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EXCEL - IDEA: XBRL DOCUMENT - PYXUS INTERNATIONAL, INC.Financial_Report.xls
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EX-31.01 - CERTIFICATION - PYXUS INTERNATIONAL, INC.aoi_ex3101.htm
EX-32 - CERTIFICATION - PYXUS INTERNATIONAL, INC.aoi_ex32.htm
EX-31.02 - CERTIFICATION - PYXUS INTERNATIONAL, INC.aoi_ex3102.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

     
FORM 10-Q
     

þ  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED June 30, 2014

o  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______ TO _______.
 
 
Alliance One International, Inc.
(Exact name of registrant as specified in its charter)

Virginia
001-13684
54-1746567
_____________________________
_____________________________
_____________________________
(State or other jurisdiction of incorporation)
(Commission File Number)
(I.R.S. Employer
Identification No.)

8001 Aerial Center Parkway
Morrisville, NC 27560-8417  (Address of principal executive offices)

(919) 379-4300
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes  þ   No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes þ    No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
 Large accelerated filer  o  Accelerated filer  þ
 Non-accelerated filer    o
 (Do not check if a smaller reporting company)
 Smaller reporting company  o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
                                               Yes o                                                                              No þ

As of July 31, 2014, the registrant had 88,313,899 shares outstanding of Common Stock (no par value) excluding 7,853,121 shares owned by a wholly owned subsidiary.
 


 
 
 
 
 
 
 
Alliance One International, Inc. and Subsidiaries
 
Table of Contents
 
 
Page No.
Part I.
Financial Information
 
   
 
Item 1.
Financial Statements (Unaudited)
 
   
 
Condensed Consolidated Statements of Operations
 
 
Three Months Ended June 30, 2014 and 2013
3
   
 
Condensed Consolidated Statements of Comprehensive Income (Loss)
 
 
Three Months Ended June 30, 2014 and 2013
4
     
 
Condensed Consolidated Balance Sheets
 
 
June 30, 2014 and 2013 and March 31, 2014
5
   
 
Condensed Statements of Consolidated Stockholders’ Equity
 
 
Three Months Ended June 30, 2014 and 2013
6
     
 
Condensed Consolidated Statements of Cash Flows
 
 
Three Months Ended June 30, 2014 and 2013
7
   
 
Notes to Condensed Consolidated Financial Statements
8 – 22
     
 
Item 2.
Management's Discussion and Analysis
 
   
of Financial Condition and Results of Operations
23 – 31
       
 
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
31
       
 
Item 4.
Controls and Procedures
31
   
Part II.
Other Information
 
     
 
Item 1.
Legal Proceedings
32
       
 
Item 1A.
Risk Factors
32
       
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
32
       
 
Item 3.
Defaults Upon Senior Securities
32
       
 
Item 4.
Mine Safety Disclosures
32
       
 
Item 5.
Other Information
32
       
 
Item 6.
Exhibits
32
 
Signature
33
   
Index of Exhibits
34
 
 
 
 

 
 
Part I.  Financial Information

Item 1. Financial Statements

Alliance One International, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended June 30, 2014 and 2013
(Unaudited)
 
   
Three Months Ended
June 30,
(in thousands, except per share data)
    2014       2013
               
Sales and other operating revenues
  $ 249,017     $ 383,887  
Cost of goods and services sold
    213,913       355,393  
Gross profit
    35,104       28,494  
Selling, general and administrative expenses
    31,325       35,491  
Other income
    800       1,244  
Restructuring and asset impairment charges
          2,196  
Operating income (loss)
    4,579       (7,949 )
Debt retirement expense
          17  
Interest expense (includes debt amortization of $1,552 and $2,511 for the three months in 2014 and 2013, respectively)
    26,922       28,843  
Interest income
    1,351       1,986  
Loss before income taxes and other items
    (20,992 )     (34,823 )
Income tax expense (benefit)
    (2,914 )     868  
Equity in net loss of investee companies
    (485 )     (1,042 )
Net loss
    (18,563 )     (36,733 )
    Less: Net income attributable to noncontrolling
    interests
    55       129  
Net loss attributable to Alliance One International, Inc.
  $ (18,618 )   $ (36,862 )
                 
                 
Loss per share:
               
     Basic
  $ (.21 )   $ (.42 )
     Diluted
  $ (.21 )   $ (.42 )
                 
Weighted average number of shares outstanding:
               
     Basic
    87,991       87,473  
     Diluted
    87,991       87,473  
 
See notes to condensed consolidated financial statements
 
 
3

 
 
Alliance One International, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Three Months Ended June 30, 2014 and 2013
(Unaudited)
 
   
Three Months Ended
 June 30,
 
(in thousands)
 
2014
   
2013
 
             
Net loss
  $ (18,563 )   $ (36,733 )
                 
Other comprehensive income, net of tax:
               
Currency translation adjustment
    208       749  
Defined benefit pension amounts reclassified to income
    414       522  
Total other comprehensive income, net of tax
    622       1,271  
Total comprehensive loss
    (17,941 )     (35,462 )
Comprehensive income attributable to noncontrolling interests
    55       129  
Comprehensive loss attributable to Alliance One International, Inc.
  $ (17,996 )   $ (35,591 )
                 
 
See notes to condensed consolidated financial statements
 
 
4

 
 
Alliance One International, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
(in thousands)
June 30, 2014
 
