Such events or circumstances include, but are not limited to, a significant decrease in the fair value of the underlying business or a change in utilization of property and equipment.

We group assets to test for impairment at the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities. These levels are dependent upon an asset's usage, which may be on an individual asset level or aggregated at a higher level including a region-wide grouping. The metal flow and management of supply within our regions creates an interdependency of the plants within a region on one another to generate cash flows. Accordingly, under normal operating conditions, our assets are grouped on a region-wide basis for impairment testing. Any expected change in usage, retirement, disposal or sale of an individual asset or group of assets below the region level which would generate a separate cash flow stream outside of normal operations could result in grouping assets below the region level for impairment testing.

When evaluating long-lived assets and finite-lived intangible assets for potential impairment, we first compare the carrying value of the asset to the asset's estimated future net cash flows (undiscounted and without interest charges). If the estimated future net cash flows are less than the carrying value of the asset, we calculate and recognize an impairment loss. If we recognize an impairment loss, the carrying amount of the asset is adjusted to fair value based on the discounted estimated future net cash flows and will be its new cost basis. For a depreciable long-lived asset, the new cost basis will be depreciated over the remaining useful life of that asset. For an amortizable intangible asset, the new cost basis will be amortized over the remaining useful life of the asset.

Our impairment loss calculations require management to apply judgments in estimating future cash flows to determine asset fair values, including forecasting useful lives of the assets and selecting the discount rate that represents the risk inherent in future cash flows. Impairment charges are recorded in "Restructuring and impairment, net" in our consolidated statement of operations. For the year ended March 31, 2017 , we recorded impairment charges of $2 million of related to assets in North America. For the year ended March 31, 2016 , we recorded impairment charges on long-lived assets and intangible assets of $3 million of certain non core assets in North America, South American and Asia. Additionally, we recorded restructuring charges during the year ended March 31, 2016 of $21 million related to the impairment of capitalized software intangible assets that would no longer be developed. For the year ended March 31, 2015 , we recorded impairment charges on long-lived assets and intangible assets of $2 million of certain non core assets in North America.

Our other intangible assets of $457 million and $523 million as of March 31, 2017 and March 31, 2016 , respectively, consisted of trade names, technology and software, customer relationships and favorable energy and supply contracts and are amortized over an original period of 3 to 20 years. As of March 31, 2017 , we do not have any other intangible assets with indefinite useful lives, other than Goodwill.

If actual results are not consistent with our assumptions and judgments used in estimating future cash flows and asset fair values, we may be exposed to additional impairment losses that could be material to our results of operations.



56


Pension and Other Postretirement Plans

We account for our pensions and other postretirement benefits in accordance with ASC 715, Compensation - Retirement Benefits (ASC 715). Liabilities and expense for pension plans and other postretirement benefits are determined using actuarial methodologies and incorporate significant assumptions, including the rate used to discount the future estimated liability, the long-term rate of return on plan assets, and several assumptions related to the employee workforce (compensation increases, health care cost trend rates, expected service period, retirement age, and mortality). These assumptions bear the risk of change as they require significant judgment and they have inherent uncertainties that management may not be able to control.

The actuarial models use an attribution approach that generally spreads the financial impact of changes to the plan and actuarial assumptions over the average remaining service lives of the employees in the plan. The principle underlying the required attribution approach is that employees render service over their average remaining service lives on a relatively smooth basis and, therefore, the accounting for benefits earned under the pension or non-pension postretirement benefits plans should follow the same relatively smooth pattern. Changes in the liability due to changes in actuarial assumptions such as discount rate, rate of compensation increases and mortality, as well as annual deviations between what was assumed and what was experienced by the plan are treated as actuarial gains or losses. The gains and losses are initially recorded to "Other comprehensive income (loss)" and are subsequently amortized over periods of 15 years or less, which represent the group's average future service life of the employees or the group's average life expectancy.

The most significant assumption used to calculate pension and other postretirement obligations is the discount rate used to determine the present value of benefits. The discount rate is based on spot rate yield curves and individual bond matching models for pension and other postretirement plans in Canada, the United States, United Kingdom, and other Euro zone countries, and on published long-term high quality corporate bond indices in other countries with adjustments made to the index rates based on the duration of the plans' obligations for each country, at the end of each fiscal year. This bond matching approach matches the bond yields with the year-to-year cash flow projections from the actuarial valuation to determine a discount rate that more accurately reflects the timing of the expected payments. The weighted average discount rate used to determine the pension benefit obligation was 3.2% , 3.3% , and 3.1% , and other postretirement benefit obligation was 4.1% , 4.0% and 3.6% as of March 31, 2017 , 2016 , and 2015 , respectively. The weighted average discount rate used to determine the net periodic benefit cost is the rate used to determine the benefit obligation at the end of the previous fiscal year.


57


As of March 31, 2017 , an increase in the discount rate of 0.5%, assuming inflation remains unchanged, would result in a decrease of $144 million in the pension and other postretirement obligations and in a pre-tax decrease of $13 million in the net periodic benefit cost in the following year. A decrease in the discount rate of 0.5% as of March 31, 2017 , assuming inflation remains unchanged, would result in an increase of $162 million in the pension and other postretirement obligations and in a pre-tax increase of $15 million in the net periodic benefit cost in the following year.

The long term expected return on plan assets is based upon historical experience, expected future performance as well as current and projected investment portfolio diversification. The weighted average expected return on plan assets was 5.4% for 2017 , 5.6% for 2016 , and 6.1% for 2015 . The expected return on assets is a long-term assumption whose accuracy can only be measured over a long period based on past experience. A variation in the expected return on assets of 0.5% as of March 31, 2017 would result in a pre-tax variation of approximately $6 million in the net periodic benefit cost in the following year.

Income Taxes

We account for income taxes using the asset and liability method.  Under the asset and liability method, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.  In addition, deferred tax assets are also recorded with respect to net operating losses and other tax attribute carryforwards.  Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled.  Valuation allowances are established when realization of the benefit of deferred tax assets is not deemed to be more likely than not.  The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

We considered all available evidence, both positive and negative, in determining the appropriate amount of the valuation allowance against our deferred tax assets as of March 31, 2017 . In evaluating the need for a valuation allowance, we consider all potential sources of taxable income, including income available in carryback periods, future reversals of taxable temporary differences, projections of taxable income, and income from tax planning strategies, as well as any other available and relevant information. Positive evidence includes factors such as a history of profitable operations, projections of future profitability within the carryforward period and potential income from prudent and feasible tax planning strategies. Negative evidence includes items such as cumulative losses, projections of future losses, and carryforward periods that are not long enough to allow for the utilization of the deferred tax asset based on existing projections of income. In certain jurisdictions, deferred tax assets related to loss carryforwards and other temporary differences exist without a valuation allowance where in our judgment the weight of the positive evidence more than offsets the negative evidence.

Upon changes in facts and circumstances, we may conclude that certain deferred tax assets for which no valuation allowance is currently recorded may not be realizable in future periods, resulting in a charge to income. Existing valuation allowances are re-examined under the same standards of positive and negative evidence. If it is determined that it is more likely than not that a deferred tax asset will be realized, the appropriate amount of the valuation allowance, if any, is released, in the period this determination is made.

As of March 31, 2017 , the Company concluded that valuation allowances totaling $680 million were required against its deferred tax assets comprised of the following:

$531 million of the valuation allowance relates to loss carryforwards in Canada and certain foreign jurisdictions, $44 million relates to New York tax credit carryforwards, and $46 million relates to tax credit carryforwards in Canada.

$59 million of the valuation allowance relates to other deferred tax assets originating from temporary differences in Canada and certain foreign jurisdictions.


In determining these amounts, the Company considered the reversal of existing temporary differences as a source of taxable income. The ultimate realization of the remaining deferred tax assets is contingent on the Company's ability to generate future taxable income within the carryforward period and within the period in which the temporary differences become deductible. Due to the history of negative earnings in these jurisdictions and future projections of losses, the Company believes it is more likely than not the deferred tax assets will not be realized prior to expiration.


58


Through March 31, 2017 , the Company recognized deferred tax assets related to loss carryforwards and other temporary items of approximately $552 million . The Company determined that existing taxable temporary differences will reverse within the same period and jurisdiction, and are of the same character as the deductible temporary items generating sufficient taxable income to support realization of $361 million of these deferred tax assets. Realization of the remaining $191 million of deferred tax assets is dependent on our ability to earn pretax income aggregating approximately $695 million in those jurisdictions to realize those deferred tax assets. The realization of our deferred tax assets is not dependent on tax planning strategies.

By their nature, tax laws are often subject to interpretation. Further complicating matters is that in those cases where a tax position is open to interpretation, differences of opinion can result in differing conclusions as to the amount of tax benefits to be recognized under ASC 740, Income Taxes . We utilize a two-step approach for evaluating tax positions. Recognition (Step 1) occurs when we conclude that a tax position, based solely on its technical merits, is more likely than not to be sustained upon examination. Measurement (Step 2) is only addressed if Step 1 has been satisfied. Under Step 2, we measure the tax benefit as the largest amount of benefit, determined on a cumulative probability basis that is more likely than not to be realized upon ultimate settlement. Consequently, the level of evidence and documentation necessary to support a position prior to being given recognition and measurement within the financial statements is a matter of judgment that depends on all available evidence.

Assessment of Loss Contingencies

We have legal and other contingencies, including environmental liabilities, which could result in significant losses upon the ultimate resolution of such contingencies. Environmental liabilities that are not legal asset retirement obligations are accrued on an undiscounted basis when it is probable that a liability exists for past events.

We have provided for losses in situations where we have concluded that it is probable that a loss has been or will be incurred and the amount of the loss is reasonably estimable. A significant amount of judgment is involved in determining whether a loss is probable and reasonably estimable due to the uncertainty involved in determining the likelihood of future events and estimating the financial statement impact of such events. If further developments or resolution of a contingent matter are not consistent with our assumptions and judgments, we may need to recognize a significant charge in a future period related to an existing contingency.


RECENTLY ISSUED ACCOUNTING STANDARDS

See Note 1 - Business and Summary of Significant Accounting Policies to our accompanying audited consolidated financial statements for a full description of recent accounting pronouncements including the respective expected dates of adoption and expected effects on results of operations and financial condition.



59


NON-GAAP FINANCIAL MEASURES

Total "Segment income" presents the sum of the results of our four operating segments on a consolidated basis. We believe that total "Segment income" is an operating performance measure that measures operating results unaffected by differences in capital structures, capital investment cycles and ages of related assets among otherwise comparable companies. In reviewing our corporate operating results, we also believe it is important to review the aggregate consolidated performance of all of our segments on the same basis we review the performance of each of our regions and to draw comparisons between periods based on the same measure of consolidated performance.

Management believes investors' understanding of our performance is enhanced by including this non-GAAP financial measure as a reasonable basis for comparing our ongoing results of operations. Many investors are interested in understanding the performance of our business by comparing our results from ongoing operations from one period to the next and would ordinarily add back items that are not part of normal day-to-day operations of our business. By providing total "Segment income," together with reconciliations, we believe we are enhancing investors' understanding of our business and our results of operations, as well as assisting investors in evaluating how well we are executing strategic initiatives.

However, total "Segment income" is not a measurement of financial performance under U.S. GAAP, and our total "Segment income" may not be comparable to similarly titled measures of other companies. Total "Segment income" has important limitations as an analytical tool and should not be considered in isolation or as a substitute for analysis of our results as reported under U.S. GAAP. For example, total "Segment income":

does not reflect the company's cash expenditures or requirements for capital expenditures or capital commitments;

does not reflect changes in, or cash requirements for, the company's working capital needs; and

does not reflect any costs related to the current or future replacement of assets being depreciated and amortized.

We also use total "Segment income":


as a measure of operating performance to assist us in comparing our operating performance on a consistent basis because it removes the impact of items not directly resulting from our core operations;

for planning purposes, including the preparation of our internal annual operating budgets and financial projections;

to evaluate the performance and effectiveness of our operational strategies; and

as a basis to calculate incentive compensation payments for our key employees.

Total "Segment income" is equivalent to our Adjusted EBITDA, which we refer to in our earnings announcements and other external presentations to analysts and investors.


"Free cash flow" consists of: (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 and hedging. Management believes "Free cash flow" is relevant to investors as it provides a measure of the cash generated internally that is available for debt service and other value creation opportunities. However, "Free cash flow" is not a measurement of financial performance or liquidity under U.S. GAAP and does not necessarily represent cash available for discretionary activities, as certain debt service obligations must be funded out of "Free cash flow." In addition, the Company's method of calculating "Free cash flow" may not be consistent with that of other companies.



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Item 7A. Quantitative and Qualitative Disclosures About Market Risk


We are exposed to certain market risks as part of our ongoing business operations, including risks from changes in commodity prices (primarily LME aluminum prices and natural gas), local market premiums, electricity rates, foreign currency exchange rates and interest rates that could impact our results of operations and financial condition. We manage our exposure to these and other market risks through regular operating and financing activities and derivative financial instruments. We use derivative financial instruments as risk management tools only, and not for speculative purposes.


By their nature, all derivative financial instruments involve risk, including the credit risk of non-performance by counterparties. All derivative contracts are executed with counterparties that, in our judgment, are creditworthy. Our maximum potential loss may exceed the amount recognized in the accompanying March 31, 2017 consolidated balance sheet.


The decision of whether and when to execute derivative instruments, along with the duration of the instrument, can vary from period to period depending on market conditions and the relative costs of the instruments. The duration is linked to the timing of the underlying exposure, with the connection between the two being regularly monitored.

The market risks we are exposed to as part of our ongoing business operations are materially consistent with our risk exposures in the prior year, as we have not entered into any new material hedging programs.

Commodity Price Risks

We have commodity price risk with respect to purchases of certain raw materials including aluminum, electricity, natural gas and transport fuel.

Aluminum

A significant amount of our business is conducted under a conversion model, which allows us to pass through increases or decreases in the price of aluminum to our customers. Nearly all of our flat-rolled products have a price structure with three components: (i) a base aluminum price quoted off the LME; (ii) a local market premium; and (iii) a "conversion premium" to produce the rolled product which reflects, among other factors, the competitive market conditions for that product. Base aluminum prices are typically driven by macroeconomic factors and global supply and demand of aluminum. The local market premiums tend to vary based on the supply and demand for metal in a particular region and associated transportation costs.

Increases or decreases in the average price of aluminum based on the LME directly impact "Net sales," "Cost of goods sold (exclusive of depreciation and amortization)" and working capital. The timing of these impacts varies based on contractual arrangements with customers and metal suppliers in each region. These timing impacts are referred to as metal price lag. Metal price lag exists due to: (i) certain customer contracts containing fixed forward price commitments which result in exposure to changes in metal prices for the period of time between when our sales price fixes and the sale actually occurs, and (ii) the period of time between the pricing of our purchases of metal, holding and processing the metal, and the pricing of the sale of finished inventory to our customers.

We use derivative instruments to preserve our conversion margins and manage the timing differences associated with metal price lag related to base aluminum price. We use over-the-counter derivatives indexed to the London Metals Exchange (LME) (referred to as our "aluminum derivative contracts") to reduce our exposure to fluctuating metal prices associated with the period of time between the pricing of our purchases of inventory and the pricing of the sale of that inventory to our customers. We also purchase forward LME aluminum contracts simultaneous with our sales contracts with customers that contain fixed metal prices. These LME aluminum forward contracts directly hedge the economic risk of future metal price fluctuations to better match the purchase price of metal with the sales price of metal.

Sensitivities

The following table presents the estimated potential effect on the fair values of these derivative instruments as of March 31, 2017 , given a 10% increase in prices ($ in millions).

Change in
Price

Change in
Fair  Value

LME aluminum

10

%

$

(90

)


61



Energy

We use several sources of energy in the manufacturing and delivery of our aluminum rolled products. For the year ended March 31, 2017 , natural gas and electricity represented approximately 98% of our energy consumption by cost. We also use fuel oil and transport fuel. The majority of energy usage occurs at our casting centers and during the hot rolling of aluminum. Prior to the smelter facilities in South America ceasing operations, our smelter operations also required a significant amount of energy. Our cold rolling facilities require relatively less energy.

We purchase our natural gas and diesel fuel on the open market, subjecting us to market price fluctuations. We seek to stabilize our future exposure to natural gas and diesel fuel prices through the use of forward purchase contracts.

A portion of our electricity requirements are purchased pursuant to long-term contracts in the local regions in which we operate. A number of our facilities are located in regions with regulated prices, which affords relatively stable costs. In North America, we have entered into an electricity swap to fix a portion of the cost of our electricity requirements.

Fluctuating energy costs worldwide, due to the changes in supply and demand, and international and geopolitical events, expose us to earnings volatility as changes in such costs cannot be immediately recovered under existing contracts and sales agreements, and may only be mitigated in future periods under future pricing arrangements.


Sensitivities


The following table presents the estimated potential effect on the fair values of these derivative instruments as of March 31, 2017 , given a 10% decline in spot prices for energy contracts ($ in millions).

Change in 

Price

Change in

Fair Value

Electricity

(10

)%

$

(5

)

Natural Gas

(10

)%

(2

)

Diesel Fuel

(10

)%

$

(2

)

Foreign Currency Exchange Risks

Exchange rate movements, particularly the Euro, the Swiss franc, the Brazilian real and the Korean won against the U.S. dollar, have an impact on our operating results. In Europe, where we have predominantly local currency selling prices and operating costs, we benefit as the Euro strengthens, but are adversely affected as the Euro weakens. In January 2015, the Swiss National Bank discontinued its policy to support a minimum exchange rate between the Euro and the Swiss franc.  Following this announcement, the Swiss franc rapidly appreciated in value.  This adversely impacted our Swiss operations, where operating costs are incurred primarily in the Swiss franc, and a large portion of revenues are denominated in the Euro. In South Korea, where we have local currency operating costs and U.S. dollar denominated selling prices for exports, we benefit as the won weakens but are adversely affected as the won strengthens. In Brazil, where we have predominately U.S. dollar selling prices and local currency manufacturing costs, we benefit as the real weakens, but are adversely affected as the real strengthens.

It is our policy to minimize exposures from non-functional currency denominated transactions within each of our operating segments. We use foreign exchange forward contracts, options and cross-currency swaps to manage exposure arising from recorded assets and liabilities, firm commitments, and forecasted cash flows denominated in currencies other than the functional currency of certain operations, which include forecasted net sales, forecasted purchase commitments, capital expenditures and net investment in foreign subsidiaries. Our most significant non-U.S. dollar functional currency operations have the Euro and the Korean won as their functional currencies, respectively. Our Brazilian operations are U.S. dollar functional.



62


We also face translation risks related to the changes in foreign currency exchange rates which are generally not hedged. Amounts invested in these foreign operations are translated into U.S. dollars at the exchange rates in effect at the balance sheet date. Any resulting translation adjustments are recorded as a component of "Accumulated other comprehensive income/loss" in the Shareholder's equity/deficit section of our consolidated balance sheets. Net sales and expenses at these non-U.S. dollar functional currency entities are translated into varying amounts of U.S. dollars depending upon whether the U.S. dollar weakens or strengthens against other currencies. Therefore, changes in exchange rates may either positively or negatively affect our net sales and expenses as expressed in U.S. dollars.


Any negative impact of currency movements on the currency contracts we have entered into to hedge foreign currency commitments to purchase or sell goods and services would be offset by an approximately equal and opposite favorable exchange impact on the commitments being hedged. For a discussion of accounting policies and other information relating to currency contracts, see Note 1 - Business and Summary of Significant Accounting Policies and Note 15 - Financial Instruments and Commodity Contracts to our accompanying consolidated financial statements.