June 30, 2013
 
March 31, 2014
ASSETS
               
Current assets
               
Cash and cash equivalents
$
126,199
   
$
148,804
   
$
234,742
 
Trade and other receivables, net
186,860
   
197,061
   
176,459
 
Accounts receivable, related parties
76,672
   
108,898
   
44,869
 
Inventories
1,014,413
   
1,134,403
   
760,607
 
Advances to tobacco suppliers
58,563
   
102,567
   
49,598
 
Recoverable income taxes
5,991
   
7,527
   
4,789
 
Current deferred taxes
13,376
   
21,838
   
10,013
 
Prepaid expenses
34,213
   
39,781
   
27,667
 
Other current assets
14,074
   
20,548
   
12,053
 
Total current assets
1,530,361
   
1,781,427
   
1,320,797
 
Other assets
               
Investments in unconsolidated affiliates
50,927
   
23,964
   
50,876
 
Goodwill and other intangible assets
34,235
   
30,269
   
34,725
 
Long-term recoverable income taxes
5,644
   
   
5,423
 
Deferred income taxes
40,878
   
51,857
   
40,927
 
Other deferred charges
19,711
   
10,992
   
19,038
 
Other noncurrent assets
39,015
   
46,478
   
42,255
 
 
190,410
   
163,560
   
193,244
 
Property, plant and equipment, net
258,613
   
268,765
   
261,246
 
 
$
1,979,384
   
$
2,213,752
   
$
1,775,287
 
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Current liabilities
               
Notes payable to banks
$
541,199
   
$
634,671
   
$
212,669
 
Accounts payable
89,054
   
92,548
   
115,177
 
Due to related parties
8,824
   
12,893
   
63,384
 
Advances from customers
40,889
   
68,035
   
22,133
 
Accrued expenses and other current liabilities
105,518
   
109,549
   
72,694
 
Income taxes
9,619
   
7,410
   
10,784
 
Long-term debt current
4,329
   
6,350
   
4,556
 
Total current liabilities
799,432
   
931,456
   
501,397
 
                 
Long-term debt
825,423
   
861,403
   
900,363
 
Deferred income taxes
5,752
   
6,397
   
5,788
 
Liability for unrecognized tax benefits
9,526
   
8,315
   
9,436
 
Pension, postretirement and other long-term liabilities
79,719
   
99,078
   
81,415
 
 
920,420
   
975,193
   
997,002
 
Commitments and contingencies
               
Stockholders’ equity
June 30, 2014
June 30, 2013
March 31, 2014
               
Common Stock—no par value:
                       
Authorized shares
250,000
250,000
250,000
                 
Issued shares
96,167
95,494
96,012
 
466,267
   
461,448
   
465,682
 
Retained deficit
(172,606
)
 
(104,191
)
 
(153,988
)
Accumulated other comprehensive loss
(37,479
)
 
(53,921
)
 
(38,101
)
Total stockholders’ equity of Alliance One International, Inc.
256,182
   
303,336
   
273,593
 
Noncontrolling interests
3,350
   
3,767
   
3,295
 
Total equity
259,532
   
307,103
   
276,888
 
 
$
1,979,384
   
$
2,213,752
   
$
1,775,287
 
 
See notes to condensed consolidated financial statements
 
 
5

 
 
Alliance One International, Inc. and Subsidiaries
CONDENSED STATEMENTS OF CONSOLIDATED STOCKHOLDERS’ EQUITY
(Unaudited)
 
   
Attributable to Alliance One International, Inc.
             
                                     
               
Accumulated Other Comprehensive Loss
             
(in thousands)
 
Common
Stock
   
Retained
Deficit
   
Currency
Translation Adjustment
   
Pensions, Net
of Tax
   
Noncontrolling
Interests
   
Total
Equity
 
                                     
Balance, March 31, 2013
  $ 460,914     $ (67,329 )   $ (5,724 )   $ (49,468 )   $ 3,638     $ 342,031  
Net income (loss)
          (36,862 )                 129       (36,733 )
Stock-based compensation
    534                                 534  
Other comprehensive loss, net of tax
                749       522             1,271  
                                                 
Balance, June 30, 2013
  $ 461,448     $ (104,191 )   $ (4,975 )   $ (48,946 )   $ 3,767     $ 307,103  
                                                 
Balance, March 31, 2014
  $ 465,682     $ (153,988 )   $ (1,640 )   $ (36,461 )   $ 3,295     $ 276,888  
Net income (loss)
          (18,618 )                 55       (18,563 )
Stock-based compensation
    585                               585  
Other comprehensive loss, net of tax
                208       414             622  
                                                 
Balance, June 30, 2014
  $ 466,267     $ (172,606 )   $ (1,432 )   $ (36,047 )   $ 3,350     $ 259,532  
                                                 
 
See notes to condensed consolidated financial statements
 
 
6

 
 
Alliance One International, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended June 30, 2014 and 2013
(Unaudited)
 
(in thousands)
 
June 30, 2014
 
June 30, 2013
 
             
Operating activities
           
   Net loss
  $ (18,563 )   $ (36,733 )
   Adjustments to reconcile net loss to net cash used by operating activities:
               
      Depreciation and amortization
    7,500       8,689  
      Debt amortization/interest
    1,889       3,550  
     (Gain) loss on foreign currency transactions
    (331 )     9,972  
      Restructuring and asset impairment charges
          2,196  
      Stock-based compensation
    750       705  
      Changes in operating assets and liabilities, net
    (339,591 )     (227,805 )
      Other, net
    175       1,034  
   Net cash used by operating activities
    (348,171 )     (238,392 )
                 
Investing activities
               
   Purchases of property, plant and equipment
    (8,052 )     (7,471 )
   Proceeds from sale of property, plant and equipment
    409       492  
   Restricted cash
    (1,114 )     (283 )
   Other, net
    (719 )     (184 )
   Net cash used by investing activities
    (9,476 )     (7,446 )
   
Financing activities
               
   Net proceeds from short-term borrowings
    329,572       275,751  
   Proceeds from long-term borrowings
          105,000  
   Repayment of long-term borrowings
    (75,489 )     (75,495 )
   Debt issuance cost
    (4,125 )     (1,682 )
   Other, net
          (16 )
   Net cash provided by financing activities
    249,958       303,558  
                 
Effect of exchange rate changes on cash
    (854 )     (942 )
   
Increase (decrease) in cash and cash equivalents
    (108,543 )     56,778  
Cash and cash equivalents at beginning of period
    234,742       92,026  
Cash and cash equivalents at end of period
  $ 126,199     $ 148,804  
   
Other information:
               