Sensitivities

The following table presents the estimated potential effect on the fair values of these derivative instruments as of March 31, 2017 , given a 10% change in rates ($ in millions).

Change in

Exchange Rate

Change in

Fair Value

Currency measured against the U.S. dollar

Brazilian real

(10

)%

$

(22

)

Euro

10

 %

(45

)

Korean won

(10

)%

(34

)

Canadian dollar

(10

)%

(4

)

British pound

(10

)%

(18

)

Swiss franc

(10

)%

(38

)

Chinese yuan

10

 %

(8

)

Interest Rate Risks

We use interest rate swaps to manage our exposure to changes in benchmark interest rates which impact our variable-rate debt.


In January 2017, we refinanced our Term Loan Facility. Our interest rate paid is a spread of 1.85% plus LIBOR ( 1.15% ). As of March 31, 2017 , the effective interest rate was 3.00% . As of March 31, 2017 , a 10 basis point increase or decrease in LIBOR interest rates would have had less than $1 million impact on our annual pre-tax income.


From time to time, we have used interest rate swaps to manage our debt cost. As of March 31, 2017 , there were no USD LIBOR based interest rate swaps outstanding.


In Korea, we periodically enter into interest rate swaps to fix the interest rate on various floating rate debt in order to manage our exposure to changes in the 3M-CD interest rate. See Note 15 - Financial Instruments and Commodity Contracts for further information on the amounts outstanding as of March 31, 2017 .

Sensitivities

The following table presents the estimated potential effect on the fair values of these derivative instruments as of March 31, 2017 , given a 100 bps decrease in the benchmark interest rate ($ in millions).

Change in

Rate

Change in

Fair Value

Interest Rate Contracts

Asia – KRW-CD-3200

(100

)

bps 

$

(1

)


63





Item 8. Financial Statements and Supplementary Data

TABLE OF CONTENTS

Management's Report on Internal Control over Financial Reporting

65

Report of Independent Registered Public Accounting Firm

66

Consolidated Statements of Operations

67

Consolidated Statements of Comprehensive Income (Loss)

68

Consolidated Balance Sheets

69

Consolidated Statements of Cash Flows

70

Consolidated Statements of Shareholder's Deficit

71

Notes to the Consolidated Financial Statements

72


64






Management's Report on Internal Control over Financial Reporting


Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act, as amended. The Company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of the Company's financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that:


Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company;

Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and

Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company's assets that could have a material effect on the Company's consolidated financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management has assessed the effectiveness of the Company's internal control over financial reporting as of March 31, 2017 . In making this assessment, management used the criteria established by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in "Internal Control - Integrated Framework (2013)." Based on its assessment, management has concluded that, as of March 31, 2017 , the Company's internal control over financial reporting was effective based on those criteria.

The effectiveness of the Company's internal control over financial reporting as of March 31, 2017 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein.




/s/ Steven Fisher

Steven Fisher

President and Chief Executive Officer

May 10, 2017



/s/ Devinder Ahuja

Devinder Ahuja

Senior Vice President and Chief Financial Officer

May 10, 2017



65


Report of Independent Registered Public Accounting Firm


To the Board of Directors and Shareholder of Novelis Inc.


In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, comprehensive income (loss), shareholder's deficit and cash flows present fairly, in all material respects, the financial position of Novelis Inc. and its subsidiaries as of March 31, 2017 and 2016, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 2017 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of March 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on these financial statements and on the Company's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States) and in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.


As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it classifies debt issuance costs as of March 31, 2017.


A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.


Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.



/s/PricewaterhouseCoopers LLP



Atlanta, Georgia

May 10, 2017




66




Novelis Inc.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In millions)

Year Ended

March 31,

2017

2016

2015

Net sales

$

9,591


$

9,872


$

11,147


Cost of goods sold (exclusive of depreciation and amortization)

8,016


8,727


9,793


Selling, general and administrative expenses

421


407


427


Depreciation and amortization

360


353


352


Interest expense and amortization of debt issuance costs

294


327


326


Research and development expenses

58


54


50


Gain on assets held for sale

(2

)

-


(22

)

Loss on extinguishment of debt

134


13


-


Restructuring and impairment, net

10


48


37


Equity in net loss of non-consolidated affiliates

8


3


5


Other expense (income), net

95


(68

)

17


9,394


9,864


10,985


Income before income taxes

197


8


162


Income tax provision

151


46


14


Net income (loss)

46


(38

)

148


Net income attributable to noncontrolling interests

1


-


-


Net income (loss) attributable to our common shareholder

$

45


$

(38

)

$

148


See accompanying notes to the consolidated financial statements.



67


Novelis Inc.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In millions)

Year Ended

March 31,

2017

2016

2015

Net income (loss)

$

46


$

(38

)

$

148


Other comprehensive (loss) income:

Currency translation adjustment

(59

)

17


(304

)

Net change in fair value of effective portion of hedges, net

(57

)

60


(44

)

Net change in pension and other benefits, net

74


(33

)

(209

)

Other comprehensive (loss) income before income tax effect

(42

)

44


(557

)

Income tax benefit related to items of other comprehensive income (loss)

-


(6

)

(72

)

Other comprehensive (loss) income, net of tax

(42

)

50


(485

)

Comprehensive income (loss)

$

4


$

12


$

(337

)

Less: Comprehensive income (loss) attributable to noncontrolling interest, net of tax

4


(11

)

(15

)

Comprehensive income (loss) attributable to our common shareholder

$

-


$

23


$

(322

)

See accompanying notes to the consolidated financial statements.


68


Novelis Inc.

CONSOLIDATED BALANCE SHEETS

(In millions, except number of shares)

March 31,

2017

2016

ASSETS

Current assets

Cash and cash equivalents

$

594


$

556


Accounts receivable, net

- third parties (net of uncollectible accounts of $6 as of March 31, 2017 and $3 as of March 31, 2016)

1,067


956


- related parties

60


59


Inventories

1,333


1,180


Prepaid expenses and other current assets

111


127


Fair value of derivative instruments

113


88


Assets held for sale

3


5


Total current assets

3,281


2,971


Property, plant and equipment, net

3,357


3,506


Goodwill

607


607


Intangible assets, net

457


523


Investment in and advances to non–consolidated affiliate

451


488


Deferred income tax assets

82


87


Other long–term assets

- third parties

94


82


- related parties

15


16


Total assets

$

8,344


$

8,280


LIABILITIES AND SHAREHOLDER'S DEFICIT

Current liabilities

Current portion of long–term debt

$

121


$

47


Short–term borrowings

294


579


Accounts payable

- third parties

1,722


1,506


- related parties

51


48


Fair value of derivative instruments

151


85


Accrued expenses and other current liabilities

554


569


Total current liabilities

2,893


2,834


Long–term debt, net of current portion

4,437


4,421


Deferred income tax liabilities

94


89


Accrued postretirement benefits

799


820


Other long–term liabilities

198


175


Total liabilities

8,421


8,339


Commitments and contingencies





Shareholder's deficit

Common stock, no par value; unlimited number of shares authorized; 1,000 shares issued and outstanding as of March 31, 2017 and 2016

-


-


Additional paid–in capital

1,404


1,404


Accumulated deficit

(918

)

(963

)

Accumulated other comprehensive loss

(545

)

(500

)

Total deficit of our common shareholder

(59

)

(59

)

Noncontrolling interests

(18

)

-


Total deficit

(77

)

(59

)

Total liabilities and deficit

$

8,344


$

8,280


See accompanying notes to the consolidated financial statements.


69




Novelis Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

Year Ended

March 31,

2017

2016

2015

OPERATING ACTIVITIES

Net income (loss)

$

46



$

(38

)

$

148


Adjustments to determine net cash provided by operating activities:




Depreciation and amortization

360



353


352


(Gain) loss on unrealized derivatives and other realized derivatives in investing activities, net

(15

)


(27

)

39


Gain on assets held for sale

(2

)


-


(22

)

Loss on sale of business

27,000,000


27


-


-


Loss on sale of assets

6



4


5


Impairment charges

2



25


7


Loss on extinguishment of debt

134



13


-


Deferred income taxes

4



(93

)

(88

)

Amortization of fair value adjustments, net

7



11


10


Equity in net loss of non-consolidated affiliates

8



3


5


Loss (gain) on foreign exchange remeasurement of debt

2



(2

)

(5

)

Amortization of debt issuance costs and carrying value adjustments

22



19


25


Other, net

3



-


1


Changes in assets and liabilities including assets and liabilities held for sale (net of effects from divestitures):




Accounts receivable

(154

)


336


(54

)

Inventories

(193

)


268


(390

)

Accounts payable

253



(327

)

578


Other current assets

9



(12

)

(27

)

Other current liabilities

10



7


66


Other noncurrent assets

(30

)


20


7


Other noncurrent liabilities

76



(19

)

(53

)

Net cash provided by operating activities

575



541


604


INVESTING ACTIVITIES




Capital expenditures

(224

)


(370

)

(518

)

Proceeds from sales of assets, third party, net of transaction fees and hedging

4



3


117


Outflows from the sale of business, net of transaction fees

(2

)

-


-


Proceeds (outflows) from investment in and advances to non-consolidated affiliates, net

2



(2

)

(20

)

Proceeds (outflows) from settlement of other undesignated derivative instruments, net

8



(9

)

5


Net cash used in investing activities

(212

)


(378

)

(416

)

FINANCING ACTIVITIES






Proceeds from issuance of long-term and short-term borrowings

4,572



174


362


Principal payments of long-term and short-term borrowings

(4,477

)


(216

)

(324

)

Revolving credit facilities and other, net

(229

)


(187

)

160


Return of capital to our common shareholder

-



-


(250

)

Dividends, noncontrolling interest

-



(1

)

(1

)

Debt issuance costs

(191

)


(15

)

(3

)

Net cash used in financing activities

(325

)


(245

)

(56

)

Net increase (decrease) in cash and cash equivalents

38



(82

)

132


Effect of exchange rate changes on cash

-



10


(13

)

Cash and cash equivalents - beginning of period

556



628


509


Cash and cash equivalents - end of period

$

594



$

556


$

628


See accompanying notes to the consolidated financial statements.

70


Novelis Inc.

CONSOLIDATED STATEMENTS OF SHAREHOLDER'S DEFICIT

(In millions, except number of shares)

Deficit of our Common Shareholder

Common Stock

Shares

Amount

Additional

Paid-in

Capital

Retained

Earnings/

(Accumulated

Deficit)

Accumulated

Other

Comprehensive

Income (Loss)

(AOCI)

Non-

Controlling

Interests

Total

Deficit

Balance as of March 31, 2014

1,000


$

-


$

1,404


$

(1,073

)

$

(91

)

$

28


$

268


Net income attributable to our common shareholder

-


-


-


148


-


-


148


Currency translation adjustment,  net of tax provision of $- included in AOCI

-


-


-


-


(302

)

(2

)

(304

)

Change in fair value of effective portion of hedges, net of tax benefit of $1 included in AOCI

-


-


-


-


(43

)

-


(43

)

Change in pension and other benefits, net of tax benefit of $71 included in AOCI

-


-


-


-


(125

)

(13

)

(138

)

Noncontrolling interests cash dividends declared

-


-


-


-


-


(1

)

(1

)

Balance as of March 31, 2015

1,000


-


1,404


(925

)

(561

)

12


(70

)

Net income attributable to our common shareholder

-


-


-


(38

)

-


-


(38

)

Currency translation adjustment, net of tax provision of $- included in AOCI

-


-


-


-


17


-


17


Change in fair value of effective portion of cash flow hedges, net of tax provision of $8 million included in AOCI

-


-


-


-


52


-


52


Change in pension and other benefits, net of tax benefit of $14 million included in AOCI

-


-


-


-


(8

)

(11

)

(19

)

Noncontrolling interests cash dividends declared

-


-


-


-


-


(1

)

(1

)

Balance as of March 31, 2016

1,000


-


1,404


(963

)

(500

)

-


(59

)

Net loss attributable to our common shareholder

-


-


-


45


-


-


45


Net income attributable to noncontrolling interests

-


-


-


-


-


1


1


Currency translation adjustment,  net of tax provision of $- included in AOCI

-


-


-


-


(60

)

1


(59

)

Change in fair value of effective portion of cash flow hedges, net of tax provision of $22 million included in AOCI

-


-


-


-


(35

)

-


(35

)

Change in pension and other benefits, net of tax benefit of $22 million included in AOCI

-


-


-


-


50


2


52


Noncontrolling interest related to the sale of a business

-


-


-


-


-


(22

)

(22

)

Balance as of March 31, 2017

1,000


$

-


$

1,404


$

(918

)

$

(545

)

$

(18

)

$

(77

)

See accompanying notes to the consolidated financial statements.


71

Novelis Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS





1.    BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

References herein to "Novelis," the "Company," "we," "our," or "us" refer to Novelis Inc. and its subsidiaries unless the context specifically indicates otherwise. References herein to "Hindalco" refer to Hindalco Industries Limited. Hindalco acquired Novelis in May 2007. All of the common shares of Novelis are owned directly by AV Metals Inc. and indirectly by Hindalco Industries Limited.

Organization and Description of Business

We produce aluminum sheet and light gauge products for use in the packaging market, which includes beverage and food can and foil products, as well as for use in the automotive, transportation, electronics, architectural and industrial product markets. We have recycling operations in many of our plants to recycle post-consumer aluminum, such as used-beverage cans and post-industrial aluminum, such as class scrap. As of March 31, 2017 , we had manufacturing operations in ten countries on four continents: North America, South America, Asia and Europe, through 24 operating facilities, including recycling operations in eleven of these plants.

Consolidation Policy

Our consolidated financial statements include the assets, liabilities, revenues and expenses of all wholly-owned subsidiaries, majority-owned subsidiaries over which we exercise control and entities in which we have a controlling financial interest or are deemed to be the primary beneficiary. We eliminate all significant intercompany accounts and transactions from our consolidated financial statements.

We use the equity method to account for our investments in entities that we do not control, but where we have the ability to exercise significant influence over operating and financial policies. Consolidated "Net (loss) income attributable to our common shareholder" includes our share of net income (loss) of these entities. The difference between consolidation and the equity method impacts certain of our financial ratios because of the presentation of the detailed line items reported in the consolidated financial statements for consolidated entities, compared to a two-line presentation of "Investment in and advances to non-consolidated affiliates" and "Equity in net loss of non-consolidated affiliates."

Use of Estimates and Assumptions

The preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP) requires us to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and the disclosures of contingent assets and liabilities as of the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. The principal areas of judgment relate to (1) the fair value of derivative financial instruments; (2) impairment of goodwill; (3) impairment of long lived assets and other intangible assets; (4) impairment and assessment of consolidation of equity investments; (5) actuarial assumptions related to pension and other postretirement benefit plans; (6) tax uncertainties and valuation allowances; and (7) assessment of loss contingencies, including environmental and litigation liabilities. Future events and their effects cannot be predicted with certainty, and accordingly, our accounting estimates require the exercise of judgment. The accounting estimates used in the preparation of our consolidated financial statements may change as new events occur, as more experience is acquired, as additional information is obtained and as our operating environment changes. We evaluate and update our assumptions and estimates on an ongoing basis and may employ outside experts to assist in our evaluations. Actual results could differ from the estimates we have used.

Risks and Uncertainties

We are exposed to a number of risks in the normal course of our operations that could potentially affect our financial position, results of operations, and cash flows.





72

Novelis Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



Laws and regulations

We operate in an industry that is subject to a broad range of environmental, health and safety laws and regulations in the jurisdictions in which we operate. These laws and regulations impose increasingly stringent environmental, health and safety protection standards and permitting requirements regarding, among other things, air emissions, wastewater storage, treatment and discharges, the use and handling of hazardous or toxic materials, waste disposal practices, the remediation of environmental contamination, post-mining reclamation and working conditions for our employees. Some environmental laws, such as the U.S. Comprehensive Environmental Response, Compensation, and Liability Act, also known as CERCLA or Superfund, and comparable state laws, impose joint and several liability for the cost of environmental remediation, natural resource damages, third party claims, and other expenses, without regard to the fault or the legality of the original conduct.

The costs of complying with these laws and regulations, including participation in assessments and remediation of contaminated sites and installation of pollution control facilities, have been, and in the future could be, significant. In addition, these laws and regulations may also result in substantial environmental liabilities associated with divested assets, third party locations and past activities. In certain instances, these costs and liabilities, as well as related action to be taken by us, could be accelerated or increased if we were to close, divest of or change the principal use of certain facilities with respect to which we may have environmental liabilities or remediation obligations. Currently, we are involved in a number of compliance efforts, remediation activities and legal proceedings concerning environmental matters, including certain activities and proceedings arising under U.S. Superfund and comparable laws in other jurisdictions where we have operations.

We have established liabilities for environmental remediation where appropriate. However, the cost of addressing environmental matters (including the timing of any charges related thereto) cannot be predicted with certainty, and these liabilities may not ultimately be adequate, especially in light of potential changes in environmental conditions, changing interpretations of laws and regulations by regulators and courts, the discovery of previously unknown environmental conditions, the risk of governmental orders to carry out additional compliance on certain sites not initially included in remediation in progress, our potential liability to remediate sites for which provisions have not been previously established and the adoption of more stringent environmental laws. Such future developments could result in increased environmental costs and liabilities and could require significant capital expenditures, any of which could have a material adverse effect on our financial position or results of operations or cash flows. Furthermore, the failure to comply with our obligations under the environmental laws and regulations could subject us to administrative, civil or criminal penalties, obligations to pay damages or other costs, and injunctions or other orders, including orders to cease operations. In addition, the presence of environmental contamination at our properties could adversely affect our ability to sell a property, receive full value for a property or use a property as collateral for a loan.

Some of our current and potential operations are located or could be located in or near communities that may regard such operations as having a detrimental effect on their social and economic circumstances. Environmental laws typically provide for participation in permitting decisions, site remediation decisions and other matters. Concern about environmental justice issues may affect our operations. Should such community objections be presented to government officials, the consequences of such a development may have a material adverse impact upon the profitability or, in extreme cases, the viability of an operation. In addition, such developments may adversely affect our ability to expand or enter into new operations in such location or elsewhere and may also have an effect on the cost of our environmental remediation projects.

We use a variety of hazardous materials and chemicals in our rolling processes and in connection with maintenance work on our manufacturing facilities. Because of the nature of these substances or related residues, we may be liable for certain costs, including, among others, costs for health-related claims or removal or re-treatment of such substances. Certain of our current and former facilities incorporated asbestos-containing materials, a hazardous substance that has been the subject of health-related claims for occupation exposure. In addition, although we have developed environmental, health and safety programs for our employees, including measures to reduce employee exposure to hazardous substances, and conduct regular assessments at our facilities, we are currently, and in the future may be, involved in claims and litigation filed on behalf of persons alleging injury predominantly as a result of occupational exposure to substances at our current or former facilities. It is not possible to predict the ultimate outcome of these claims and lawsuits due to the unpredictable nature of personal injury litigation. If these claims and lawsuits, individually or in the aggregate, were finally resolved against us, our financial position, results of operations and cash flows could be adversely affected.






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Materials and labor

In the aluminum rolled products industry, our raw materials are subject to continuous price volatility. We may not be able to pass on the entire cost of the increases to our customers or offset fully the effects of higher raw material costs through productivity improvements, which may cause our profitability to decline. In addition, there is a potential time lag between changes in prices under our purchase contracts and the point when we can implement a corresponding change under our sales contracts with our customers. As a result, we could be exposed to fluctuations in raw materials prices which could have a material adverse effect on our financial position, results of operations and cash flows. Significant price increases may result in our customers substituting other materials, such as plastic or glass, for aluminum or switching to another aluminum rolled products producer, which could have a material adverse effect on our financial position, results of operations and cash flows.

We consume substantial amounts of energy in our rolling operations and our cast house operations. The factors that affect our energy costs and supply reliability tend to be specific to each of our facilities. A number of factors could materially adversely affect our energy position including, but not limited to: (a) increases in the cost of natural gas; (b) increases in the cost of supplied electricity or fuel oil related to transportation; (c) interruptions in energy supply due to equipment failure or other causes and (d) the inability to extend energy supply contracts upon expiration on economical terms. A significant increase in energy costs or disruption of energy supplies or supply arrangements could have a material adverse effect on our financial position, results of operations and cash flows.

A substantial portion of our employees are represented by labor unions under a large number of collective bargaining agreements with varying durations and expiration dates. We may not be able to satisfactorily renegotiate our collective bargaining agreements when they expire. In addition, existing collective bargaining agreements may not prevent a strike or work stoppage at our facilities in the future, and any such work stoppage could have a material adverse effect on our financial position, results of operations and cash flows.

Geographic markets

We are, and will continue to be, subject to financial, political, economic and business risks in connection with our global operations. We have made investments and carry on production activities in various emerging markets, including China, Brazil and South Korea, and we market our products in these countries, as well as certain other countries in Asia, Africa, and the Middle East. While we anticipate higher growth or attractive production opportunities from these emerging markets, they also present a higher degree of risk than more developed markets. In addition to the business risks inherent in developing and servicing new markets, economic conditions may be more volatile, legal and regulatory systems may be less developed and predictable, and the possibility of various types of adverse governmental action may be more pronounced. In addition, inflation, fluctuations in currency and interest rates, competitive factors, civil unrest and labor problems could affect our revenues, expenses and results of operations. Our operations could also be adversely affected by acts of war, terrorism or the threat of any of these events as well as government actions such as controls on imports, exports and prices, tariffs, new forms of taxation, changes in fiscal regimes and increased government regulation in the countries in which we operate or service customers. Unexpected or uncontrollable events or circumstances in any of these markets could have a material adverse effect on our financial position, results of operations and cash flows.

Other risks and uncertainties

In addition, refer to Note 17 - Fair Value Measurements and Note 20 - Commitments and Contingencies for a discussion of financial instruments and commitments and contingencies.

Revenue Recognition

We recognize sales when the revenue is realized or realizable, and has been earned. We record sales when a firm sales agreement is in place, delivery has occurred and collectability of the fixed or determinable sales price is reasonably assured.

We recognize product revenue, net of trade discounts, allowances, and estimated billing adjustments, in the reporting period in which the products are shipped and the title and risk of ownership pass to the customer. We sell most of our products under contracts based on a "conversion premium," which is subject to periodic adjustments based on market factors. As a result, the aluminum price risk is largely absorbed by the customer. In situations where we offer customers fixed prices for future delivery of our products, we enter into derivative instruments for all or a portion of the cost of metal inputs to protect our profit on the conversion of the product.

Shipping and handling amounts we bill to our customers are included in "Net sales" and the related shipping and handling costs we incur are included in "Cost of goods sold (exclusive of depreciation and amortization)."


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Our customers can receive or earn certain incentives including, but not limited to, contract signing bonuses, cash discounts, volume based incentive programs, and support for infrastructure programs. The incentives are recorded as reductions to "Net sales" and are recognized over the minimum contractual period in which the customer is obligated to make purchases from Novelis. For incentives that must be earned, management must make estimates related to customer performance and sales volume to determine the total amounts earned and to be recorded as reductions to "Net sales." In making these estimates, management considers historical results. The actual amounts may differ from these estimates.

On occasion, and in an attempt to better manage inventory levels, we sell inventory to third parties and have agreed to repurchase the same or similar inventory back from the third parties over a future period, based on market prices at the time of repurchase. For transactions in which the Company sells inventory and agrees to repurchase at a later date, we record the initial sale of the inventory on a net basis in our consolidated statement of operations through "Cost of goods sold (exclusive of depreciation and amortization)." Upon repurchase, the Company accounts for the inventory at the reacquisition price which becomes an input to our moving average inventory cost basis.

Cost of Goods Sold (Exclusive of Depreciation and Amortization)

"Cost of goods sold (exclusive of depreciation and amortization)" includes all costs associated with inventories, including the procurement of materials, the conversion of such materials into finished products, and the costs of warehousing and distributing finished goods to customers. Material procurement costs include inbound freight charges as well as purchasing, receiving, inspection and storage costs. Conversion costs include the costs of direct production inputs such as labor and energy, as well as allocated overheads from indirect production centers and plant administrative support areas. Warehousing and distribution costs include inside and outside storage costs, outbound freight charges and the costs of internal transfers.

Selling, General and Administrative Expenses

"Selling, general and administrative expenses" include selling, marketing and advertising expenses; salaries, travel and office expenses of administrative employees and contractors; legal and professional fees; software license fees; bad debt expenses; and factoring expenses.

Research and Development

We incur costs in connection with research and development programs that are expected to contribute to future earnings, and charge such costs against income as incurred. Research and development costs consist primarily of salaries and administrative costs.

Restructuring Activities

Restructuring charges, which are recorded within "Restructuring and impairment, net," include employee severance and benefit costs, impairments of assets, and other costs associated with exit activities. We apply the provisions of ASC 420, Exit or Disposal Cost Obligations (ASC 420). Severance costs accounted for under ASC 420 are recognized when management with the proper level of authority has committed to a restructuring plan and communicated those actions to employees. Impairment losses are based upon the estimated fair value less costs to sell, with fair value estimated based on existing market prices for similar assets. Other exit costs include environmental remediation costs and contract termination costs, primarily related to equipment and facility lease obligations. At each reporting date, we evaluate the accruals for restructuring costs to ensure the accruals are still appropriate. See Note 2 - Restructuring and Impairment for further discussion.

Cash and Cash Equivalents

"Cash and cash equivalents" includes investments that are highly liquid and have maturities of three months or less when purchased. The carrying values of cash and cash equivalents approximate their fair value due to the short-term nature of these instruments.

We maintain amounts on deposit with various financial institutions, which may, at times, exceed federally insured limits. However, management periodically evaluates the credit-worthiness of those institutions, and we have not experienced any losses on such deposits.


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Accounts Receivable

Our accounts receivable are geographically dispersed. We do not obtain collateral relating to our accounts receivable. We do not believe there are any significant concentrations of revenues from any particular customer or group of customers that would subject us to any significant credit risks in the collection of our accounts receivable. We report accounts receivable at the estimated net realizable amount we expect to collect from our customers.

Additions to the allowance for doubtful accounts are made by means of the provision for doubtful accounts. We write-off uncollectible accounts receivable against the allowance for doubtful accounts after exhausting collection efforts. For each of the periods presented, we performed an analysis of our historical cash collection patterns and considered the impact of any known material events in determining the allowance for doubtful accounts. See Note 3 - Accounts Receivable for further discussion.

Derivative Instruments

We hold derivatives for risk management purposes and not for trading. We use derivatives to mitigate uncertainty and volatility caused by underlying exposures to aluminum prices, foreign exchange rates, interest rates, and energy prices. The fair values of all derivative instruments are recognized as assets or liabilities at the balance sheet date and are reported gross.

We may be exposed to losses in the future if the counterparties to our derivative contracts fail to perform. We are satisfied that the risk of such non-performance is remote due to our monitoring of credit exposures. Additionally, we enter into master netting agreements with contractual provisions that allow for netting of counterparty positions in case of default, and we do not face credit contingent provisions that would result in the posting of collateral.

For derivatives designated as cash flow hedges or net investment hedges, we assess hedge effectiveness by formally evaluating the high correlation of the expected future cash flows of the hedged item and the derivative hedging instrument. The effective portion of gain or loss on the derivative is included in other comprehensive income (OCI) and reclassified to earnings in the period in which earnings are impacted by the hedged items or in the period that the transaction becomes probable of not occurring. Gains or losses representing reclassifications of OCI to earnings are recognized in the line item most reflective of the underlying risk exposure. We exclude the time value component of foreign currency and aluminum price risk hedges when measuring and assessing ineffectiveness to align our accounting policy with risk management objectives when it is necessary. If at any time during the life of a cash flow hedge relationship we determine that the relationship is no longer effective, the derivative will no longer be designated as a cash flow hedge and future gains or losses on the derivative will be recognized in "Other (income) expense, net."

For derivatives designated as fair value hedges, we assess hedge effectiveness by formally evaluating the high correlation of changes in the fair value of the hedged item and the derivative hedging instrument. The changes in the fair values of the underlying hedged items are reported in "Prepaid expenses and other current assets," "Other long-term assets", "Accrued expenses and other current liabilities," and "Other long-term liabilities" in the consolidated balance sheets. Changes in the fair values of these derivatives and underlying hedged items generally offset and the effective portion is recorded in "Net sales" consistent with the underlying hedged item and the net ineffectiveness is recorded in "Other (income) expense, net."

If no hedging relationship is designated, gains or losses are recognized in "Other (income) expense, net" in our current period earnings.

Consistent with the cash flows from the underlying risk exposure, we classify cash settlement amounts associated with designated derivatives as part of either operating or investing activities in the consolidated statements of cash flows. If no hedging relationship is designated, we classify cash settlement amounts as part of investing activities in the consolidated statement of cash flows.

    The majority of our derivative contracts are valued using industry-standard models that use observable market inputs as their basis, such as time value, forward interest rates, volatility factors, and current (spot) and forward market prices for foreign exchange rates. See Note 15 - Financial Instruments and Commodity Contracts and Note 17 - Fair Value Measurements for additional discussion related to derivative instruments.

Inventories

We carry our inventories at the lower of their cost or net realizable value, reduced for obsolete and excess inventory. We use the average cost method to determine cost. Included in inventories are stores inventories, which are carried at average cost. See Note 4 - Inventories for further discussion.


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Property, Plant and Equipment

We record land, buildings, leasehold improvements and machinery and equipment at cost. We record assets under capital lease obligations at the lower of their fair value or the present value of the aggregate future minimum lease payments as of the beginning of the lease term. We generally depreciate our assets using the straight-line method over the shorter of the estimated useful life of the assets or the lease term, excluding any lease renewals, unless the lease renewals are reasonably assured. See Note 6 - Property, Plant and Equipment for further discussion. We assign useful lives to and depreciate major components of our property, plant and equipment.

The ranges of estimated useful lives are as follows:

Years

Buildings

30 to 40

Leasehold improvements

7 to 20

Machinery and equipment

2 to 25

Furniture, fixtures and equipment

3 to 10

Equipment under capital lease obligations

5 to 15

As noted above, our machinery and equipment have useful lives of 2 to 25 years. Most of our large scale machinery, including hot mills, cold mills, continuous casting mills, furnaces and finishing mills have useful lives of 15 to 25 years. Supporting machinery and equipment, including automation and work rolls, have useful lives of 2 to 15 years.

Maintenance and repairs of property and equipment are expensed as incurred. We capitalize replacements and improvements that increase the estimated useful life of an asset, and we capitalize interest on major construction and development projects while in progress.

We retain fully depreciated assets in property and accumulated depreciation accounts until we remove them from service. In the case of sale, retirement or disposal, the asset cost and related accumulated depreciation balances are removed from the respective accounts, and the resulting net amount, after consideration of any proceeds, is included as a gain or loss in "Other (income) expense, net" or "(Gain) loss on assets held for sale" in our consolidated statements of operations.

We account for operating leases under the provisions of ASC 840, Leases. These pronouncements require us to recognize escalating rents, including any rent holidays, on a straight-line basis over the term of the lease for those lease agreements where we receive the right to control the use of the entire leased property at the beginning of the lease term.

Goodwill

We test for impairment at least annually as of the last day of February of each fiscal year, unless a triggering event occurs that would require an interim impairment assessment. We do not aggregate components of operating segments to arrive at our reporting units and, as such, our reporting units are the same as our operating segments.

In performing our goodwill impairment test, we have the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the estimated fair value of a reporting unit is less than its carrying amount. If we perform a qualitative assessment and determine that an impairment is more likely than not, then we perform the two-step quantitative impairment test, otherwise no further analysis is required. We also may elect not to perform the qualitative assessment and, instead, proceed directly to the two-step quantitative impairment test. The ultimate outcome of the goodwill impairment assessment will be the same whether we choose to perform the qualitative assessment or proceed directly to the two-step quantitative impairment test.

For the years ended March 31, 2017 , 2016 and 2015 we elected to perform the two-step quantitative impairment test. No goodwill impairment was identified in any of the years. See Note 7 - Goodwill and Intangible Assets for further discussion.


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We use the present value of estimated future cash flows to establish the estimated fair value of our reporting units as of the testing date. This approach includes many assumptions related to future growth rates, discount factors and tax rates, among other considerations. Changes in economic and operating conditions impacting these assumptions could result in goodwill impairment in future periods. When available and as appropriate, we use the market approach to corroborate the estimated fair value. If the carrying amount of a reporting unit's goodwill exceeds its estimated fair value, the second step of the impairment test is performed in order to determine the amount of impairment loss, if any. The second step compares the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill. If the carrying amount of the reporting unit's goodwill exceeds its implied fair value we would recognize an impairment charge in an amount equal to that excess in our consolidated statements of operations.

When a business within a reporting unit is disposed of, goodwill is allocated to the gain or loss on disposition using the relative fair value methodology.

Long-Lived Assets and Other Intangible Assets

We amortize the cost of intangible assets over their respective estimated useful lives to their estimated residual value. See Note 7 - Goodwill and Intangible Assets for further discussion.

We assess the recoverability of long-lived assets (excluding goodwill) and finite-lived intangible assets, whenever events or changes in circumstances indicate that we may not be able to recover the asset's carrying amount. We measure the recoverability of assets to be held and used by a comparison of the carrying amount of the asset (groups) to the expected, undiscounted future net cash flows to be generated by that asset (groups), or, for identifiable intangible assets, by determining whether the amortization of the intangible asset balance over its remaining life can be recovered through undiscounted future cash flows. The amount of impairment of identifiable intangible assets is based on the present value of estimated future cash flows. We measure the amount of impairment of other long-lived assets and intangible assets (excluding goodwill) as the amount by which the carrying value of the asset exceeds the fair value of the asset, which is generally determined as the present value of estimated future cash flows or as the appraised value. Impairments of long-lived assets and intangible assets are included in "Restructuring and impairment, net" in the consolidated statement of operations. See Note 2 - Restructuring and Impairment for further discussions.

Assets and Liabilities Held for Sale

We classify long-lived assets (disposal groups) to be sold as held for sale in the period in which all of the following criteria are met: management, having the authority to approve the action, commits to a plan to sell the asset (disposal group); the asset (disposal group) is available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such assets (disposal groups); an active program to locate a buyer and other actions required to complete the plan to sell the asset (disposal group) have been initiated; the sale of the asset (disposal group) is probable, and transfer of the asset (disposal group) is expected to qualify for recognition as a completed sale within one year, except if events or circumstances beyond our control extend the period of time required to sell the asset (disposal group) beyond one year; the asset (disposal group) is being actively marketed for sale at a price that is reasonable in relation to its current fair value; and actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.

We initially measure a long-lived asset (disposal group) that is classified as held for sale at the lower of its carrying value or fair value less any costs to sell. Any loss resulting from this measurement is recognized in the period in which the held for sale criteria are met. Conversely, gains are not recognized on the sale of a long-lived asset (disposal group) until the date of sale. We assess the fair value of a long-lived asset (disposal group) less any costs to sell each reporting period it remains classified as held for sale and report any reduction in fair value as an adjustment to the carrying value of the asset (disposal group). Upon being classified as held for sale we cease depreciation. We continue to depreciate long-lived assets to be disposed of other than by sale.

Upon determining that a long-lived asset (disposal group) meets the criteria to be classified as held for sale, we report the assets and liabilities of the disposal group, if material, in the line items "Assets held for sale" and "Liabilities held for sale," respectively, in our consolidated balance sheets. See Note 5 - Assets Held for Sale for further discussion.


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Investment in and Advances to Non-Consolidated Affiliates

We assess the potential for other-than-temporary impairment of our equity method investments when impairment indicators are identified. We consider all available information, including the recoverability of the investment, the earnings and near-term prospects of the affiliate, factors related to the industry, conditions of the affiliate, and our ability, if any, to influence the management of the affiliate. We assess fair value based on valuation methodologies, as appropriate, including the present value of estimated future cash flows, estimates of sales proceeds, and external appraisals. If an investment is considered to be impaired and the decline in value is other than temporary, we record an appropriate write-down. See Note 9 - Investment in and Advances to Non-Consolidated Affiliates for further discussion.

Financing Costs

We amortize financing costs and premiums, and accrete discounts, over the remaining life of the related debt using the effective interest amortization method, unless the impact of utilizing the straight-line method results in an immaterial difference. The expense is included in "Interest expense and amortization of debt issuance costs" in our consolidated statements of operations. We record discounts and unamortized financing costs as a direct deduction from, or premiums as a direct addition to, the face amount of the financing.

Fair Value of Financial Instruments

ASC 820, Fair Value Measurements and Disclosures (ASC 820), defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. ASC 820 also applies to measurements under other accounting pronouncements, such as ASC 825, Financial Instruments (ASC 825) that require or permit fair value measurements. ASC 825 requires disclosures of the fair value of financial instruments. Our financial instruments include: cash and cash equivalents; certificates of deposit; accounts receivable; accounts payable; foreign currency, energy and interest rate derivative instruments; cross-currency swaps; metal option and forward contracts; share-based compensation; related party notes receivable and payable; letters of credit; short-term borrowings and long-term debt.

The carrying amounts of cash and cash equivalents, certificates of deposit, accounts receivable, accounts payable and current related party notes receivable and payable approximate their fair value because of the short-term maturity and highly liquid nature of these instruments. The fair value of our letters of credit is deemed to be the amount of payment guaranteed on our behalf by third party financial institutions. We determine the fair value of our short-term borrowings and long-term debt based on various factors including maturity schedules, call features and current market rates. We also use quoted market prices, when available, or the present value of estimated future cash flows to determine fair value of our share-based compensation liabilities, short-term borrowings and long-term debt. When quoted market prices are not available for various types of financial instruments (such as currency, energy and interest rate derivative instruments, swaps, options and forward contracts), we use standard pricing models with market-based inputs, which take into account the present value of estimated future cash flows. See Note 17 - Fair Value Measurements for further discussion.

Pensions and Postretirement Benefits

Our pension obligations relate to funded defined benefit pension plans in the U.S., Canada, Switzerland and the U.K., unfunded pension plans in the U.S., Canada, and Germany, and unfunded lump sum indemnities in France, Malaysia and Italy; and partially funded lump sum indemnities in South Korea. Our other postretirement obligations include unfunded health care and life insurance benefits provided to retired employees in Canada, the U.S. and Brazil.    

We account for our pensions and other postretirement benefits in accordance with ASC 715, Compensation - Retirement Benefits (ASC 715). We recognize the funded status of our benefit plans as a net asset or liability, with an offsetting adjustment to accumulated other comprehensive income in shareholder's (deficit) equity. The funded status is calculated as the difference between the fair value of plan assets and the benefit obligation. For the years ended March 31, 2017 and 2016 , we used March 31 as the measurement date.