      Cash paid for income taxes
  $ 2,638     $ 1,915  
      Cash paid for interest
  $ 5,380     $ 6,378  
      Cash received from interest
  $ (1,276 )   $ (3,521 )
                 
                 
 
See notes to condensed consolidated financial statements
 
 
7

 
 
Alliance One International, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)

1.  BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

Because of the seasonal nature of the Company’s business, the results of operations for any fiscal quarter will not necessarily be indicative of results to be expected for other quarters or a full fiscal year.  In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair statement of financial position, results of operation and cash flows at the dates and for the periods presented have been included.  Included in Operating Income (Loss) for the three months ended June 30, 2013 is a pretax charge of approximately $11,000 primarily resulting from reducing the estimate for recoveries of advances to tobacco suppliers in Zambia.  The unaudited information included in this Form 10-Q should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2014.
          On March 26, 2014, the Company sold 51% of a Brazilian subsidiary to China Tobacco and reported its remaining 49% interest in the subsidiary under the equity method of accounting at March 31, 2014.  As a result the June 30, 2014 Condensed Consolidated Balance Sheet, Condensed Consolidated Statement of Operations and Condensed Consolidated Statement of Cash Flows do not include the assets, liabilities, results of operations and cash flows of this subsidiary which were included in the June 30, 2013 financial statements.

Taxes Collected from Customers
Certain subsidiaries are subject to value added taxes on local sales.  These amounts have been included in sales and cost of sales and were $6,241 and $7,531 for the three months ended June 30, 2014 and 2013, respectively.

Other Deferred Charges
Other deferred charges are primarily deferred financing costs that are amortized over the life of the debt.

New Accounting Standards

Recently Adopted Accounting Pronouncements
On April 1, 2014, the Company adopted new accounting guidance on the financial presentation of an unrecognized tax benefit when a net operating loss (“NOL”) carryforward, a similar tax loss, or a tax credit carryforward exists. Companies are required to report an unrecognized tax benefit as a reduction in a deferred tax asset for a NOL or tax credit carryforward whenever the NOL or tax credit carryforward would be available to reduce the additional taxable income or tax due if the tax position is disallowed.  The adoption of this new accounting guidance had no material impact on the Company’s financial condition or results of operations.

Recent Accounting Pronouncements Not Yet Adopted
In May 2014, the Financial Accounting Standards Board ("FASB") issued new accounting guidance that outlines a single comprehensive model to use in accounting for revenue from contracts with customers. The primary objective of this accounting guidance is to recognize revenue that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which an entity expects to be entitled in exchange for those goods or services. This accounting guidance is effective for the Company on April 1, 2017. The Company is currently evaluating the impact of this new guidance and it may have a material impact on its financial condition or results of operations.

2.  INCOME TAXES

Accounting for Uncertainty in Income Taxes
As of June 30, 2014, the Company’s unrecognized tax benefits totaled $10,188, all of which would impact the Company’s effective tax rate if recognized.
         The Company recognizes interest and penalties related to unrecognized tax benefits in income tax expense.  As of June 30, 2014, accrued interest and penalties totaled $807 and $1,039 respectively.
         The Company expects to continue accruing interest expense related to the unrecognized tax benefits described above.  Additionally, the Company may be subject to fluctuations in the unrecognized tax liability due to currency exchange rate movements.
         
 
8

 
 
Alliance One International, Inc. and Subsidiaries

2.  INCOME TAXES (continued)
Accounting for Uncertainty in Income Taxes (continued)
         The Company does not foresee any reasonably possible changes in the unrecognized tax benefits in the next twelve months but acknowledges circumstances can change due to unexpected developments in the law.  In certain jurisdictions, tax authorities have challenged positions that the Company has taken that resulted in recognizing benefits that are material to its financial statements.  The Company believes it is more likely than not that it will prevail in these situations and accordingly has not recorded liabilities for these positions.  The Company expects the challenged positions to be settled at a time greater than twelve months from its balance sheet date.
         The Company and its subsidiaries file a U.S. federal consolidated income tax return as well as returns in several U.S. states and a number of foreign jurisdictions.  As of June 30, 2014, the Company’s earliest open tax year for U.S. federal income tax purposes was its fiscal year ended March 31, 2009.  Open tax years in state and foreign jurisdictions generally range from three to six years.

Provision for the Three Months Ended June 30, 2014
The effective tax rate used for the three months ended June 30, 2014 was 13.9% compared to (2.5)% for the three months ended June 30, 2013.  The effective tax rates for these periods are based on the current estimate of full year results including the effect of taxes related to discrete events which are recorded in the interim period in which they occur.  The Company expects the tax rate for the year ended March 31, 2015 to be 44.1% after absorption of discrete items.
         For the three months ended June 30, 2014, the Company recorded a discrete event adjustment benefit of $1,410, bringing the effective tax rate estimated for the three months of 7.2% to 13.9%.  This discrete event adjustment benefit relates primarily to net exchange losses on income tax accounts and net exchange gains related to liabilities for unrecognized tax benefits.  For the three months ended June 30, 2013 , the Company recorded a discrete event adjustment expense of $5,610, bringing the effective tax rate estimated for the three months of 13.6% to (2.5)%.  This discrete event adjustment expense relates primarily to net exchange losses on income tax accounts and net exchange gains related to liabilities for unrecognized tax benefits.  The significant difference in the estimated effective tax rate for the three months ended June 30, 2014 from the U.S. federal statutory rate is primarily due to net exchange losses on income tax accounts, foreign income tax rates lower than the U.S. rate and certain losses for which no benefit is currently recorded.

3.  GUARANTEES

The Company and certain of its foreign subsidiaries guarantee bank loans to suppliers to finance their crops.  Under longer-term arrangements, the Company may also guarantee financing on suppliers’ construction of curing barns or other tobacco production assets.  Guaranteed loans are generally repaid concurrent with the delivery of tobacco to the Company.  The Company is obligated to repay any guaranteed loan should the supplier default.  If default occurs, the Company has recourse against the supplier.  The Company also guarantees bank loans of certain unconsolidated subsidiaries in Asia, Brazil and Zimbabwe.
         The following table summarizes amounts guaranteed and the fair value of those guarantees:
 
    June 30, 2014    
June 30,  2013
   
March  31, 2014
 
Amounts guaranteed (not to exceed)
  $ 283,228     $ 102,221     $ 301,870  
Amounts outstanding under guarantee
    186,522       87,525       218,847  
Fair value of guarantees
    7,262       6,176       7,344  
                         
      
           Of the guarantees outstanding at June 30, 2014, all expire within one year.  The fair value of guarantees is recorded in Accrued Expenses and Other Current Liabilities in the Condensed Consolidated Balance Sheets and included in crop costs except for Zimbabwe and Brazil which are included in Accounts Receivable, Related Parties.
         In Brazil, certain suppliers obtain government subsidized rural credit financing from local banks that is guaranteed by the Company.  The Company withholds amounts owed to suppliers related to the rural credit financing of the supplier upon delivery of tobacco to the Company.  The Company remits payments to the local banks on behalf of the guaranteed suppliers.  Terms of rural credit financing are such that repayment is due to local banks based on contractual due dates.  As of June 30, 2014 and 2013 and March 31, 2014, respectively, the Company had balances of $15,863, $21,269 and $26,076 that were due to local banks on behalf of suppliers.  These amounts are included in Accounts Payable in the Condensed Consolidated Balance Sheets.
 
 
9

 

Alliance One International, Inc. and Subsidiaries
 
4.  RESTRUCTURING AND ASSET IMPAIRMENT CHARGES

The Company previously implemented several strategic initiatives in response to shifts in supply and demand balances and changing business models of its customers.  These initiatives were substantially complete at March 31, 2014.  The Company continues to focus on improving factory efficiencies and other core components of its business.  As part of this focus, the Company agreed to a joint processing venture in Turkey during the three months ended June 30, 2013.   As a result, the Company recorded pretax charges of $1,893 in connection with the reduction in workforce including the effect on the Company's defined benefit pension plans of $1,261.  An asset impairment charge of $303 was recorded for certain processing equipment in connection with the new venture.
         The following table summarizes the restructuring charges recorded in the Company’s reporting segments during the three months ended June 30, 2014 and 2013, respectively:

   
Three Months Ended
 June 30,
 
Restructuring and Asset Impairment Charges
 
2014
   
2013
 
Employee separation and other cash charges:
           
Beginning balance
  $ 397     $ 668  
Period charges:
               
Severance charges
          632  
Total period charges
          632  
Payments through June 30
    (296 )     (156 )
Ending balance June 30
  $ 101     $ 1,144  
Asset impairment and other non-cash charges
  $     $ 1,564  
Total restructuring charges for the period
  $     $ 2,196  
 
   
Three Months Ended
 June 30,
 
Employee Separation and Other Cash Charges
 
2014
   
2013
 
Beginning balance:
  $ 397     $ 668  
   South America
           
   Value added services
           
   Other regions
    397       668  
Period charges:
  $     $ 632  
   South America
           
   Value added services
           
   Other regions
          632  
Payments through June 30
  $ (296 )   $ (156 )
   South America
           
   Value added services
           
   Other regions
    (296 )     (156 )
Ending balance June 30
  $ 101     $ 1,144  
   South America
           
   Value added services
           
   Other regions
    101       1,144  

5.  GOODWILL AND INTANGIBLES

Goodwill represents costs in excess of fair values assigned to the underlying net assets of acquired businesses.  Goodwill is not subject to amortization, but rather is tested for impairment annually or whenever events and circumstances indicate that an impairment may have occurred.  The Company has chosen the first day of the last quarter of its fiscal year as the date to perform its annual goodwill impairment test.
 
 
10

 

Alliance One International, Inc. and Subsidiaries
 
5.  GOODWILL AND INTANGIBLES (continued)
         The Company has no intangible assets with indefinite useful lives.  It does have intangible assets which are amortized.  The following table summarizes the changes in the Company’s goodwill and other intangibles for the three months ended June 30, 2014 and 2013:

         
Amortizable Intangibles
 
   
Goodwill (1)
 
Customer
Relationship 
Intangible
 
Production
and Supply 
Contract Intangibles
 
Internally
Developed Software 
Intangible
 
Total
Weighted average remaining useful
        life in years as of June 30, 2014
        10.75     6.50            
March 31, 2013 balance:
                             
Gross carrying amount
 
$
2,794
   
$
33,700
   
$
7,893
   
$
17,564
   
$
61,951
 
Accumulated amortization
 
   
(13,269
)
 
(3,657
)
 
(13,554
)
 
(30,480
)
Net March 31, 2013
 
2,794
   
20,431
   
4,236
   
4,010
   
31,471
 
Additions
 
   
   
   
221
   
221
 
Amortization expense
 
   
(421
)
 
(196
)
 
(806
)
 
(1,423
)
Net June 30, 2013
 
2,794
   
20,010
   
4,040
   
3,425
   
30,269
 
Additions
 
   
   
7,000
   
665
   
7,665
 
Amortization expense
 
   
(1,264
)
 
(899
)
 
(1,046
)
 
(3,209
)
Net March 31, 2014
 
2,794
   
18,746
   
10,141
   
3,044
   
34,725
 
Additions
 
   
   
   
269
   
269
 
Amortization expense
 
   
(421
)
 
(146
)
 
(192
)
 
(759
)
Net June 30, 2014
 
$
2,794
   
$
18,325
   
$
9,995
   
$
3,121
   
$
34,235
 
(1) Goodwill of $1,592 relates to the Other Regions segment and $1,202 relates to the Value Added Services segment.