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We use standard actuarial methods and assumptions to account for our pension and other postretirement benefit plans. Pension and postretirement benefit obligations are actuarially calculated using management's best estimates of the rate used to discount the future estimated liability, the long-term rate of return on plan assets, and several assumptions related to the employee workforce (compensation increases, health care cost trend rates, expected service period, retirement age, and mortality). Pension and postretirement benefit expense includes the actuarially computed cost of benefits earned during the current service period, the interest cost on accrued obligations, the expected return on plan assets based on fair market value and the straight-line amortization of net actuarial gains and losses and adjustments due to plan amendments, curtailments, and settlements. Net actuarial gains and losses are amortized over periods of 15 years or less, which represent the group's average future service life of the employees or the group's average life expectancy. See Note 13 - Postretirement Benefit Plans for further discussion.

Noncontrolling Interests in Consolidated Affiliates

These financial statements reflect the application of ASC 810, Consolidations (ASC 810), which establishes accounting and reporting standards that require: (i) the ownership interest in subsidiaries held by parties other than the parent to be clearly identified and presented in the consolidated balance sheet within shareholder's (deficit) equity, but separate from the parent's (deficit) equity; (ii) the amount of consolidated net income attributable to the parent and the noncontrolling interest to be clearly identified and presented on the face of the consolidated statement of operations and (iii) changes in a parent's ownership interest while the parent retains its controlling financial interest in its subsidiary to be accounted for consistently.

Our consolidated financial statements include all assets, liabilities, revenues and expenses of less-than-100%-owned affiliates that we control or for which we are the primary beneficiary. We record a noncontrolling interest for the allocable portion of income or loss and comprehensive income or loss to which the noncontrolling interest holders are entitled based upon their ownership share of the affiliate. Distributions made to the holders of noncontrolling interests are charged to the respective noncontrolling interest balance.

Losses attributable to the noncontrolling interest in an affiliate may exceed our interest in the affiliate's equity. The excess, and any further losses attributable to the noncontrolling interest, shall be attributed to those interests. The noncontrolling interest shall continue to be attributed its share of losses even if that attribution results in a deficit noncontrolling interest balance. As of March 31, 2017 and 2016 , we have no such losses.

Environmental Liabilities

We record accruals for environmental matters when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated, based on current law and existing technologies. We adjust these accruals periodically as assessment and remediation efforts progress or as additional technical or legal information becomes available. Accruals for environmental liabilities are stated at undiscounted amounts. Environmental liabilities are included in our consolidated balance sheets in "Accrued expenses and other current liabilities" and "Other long-term liabilities," depending on their short- or long-term nature. Any receivables for related insurance or other third party recoveries for environmental liabilities are recorded when it is probable that a recovery will be realized and are included in our consolidated balance sheets in "Prepaid expenses and other current assets."

Costs related to environmental matters are charged to expense. Estimated future incremental operations, maintenance and management costs directly related to remediation are accrued in the period in which such costs are determined to be probable and estimable. See Note 20 - Commitments and Contingencies for further discussion.

Litigation Contingencies

We accrue for loss contingencies associated with outstanding litigation, claims and assessments for which management has determined it is probable that a loss contingency exists and the amount of loss can be reasonably estimated. We expense professional fees associated with litigation claims and assessments as incurred. See Note 20 - Commitments and Contingencies for further discussion.


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Income Taxes

We account for income taxes using the asset and liability method. This approach recognizes the amount of income taxes payable or refundable for the current year, as well as deferred tax assets and liabilities for the future tax consequence of events recognized in the consolidated financial statements and income tax returns. Deferred income tax assets and liabilities are adjusted to recognize the effects of changes in tax laws or enacted tax rates. Under ASC 740 Income Taxes , (ASC 740) a valuation allowance is required when it is more likely than not that some portion of the deferred tax assets will not be realized. Realization is dependent on generating sufficient taxable income through various sources.

We record tax benefits related to uncertain tax positions taken or expected to be taken on a tax return when such benefits meet a more than likely than not threshold. Otherwise, these tax benefits are recorded when a tax position has been effectively settled, the statute of limitation has expired or the appropriate taxing authority has completed their examination. Interest and penalties related to uncertain tax positions are recognized as part of the provision for income taxes and are accrued beginning in the period that such interest and penalties would be applicable under relevant tax law until such time that the related tax benefits are recognized. See Note 19 - Income Taxes for further discussion.


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Share-Based Compensation

In accordance with ASC 718, Compensation - Stock Compensation (ASC 718), we recognize compensation expense for a share-based award over an employee's requisite service period based on the award's grant date fair value, subject to adjustment. Our share-based awards are settled in cash and are accounted for as liability based awards. As such, liabilities for awards under these plans are required to be measured at fair value at each reporting date until the date of settlement. See Note 12 - Share-Based Compensation for further discussion.

Foreign Currency Translation

The assets and liabilities of foreign operations, whose functional currency is other than the U.S. dollar (located in Europe and Asia), are translated to U.S. dollars at the period end exchange rates and revenues and expenses are translated at average exchange rates for the period. Differences arising from this translation are included in the currency translation adjustment (CTA) component of AOCI and Noncontrolling Interest. If there is a planned or completed sale or liquidation of our ownership in a foreign operation, the relevant CTA is recognized in our consolidated statement of operations.

For all operations, the monetary items denominated in currencies other than the functional currency are remeasured at period-end exchange rates and transaction gains and losses are included in "Other (income) expense, net" in our consolidated statements of operations. Non-monetary items are remeasured at historical rates.

Recently Adopted Accounting Standards

Effective for the first quarter of fiscal 2017, we early adopted FASB ASU 2016-05, Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships, which addresses a lack of guidance in existing US GAAP related to the impact of derivative contract novations on existing hedge accounting relationships under Accounting Standards Codification Topic 815, Derivatives and Hedging (ASC 815). The new guidance clarifies that a change in one of the parties (a novation) to a derivative contract that is part of an existing hedge accounting relationship under ASC 815 does not, in and of itself, require a de-designation of that hedge accounting relationship. The impact of the adoption will prospectively allow hedge accounting treatment to continue on existing hedges when a novation event occurs. There was no impact upon adoption.

Effective for the first quarter of fiscal 2017, we adopted the FASB ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory , which removes the requirement to measure inventory at the lower of cost or market whereas market could be replacement cost, net realizable value, or net realizable value less an approximately normal profit margin, and requires an entity to measure inventory at the lower of cost or net realizable value. There was no impact upon adoption.

Effective for fiscal year 2017, we adopted FASB ASU 2015-07, Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent), which remove the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. We applied the amendments retrospectively to all periods presented in our postretirement benefit plans footnote disclosure on Form 10-K for the year ended March 31, 2017.

Effective for the first quarter of fiscal 2017, we adopted FASB ASU 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs, which requires the debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this update. In August 2015, the FASB issued ASU 2015-15, a clarifying amendment, allowing for debt issuance costs related to lines of credit being presented as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line of credit arrangement, regardless of whether there are any outstanding borrowings on the line of credit arrangement. The impact of the adoption was a decrease in "Other long-term assets" and "Long-term debt, net of current portion" in the consolidated balance sheets as of March 31, 2016 of $30 million . We made the policy election to continue to present debt issuance costs related to lines of credit as an asset.



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Effective for the first quarter fiscal 2017, we adopted FASB ASU 2015-02, Consolidations (Topic 810): Amendments to the Consolidations Analysis. The amendment (i) modifies the evaluation of whether limited partnerships and similar legal entities are variable interest entities or voting interest entities, (ii) eliminates the presumption that a general partner should consolidate a limited partnership, (iii) affects the consolidation analysis of reporting entities that are involved with variable interest entities, particularly those that have fee arrangements and related party relationships, and (iv) provides a scope exception from consolidation guidance for reporting entities with interests in legal entities that are required to comply with or operate in accordance with requirements that are similar to those in Rule 2a-7 of the Investment Company Act of 1940 for registered money market funds.  There was no impact upon adoption.

Recently Issued Accounting Standards

In March 2017, the FASB issued ASU 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. This update was issued primarily to improve the presentation of net periodic pension cost and net periodic postretirement benefit cost. The new guidance requires entities to (1) disaggregate the current-service-cost component from the other components of net benefit cost (the "other components") and present it with other current compensation costs for related employees in the results of operations and (2) present the other components elsewhere in the results of operations and outside of income from operations if that subtotal is presented. In addition, the new guidance requires entities to disclose the results of operations line items that contain the other components if they are not presented on appropriately described separate lines. The guidance is effective for public business entities for interim and annual periods beginning after December 15, 2017. Early adoption is permitted. Adoption of this standard is not expected to have an impact on our consolidated results of operations.

In February 2017, the FASB issued ASU 2017-06, Plan Accounting: Defined Benefit Pension Plans (Topic 960), Defined Contribution Pension Plans (Topic 962), Health and Welfare Benefit Plans (Topic 965), Employee Benefit Plan Master Trust Reporting ("ASU 2017-06") . This update primarily impacted the reporting by an employee benefit plan (a plan) for its interest in a master trust. The amendments in this update require all plans to disclose (1) their master trust's other asset and liability balances and (2) the dollar amount of the plan's interest in each of those balances. The amendments in this update are effective for fiscal years beginning after December 15, 2018. Early adoption is permitted. Adoption of this standard is not expected to have an impact on our consolidated financial position or results of operations.

In February 2017, the FASB issued ASU 2017-05, Other Income-Gains and Losses from the Derecognition of Non-financial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Non-financial Assets . The amendments in this update include (i) clarification that non-financial assets within the scope of ASC 610-20 may include non-financial assets transferred within a legal entity to a counterparty; (ii) clarification that an entity should allocate consideration to each distinct asset by applying the guidance in ASC 606 on allocating the transaction price to performance obligations; and (iii) a requirement for entities to derecognize a distinct non-financial asset or distinct in substance non-financial asset in a partial sale transaction when it does not have (or ceases to have) a controlling financial interest in the legal entity that holds the asset in accordance with ASC 810, and transfers control of the asset in accordance with ASC 606. The guidance is effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods. Early adoption is permitted. Adoption of this standard is expected to have an immaterial impact on our consolidated financial position and results of operations.

In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, accounting guidance, which removes Step 2 from the goodwill impairment test. As amended, the goodwill impairment test will consist of one step comparing the fair value of a reporting unit with its carrying amount. Under the simplified model, a goodwill impairment is calculated as the difference between the carrying amount of the reporting unit and its fair value, but not to exceed the carrying amount of goodwill allocated to that reporting unit. Early adoption is permitted. The guidance is effective for public business entities for interim and annual periods beginning after its annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019. We are currently evaluating the impact of this standard and we do not expect the adoption of this standard will have an impact on our consolidated financial position and results of operations.

In January 2017, the FASB issued ASU 2017-01, C larifying the Definition of a Business (Topic 805) , which provides guidance on evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. The new guidance amends ASC 805 to provide a more robust framework to use in determining when a set of assets and activities is a business. In addition, the amendments provide more consistency in applying the guidance, reduce the costs of application, and make the definition of a business more operable. The guidance is effective for annual periods beginning after December


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15, 2017, and interim periods within those annual periods. Early adoption is permitted. Adoption of this standard is not expected to have a current impact on our consolidated financial statements.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230) - Statement of Cash Flows (Topic 230): Restricted Cash. The amendments in this update apply to all entities that have restricted cash or restricted cash equivalents and are required to present a statement of cash flows under Topic 230. The amendments in this Update require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. The guidance is effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods. Early adoption is permitted. We are currently evaluating the impact of this standard and we believe that the adoption of this standard will have an immaterial impact on our statement of cash flow.

In October 2016, the FASB issued ASU 2016-16, Accounting for Income Taxes: Intra-Entity Asset Transfers of Assets

Other than Inventory . The new guidance eliminates the exception for all intra-entity sales of assets other than inventory. The

guidance will require the tax effects of intercompany transactions to be recognized currently and will likely impact reporting

entities' effective tax rates. The guidance is effective for annual periods beginning after December 15, 2017, and interim

periods within those annual periods. Early adoption is permitted. We are currently evaluating the impact of this standard on

our consolidated financial position and results of operations.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230) - Classification of Certain Cash Receipts and Cash Payments. The new guidance applies to all entities that are required to present a statement of cash flows under Topic 230 and addresses specific cash flow items to provide clarification and reduce the diversity in presentation of these items. The guidance is effective for annual periods beginning after December 15, 2017 and interim periods within that year. Early adoption is permitted. Adoption of this standard is not expected to have any impact on our consolidated financial position and results of operations as our current policies are aligned with this standard.    

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which when effective will require organizations that lease assets (e.g., through "leases") to recognize assets and liabilities for the rights and obligations created by the leases on balance sheet. A lessee will be required to recognize assets and liabilities for leases with terms that exceed twelve months. The standard will also require disclosures to help investors and financial statement users better understand the amount, timing and uncertainty of cash flows arising from leases. The disclosures include qualitative and quantitative requirements, providing additional information about the amounts recorded in the financial statements. The guidance is effective for annual periods beginning after December 15, 2018, and interim periods within those annual periods. Early adoption is permitted. We are currently evaluating the impact of this standard on our consolidated financial position and results of operations.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606) , which, when effective, will supersede the guidance in former ASC 605, Revenue Recognition . The new guidance requires entities to recognize revenue based on the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for these goods or services. The guidance is effective for annual periods beginning after December 15, 2016 and interim periods within that year. Early adoption is not permitted. In August 2015, the FASB issued ASU 2015-14 Revenue from Contracts with Customers (Topic 606): Deferral of Effective Date, which provides an optional one-year deferral of the effective date. Subsequent to these amendments, further clarifying amendments have been issued. We are currently evaluating the impact of the standard on our consolidated financial position and results of operations. We have begun assessing our contracts and drafting polices to implement the new revenue standards and will be implementing this standard during the first quarter of FY 2019. We have not yet determined the impact of adopting the standard on our consolidated financial statements, nor have we determined whether we will utilize the full retrospective or modified retrospective approach.    





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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



2.    RESTRUCTURING AND IMPAIRMENT


"Restructuring and impairment, net" for the year ended March 31, 2017 was $10 million , which included impairment charges unrelated to restructuring actions of $2 million on certain fixed assets in North America, South America, and Asia. "Restructuring and impairment, net" for the year ended March 31, 2016 was $48 million , which included impairment charges unrelated to restructuring actions of $3 million on certain fixed assets in North America, South America and Asia. "Restructuring and impairment, net" for the year ended March 31, 2015 was $37 million , which included impairment charges unrelated to restructuring actions of $2 million on certain non-core assets in North America.


The following table summarizes our restructuring liability activity and other impairment charges (in millions).

Total restructuring

liabilities

Other restructuring charges

(A)

Total restructuring charges

Other impairments (B)

Total
restructuring 

and impairments, net

Balance as of March 31, 2014

$

47


Fiscal 2015 Activity:

Expenses

30


$

5


$

35


$

2


$

37


Cash payments

(32

)

Foreign currency translation and other (C)

(13

)

Balance as of March 31, 2015

32


Fiscal 2016 Activity:

-Provisions

23


-Reversal of expense

(2

)

Expenses

21


$

24


$

45


-


$

3


$

48


Cash payments

(22

)

Foreign currency translation and other (C)

(4

)

Balance as of March 31, 2016

27


Fiscal 2017 Activity:

Expenses

8


$

-


$

8


$

2


$

10


Cash payments

(13

)

Foreign currency translation and other (C)

2


Balance as of March 31, 2017

$

24


(A)

Other restructuring charges include period expenses that were not recorded through the restructuring liability and impairments related to a restructuring activity.

(B)

Other impairment charges not related to a restructuring activity.

(C)

This primarily relates to the remeasurement of Brazilian real denominated restructuring liabilities.

As of March 31, 2017 , $16 million of restructuring liabilities was classified as short-term and was included in "Accrued expenses and other current liabilities" and $8 million was classified as long-term and was included in "Other long-term liabilities" on our consolidated balance sheet. Additionally, restructuring payments and the remaining liability for the Asia segment for the year ended March 31, 2017 was $1 million which relates primarily to staff rationalization activities to better align operations to current needs.


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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



North America

The following table summarizes our restructuring activity for the North America segment by plan (in millions).


Year Ended March 31,

2017

2016

2015

Prior to
April 1, 2014

Restructuring charges - North America

Saguenay Plant Closure:

Severance

$

-


$

-


$

-


$

5


Fixed asset impairment (A)

-


-


-


28


Other exit related costs

1


-


1


1


Period expenses (A)

-


1


-


4


Total restructuring charges - North America

$

1


$

1


$

1


$

38


 Restructuring payments - North America

Severance

$

-


$

-


$

(2

)

Other

-


(1

)

(1

)

Total restructuring payments - North America

$

-


$

(1

)

$

(3

)


(A)     These charges were not recorded through the restructuring liability.


In fiscal 2012, we closed our Saguenay Works facility in Canada and relocated our North America research and development operations to a new global research and technology facility in Kennesaw, Georgia. As of March 31, 2017 , the outstanding restructuring liability for the North America segment was $1 million , which related to environmental charges.


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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



Europe


The following table summarizes our restructuring activity for the Europe segment by plan (in millions).


Year Ended March 31,

2017

2016

2015

Prior to
April 1, 2014

Restructuring charges - Europe

Business optimization

Severance

$

-


$

-


$

3


$

42


Pension settlement loss (A)

-


-


-


1


Corporate restructuring program

Severance

2


4


-


-


Total restructuring charges - Europe

$

2


$

4


$

3


$

43


Restructuring payments - Europe

Severance

$

(4

)

$

(6

)

$

(12

)

Other

-


-


-


Total restructuring payments - Europe

$

(4

)

$

(6

)

$

(12

)

(A)     These charges were not recorded through the restructuring liability.


The Company implemented a series of restructuring actions at the global headquarters office and in the Europe region which include staff rationalization activities and the shutdown of facilities to optimize our business in Europe.


As of March 31, 2017 , the outstanding restructuring liability for the Europe segment was $2 million , which relates to severance charges.


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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



South America

The following table summarizes our restructuring activity for the South America segment by plan (in millions).

Year Ended March 31,

2017

2016

2015

Prior to
April 1, 2014

Restructuring charges - South America

Ouro Preto closures

Severance

$

1


$

2


$

14


$

5


Asset impairments (A)

-


-


5


1


Environmental (reversal) charges

-


(1

)

6


16


Contract termination and other exit related costs

2


2


5


6


Other South America restructuring programs

Severance

2


-


-


-


Other past restructuring programs

Severance

-


-


-


7


Asset impairments (A)

-


-


-


7


Contract termination and other exit related costs

-


-


1


6


Total restructuring charges - South America

$

5


$

3


$

31


$

48


Restructuring payments - South America

Severance

$

(2

)

$

(2

)

$

(12

)

Other

(5

)

(3

)

(4

)

Total restructuring payments - South America

$

(7

)

$

(5

)

$

(16

)


(A)     These charges were not recorded through the restructuring liability.

We ceased operations at the smelter in Ouro Preto, Brazil, in December 2014. This decision was made in an effort to further align our global sustainability strategy, and exit non-core operations. Certain charges associated with this closure are reflected within the "Ouro Preto closures" section above, along with our closure of a pot line in Ouro Preto, Brazil, in fiscal 2013.

In fiscal 2017, the Company implemented additional restructuring actions in South America which include staff rationalization activities to optimize our business in South America.

As of March 31, 2017 , the outstanding restructuring liability for the South America segment was $19 million and relates to $12 million of environmental charges, and $7 million of contract termination and other exit related costs.

For additional information on environmental charges see Note 20 - Commitments and Contingencies.



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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



Corporate

The following table summarizes our restructuring activity for the Corporate segment by plan (in millions).

Year Ended March 31

2017

2016

2015

Prior to
April 1, 2014

Restructuring charges - Corporate

Severance

$

-


$

12


$

-


$

-


Asset impairments (A)

-


21


-


-


Period expenses (A)

-


2


-


-


Total restructuring charges - Corporate

-


35


-


-


Restructuring payments - Corporate

Severance

(1

)

(10

)

-


Total restructuring payments - Corporate

$

(1

)

$

(10

)

$

-



(A)

These charges were not recorded through the restructuring liability and related to the partial impairment of certain capitalized software intangible assets that will no longer be developed.

In fiscal 2016, the Company implemented a series of restructuring actions at the global headquarters office and in the Europe region to better align the organizational structure and corporate staffing levels with strategic priorities. As part of this plan, the Company impaired certain capitalized software assets. As of March 31, 2017 , the restructuring liability for the corporate office was $1 million and related to severance charges.




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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)





3.    ACCOUNTS RECEIVABLE

"Accounts receivable, net" consists of the following (in millions).

March 31,

2017

2016

Trade accounts receivable

$

971


$

884


Other accounts receivable

102


75


Accounts receivable - third parties

1,073


959


Allowance for doubtful accounts - third parties

(6

)

(3

)

Accounts receivable, net - third parties

$

1,067


$

956


Accounts receivable, net - related parties

$

60


$

59


Allowance for Doubtful Accounts

As of March 31, 2017 and 2016 , our allowance for doubtful accounts represented approximately 0.6% and 0.3% , respectively, of gross accounts receivable.

Activity in the allowance for doubtful accounts is as follows (in millions).

Balance at
Beginning
of Period

Additions
Charged to
Expense

Accounts
Recovered/
(Written-
Off)

Foreign
Exchange
and Other

Balance at
End of  Period

Year Ended March 31, 2017

$

3


$

3


$

-


$

-


$

6


Year Ended March 31, 2016

$

3


$

-


$

-


$

-


$

3


Year Ended March 31, 2015

$

4


$

-


$

-


$

(1

)

$

3


Factoring of Trade Receivables

We factor and forfait trade receivables (collectively, we refer to these as "factoring" programs) based on local cash needs, as well as attempting to balance the timing of cash flows of trade payables and receivables, fund strategic investments, and fund other business needs. Factored invoices are not included in our consolidated balance sheets when we do not retain a financial or legal interest. If a financial or legal interest is retained, we classify these factorings as secured borrowings.

The following tables summarize amounts relating to our factoring activities (in millions).

Year Ended March 31,

2017

2016

2015

Aggregated receivables factored

$

5,149


$

3,314


$

1,796


Factoring expense

$

16


$

19


$

10


March 31,

2017

2016

Factored receivables outstanding

$

679


$

626



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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)




4.    INVENTORIES

"Inventories" consists of the following (in millions).

March 31,

2017

2016

Finished goods

$

389


$

295


Work in process

576


416


Raw materials

213


322


Supplies

155


147


Inventories

$

1,333


$

1,180





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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)




5.    ASSETS HELD FOR SALE

We are focused on capturing the global growth we see in our product markets of beverage can, automotive and specialty products. We continually analyze our product portfolio to ensure we are focused on growing in attractive market segments. The following transactions relate to exiting certain non-core operations to focus on our growth strategy in the premium product markets.

We made the decision to sell two hydroelectric power generation facilities in South America with a net book value of $4 million as of March 31, 2016 , which were classified as "Assets held for sale" in our consolidated balance sheet. During the year ended March 31, 2017 , we recorded a $1 million gain from our sale of one hydroelectric power generation facility. The remaining hydroelectric power generation assets have a net book value of $3 million as of March 31, 2017 and continue to be reflected as "Assets held for sale" pending the resolution of certain operating license issues. Additionally, during the fourth

quarter of fiscal 2016, an impairment of $1 million was recorded due to the expiration of a license related to a portion of the

hydroelectric power generation facilities.

In March 2016, we made a decision to sell properties in Ouro Preto, Brazil related to the closure of the Ouro Preto smelter facility in South America with a net book value of $1 million as of March 31, 2016, which were classified as "Assets held for sale" in our consolidated balance sheet. "Gain on assets held for sale" during the year ended March 31, 2017 includes a $1 million gain from the sale of these assets.

During the year ended March 31, 2015, "Gain on assets held for sale" includes a $23 million gain from our sale of the joint venture of Consorcio Candonga, $7 million from the sale of our consumer foil operations in North America and $6 million for a property and mining rights sale in South America. These gains were partially offset during the twelve months ended March 31, 2015 by an estimated loss of $14 million related to the sale of certain hydroelectric assets that was completed in the fourth quarter of fiscal 2015.



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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)




6.    PROPERTY, PLANT AND EQUIPMENT

"Property, plant and equipment, net" consists of the following (in millions).

March 31,

2017

2016

Land and property rights

$

173


$

179


Buildings

1,309


1,325


Machinery and equipment

4,312


4,265


5,794


5,769


Accumulated depreciation and amortization

(2,575

)

(2,398

)

3,219


3,371


Construction in progress

138


135


Property, plant and equipment, net

$

3,357


$

3,506


As of March 31, 2017 and 2016 , there were $1 billion of fully depreciated assets included in our consolidated balance sheets.

For the years ended March 31, 2017 , 2016 and 2015 , we capitalized $2 million , $14 million and $20 million of interest related to construction of property, plant and equipment and intangibles under development, respectively. Depreciation expense related to property, plant, and equipment, net is shown in the table below (in millions).

Year Ended March 31,

2017

2016

2015

Depreciation expense related to property, plant and equipment, net

$

299


$

294


$

294



Asset impairments

Impairment charges are recorded in "Restructuring and impairment, net." See Note 2 - Restructuring and impairment for additional information.

Leases

We lease certain land, buildings and equipment under non-cancelable operating leases expiring at various dates, and we lease assets in Sierre, Switzerland, including a fifteen -year capital lease through December 2019 from Constellium. Operating leases generally have five to ten-year terms, with one or more renewal options, with terms to be negotiated at the time of renewal. Various facility leases include provisions for rent escalation to recognize increased operating costs or require us to pay certain maintenance and utility costs. During fiscal 2014 through 2016 we entered into various capital lease arrangements to upgrade and expand our information technology infrastructure.

The following table summarizes rent expense included in our consolidated statements of operations (in millions):

Year Ended March 31,

2017

2016

2015

Rent expense

$

24


$

22


$

22



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Novelis Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



Future minimum lease payments as of March 31, 2017 , for our operating and capital leases having an initial or remaining non-cancelable lease term in excess of one year are as follows (in millions).

Year Ending March 31,

Operating

leases

Capital lease

obligations

2018

$

30


$

9


2019

21


7


2020

18


5


2021

15


-


2022

11


-


Thereafter

33


-


Total minimum lease payments

$

128


$

21


Less: interest portion on capital lease

2


Principal obligation on capital leases



$

19


Assets and related accumulated amortization under capital lease obligations as of March 31, 2017 and 2016 are as follows (in millions).

March 31,

2017

2016

Assets under capital lease obligations:

Buildings

$

11


$

11


Machinery and equipment

73


77


CWIP

2


-


86


88


Accumulated amortization

(70

)

(70

)

$

16


$

18






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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



7.    GOODWILL AND INTANGIBLE ASSETS

There were no changes to the gross carrying amount or accumulated impairment of goodwill during the years ended March 31, 2017 and 2016 . The following table summarizes "Goodwill" (in millions) for the years ended March 31, 2017 and 2016 .

March 31, 2017

March 31, 2016

Gross

Carrying

Amount

Accumulated

Impairment

Net

Carrying

Value

Gross
Carrying
Amount

Accumulated
Impairment

Net
Carrying
Value

North America

$

1,145


$

(860

)

$

285


$

1,145


$

(860

)

$

285


Europe

511


(330

)

181


511


(330

)

181


South America

291


(150

)

141


291


(150

)

141


$

1,947


$

(1,340

)

$

607


$

1,947


$

(1,340

)

$

607


The components of "Intangible assets, net" are as follows (in millions).

March 31, 2017

March 31, 2016

Weighted

Average

Life

Gross

Carrying

Amount

Accumulated

Amortization

Net

Carrying

Amount

Gross

Carrying

Amount

Accumulated

Amortization

Net

Carrying

Amount

Tradenames

20 years

$

142


$

(70

)

$

72


$

142


$

(63

)

$

79


Technology and software

10.4 years

369


(209

)

160


365


(179

)

186


Customer-related intangible assets

20 years

443


(218

)

225


449


(199

)

250


Favorable energy supply contract

9.5 years

-


-


-


124


(116

)

8


16.3 years

$

954


$

(497

)

$

457


$

1,080


$

(557

)

$

523


In the year ended March 31, 2016, we recorded impairment charges related to certain capitalized software. In the year of March 31, 2017, there were no such impairments recorded. For additional information refer to Note 2 - Restructuring and impairment.

Our favorable energy supply contract is amortized over its estimated useful life using a method that reflects the pattern in which the economic benefits are expected to be consumed. The contract was fully amortized and matured in January 2017. All other intangible assets are amortized using the straight-line method.

Amortization expense related to "Intangible assets, net" is as follows (in millions).

Year Ended March 31,

2017

2016

2015

Total amortization expense related to intangible assets

$

69


$

71


$

70


Less: Amortization expense related to intangible assets included in "Cost of goods sold (exclusive of depreciation and amortization)" (A)

(8

)

(12

)

(12

)

Amortization expense related to intangible assets included in "Depreciation and amortization"

$

61


$

59


$

58


(A)

Relates to amortization of favorable energy supply contract.

Estimated total amortization expense related to "Intangible assets, net" for each of the five succeeding fiscal years is as follows (in millions). Actual amounts may differ from these estimates due to such factors as customer turnover, raw material consumption patterns, impairments, additional intangible asset acquisitions and other events.


Fiscal Year Ending March 31,

2018

$

65


2019

65


2020

65


2021

65


2022

46



95

Novelis Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



8.    CONSOLIDATION


Variable Interest Entities (VIE)

The entity that has a controlling financial interest in a VIE is referred to as the primary beneficiary and consolidates the VIE. An entity is deemed to have a controlling financial interest and is the primary beneficiary of a VIE if it has both the power to direct the activities of the VIE that most significantly impact the VIE's economic performance and an obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE.

We have a joint interest in Logan Aluminum Inc. (Logan) with Tri-Arrows Aluminum Inc. (Tri-Arrows). Logan processes metal received from Novelis and Tri-Arrows and charges the respective partner a fee to cover expenses. Logan is thinly capitalized and relies on the regular reimbursement of costs and expenses by Novelis and Tri-Arrows to fund its operations. This reimbursement is considered a variable interest as it constitutes a form of financing of the activities of Logan. Other than these contractually required reimbursements, we do not provide other material support to Logan. Logan's creditors do not have recourse to our general credit.

We have the ability to make decisions regarding Logan's production operations. We also have the ability to take the majority share of production and associated costs. These facts qualify us as Logan's primary beneficiary and this entity is consolidated for all periods presented. All significant intercompany transactions and balances have been eliminated.

The following table summarizes the carrying value and classification of assets and liabilities owned by the Logan joint venture and consolidated in our consolidated balance sheets (in millions). There are significant other assets used in the operations of Logan that are not part of the joint venture, as they are directly owned and consolidated by Novelis or Tri-Arrows.

March 31,

2017

2016

Assets

Current assets

Cash and cash equivalents

$

2


$

3


Accounts receivable

29


33


Inventories

62


61


Prepaid expenses and other current assets

2


2


Total current assets

95


99


Property, plant and equipment, net

25


21


Goodwill

12


12


Deferred income taxes

89


84


Other long-term assets

30


8


Total assets

$

251


$

224


Liabilities

Current liabilities

Accounts payable

$

32


$

30


Accrued expenses and other current liabilities

21


15


Total current liabilities

53


45


Accrued postretirement benefits

224


214


Other long-term liabilities

3


3


Total liabilities

$

280


$

262



96

Novelis Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)




9.

INVESTMENT IN AND ADVANCES TO NON-CONSOLIDATED AFFILIATES AND RELATED PARTY TRANSACTIONS


Investments in and Advances to Non-Consolidated Affiliates

The following table summarizes the ownership structure and our ownership percentage of the non-consolidated affiliate in which we have an investment as of March 31, 2017 and 2016 , and which we account for using the equity method. We do not control our non-consolidated affiliate, but have the ability to exercise significant influence over the operating and financial policies. We have no material investments that we account for using the cost method.

Affiliate Name

Ownership Structure

Ownership

Percentage

Aluminium Norf GmbH (Alunorf)

Corporation

50%


The following table summarizes the assets, liabilities and equity of our equity method affiliate in the aggregate as of March 31, 2017 and 2016 (in millions).

March 31,

2017

2016

Assets:

Current assets

$

143


$

148


Non-current assets

355


394


Total assets

$

498


$

542


Liabilities:

Current liabilities

$

53


$

55


Non-current liabilities

283


337


Total liabilities

336


392


Equity:

Total equity

162


150


Total liabilities and equity

$

498


$

542



As of March 31, 2017 , the investment in Alunorf exceeded our proportionate share of the net assets of Alunorf by $370 million . The difference is primarily related to the unamortized fair value adjustments that are included in our investment balance as a result of the acquisition of Novelis by Hindalco in 2007.


The following table summarizes the results of operations of our equity method affiliates in the aggregate for the years ending March 31, 2017 , 2016 and 2015 ; and the nature and amounts of significant transactions that we had with our non-consolidated affiliates (in millions). The amounts in the table below are disclosed at 100% of the operating results of these affiliates.

Year Ended March  31,

2017

2016

2015

Net sales

$

447


$

464


$

524


Costs and expenses related to net sales

463


463


527


(Benefit) provision for taxes on income

(5

)

2


-


Net loss

$

(11

)

$

(1

)

$

(3

)

Purchase of tolling services from Alunorf

$

224


$

232


$

261




97

Novelis Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



Included in the accompanying consolidated financial statements are transactions and balances arising from business we conduct with Alunorf, which we classify as related party transactions and balances. The following table describes the period-end account balances that we had with Norf, shown as related party balances in the accompanying consolidated balance sheets (in millions). We had no other material related party balances with non-consolidated affiliates.


March 31,

2017

2016

Accounts receivable-related parties

$

60


$

59


Other long-term assets-related parties

$

15


$

16


Accounts payable-related parties

$

51


$

48



We earned less than $1 million of interest income on a loan due from Alunorf during each of the years presented in "Other long-term assets-related parties" in the table above. We believe collection of the full receivable from Alunorf is probable; thus no allowance for loan loss was provided for this loan as of March 31, 2017 and 2016 .

We have guaranteed the indebtedness for a credit facility and loan on behalf of Alunorf.  The guarantee is limited to 50% of the outstanding debt, not to exceed 6 million euros. As of March 31, 2017 , there were no amounts outstanding under our guarantee with Alunorf. We have also guaranteed the payment of early retirement benefits on behalf of Alunorf. As of March 31, 2017 , this guarantee totaled $2 million .


Transactions with Hindalco and AV Metals Inc.

We occasionally have related party transactions with our indirect parent company, Hindalco. During the years ended March 31, 2017 , 2016 and 2015 we recorded "Net sales" of less than $1 million , less than $1 million and $1 million , respectively, between Novelis and our indirect parent related primarily to sales of equipment and other services. As of March 31, 2017 and 2016 there were less than $1 million of "Accounts receivable, net - related parties" outstanding related to transactions with Hindalco.

During the year ended March 31, 2017 , Novelis purchased $3 million in raw materials from Hindalco that were fully paid for during the quarter ended December 31, 2016 . During the year ended March 31, 2016 , Novelis purchased $5 million in raw materials from Hindalco that were fully paid for during the quarter ended December 31, 2015 . We also loaned $3 million to a subsidiary of our parent, which was repaid during the quarter ended March 31, 2017 .

In March 2014, we declared a return of capital to our direct shareholder, AV Metals Inc., in the amount of $250 million , which we subsequently paid on April 30, 2014.


98

Novelis Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)




10.    ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES


"Accrued expenses and other current liabilities" consists of the following (in millions).

March 31,

2017

2016

Accrued compensation and benefits

$

191


$

174


Accrued interest payable

60


66


Accrued income taxes

28


13


Other current liabilities

275


316


Accrued expenses and other current liabilities - third parties

$

554


$

569





99

Novelis Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



11.    DEBT

Debt consists of the following (in millions).

March 31, 2017

March 31, 2016

Interest

Rates (A)

Principal

Unamortized

Carrying  Value

Adjustments

Carrying

Value

Principal

Unamortized

Carrying  Value

Adjustments

Carrying

Value

Third party debt:

Short term borrowings

2.92

%

$

294


$

-


$

294


$

579


$

-


$

579


Novelis Inc.

Floating rate Term Loan Facility, due June 2022

3.00

%

1,796


(53

)

(B) 

1,743


1,787


(25

)

(B) 

1,762


8.375% Senior Notes, due December 2017

8.375

%

-


-


-


1,100


(6

)

1,094


8.75% Senior Notes, due December 2020

8.75

%

-


-


-


1,400


(15

)

1,385


Capital lease obligations, due through July 2017

3.64

%

2


-


2


5


-


5


Novelis Corporation

5.875% Senior Notes, due September 2026

5.875

%

1,500


(23

)

(B)

1,477


-


-



-


6.25% Senior Notes, due August 2024

6.25

%

1,150


(19

)

(B)

1,131


-


-


-


Novelis Korea Limited

Bank loans, due through September 2020 (KRW 205 billion)

2.62

%

184


-


184


195


-


195


Novelis Switzerland S.A.

Capital lease obligation, due through December 2019 (Swiss francs (CHF) 17 million)

7.50

%

17


(1

)

(B)

16


23


(1

)

(B)

22


Novelis do Brasil Ltda.

BNDES loans, due through April 2021 (BRL 14 million)

5.90

%

4


-


4


5


(1

)

(B)

4


Other

Other debt, due through December 2020

5.01

%

1


-


1


1


-


1


Total debt

4,948


(96

)

4,852


5,095


(48

)

5,047


Less: Short term borrowings

(294

)

-


(294

)

(579

)

-


(579

)

Current portion of long-term debt

(121

)

-


(121

)

(47

)

-


(47

)

Long-term debt, net of current portion:

$

4,533


$

(96

)

$

4,437


$

4,469


$

(48

)

$

4,421


(A)

I nterest rates are the stated rates of interest on the debt instrument (not the effective interest rate) as of  March 31, 2017 , and therefore, exclude the effects of related interest rate swaps and accretion/amortization of fair value adjustments as a result of purchase accounting in connection with Hindalco's purchase of Novelis and accretion/amortization of debt issuance costs related to refinancing transactions and additional borrowings. We present stated rates of interest because they reflect the rate at which cash will be paid for future debt service.

(B)

Amounts include unamortized debt issuance costs and debt discounts.



100

Novelis Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



 Principal repayment requirements for our total debt over the next five years and thereafter using exchange rates as of March 31, 2017 for our debt denominated in foreign currencies) are as follows (in millions). 

As of March 31, 2017

Amount

Short-term borrowings and Current portion of long term debt due within one year

$

415


2 years

103


3 years

36


4 years

21


5 years

18


Thereafter

4,355


Total

$

4,948


Senior Secured Credit Facilities

As of March 31, 2017 , the senior secured credit facilities consisted of (i) a $1.8 billion five -year secured term loan credit facility (Term Loan Facility) and (ii) a $1.0 billion five -year asset based loan facility (ABL Revolver). As of March 31, 2017 , $18 million of the Term Loan Facility is due within one year.

In June 2015, we entered into a $200 million secured lien revolving loan facility (the Subordinated Lien Revolver) with a maturity date of September 10, 2016 . In June 2016, we amended the Subordinated Lien Revolver to downsize the facility to $150 million and extend the maturity date to October 30, 2016. The Subordinated Lien Revolver was subsequently extinguished in July 2016.