         The following table summarizes the estimated intangible asset amortization expense for the next five years and beyond:

For Fiscal
Years Ended
 
Customer
Relationship 
Intangible
 
Production
and Supply 
Contract 
Intangible
 
Internally
Developed 
Software 
Intangible*
 
Total
July 1, 2014 through March 31, 2015
  $
1,264
    $
1,027
    $
1,038
    $
 3,329
 
2016
 
1,685
   
2,319
   
830
   
4,834
 
2017
 
1,685
   
1,405
   
655
   
3,745
 
2018
 
1,685
   
1,403
   
426
   
3,514
 
2019
 
1,685
   
1,397
   
172
   
3,254
 
Later
 
10,321
   
2,444
   
   
12,765
 
   
$
18,325
   
$
9,995
   
$
3,121
   
$
31,441
 
*  Estimated amortization expense for the internally developed software is based on costs accumulated as of June 30, 2014.  These estimates will change as new costs are incurred and until the software is placed into service in all locations.

6.  VARIABLE INTEREST ENTITIES

The Company holds variable interests in seven joint ventures that are accounted for under the equity method of accounting.  These joint ventures procure inventory on behalf of the Company and the other joint venture partners.  The variable interests relate to equity investments and advances made by the Company to the joint ventures.  In addition, the Company also guarantees one of its joint venture’s borrowings which also represents a variable interest in that joint venture.  The Company is not the primary beneficiary, as it does not have the power to direct the activities that most significantly impact the economic performance of the entities as a result of the entities’ management and board of directors structure.  Therefore, these entities are not consolidated.  At June 30, 2014 and 2013, and March 31, 2014, the Company’s investment in these joint ventures was $49,911, $22,944, and $49,860, respectively and is classified as Investments in Unconsolidated Affiliates in the Condensed Consolidated Balance Sheets.  The Company’s advances to these joint ventures at June 30, 2014 and 2013, and March 31, 2014 were $8,222, $296 and $10, respectively and are classified as Accounts Receivable, Related Parties in the Condensed Consolidated Balance Sheets.  The Company guaranteed an amount to two joint ventures not to exceed $137,333, $18,764 and $142,904 at June 30, 2014 and 2013, and March 31, 2014, respectively.  The investments, advances and guarantee in these joint ventures represent the Company’s maximum exposure to loss.
 
 
11

 
 
Alliance One International, Inc. and Subsidiaries
 
7.  SEGMENT INFORMATION

The Company purchases, processes, sells and stores leaf tobacco.  Tobacco is purchased in more than 35 countries and shipped to approximately 90 countries.  The sales, logistics and billing functions of the Company are primarily concentrated in service centers outside of the producing areas to facilitate access to its major customers.  Within certain quality and grade constraints, tobacco is fungible and, subject to these constraints, customers may choose to fulfill their needs from any of the areas where the Company purchases tobacco.
          Selling, logistics, billing, and administrative overhead, including depreciation, which originates primarily from the Company’s corporate and sales offices are allocated to the segments based upon segment operating income.  The Company reviews performance data from the purchase of the product or the service provided through sale based on the source of the product or service and all intercompany transactions are allocated to the operating segment that either purchases or processes the tobacco.
          On March 26, 2014, the Company sold 51% of a Brazilian subsidiary to China Tobacco and reports its remaining 49% interest under the equity method of accounting at March 31, 2014.  As a result the information for the three months ended June 30, 2014 does not include the assets or results of operations for this subsidiary which are included in the June 30, 2013 information.

          The following table presents the summary segment information for the three months ended June 30, 2014 and 2013:       
 
   
Three Months Ended
June 30,
 
   
2014
   
2013
 
Sales and other operating revenues:
           
    South America
  $ 62,123     $ 187,278  
    Value added services
    31,443       31,080  
    Other regions
    155,451       165,529  
    Total revenue
  $ 249,017     $ 383,887  
                 
Operating income (loss):
               
    South America
  $ 6,647     $ 6,852  
    Value added services
    2,876       2,572  
    Other regions
    (4,994 )     (17,373 )
Total operating income (loss)
    4,579       (7,949
                 
    Debt retirement expense
          17  
      Interest expense
    26,922       28,843  
      Interest income
    1,351       1,986  
Loss before income taxes and other items
  $ (20,992 )   $ (34,823 )
 
Analysis of Segment Assets
 
June 30, 2014
   
June 30, 2013
   
March 31, 2014
Segment assets:
                 
    South America
  $ 589,594     $ 769,199     $ 457,585  
    Value added services
    224,242       223,704       194,562  
    Other regions
    1,165,548       1,220,849       1,123,140  
    Total assets
  $ 1,979,384     $ 2,213,752     $ 1,775,287  

8.  EARNINGS PER SHARE

The weighted average number of common shares outstanding is reported as the weighted average of the total shares of common stock outstanding net of shares of common stock held by a wholly owned subsidiary.  Shares of common stock owned by the subsidiary were 7,853 at June 30, 2014 and 2013.  This subsidiary waives its right to receive dividends and it does not have the right to vote.
          Certain potentially dilutive options were not included in the computation of earnings per diluted share because their exercise prices were greater than the average market price of the shares of common stock during the period and their effect would be antidilutive.  These shares totaled 6,859 at a weighted average exercise price of $6.04 per share at June 30, 2014 and 6,960 at a weighted average exercise price of $6.05 per share at June 30, 2013.
 
 
12

 
 
Alliance One International, Inc. and Subsidiaries
 
8.  EARNINGS PER SHARE (continued)
          In connection with the offering of the Company’s 5 ½% Convertible Senior Subordinated Notes due 2014, issued on July 2, 2009 (the “Convertible Notes”), the Company entered into privately negotiated convertible note hedge transactions (the “convertible note hedge transactions”) equal to the number of shares that underlie the Company’s Convertible Notes.  These convertible note hedge transactions are expected to reduce the potential dilution of the Company’s common stock upon conversion of the Convertible Notes in the event that the value per share of common stock exceeds the initial conversion price of $5.0280 per share.  These shares were not included in the computation of earnings per diluted share because their inclusion would be antidilutive.
          The following table summarizes the computation of earnings per share for the three months ended June 30, 2014 and 2013, respectively.