In January 2017, we entered into a new Term Loan Facility. The Agreement provided Novelis with $1.8 billion , and the proceeds were used to extinguish the existing Term Loan agreement originally maturing on June 2, 2022. We incurred lender fees and debt issuance costs of $56 million on the new Term Loan Facility which were capitalized and will be amortized as an increase to "Interest expense and amortization of debt issuance costs" over the term of this instrument, of which we paid $52 million . Additionally, we recorded "Loss on extinguishment of debt" of $22 million in the fourth quarter of fiscal 2017 related to this financing transaction.

    The Term Loan Facility matures on June 2, 2022 , subject to 0.25% quarterly amortization payments. The loans under the Term Loan Facility accrue interest at LIBOR plus 1.85% . The Term Loan Facility also requires customary mandatory prepayments with excess cash flow, asset sale and condemnation proceeds and proceeds of prohibited indebtedness, all subject to customary exceptions. The Term Loan may be prepaid, in full or in part, at any time at the Company's election without penalty or premium; provided that any optional prepayment in connection with a repricing amendment or refinancing through the issuance of lower priced debt made within six -months after the earlier of (i) completion of the initial syndication of the Term Loan and (ii) April 13, 2017 , will be subject to a 1.00% prepayment premium. The Term Loan Facility allows for additional term loans to be issued in an amount not to exceed $300 million (or its equivalent in other currencies) plus an unlimited amount if, after giving effect to such incurrence on a pro forma basis, the senior secured net leverage ratio does not exceed 3.00 to 1.00 . The lenders under the Term Loan Facility have not committed to provide any such additional term loans.

In October 2014, we amended and extended our ABL Revolver by entering into a $1.2 billion , five -year, senior secured ABL Revolver bearing an interest rate of LIBOR plus a spread of 1.50% to 2.00% plus a prime spread of 0.50% to 1.00% based on excess availability. In fiscal 2017, we elected to reduce the capacity of the ABL Revolver to $1.0 billion . The ABL Revolver has a provision that allows the facility to be increased by an additional $500 million . The ABL Revolver has various customary covenants including maintaining a minimum fixed charge coverage ratio of 1.25 to 1 if excess availability is less than the greater of (1) $110 million and (2) 12.5% of the lesser of (a) the maximum size of the ABL Revolver and (b) the borrowing base. The fixed charge coverage ratio will be equal to the ratio of (1) (a) ABL Revolver defined Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA") less (b) maintenance capital expenditures less (c) cash taxes; to (2) (a) interest expense plus (b) scheduled principal payments plus (c) dividends to the Company's direct holding company to pay certain taxes, operating expenses and management fees and repurchases of equity interests from employees, officers and directors. The ABL Revolver matures on October 6, 2019; provided that, in the event that any of the Notes, the Term Loan Facility, or certain other indebtedness are outstanding (and not refinanced with a maturity date later than April 6, 2020) 90 days prior to their respective maturity dates, then the ABL Revolver will mature 90 days prior to the maturity date for the Notes, the Term Loan Facility or such other indebtedness, as applicable; unless excess availability under the ABL Revolver is at least (i) 25% of the lesser of (x) the total ABL Revolver commitment and (y) the then applicable borrowing base and (ii) 20% of the lesser of (x) the total ABL Revolver commitment and (y) the then applicable borrowing base, and a minimum fixed charged ratio test of at least 1.25 to 1 is met.


101

Novelis Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



The senior secured credit facilities contain various affirmative covenants, including covenants with respect to our financial statements, litigation and other reporting requirements, insurance, payment of taxes, employee benefits and (subject to certain limitations) causing new subsidiaries to pledge collateral and guaranty our obligations. The senior secured credit facilities also include various customary negative covenants and events of default, including limitations on our ability to (1) make certain restricted payments, (2) incur additional indebtedness, (3) sell certain assets, (4) enter into sale and leaseback transactions, (5) make investments, loans and advances, (6) pay dividends or returns of capital and distributions beyond certain amounts, (7) engage in mergers, amalgamations or consolidations, (8) engage in certain transactions with affiliates, and (9) prepay certain indebtedness. The Term Loan Credit Agreement also contains a financial maintenance covenant, prohibiting the Company's senior secured net leverage ratio as of the last day of each fiscal quarter period and measured on a rolling four quarter basis from exceeding 3.50 to 1.00 , subject to customary equity cure rights. The senior secured credit facilities include a cross-default provision under which lenders could accelerate repayment of the loans if a payment or non-payment default arises under any other indebtedness with an aggregate principal amount of more than $100 million (or, in the case of the Term Loan Facility, under the ABL Revolver regardless of the amount outstanding). Substantially all of our assets are pledged as collateral under the senior secured credit facilities.

Short-Term Borrowings

As of March 31, 2017 , our short-term borrowings were $294 million consisting of $184 million of short-term loans under our ABL Revolver, $50 million in Novelis Brazil loans, and $59 million in Novelis China loans (CNY 405 million ) and $1 million of other short term borrowings.

As of March 31, 2017 , $20 million of the ABL Revolver was utilized for letters of credit, and we had $448 million in remaining availability under the ABL Revolver.

In fiscal years 2016 and 2017 , Novelis Korea entered into various short-term facilities, including revolving loan facilities and committed credit lines. As of March 31, 2017 , we had $211 million (KRW 236 billion ) in remaining availability under these facilities.

In fiscal year 2016, Novelis Middle East and Africa entered into various short-term facilities, including revolving loan facilities and committed credit lines. As of March 31, 2017 , we had $40 million in remaining availability under these facilities.

In December 2014, Novelis China entered into a committed facility. As of March 31, 2017 , we had $2 million (CNY 11 million ) in remaining availability under this facility.    

Senior Notes

On August 29, 2016 , Novelis Corporation, an indirect wholly owned subsidiary of Novelis Inc., issued $1.15 billion in aggregate principal amount of 6.25% Senior Notes Due 2024 (the 2024 Notes). The 2024 Notes are guaranteed, jointly and severally, on a senior unsecured basis, by Novelis Inc. and certain of its subsidiaries.

Additionally, on September 14, 2016 , Novelis Corporation issued $1.5 billion in aggregate principal amount of 5.875% Senior Notes Due 2026 (the 2026 Notes, and together with the 2024 Notes, the Notes). The 2026 Notes are guaranteed, jointly and severally, on a senior unsecured basis, by Novelis Inc. and certain of its subsidiaries.

The proceeds from the issuance of the 2024 Notes and the 2026 Notes were used to extinguish our 8.375% 2017 Senior Notes and our 8.75% 2020 Senior Notes, respectively. In addition, we paid combined tender offer premiums and issuance costs of $139 million associated with the refinancing transactions, including fees paid to lenders, arrangers, and outside professionals such as attorneys and rating agencies. We recorded a "Loss on extinguishment of debt" of $112 million in the second quarter of fiscal 2017 related to refinancing transactions. We incurred debt issuance costs of $45 million on the Notes which were capitalized and will be amortized as an increase to "Interest expense and amortization of debt issuance costs" over the term of these instruments.

The Notes contain customary covenants and events of default that will limit our ability and, in certain instances, the ability of certain of our subsidiaries to (1) incur additional debt and provide additional guarantees, (2) pay dividends or return capital beyond certain amounts and make other restricted payments, (3) create or permit certain liens, (4) make certain asset sales, (5) use the proceeds from the sales of assets and subsidiary stock, (6) create or permit restrictions on the ability of certain of the Company's subsidiaries to pay dividends or make other distributions to the Company, (7) engage in certain transactions with affiliates, (8) enter into sale and leaseback transactions, (9) designate subsidiaries as unrestricted subsidiaries and (10) consolidate, merge or transfer all or substantially all of our assets and the assets of certain of our subsidiaries. During any future period in which either Standard & Poor's Ratings Group, Inc. or Moody's Investors Service, Inc. have assigned an investment grade credit rating to the Notes and no default or event of default under the indenture has occurred and is


102

Novelis Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



continuing, most of the covenants will be suspended. The Notes include a cross-acceleration event of default triggered if (1) any other indebtedness with an aggregate principal amount of more than $100 million is (1) accelerated prior to its maturity or (2) not repaid at its maturity. As of March 31, 2017 , we were in compliance with the covenants in the Notes. The Notes also contain customary call protection provisions for our bond holders that extend through August 2022 for the 2024 Notes and through September 2024 for the 2026 Notes.

Korean Bank Loans

As of March 31, 2017 , Novelis Korea had $93 million (KRW 103 billion ) of outstanding long-term loans with various banks due within one year. All loans have variable interest rates with base rates tied to Korea's 91-day CD rate plus an applicable spread ranging from 0.91% to 1.58% .

Brazil BNDES Loans

Novelis Brazil entered into loan agreements with Brazil's National Bank for Economic and Social Development (the BNDES loans) related to the plant expansion in Pindamonhangaba, Brazil (Pinda). As of March 31, 2017 , there are $2 million of BNDES loans due within one year.

Other Long-term Debt

In December 2004, we entered into a fifteen -year capital lease obligation with Alcan for assets in Sierre, Switzerland, which has an interest rate of 7.5% and fixed quarterly payments of CHF 1.7 million , (USD $1.7 million ).

During fiscal 2013 and 2014, Novelis Inc. entered into various five -year capital lease arrangements to upgrade and expand our information technology infrastructure.

As of March 31, 2017 , we had $1 million of other debt, including certain capital lease obligations, with due dates through December 2020.

Interest Rate Swaps

We use interest rate swaps to manage our exposure to changes in benchmark interest rates which impact our variable-rate debt. See Note 15 - Financial Instruments and Commodity Contracts for further information about these interest rate swaps.



103

Novelis Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)




12.    SHARE-BASED COMPENSATION

The Company's board of directors has authorized long term incentive plans (LTIPs), under which Hindalco stock appreciation rights (Hindalco SARs), Novelis stock appreciation rights (Novelis SARs), phantom restricted stock units (RSUs), and Novelis Performance Units (Novelis PUs) are granted to certain executive officers and key employees.

The Hindalco SARs vest at the rate of 25%  or 33% per year, subject to the achievement of an annual performance target, and expire 7 years from their original grant date. The performance criterion for vesting of the Hindalco SARs is based on the actual overall Novelis operating EBITDA compared to the target established and approved each fiscal year. The minimum threshold for vesting each year is 75% of each annual target operating EBITDA. Given that the performance criterion is based on an earnings target in a future period for each fiscal year, the grant date of the awards for accounting purposes is generally not established until the performance criterion has been defined.

Each Hindalco SAR is to be settled in cash based on the difference between the market value of one Hindalco share on the date of grant and the market value on the date of exercise. Each Novelis SAR is to be settled in cash based on the difference between the fair value of one Novelis phantom share on the original date of grant and the fair value of a phantom share on the date of the exercise. The amount of cash paid to settle Hindalco SARs and Novelis SARs is limited to two and a half or three times the target payout , depending on the plan year. The Hindalco SARs and Novelis SARs do not transfer any shareholder rights in Hindalco or Novelis to a participant. The Hindalco SARs and Novelis SARs are classified as liability awards and are remeasured at fair value each reporting period until the SARs are settled.

    In May 2016, the Company's board of directors approved the issuance of Novelis PUs which have a fixed $100 value per unit and will vest in full three years from the grant date, subject to specific performance criteria compared to the established target. The Company made a voluntary offer to the participants with outstanding Novelis SARs granted for fiscal years 2012 through 2016 to exchange their Novelis SARs for an equivalently valued number of Novelis PUs. The voluntary exchange resulted in 1,054,662 Novelis SARs being modified into PUs which are not based on Novelis' nor Hindalco's fair values and are accounted for outside the scope of ASC 718, Compensation - Stock Compensation. This exchange was accounted for as a modification. There were 108,549 of Novelis SARs that remain outstanding as of March 31, 2017.

The RSUs are based on Hindalco's stock price. The RSUs vest either in full three years from the grant date or 33% per year over three years, subject to continued employment with the Company, but are not subject to performance criteria. Each RSU is to be settled in cash equal to the market value of one Hindalco share. The payout on the RSUs is limited to three times the market value of one Hindalco share measured on the original date of grant. The RSUs are classified as liability awards and expensed over the requisite service period (three years) based on the Hindalco stock price as of each balance sheet date.

On May 13, 2013, the Company's board of directors amended the long-term incentive plans for fiscal years 2010 - 2013 (FY 2010 Plan), fiscal years 2011- 2014 (FY 2011 Plan), fiscal years 2012 - 2015 (FY 2012 Plan) and fiscal years 2013 - 2016 (FY 2013 Plan). The amendment gave each participant the option to cancel a portion of their outstanding Hindalco SARs for a lump-sum cash payment and/or the issuance of new Novelis SARs. The remaining Hindalco SARs and the new Novelis SARs continue to vest according to the terms and conditions of the original grant.

Total compensation expense related to Hindalco SARs, Novelis SARs, and RSUs under the plans for the respective periods is presented in the table below (in millions). These amounts are included in "Selling, general and administrative expenses" in our consolidated statements of operations. As the performance criteria for fiscal years 2018, 2019 and 2020 have not yet been established, measurement periods for Hindalco SARs and Novelis SARs relating to those periods have not yet commenced. As a result, only compensation expense for vested and current year Hindalco SARs and Novelis SARs has been recorded.


Year Ended March 31,

2017

2016

2015

Total compensation expense (income)

$

21


$

(2

)

$

9



104

Novelis Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



The table below shows the RSUs activity for the year ended March 31, 2017 .

Number of

RSUs

Grant Date Fair

Value

(in Indian Rupees)

Aggregate

Intrinsic

Value (USD

in millions)

RSUs outstanding as of March 31, 2016

4,582,725


124.52


$

7


Granted

5,382,251


92.20


-


Exercised

(1,374,877

)

108.37


2


Forfeited/Cancelled

(877,115

)

117.18


-


RSUs outstanding as of March 31, 2017

7,712,984


105.68


$

23


The table below shows Hindalco SARs activity for the year ended March 31, 2017 .

Number of

Hindalco SARs

Weighted

Average

Exercise Price

(in Indian Rupees)

Weighted Average

Remaining

Contractual Term

(In years)

Aggregate

Intrinsic

Value (USD

in millions)

SARs outstanding as of March 31, 2016

21,493,712


125.65


4.4


$

-


Granted

3,687,728


92.52


6.1


-


Exercised

(7,175,896

)

118.92


-


7


Forfeited/Cancelled

(2,844,311

)

117.00


-


-


SARs outstanding as of March 31, 2017

15,161,233


122.16


4.4


18


SARs exercisable as of March 31, 2017

4,422,990


139.54


2.8


$

4


The table below shows the Novelis SARs activity for the year ended March 31, 2017 .


Number of
Novelis SARs

Weighted
Average
Exercise Price
(in USD)

Weighted Average
Remaining
Contractual Term
(In years)

Aggregate
Intrinsic
Value (USD
in millions)

SARs outstanding as of March 31, 2016

1,341,883


$

80.00


5.1


$

-


Exercised

(12,739

)

64.40


-


-


Forfeited/Cancelled

(1,220,595

)

79.85


-


-


SARs outstanding as of March 31, 2017

108,549


83.57


3.5


-


SARs exercisable as of March 31, 2017

65,185


$

86.89


2.8


$

-



The fair value of each unvested Hindalco SAR was estimated using the following assumptions:

Year ended March 31,

2017

2016

2015

Risk-free interest rate

5.82% - 6.99%


7.23% - 7.68%


7.75% - 7.79%


Dividend yield

0.51

%

1.14

%

0.78

%

Volatility

35% - 44%


43% - 44%


39% - 46%



The fair value of each unvested Novelis SAR was estimated using the following assumptions:

Year ended March 31,

2017

2016

2015

Risk-free interest rate

0.78% - 1.95%


0.89% - 1.39%


0.96% - 1.59%


Dividend yield

-

%

-

%

-

%

Volatility

25% - 28%


38% - 41%


27% - 34%


The fair value of each unvested Hindalco SAR was based on the difference between the fair value of a long call and a short call option. The fair value of each of these call options was determined using the Monte Carlo Simulation model. We used historical stock price volatility data of Hindalco on the National Stock Exchange of India to determine expected volatility assumptions. The risk-free interest rate is based on Indian treasury yields interpolated for a time period corresponding to the


105

Novelis Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



remaining contractual life. The forfeiture rate is estimated based on actual historical forfeitures. The dividend yield is estimated to be the annual dividend of the Hindalco stock over the remaining contractual lives of the Hindalco SARs. The value of each vested Hindalco SAR is remeasured at fair value each reporting period based on the excess of the current stock price over the exercise price, not to exceed the maximum payout as defined by the plans. The fair value of the Hindalco SARs is being recognized over the requisite performance and service period of each tranche, subject to the achievement of any performance criteria.

The fair value of each unvested Novelis SAR was based on the difference between the fair value of a long call and a short call option. The fair value of each of these call options was determined using the Monte Carlo Simulation model. We used the historical volatility of comparable companies to determine expected volatility assumptions. The risk-free interest rate is based on U.S. treasury yields for a time period corresponding to the remaining contractual life. The forfeiture rate is estimated based on actual historical forfeitures of Hindalco SARs. The value of each vested Novelis SAR is remeasured at fair value each reporting period based on the percentage increase in the current Novelis phantom stock price over the exercise price, not to exceed the maximum payout as defined by the plans. The fair value of the Novelis SARs is being recognized over the requisite performance and service period of each tranche, subject to the achievement of any performance criteria.

The cash payments made to settle SAR liabilities were $7 million , $2 million , and $8 million , in the years ended March 31, 2017 , 2016 , and 2015 , respectively. Total cash payments made to settle Hindalco RSUs were $2 million , $5 million , and $3 million in the years ended March 31, 2017 , 2016 and 2015 , respectively. Unrecognized compensation expense related to the non-vested Hindalco SARs (assuming all future performance criteria are met) was $8 million which is expected to be recognized over a weighted average period of 1.5 years . Unrecognized compensation expense related to the non-vested Novelis SARs (assuming all future performance criteria are met) was less than $1 million , which is expected to be recognized over a weighted average period of 1.4 years . Unrecognized compensation expense related to the RSUs was $11 million , which will be recognized over the remaining weighted average vesting period of 1 year .


106

Novelis Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)




13.    POSTRETIREMENT BENEFIT PLANS

Our pension obligations relate to: (1) funded defined benefit pension plans in the U.S., Canada, Switzerland, and the U.K.; (2) unfunded defined benefit pension plans in Germany; (2) unfunded lump sum indemnities payable upon retirement to employees in France and Italy; and (4) partially funded lump sum indemnities in South Korea. Our other postretirement obligations (Other Benefits, as shown in certain tables below) include unfunded health care and life insurance benefits provided to retired employees in the U.S., Canada, and Brazil. We have combined our domestic (i.e. Canadian Plans) and foreign (i.e. All other Plans other than Canadian Plans) postretirement benefit plan disclosures because our domestic benefit obligation is not significant as compared to our total benefit obligation, as our foreign benefit obligation is 95% of the total benefit obligation, and the assumptions used to value domestic and foreign plans were not significantly different.

During fiscal year 2015 and as a result of the sale of our North America foil operations, $11 million of benefits were transferred out of the pension plan along with a corresponding amount of plan assets resulting in settlement accounting. Various other pension plans recognized settlements totaling $3 million as a result of restructuring initiatives and other factors. The settlements resulted in an insignificant impact to the statement of operations.

In October 2014, the Society of Actuaries published an updated mortality table and mortality improvement scale for U.S. plans. We recognized an increase of $33 million to our benefit obligation and net actuarial loss as a result of updating mortality assumptions applicable to our U.S. plans. These deferred costs will be amortized on a straight-line basis to net periodic benefit costs in future years.

In June 2014, the Company amended its U.S. non-union retiree medical plan to extend retirees' option to participate in a Retiree Health Access Exchange (RHA). For calendar years 2014 through 2017, the Company will subsidize a portion of the retiree medical premium rates of the RHA. The Company will not provide a subsidy beginning in calendar year 2018. The amendment to the plan resulted in a plan remeasurement and recognition of prior service costs of approximately $11 million which is being amortized on a straight-line basis through December 31, 2017, subject to an annual remeasurement adjustment.

In August 2013, the Company amended its U.S. non-union retiree medical plan. Beginning January 2014, the health care benefits provided by the Company to retirees' was discontinued and replaced with the retirees' option to participate in a new Retiree Health Access Exchange. For calendar year 2014 and 2015, the Company will subsidize a portion of the retiree medical premium rates of the RHA. The amendment resulted in the Company no longer providing a subsidy beginning in calendar year 2016. The amendments to the plan resulted in a plan remeasurement and recognition of a negative plan amendment, which reduced our obligation by $97 million as of August 31, 2013. The negative plan amendment, net of unrecognized actuarial losses resulted in a credit balance of $70 million recorded in AOCI as of August 31, 2013. The $70 million is being amortized, on a straight-line basis, as a reduction to net periodic benefit cost from September 1, 2013 through December 31, 2015, subject to an annual remeasurement adjustment.

Employer Contributions to Plans

For pension plans, our policy is to fund an amount required to provide for contractual benefits attributed to service to-date, and amortize unfunded actuarial liabilities typically over periods of 15 years or less. We also participate in savings plans in Canada and the U.S., as well as defined contribution pension plans in the U.S., U.K., Canada, Germany, Italy, Switzerland and Brazil. We contributed the following amounts (in millions) to all plans.

Year Ended March  31,

2017

2016

2015

Funded pension plans

$

26


$

28


$

28


Unfunded pension plans

15


12


13


Savings and defined contribution pension plans

25


24


18


Total contributions

$

66


$

64


$

59


During fiscal year 2018 , we expect to contribute $29 million to our funded pension plans, $16 million to our unfunded pension plans and $25 million to our savings and defined contribution pension plans.




107

Novelis Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



Benefit Obligations, Fair Value of Plan Assets, Funded Status and Amounts Recognized in Financial Statements

The following tables present the change in benefit obligation, change in fair value of plan assets and the funded status for pension and other benefits (in millions).

Pension Benefits

Other Benefits

Year Ended

March  31,

Year Ended
March  31,

2017

2016

2017

2016

Benefit obligation at beginning of period

$

1,868


$

1,863


$

151


$

139


Service cost

45


47


6


5


Interest cost

59


59


6


5


Members' contributions

4


5


-


-


Benefits paid

(74

)

(65

)

(8

)

(10

)

Amendments

2


-


-


-


Curtailments, settlements and special termination benefits

(4

)

(1

)

-


-


Actuarial losses (gains)

35


(43

)

(3

)

11


       Other

(4

)

(1

)

-


-


Currency (gains) losses

(66

)

4


1


1


Benefit obligation at end of period

$

1,865


$

1,868


$

153


$

151


Benefit obligation of funded plans

$

1,594


$

1,578


$

-


$

-


Benefit obligation of unfunded plans

271


290


153


151


Benefit obligation at end of period

$

1,865


$

1,868


$

153


$

151


Pension Benefits

Year Ended

March 31,

2017

2016

Change in fair value of plan assets

Fair value of plan assets at beginning of period

$

1,177


$

1,233


Actual return on plan assets

106


(21

)

Members' contributions

4


5


Benefits paid

(74

)

(65

)

Company contributions

37


39


Settlements

(4

)

(1

)

       Other

(3

)

(1

)

Currency

(43

)

(12

)

Fair value of plan assets at end of period

$

1,200


$

1,177



108

Novelis Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



March 31,

2017

2016

Pension

Benefits

Other

Benefits

Pension

Benefits

Other

Benefits

Funded status

Funded status at end of period:

Assets less the benefit obligation of funded plans

$

(394

)

$

-


$

(401

)

$

-


Benefit obligation of unfunded plans

(271

)

(153

)

(290

)

(151

)

$

(665

)

$

(153

)

$

(691

)

$

(151

)

As included in our consolidated balance sheets within Total assets / (Total liabilities)

Other non- current assets

$

2


$

-


$

-


$

-


Accrued expenses and other current liabilities

(12

)

(10

)

(13

)

(9

)

Accrued postretirement benefits

(655

)

(143

)

(678

)

(142

)

$

(665

)

$

(153

)

$

(691

)

$

(151

)

The postretirement amounts recognized in "Accumulated other comprehensive loss," before tax effects, are presented in the table below (in millions), and includes the impact related to our equity method investments. Amounts are amortized to net periodic benefit cost over the group's average future service life of the employees or the group's average life expectancy.

March 31,

2017

2016

Pension

Benefits

Other

Benefits

Pension

Benefits

Other

Benefits

Net actuarial losses

$

(375

)

$

(16

)

$

(444

)

$

(22

)

Prior service credit

4


7


9


6


Total postretirement amounts recognized in Accumulated other comprehensive (loss) income

$

(371

)

$

(9

)

$

(435

)

$

(16

)

The estimated amounts that will be amortized from "Accumulated other comprehensive loss" into net periodic benefit costs in fiscal year 2018 (exclusive of equity method investments) are $34 million for pension benefit costs related to net actuarial losses of $35 million partially offset by prior service credits of less than $1 million , and $2 million for other postretirement benefits, related to amortization of prior service costs of less than $1 million and net actuarial losses of $1 million .

The postretirement changes recognized in "Accumulated other comprehensive loss," before tax effects, are presented in the table below (in millions), and include the impact related to our equity method investments.

March 31,

2017

2016

Pension

Benefits

Other

Benefits

Pension

Benefits

Other

Benefits

Beginning balance in Accumulated other comprehensive (loss) income

$

(435

)

$

(16

)

$

(439

)

$

18


Curtailments, settlements, and special termination benefits

1


-


-


-


Net actuarial gain (loss)

11


2


(25

)

(11

)

Prior service cost

(2

)

-


-


-


Amortization of:


Prior service credits

(2

)

1


(2

)

(27

)

Actuarial losses (gains)

43


4


41


4


Effect of currency exchange

13


-


(10

)

-


Total postretirement amounts recognized in Accumulated other comprehensive (loss) income

$

(371

)

$

(9

)

$

(435

)

$

(16

)



109

Novelis Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)







Pension Plan Obligations

The projected benefit obligation, accumulated benefit obligation and fair value of plan assets are presented in the table below (in millions).

March 31,

2017

2016

The projected benefit obligation and accumulated benefit obligation for all defined benefit pension plans:

       Projected benefit obligation

$

1,865


$

1,868


       Accumulated benefit obligation

$

1,711


$

1,692


Pension plans with projected benefit obligations in excess of plan assets:

       Projected benefit obligation

$

1,769


$

1,868


       Fair value of plan assets

$

1,103


$

1,177


Pension plans with accumulated benefit obligations in excess of plan assets:

       Accumulated benefit obligation

$

1,581


$

1,567


       Fair value of plan assets

$

1,049


$

1,039


Pension plans with projected benefit obligations less than plan assets:

       Projected benefit obligation

$

96


$

-


       Fair value of plan assets

$

97


$

-


 Future Benefit Payments

Expected benefit payments to be made during the next ten fiscal years are listed in the table below (in millions).

Pension Benefits

Other Benefits

2018

$

67


$

6


2019

71


6


2020

76


7


2021

79


8


2022

84


9


2023 through 2027

481


52


Total

$

858


$

88



110

Novelis Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



Components of Net Periodic Benefit Cost

The components of net periodic benefit cost for the respective periods are listed in the table below (in millions).

Pension Benefits

Other Benefits

Year Ended

March 31,

Year Ended
March 31,

2017

2016

2015

2017

2016

2015

Net periodic benefit costs

Service cost

$

45


$

47


$

43


$

6


$

5


$

5


Interest cost

59


59


66


6


5


5


Expected return on assets

(61

)

(67

)

(69

)

-


-


-


Amortization - losses

40


37


22


4


4


5


Amortization - prior service credit

(2

)

(2

)

(2

)

2


(27

)

(37

)

Curtailment, settlement, and special termination

losses (gains)

1


-


1


-


-


(1

)

Net periodic benefit cost (income)

$

82


$

74


$

61


$

18


$

(13

)

$

(23

)

Proportionate share of non-consolidated affiliates' pension costs

8


9


7


-


-


-


Total net periodic benefit costs (income) recognized

$

90


$

83


$

68


$

18


$

(13

)

$

(23

)

Actuarial Assumptions and Sensitivity Analysis

The weighted average assumptions used to determine benefit obligations and net periodic benefit costs for the respective periods are listed in the table below.

Pension Benefits

Other Benefits

Year Ended

March 31,

Year Ended

March 31,

2017

2016

2015

2017

2016

2015

Weighted average assumptions used to determine benefit obligations

Discount rate

3.2

%

3.3

%

3.1

%

4.1

%

4.0

%

3.6

%

Average compensation growth

3.1

%

3.1

%

3.1

%

3.5

%

3.5

%

3.5

%

Weighted average assumptions used to determine net periodic benefit cost

Discount rate

3.3

%

3.1

%

4.0

%

4.0

%

3.6

%

4.1

%

Average compensation growth

3.1

%

3.1

%

3.1

%

3.5

%

3.5

%

3.5

%

Expected return on plan assets

5.4

%

5.6

%

6.1

%

-

%

-

%

-

%

In selecting the appropriate discount rate for each plan, for pension and other postretirement plans in Canada, the U.S., U.K., and other Euro zone countries, we used spot rate yield curves and individual bond matching models. For other countries we used published long-term high quality corporate bond indices with adjustments made to the index rates based on the duration of the plans' obligation.

In estimating the expected return on assets of a pension plan, consideration is given primarily to its target allocation, the current yield on long-term bonds in the country where the plan is established, and the historical risk premium of equity or real estate over long-term bond yields in each relevant country. The approach is consistent with the principle that assets with higher risk provide a greater return over the long-term. The expected long-term rate of return on plan assets is 5.0% in fiscal 2018 .

We provide unfunded health care and life insurance benefits to our retired employees in Canada, the U.S. and Brazil, for which we paid $8 million , $10 million , and $10 million in fiscal 2017 , 2016 and 2015 , respectively. The assumed health care cost trend used for measurement purposes is 7.0% for fiscal 2018 , decreasing gradually to 5% in 2026 and remaining at that level thereafter.


111

Novelis Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



A change of one percentage point in the assumed health care cost trend rates would have the following effects on our other benefits (in millions).

1% Increase

1% Decrease

Sensitivity Analysis

Effect on service and interest costs

$

2


$

(2

)

Effect on benefit obligation

$

15


$

(13

)

In addition, we provide post-employment benefits, including disability, early retirement and continuation of benefits (medical, dental, and life insurance) to our former or inactive employees, which are accounted for on the accrual basis in accordance with ASC No. 712, Compensation - Retirement Benefits . "Other long-term liabilities" and "Accrued expenses and other current liabilities" on our consolidated balance sheets include $9 million and $4 million , respectively, as of March 31, 2017 , for these benefits. Comparatively, "Other long-term liabilities" and "Accrued expenses and other current liabilities" on our consolidated balance sheets include $12 million and $5 million , respectively, as of March 31, 2016 .

Investment Policy and Asset Allocation

The Company's overall investment strategy is to achieve a mix of approximately 50% of investments for long-term growth (equities, real estate) and 50% for near-term benefit payments (debt securities, other) with a wide diversification of asset categories, investment styles, fund strategies and fund managers. Since most of the defined benefit plans are closed to new entrants, we expect this strategy to gradually shift more investments toward near-term benefit payments.

Each of our funded pension plans is governed by an Investment Fiduciary, who establishes an investment policy appropriate for the pension plan. The Investment Fiduciary is responsible for selecting the asset allocation for each plan, monitoring investment managers, monitoring returns versus benchmarks and monitoring compliance with the investment policy. The targeted allocation ranges by asset class, and the actual allocation percentages for each class are listed in the table below.

Asset Category

Target

Allocation  Ranges

Allocation in

Aggregate as of

March 31,

2017

2016

Equity

15-55%

32%

32%

Fixed income

45-77%

49%

62%

Real estate

0-15%

3%

2%

Other

0-16%

17%

5%


112

Novelis Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)




Fair Value of Plan Assets

The following pension plan assets are measured and recognized at fair value on a recurring basis (in millions). Please see Note 17- Fair value measurements for a description of the fair value hierarchy. The U.S. and Canadian pension plan assets are invested exclusively in commingled funds and classified in Level 2, and the U.K., Switzerland, and South Korea pension plan assets are invested in both direct investments (Levels 1 and 2) and commingled funds (Level 2).

Pension Plan Assets


March 31, 2017
Fair  Value Measurements Using

March 31, 2016
Fair  Value Measurements Using

Level 1

Level 2

Level 3

Total

Level 1

Level 2

Level 3

Total

Equity

-


-


-


-


-


-


-


-


Fixed income

136


54


-


190


131


44


-


175


Real estate

-


-


-


-


-


-


-


-


Cash and cash equivalents

8


-


-


8


9


-


-


9


Other

-


-


-


-


-


-


-


-


Investments measured at net asset value (A)

-


-


-


1,002


-


-


-


993


Total

$

144


$

54


$

-


$

1,200


$

140


$

44


$

-


$

1,177


(A) Certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been categorized in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the statement of financial position.



113

Novelis Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)




14.    CURRENCY (GAINS) LOSSES

The following currency (gains) losses are included in "Other expense (income), net" in the accompanying consolidated statements of operations (in millions).

Year Ended March 31,

2017

2016

2015

Loss (gain) on remeasurement of monetary assets and liabilities, net

$

30


$

(55

)

$

14


Loss released from accumulated other comprehensive loss

-


1


3


(Gain) loss recognized on balance sheet remeasurement currency exchange contracts, net

(35

)

52


10


Currency (gains) losses, net

$

(5

)

$

(2

)

$

27


The following currency losses are included in "Accumulated other comprehensive loss, net of tax" and "Noncontrolling interests" in the accompanying consolidated balance sheets (in millions).

Year Ended March 31,

2017

2016

2015

Cumulative currency translation adjustment - beginning of period

$

(197

)

$

(214

)

$

90


Effect of changes in exchange rates

(75

)

17


(304

)

Sale of investment in foreign entities (A)

16


-


-


Cumulative currency translation adjustment - end of period

$

(256

)

$

(197

)

$

(214

)


(A) We reclassified $16 million of cumulative currency losses from AOCI to "Other expense (income), net" in the twelve months ended March 31, 2017. Refer to Note 18 - Other expense (income), net for further details.


114

Novelis Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



15.    FINANCIAL INSTRUMENTS AND COMMODITY CONTRACTS

The following tables summarize the gross fair values of our financial instruments and commodity contracts as of March 31, 2017 and 2016 (in millions):

March 31, 2017

Assets

Liabilities

Net Fair Value

Current

Noncurrent(A)

Current

Noncurrent(A)

Assets/(Liabilities)

Derivatives designated as hedging instruments:

Cash flow hedges

Aluminum contracts

$

-


$

-


$

(69

)

$

-


$

(69

)

Currency exchange contracts

26


1


(1

)

(3

)

23


Energy contracts

1


-


-


(9

)

(8

)

Total derivatives designated as hedging instruments

27


1


(70

)

(12

)

(54

)

Derivatives not designated as hedging instruments

Aluminum contracts

57


1


(68

)

(1

)

(11

)

Currency exchange contracts

29


-


(13

)

-


16


Total derivatives not designated as hedging instruments

86


1


(81

)

(1

)

5


Total derivative fair value

$

113


$

2


$

(151

)

$

(13

)

$

(49

)

March 31, 2016

Assets

Liabilities

Net Fair Value

Current

Noncurrent(A)

Current

Noncurrent(A)

Assets/(Liabilities)

Derivatives designated as hedging instruments:

Cash flow hedges

Aluminum contracts

$

10


$

-


$

(2

)

$

-


$

8


Currency exchange contracts

15


5


(3

)

(5

)

12


Energy contracts

-


-


(4

)

-


(4

)

Interest rate swaps

-


-


-


(1

)

(1

)

Net Investment hedges

Currency exchange contracts

-


-


(1

)

-


(1

)

Total derivatives designated as hedging instruments

25


5


(10

)

(6

)

14


Derivatives not designated as hedging instruments

Aluminum contracts

24


-


(26

)

-


(2

)

Currency exchange contracts

39


-


(39

)

(1

)

(1

)

Energy contracts

-


1


(10

)

-


(9

)

Total derivatives not designated as hedging instruments

63


1


(75

)

(1

)

(12

)

Total derivative fair value

$

88


$

6


$

(85

)

$

(7

)

$

2


(A)

The noncurrent portions of derivative assets and liabilities are included in "Other long-term assets-third parties" and in "Other long-term liabilities", respectively, in the accompanying consolidated balance sheets.


115

Novelis Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



Aluminum

We use derivative instruments to preserve our conversion margins and manage the timing differences associated with metal price lag. We use over-the-counter derivatives indexed to the London Metals Exchange (LME) (referred to as our "aluminum derivative forward contracts") to reduce our exposure to fluctuating metal prices associated with the period of time between the pricing of our purchases of inventory and the pricing of the sale of that inventory to our customers, which is known as "metal price lag." We also purchase forward LME aluminum contracts simultaneously with our sales contracts with customers that contain fixed metal prices. These LME aluminum forward contracts directly hedge the economic risk of future metal price fluctuations to better match the selling price of the metal with the purchase price of the metal. The volatility in local market premiums also results in metal price lag.

Price risk exposure arises from commitments to sell aluminum in future periods at fixed prices. We identify and designate certain LME aluminum forward contracts as fair value hedges of the metal price risk associated with fixed price sales commitments that qualify as firm commitments. We did not have any outstanding aluminum forward purchase contracts designated as fair value hedges as of March 31, 2017. We had less than 1 kt of outstanding aluminum forward purchase contracts designated as fair value hedges as of March 31, 2016. One kilotonne (kt) is 1,000 metric tonnes.

The following table summarizes the amount of gain (loss) recognized on fair value hedges of metal price risk (in millions):

Amount of Gain (Loss)

Recognized on Changes in Fair Value

Year Ended March 31,

2017

2016

Fair value hedges of metal price risk

Derivative contracts

$

-


$

(2

)

Designated hedged items

-


2


Net ineffectiveness (A)

$

-


$

-



(A)

Effective portion is recorded in "Net sales" and net ineffectiveness in "Other expense (income), net". There was no amount excluded from the assessment of hedge effectiveness related to Fair Value Hedges.

Price risk arises due to fluctuating aluminum prices between the time the sales order is committed and the time the order is shipped. We identify and designate certain LME aluminum forward purchase contracts as cash flow hedges of the metal price risk associated with our future metal purchases that vary based on changes in the price of aluminum. We did not have any outstanding aluminum forward purchase contracts designated as cash flow hedges as of March 31, 2017. We had 1 kt of outstanding aluminum forward purchase contracts designated as cash flow hedges as of March 31, 2016.