   
Three Months Ended
 
   
June 30,
 
(in thousands, except per share data)
 
2014
         
2013
       
BASIC LOSS
                       
Net loss attributable to Alliance One International, Inc.
  $ (18,618 )         $ (36,862 )      
                             
SHARES
                           
   Weighted average number of shares outstanding
    87,991             87,473        
                             
BASIC LOSS PER SHARE
  $ (.21 )         $ (.42 )      
                             
DILUTED LOSS
                           
   Net loss attributable to Alliance One International, Inc.
  $ (18,618 )         $ (36,862 )      
   Plus interest expense on 5 ½ % convertible notes,
   net of tax
          *             *  
   Net loss attributable to Alliance One
         International, Inc. as adjusted
  $ (18,618 )           $ (36,862 )        
                                 
SHARES
                               
   Weighted average number of common shares
   outstanding
    87,991               87,473          
   Plus:  Restricted shares issued and shares applicable to
             stock options and restricted stock units, net of
             shares assumed to be purchased from proceeds
             at average market price
          *             *  
              Assuming conversion of 5 ½ % convertible
              notes at the time of issuance
          *             *  
              Shares applicable to stock warrants
          **             **  
   Adjusted weighted average number of common
   shares outstanding
    87,991               87,473          
DILUTED LOSS PER SHARE
  $ (.21 )           $ (.42 )        
                                 
* Assumed conversion of convertible notes at the beginning of the period has an antidilutive effect on earnings per share. All outstanding restricted shares and shares applicable to stock options and restricted stock units are excluded because their inclusion would have an antidilutive effect on the loss per share.
 
** For the three months ended June 30, 2014 and 2013, the warrants were not assumed exercised because the exercise price was more than the average price for the periods presented.
 

9.  STOCK-BASED COMPENSATION

The Company recorded stock-based compensation expense related to stock-based awards granted under its various employee and non-employee stock incentive plans of $750 and $705 for the three months ended June 30, 2014 and 2013, respectively.
          The Company’s shareholders approved amendments to the 2007 Incentive Plan (the “2007 Plan”) at its Annual Meeting of Shareholders on August 11, 2011 and August 6, 2009.  The 2007 Plan is an omnibus plan that provides the flexibility to grant a variety of equity awards including stock options, stock appreciation rights, stock awards, stock units, performance awards and incentive awards to officers, directors and employees of the Company.
          
 
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Alliance One International, Inc. and Subsidiaries

9.  STOCK-BASED COMPENSATION (continued)
          
          During the three months ended June 30, 2014 and 2013, respectively, the Company made the following stock-based compensation awards:
 
   
Three Months Ended
 
 
 
  June 30,  
  (in thousands, except grant date fair value)
 
2014
 
2013
 
  Restricted Stock Units
           
            Number Granted
 
220
   
643
 
            Grant Date Fair Value
$
2.72
 
$
3.85
 
  Cash-Settled Restricted Stock Units
           
            Number Granted
 
436
   
 —
 
            Grant Date Fair Value
2.72
  $
 
  Performance Based Stock Units
           
            Number Granted
 
220
   
643
 
            Grant Date Fair Value
$
2.72
 
$
3.85
 
  Cash-Settled Performance Based Stock Unites
           
            Number Granted
 
436
   
 
            Grant Date Fair Value
$
2.72
  $
 
 
          Under the terms of the Performance Based Stock Units, shares ultimately issued will be contingent upon specified business performance goals.

10.  CONTINGENCIES AND OTHER INFORMATION

Non-Income Tax
The government in the Brazilian State of Parana (“Parana”) issued a tax assessment on October 26, 2007 with respect to local intrastate trade tax credits that result primarily from tobacco transferred between states within Brazil.  The assessment for intrastate trade tax credits taken is $5,981 and the total assessment including penalties and interest at June 30, 2014 is $16,207.  The Company believes it has properly complied with Brazilian law and will contest any assessment through the judicial process.  Should the Company lose in the judicial process, the loss of the intrastate trade tax credits would have a material impact on the financial statements of the Company.
          The Company also has local intrastate trade tax credits in the Brazilian State of Rio Grande do Sul and the State of Santa Catarina.  These jurisdictions permit the sale or transfer of excess credits to third parties, however approval must be obtained from the tax authorities.  The Company has agreements with the state governments regarding the amounts and timing of credits that can be sold.  The tax credits have a carrying value of $11,426, which is net of impairment charges based on management’s expectations about future realization.  The intrastate trade tax credits will continue to be monitored for impairment in future periods based on market conditions and the Company’s ability to use or sell the tax credits.
          In 1969, the Brazilian government created a tax credit program that allowed companies to earn IPI tax credits (“IPI credits”) based on the value of their exports.  The government began to phase out this program in 1979, which resulted in numerous lawsuits between taxpayers and the Brazilian government.  The Company has a long legal history with respect to credits it earned while the IPI credit program was in effect.  In 2001, the Company won a claim related to certain IPI credits it earned between 1983 and 1990.  The Brazilian government appealed this decision and numerous rulings and appeals were rendered on behalf of both the government and the Company from 2001 through 2013.  Because of this favorable ruling, the Company began to use these earned IPI credits to offset federal taxes in 2004 and 2005, until it received a Judicial Order to suspend the IPI offsetting in 2005.  The value of the federal taxes offset in 2004 and 2005 was $24,142 and the Company established a reserve on these credits at the time of offsetting as they were not yet realizable due to the legal uncertainty that existed.  Specifically, the Company extinguished other federal tax liabilities using IPI credits and recorded a liability in Pension, Postretirement and Other Long-Term Liabilities to reflect that the credits were not realizable at that time due to the prevalent legal uncertainty.  On March 7, 2013, the Brazilian Supreme Court rendered a final decision in favor of the Company that recognized the validity of the IPI credits and secured the Company's right to benefit from the IPI credits earned from March 1983 to October 1990.  This final decision expressly stated the Company has the right to the IPI credits.  The Company estimated the total amount of the IPI credits to be approximately $94,316 at March 31, 2013.  Since the March 2013 ruling definitively (without the government's ability to appeal) granted the Company the ownership of the IPI credits generated between 1983 and 1990 the Company believed the amount of IPI credits that were used to offset other federal taxes in 2004 and 2005 were realizable beyond a reasonable doubt.  Accordingly, and at March 31, 2013, the Company recorded the $24,142 IPI credits it realized in the Statements of Consolidated Operations in Other Income.  No further benefit has been recognized pending the outcome of the judicial procedure to ascertain the final amount as those amounts have not yet been realized.
 