Price risk exposure arises due to the timing lag between the LME based pricing of raw material aluminum purchases and the LME based pricing of finished product sales. We identify and designate certain LME aluminum forward sales contracts as cash flow hedges of the metal price risk associated with our future metal sales that vary based on changes in the price of aluminum. Generally, such exposures do not extend beyond two years in length. We had 391 kt and 301 kt of outstanding aluminum forward sales contracts designated as cash flow hedges as of March 31, 2017 and 2016 , respectively.

The remaining aluminum derivative contracts are not designated as accounting hedges. As of March 31, 2017 and 2016 , we had 89 kt and 76 kt, respectively, of outstanding aluminum sales contracts not designated as hedges. The average duration of undesignated contracts is less than one year .

The following table summarizes our notional amount (in kt).

March 31,

2017

2016

Hedge type

Purchase (sale)

Cash flow purchases

-


1


Cash flow sales

(391

)

(301

)

Not designated

(89

)

(76

)

Total, net

(480

)

(376

)



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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



Foreign Currency

We use foreign exchange forward contracts, cross-currency swaps and options to manage our exposure to changes in exchange rates. These exposures arise from recorded assets and liabilities, firm commitments and forecasted cash flows denominated in currencies other than the functional currency of certain operations.

We use foreign currency contracts to hedge expected future foreign currency transactions, which include capital expenditures. These contracts cover the same periods as known or expected exposures. We had total notional amounts of $465 million and $601 million in outstanding foreign currency forwards designated as cash flow hedges as of March 31, 2017 and 2016 , respectively.

We use foreign currency contracts to hedge our foreign currency exposure to our net investment in foreign subsidiaries. We did not have any outstanding foreign currency forwards designated as net investment hedges as of March 31, 2017. We had $36 million of outstanding foreign currency forwards designated as net investment hedges as of March 31, 2016 .

As of March 31, 2017 and 2016 , we had outstanding foreign currency exchange contracts with a total notional amount of $683 million and $636 million , respectively, to primarily hedge balance sheet remeasurement risk, which were not designated as hedges. Contracts representing the majority of this notional amount will mature during the first quarter of fiscal 2018 and offset the remeasurement impact.

Energy

We owned an interest in an electricity swap that matured January 5, 2017 which we formerly designated as a cash flow hedge of our exposure to fluctuating electricity prices. As of March 31, 2011, due to significant credit deterioration of our counterparty, we discontinued hedge accounting for this electricity swap. We did not have any outstanding notional megawatt hours remaining as of March 31, 2017. As of March 31, 2016 , the fair value of this electricity swap was a liability of $9 million .

On December 31, 2015, we entered into an agreement to extend the electricity swap contract for an additional five years, effective January 6, 2017 and maturing on January 5, 2022. As of March 31, 2017 and 2016 , 1 million of notional megawatt hours was outstanding and the fair value of this swap was a liability of $9 million and an asset of $1 million, respectively. The electricity swap was designated as a cash flow hedge in the first quarter of fiscal year 2017.

We use natural gas forward purchase contracts to manage our exposure to fluctuating energy prices in North America. We had 6 million MMBTUs designated as cash flow hedges as of March 31, 2017 , and the fair value was an asset of $1 million . There were 5 million MMBTUs of natural gas forward purchase contracts designated as cash flow hedges as of March 31, 2016 and the fair value was a liability of $4 million . As of March 31, 2017 and 2016 , we had less than 1 million of MMBTUs of natural gas forward purchase contracts that were not designated as hedges. The fair value as of March 31, 2017 and 2016 was a liability of less than $1 million and a liability of $1 million , respectively, for the forward purchase contracts not designated as hedges. The average duration of undesignated contracts is less than one year in length. One MMBTU is the equivalent of one decatherm, or one million British Thermal Units.

We use diesel fuel forward purchase contracts to manage our exposure to fluctuating fuel prices in North America, which are not designated as hedges as of March 31, 2017 . As of March 31, 2017 and 2016 , we had 8 million gallons and 4 million gallons, respectively, of diesel fuel forward purchase contracts outstanding, and the fair value was a liability of less than $1 million . The average duration of undesignated contracts is approximately one year in length.

Interest Rate

As of March 31, 2017 , we swapped $119 million ( KRW 133 billion ) floating rate loans to a weighted average fixed rate of 2.92% . All swaps expire concurrent with the maturity of the related loans. As of March 31, 2017 and 2016 , $119 million ( KRW 133 billion ) and $115 million ( KRW 133 billion ), respectively, were designated as cash flow hedges.

Gain (Loss) Recognition


The following table summarizes the gains (losses) associated with the change in fair value of derivative instruments not designated as hedges and the ineffectiveness of designated derivatives recognized in "Other expense (income), net" (in millions). Gains (losses) recognized in other line items in the consolidated statement of operations are separately disclosed within this footnote.



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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



Year Ended March 31,

2017

2016

2015

Derivative instruments not designated as hedges

Aluminum contracts

$

(44

)

$

47


$

(31

)

Currency exchange contracts

40


(60

)

(5

)

Energy contracts (A)

8


3


2


Gain (loss) recognized in "Other expense (income), net"

4


(10

)

(34

)

Derivative instruments designated as hedges

(Loss) gain recognized in "Other expense (income), net" (B)

(25

)

17


19


Total (loss) gain recognized in "Other expense (income), net"

$

(21

)

$

7


$

(15

)

Balance sheet remeasurement currency exchange contract gains (losses)

$

35


$

(53

)

$

(13

)

Realized (losses) gains, net (C)

(61

)

64


(2

)

Unrealized gains (losses) on other derivative instruments, net

5


(4

)

-


Total (loss) gain recognized in "Other expense (income), net"

$

(21

)

$

7


$

(15

)

(A)

Includes amounts related to de-designated electricity swap, diesel fuel forward contracts and natural gas swaps not designated as hedges.

(B)

Amount includes: forward market premium/discount excluded from hedging relationship and ineffectiveness on designated aluminum and foreign currency capital expenditure contracts; releases to income from AOCI on balance sheet remeasurement contracts; and ineffectiveness of fair value hedges involving aluminum derivatives.

(C)

During the year ended March 31, 2017, the level of undesignated aluminum derivatives was higher due to the volatility in LME pricing. During the year ended March 31, 2016, the level of undesignated aluminum derivatives was higher due to the volatility in the local market premium component of our net selling prices, forward market premium/discount excluded from hedging relationship and ineffectiveness on designated aluminum and foreign currency capital expenditure contracts.


The following table summarizes the impact on AOCI and earnings of derivative instruments designated as cash flow and net investment hedges (in millions). Within the next twelve months, we expect to reclassify $43 million of losses from AOCI to earnings, before taxes.

Amount of Gain (Loss)

Recognized in OCI

(Effective Portion)

Amount of Gain (Loss)

Recognized in "Other (Income) Expense,  net" (Ineffective and

Excluded Portion)

Year Ended March 31,

Year Ended March 31,

2017

2016

2015

2017

2016

2015

Cash flow hedging derivatives

Aluminum contracts

$

(137

)

$

84


$

(26

)

$

(27

)

$

17


$

24


Currency exchange contracts

48


(7

)

(44

)

2


1


(2

)

Energy contracts

(7

)

(5

)

(12

)

(1

)

(1

)

-


Interest rate swaps

-


(1

)

(1

)

-


-


-


Total cash flow hedging derivatives

(96

)

71


(83

)

(26

)

17


22


Net investment derivatives

Currency exchange contracts

-


(2

)

11


-


-


-


Total

$

(96

)

$

69


$

(72

)

$

(26

)

$

17


$

22





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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



Gain (Loss) Reclassification

Amount of Gain (Loss)

Reclassified from AOCI into Income/(Expense)

(Effective Portion)

Year Ended March 31,

Location of Gain (Loss)

Reclassified from AOCI into

Earnings

Cash flow hedging derivatives

2017

2016

2015

Energy contracts (A)

$

(4

)

$

(5

)

$

(5

)

Other expense (income), net

Energy contracts (C)

(4

)

(10

)

-


Cost of goods sold (B)

Aluminum contracts

(55

)

83


(40

)

Cost of goods sold (B)

Aluminum contracts

(3

)

-


-


Net sales

Currency exchange contracts

18


(44

)

(14

)

Cost of goods sold (B)

Currency exchange contracts

2


(4

)

(1

)

Selling, general and administrative expenses

Currency exchange contracts

7


(9

)

18


Net sales

Currency exchange contracts

-


(1

)

(3

)

Other expense (income), net

Currency exchange contracts

-


-


7


Gain on assets held for sale, net

Currency exchange contracts

(1

)

(1

)

(1

)

Depreciation and amortization

Interest rate swaps

-


(1

)

-


Interest expense

Total

(40

)

8


(39

)

(Loss) income before income taxes

12


(19

)

8


Income tax benefit (provision)

$

(28

)

$

(11

)

$

(31

)

Net loss

(A)

Includes amounts related to de-designated electricity swap. AOCI related to this swap was amortized to income over the remaining term of the hedged item.

(B)

"Cost of goods sold" is exclusive of depreciation and amortization.

(C)

Includes amounts related to natural gas swaps.


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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)




16.    ACCUMULATED OTHER COMPREHENSIVE LOSS

The following table summarizes the change in the components of accumulated other comprehensive loss net of tax and excluding "Noncontrolling interests", for the periods presented (in millions).


 (A)

Currency Translation

(B)

Cash Flow Hedges

(C)

Postretirement Benefit Plans

Total

Balance as of March 31, 2014

$

89


$

(20

)

$

(160

)

$

(91

)

Other comprehensive income before reclassifications

(302

)

(74

)

(118

)

(494

)

Amounts reclassified from AOCI, net

-


31


(7

)

24


Net current-period other comprehensive loss

(302

)

(43

)

(125

)

(470

)

Balance as of March 31, 2015

(213

)

(63

)

(285

)

(561

)

Other comprehensive loss (income) before reclassifications

17


41


(15

)

43


Amounts reclassified from AOCI, net

-


11


7


18


Net current-period other comprehensive income (loss)

17


52


(8

)

61


Balance as of March 31, 2016

(196

)

(11

)

(293

)

(500

)

Other comprehensive (loss) income before reclassifications

(76

)

(63

)

22


(117

)

Amounts reclassified from AOCI, net

16


28


28


72


Net current-period other comprehensive (loss) income

(60

)

(35

)

50


(45

)

Balance as of March 31, 2017

$

(256

)

$

(46

)

$

(243

)

$

(545

)

(A) The $16 million in currency translation reclassified from AOCI relates to CTA that was written off as part of our sale of the Aluminum Company of Malaysia Berhad (ALCOM) business. Refer to Note 18 - Other (Income) Expense, Net for additional information.

(B)

For additional information on our cash flow hedges see Note 15 - Financial Instruments and Commodity Contracts.

(C)

For additional information on our postretirement benefit plans see Note 13 - Postretirement Benefit Plans.


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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)




17.    FAIR VALUE MEASUREMENTS

We record certain assets and liabilities, primarily derivative instruments, on our consolidated balance sheets at fair value. We also disclose the fair values of certain financial instruments, including debt and loans receivable, which are not recorded at fair value. Our objective in measuring fair value is to estimate an exit price in an orderly transaction between market participants on the measurement date. We consider factors such as liquidity, bid/offer spreads and nonperformance risk, including our own nonperformance risk, in measuring fair value. We use observable market inputs wherever possible. To the extent observable market inputs are not available, our fair value measurements will reflect the assumptions we used. We grade the level of the inputs and assumptions used according to a three-tier hierarchy:

Level 1 - Unadjusted quoted prices in active markets for identical, unrestricted assets or liabilities we have the ability to access at the measurement date.

Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.

Level 3 - Unobservable inputs for which there is little or no market data, which require us to develop our own assumptions based on the best information available as what market participants would use in pricing the asset or liability.

The following section describes the valuation methodologies we used to measure our various financial instruments at fair value, including an indication of the level in the fair value hierarchy in which each instrument is generally classified.

Derivative Contracts

For certain derivative contracts with fair values based upon trades in liquid markets, such as aluminum, foreign exchange, natural gas and diesel fuel forward contracts and options, valuation model inputs can generally be verified and valuation techniques do not involve significant judgment. The fair values of such financial instruments are generally classified within Level 2 of the fair value hierarchy.

The majority of our derivative contracts are valued using industry-standard models with observable market inputs as their basis, such as time value, forward interest rates, volatility factors, and current (spot) and forward market prices. We generally classify these instruments within Level 2 of the valuation hierarchy. Such derivatives include interest rate swaps, cross-currency swaps, foreign currency contracts, aluminum derivative contracts, natural gas and diesel fuel forward contracts.

We classify derivative contracts that are valued based on models with significant unobservable market inputs as Level 3 of the valuation hierarchy. Our two electricity swaps, which are our only Level 3 derivative contracts, represent agreements to buy electricity at a fixed price at our Oswego, New York facility. Forward prices are not observable for this market, so we must make certain assumptions based on available information we believe to be relevant to market participants. We use observable forward prices for a geographically nearby market and adjust for 1) historical spreads between the cash prices of the two markets, and 2) historical spreads between retail and wholesale prices.

For the electricity swap that matured January 5, 2017, we did not have any outstanding notional megawatt hours remaining as of March 31, 2017.

For the electricity swap maturing January 5, 2022, the average forward price at March 31, 2017 , estimated using the method described above, was $40 per megawatt hour, which represented less than $1 premium over forward prices in the nearby observable market. The actual rate from the most recent swap settlement was approximately $37 per megawatt hour. Each $1 per megawatt hour decline in price decreases the valuation of the electricity swap by $1 million .

For Level 2 and 3 of the fair value hierarchy, where appropriate, valuations are adjusted for various factors such as liquidity, bid/offer spreads and credit considerations (nonperformance risk). We regularly monitor these factors along with significant market inputs and assumptions used in our fair value measurements and evaluate the level of the valuation input according to the fair value hierarchy.  This may result in a transfer between levels in the hierarchy from period to period. As of March 31, 2017 and March 31, 2016 , we did not have any Level 1 derivative contracts. No amounts were transferred between levels in the fair value hierarchy.

All of the Company's derivative instruments are carried at fair value in the statements of financial position prior to considering master netting agreements.


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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



The following table presents our derivative assets and liabilities which were measured and recognized at fair value on a recurring basis classified under the appropriate level of the fair value hierarchy as of March 31, 2017 and March 31, 2016 (in millions). The table below also discloses the net fair value of the derivative instruments after considering the impact of master netting agreements.

March 31,

2017

2016

Assets

Liabilities

Assets

Liabilities

Level 2 instruments

Aluminum contracts

$

58


$

(138

)

$

34


$

(28

)

Currency exchange contracts

56


(17

)

59


(49

)

Energy contracts

1


-


-


(5

)

Interest rate swaps

-


-


-


(1

)

Total level 2 instruments

115


(155

)

93


(83

)

Level 3 instruments

Energy contracts

-


(9

)

1


(9

)

Total level 3 instruments

-


(9

)

1


(9

)

Total gross

$

115


$

(164

)

$

94


$

(92

)

Netting adjustment (A)

$

(46

)

$

46


$

(31

)

$

31


Total net

$

69


$

(118

)

$

63


$

(61

)


(A) Amounts represent the impact of legally enforceable master netting agreements that allow the Company to settle positive and negative positions with the same counterparties.

We recognized gains of $5 million for the year ended March 31, 2017 related to Level 3 financial instrument that matured in January 2017. These gains were included in "Other expense (income), net."

The following table presents a reconciliation of fair value activity for Level 3 derivative contracts (in millions).

Level 3 –

Derivative

Instruments (A)

Balance as of March 31, 2015

$

(16

)

Unrealized gain included in earnings (B)

9


Settlements

(1

)

Balance as of March 31, 2016

$

(8

)

Unrealized/realized gain included in earnings (B)

11


Unrealized/realized (loss) included in AOCI (C)

(9

)

Settlements

(3

)

Balance as of March 31, 2017

$

(9

)

(A) Represents net derivative liabilities.

(B) Included in "Other expense (income), net"

(C) Included in "Change in fair value of effective portion of cash flow hedges, net"


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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)



Financial Instruments Not Recorded at Fair Value

The table below presents the estimated fair value of certain financial instruments not recorded at fair value on a recurring basis (in millions). The table excludes short-term financial assets and liabilities for which we believe carrying value approximates fair value. We value long-term receivables and long-term debt using Level 2 inputs. Valuations are based on either market and/or broker ask prices when available or on a standard credit adjusted discounted cash flow model using market observable inputs.

March 31,

2017

2016

Carrying

Value

Fair

Value

Carrying

Value

Fair

Value

Assets

Long-term receivables from related parties

$

15


$

14


$

16


$

17


Liabilities

Total debt - third parties (excluding short term borrowings)

$

4,558


$

4,797


$

4,468


$

4,659




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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)




18.    OTHER EXPENSE (INCOME)

"Other expense (income), net" is comprised of the following (in millions).

Year Ended March 31,

2017

2016

2015

Foreign currency remeasurement (gain) loss, net (A)

$

(5

)

$

(2

)

$

27


(Gain) loss on change in fair value of other unrealized derivative instruments, net (B)

(5

)

4


-


Loss (gain) on change in fair value of other realized derivative instruments, net (B)

61


(64

)

2


Loss on sale of assets, net

6


4


5


Loss on sale of business (C)

27


-


-


Loss on Brazilian tax litigation, net (D)

5


5


7


Interest income

(11

)

(13

)

(7

)

Gain on business interruption insurance recovery (E)

-


(10

)

(19

)

Other, net

17


8


2


Other expense (income), net

$

95


$

(68

)

$

17


(A)

Includes "(Gain) loss recognized on balance sheet remeasurement currency exchange contracts, net."

(B)

See Note 15 - Financial Instruments and Commodity Contracts for further details.

(C)

On September 30, 2016, we sold our 59.15% equity interest in Aluminum Company of Malaysia Berhad (ALCOM), a previously consolidated subsidiary, to Towerpack Sdn. Bhd. for $12 million (MYR 48 million ), which was recorded in "Accounts Receivable, net" as of September 30, 2016 , and received in October 2016. The transaction includes our interest in the Bukit Raja, Malaysia facility, which processed aluminum within the construction/industrial and heavy and light gauge foil markets, and the wholly-owned entity Alcom Nikkei Specialty Coatings Sdn. Berhad. This sale is part of our continued strategy to exit certain non-core operations and align our growth strategy in the premium product markets. The sale resulted in a loss of $27 million during the year ended March 31, 2017 . As a result of this sale, we no longer own any interest in ALCOM.

(D)

See Note 20 - Commitments and Contingencies – Brazil Tax and Legal Matters for further details.

(E)

We experienced an outage at the hotmill in the Logan facility in North America due to an unexpected motor failure in fiscal 2015 and recognized gains of $10 million and $13 million during the years ended March 31, 2016 and March 31, 2015 , respectively. Additionally, the fiscal year 2015 gain also includes an insurance settlement which resulted in a gain of $6 million related to lost shipments and profits resulting from an electrical short circuit impacting a hot mill motor at one of our facilities in our Europe segment in fiscal 2015.




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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)




19.    INCOME TAXES

We are subject to Canadian and United States federal, state, and local income taxes as well as other foreign income taxes. The domestic (Canada) and foreign components of our "Income before income taxes" (and after removing our "Equity in net loss of non-consolidated affiliates") are as follows (in millions).

Year Ended March 31,

2017

2016

2015

Domestic (Canada)

$

(286

)

$

(313

)

$

(267

)

Foreign (all other countries)

491


324


434


Pre-tax income before equity in net loss of non-consolidated affiliates

$

205


$

11


$

167


The components of the "Income tax provision" are as follows (in millions).

Year Ended March 31,

2017

2016

2015

Current provision:

Domestic (Canada)

$

8


$

5


$

4


Foreign (all other countries)

139


134