 
14

 
 
Alliance One International, Inc. and Subsidiaries

10.  CONTINGENCIES AND OTHER INFORMATION (continued)

Other
Mindo, S.r.l., the purchaser in 2004 of the Company's Italian subsidiary Dimon Italia, S.r.l., asserted claims against a subsidiary of the Company arising out of that sale transaction in an action filed before the Court of Rome on April 12, 2007. The claim involved a guaranty letter issued by a consolidated subsidiary of the Company in connection with the sale transaction. On November 11, 2013, the court issued its judgment in favor of the Companys subsidiary, rejecting the claims asserted by Mindo, S.r.l., and awarding the Companys subsidiary legal costs of €48. The period for appeal of the courts judgment is pending, and it is uncertain whether Mindo S.r.l. will pursue an appeal.
       In accordance with generally accepted accounting principles, the Company records all known asset retirement obligations (ARO) for which the liability can be reasonably estimated. Currently, it has identified an ARO associated with one of its facilities that requires it to restore the land to its initial condition upon vacating the facility. The Company has not recognized a liability under generally accepted accounting principles for this ARO because the fair value of restoring the land at this site cannot be reasonably estimated since the settlement date is unknown at this time. The settlement date is unknown because the land restoration is not required until title is returned to the government, and the Company has no current or future plans to return the title. The Company will recognize a liability in the period in which sufficient information is available to reasonably estimate its fair value.
       
11.  DEBT ARRANGEMENTS

Notes Payable to Banks increased $328,530 from March 31, 2014 due to the seasonal financing for the purchasing and processing of the South America and Africa crops.
          On April 15, 2014, the Company’s senior secured credit facility with a syndicate of banks automatically reduced to approximately $210,300 from approximately $303,900 per the amended and restated agreement dated August 1, 2013.   At June 30, 2014, borrowings under the senior secured credit facility were $100,000.  The Company continuously monitors its compliance with the covenants of its senior secured credit facility and its senior notes.  Significant changes in market conditions or other factors could adversely affect the Company's business and future debt covenant compliance thereunder.  As a result, the Company may not be able to maintain compliance with the covenants over the next twelve months.  If the Company were unable to maintain compliance with the covenants in the Senior Secured Credit Facility agreement, as amended from time-to-time, the Company would seek modification to the existing agreement to further amend covenants and extend maturities.  If the Company were unable to obtain modification, in a scenario where it is required, the Company could decide to pay off outstanding amounts and terminate the agreement.  In such case, the liquidity provided by the agreement would not be available and the Company believes that it has sufficient liquidity from operations and other available funding sources to meet future requirements.
          As amended, the senior secured credit facility restricts the Company from paying any dividends during the remaining term of the facility.  In addition, the indenture governing the Company's senior notes contains similar restrictions and also prohibits the payment of dividends and other distributions if the Company fails to satisfy a ratio of consolidated EBITDA to fixed charges of at least 2.0 to 1.0.  At June 30, 2014, the Company did not satisfy this fixed charge coverage ratio.  The Company may from time to time not satisfy this ratio.

12.  DERIVATIVE FINANCIAL INSTRUMENTS

Fair Value of Derivative Financial Instruments
The Company recognizes all derivative financial instruments, such as foreign exchange contracts at fair value.  Changes in the fair value of derivative financial instruments are either recognized periodically in income or in shareholders’ equity as a component of other comprehensive income depending on whether the derivative financial instrument qualifies for hedge accounting, and if so, whether it qualifies as a fair value hedge or a cash flow hedge.  The Company has elected not to offset fair value amounts recognized for derivative instruments with the same counterparty under a master netting agreement.  See Note 17 “Fair Value Measurements” to the “Notes to Condensed Consolidated Financial Statements” for further information on fair value methodology.
 
 
15

 
 
Alliance One International, Inc. and Subsidiaries
 
12.  DERIVATIVE FINANCIAL INSTRUMENTS (continued)

Fair Value of Derivative Financial Instruments (continued)

           The following table summarizes the fair value of the Company’s derivatives by type at June 30, 2014 and 2013, and March 31, 2013.

 
Fair Values of Derivative Instruments
 
 
Assets
Liabilities
 
Derivatives Not Designated as Hedging Instruments:
Balance Sheet Account
 
Fair
Value
Balance Sheet Account
 
Fair
Value
 
     Foreign currency contracts at June 30, 2014
Other Current Assets
 
$
1,550
 
Accrued Expenses and
Other Current
Liabilities
 
$
 
     Foreign currency contracts at June 30, 2013
Other Current Assets
 
$
127
 
Accrued Expenses and
Other Current
Liabilities
 
$
 
     Foreign currency contracts at March 31, 2014
Other Current Assets
 
$
 
Accrued  Expenses
and Other Current
Liabilities
 
$
169
 

Earnings Effects of Derivatives
The Company periodically enters into forward or option currency contracts to protect against volatility associated with certain non-U.S. dollar denominated forecasted transactions.  These contracts are for green tobacco purchases and processing costs as well as selling, general and administrative costs as the Company deems necessary.  These contracts do not meet the requirements for hedge accounting treatment under generally accepted accounting principles, and as such, all changes in fair value are reported in income each period.
          The following table summarizes the earnings effects of derivatives in the Condensed Consolidated Statements of Operations for the three months ended June 30, 2014 and 2013.

Derivatives Not Designated
as Hedging Instruments
Location of Gain (Loss)
Recognized in Income
 
Gain (Loss) Recognized in Income for the Three Months Ending June 30,
     
2014
   
2013
 
               
Foreign currency contracts
Cost of goods and services sold
 
$
2,072
   
$
(3,280
)

Credit Risk
Financial instruments, including derivatives, expose the Company to credit loss in the event of non-performance by counterparties.  The Company manages its exposure to counterparty credit risk through specific minimum credit standards, diversification of counterparties, and procedures to monitor concentrations of credit risk.  If a counterparty fails to meet the terms of an arrangement, the Company’s exposure is limited to the net amount that would have been received, if any, over the arrangement’s remaining life.  The Company does not anticipate non-performance by the counterparties and no material loss would be expected from non-performance by any one of such counterparties.

13.  PENSION AND POSTRETIREMENT BENEFITS

The Company has multiple benefit plans at several locations.  The Company has a defined benefit plan that provides retirement benefits for substantially all U.S. salaried personnel based on years of service rendered, age and compensation.  The Company also maintains various other Excess Benefit and Supplemental Plans that provide additional benefits to (1) certain individuals whose compensation and the resulting benefits that would have actually been paid are limited by regulations imposed by the Internal Revenue Code and (2) certain individuals in key positions.  The Company funds these plans in amounts consistent with the funding requirements of federal law and regulations.
         Additional non-U.S. defined benefit plans sponsored by certain subsidiaries cover certain full-time employees located in Germany, Turkey, and the United Kingdom.
         The Company experienced a special termination benefit and curtailment loss of $1,261 during the quarter ended June 30, 2013 in connection with restructuring in its Turkey location, which was recorded in Restructuring and Asset Impairment Charges.
 
 
16

 

Alliance One International, Inc. and Subsidiaries

13.  PENSION AND POSTRETIREMENT BENEFITS (continued)

Components of Net Periodic Benefit Cost
Net periodic pension cost for continuing operations consisted of the following:

   
Three Months Ended June 30,
 
   
2014
   
2013
 
     Service cost
  $ 510     $ 548  
     Interest expense
    1,693       1,722  
     Expected return on plan assets
    (1,677 )     (1,519 )
     Amortization of prior service cost
    48       53  
     Actuarial loss
    557       757  
     Curtailment loss
          77  
     Special termination benefit
          1,184  
     Net periodic pension cost
  $ 1,131     $ 2,822  
 
Employer Contributions
The Company’s investment objectives are to generate consistent total investment return to pay anticipated plan benefits, while minimizing long-term costs.  Financial objectives underlying this policy include maintaining plan contributions at a reasonable level relative to benefits provided and assuring that unfunded obligations do not grow to a level to adversely affect the Company’s financial health.  As of June 30, 2014, contributions of $2,134 were made to pension plans for fiscal 2015.  Additional contributions to pension plans of approximately $9,529 are expected during the remainder of fiscal 2015.  However, this amount is subject to change, due primarily to asset performance significantly above or below the assumed long-term rate of return on pension assets and significant changes in interest rates.

Postretirement Health and Life Insurance Benefits
The Company also provides certain health and life insurance benefits to retired employees, and their eligible dependents, who meet specified age and service requirements.  As of June 30, 2014, contributions of $182 were made to the plans for fiscal 2015.  Additional contributions of $720 to the plans are expected during the rest of fiscal 2015.  The Company retains the right, subject to existing agreements, to modify or eliminate the postretirement medical benefits.

Components of Net Periodic Benefit Cost
Net periodic benefit cost for postretirement health and life insurance benefit plans consisted of the following:
 
   
Three Months Ended
 June 30,
 
             
   
2014
   
2013
 
     Service cost
  $ 11     $ 17  
     Interest expense
    134       142  
     Amortization of prior service cost
    (303 )     (410 )
     Actuarial loss
    111       123  
     Net periodic pension (benefit)
  $ (47 )   $ (128 )

14.  INVENTORIES

The following table summarizes the Company’s costs in inventory:

   
June 30, 2014
   
June 30, 2013
   
March 31, 2014
 
Processed tobacco
  $ 650,180     $ 776,149     $ 404,683  
Unprocessed tobacco
    317,713       316,128       309,570  
Other
    46,520       42,126       46,354  
    $ 1,014,413     $ 1,134,403     $ 760,607  

 
17

 
 
Alliance One International, Inc. and Subsidiaries
 
15.  OTHER COMPREHENSIVE INCOME (LOSS)

The following tables set forth the changes in each component of accumulated other comprehensive loss, net of tax, attributable to the Company:

    Currency Translation Adjustment    
Pensions,
Net of Tax
    Accumulated Other Comprehensive Loss  
Balances, March 31, 2014
  $ (1,640 )   $ (36,461 )   $ (38,101 )
Other comprehensive earnings before reclassifications
    208             208  
Amounts reclassified to net earnings, net of tax
          414       414  
Other comprehensive earnings, net of tax
    208       414       622  
Balances, June 30, 2014
  $ (1,432 )   $ (36,047 )   $ (37,479 )
                         
Balances, March 31, 2013
  $ (5,724 )   $ (49,468 )   $ (55,192 )
Other comprehensive losses before reclassifications
    749             749  
Amounts reclassified to net earnings, net of tax
          522       522  
Other comprehensive losses, net of tax
    749       522       1,271  
Balances, June 30, 2013
  $ (4,975 )   $ (48,946 )   $ (53,921 )

The following table sets forth amounts by component, reclassified from accumulated other comprehensive loss to earnings for the three months ended June 30, 2014 and 2013:
 
   
Three Months Ended
June 30,
 
   
2014
   
2013
 
Pension and postretirement plans (*):
           
       Actuarial loss
  $ 669     $ 879  
       Amortization of prior service cost
    (255 )     (357 )
    $ 414     $ 522  
                 
Amounts reclassified from accumulated other
comprehensive losses to net earnings
  $ 414     $ 522  
 
            (*) Amounts are included in net periodic benefit costs for pension and postretirement plans.  See Note 13 "Pension and
             Postretirement Benefits" to the "Notes to Condensed Consolidated Financial Statements" for further information.

16.  SALE OF RECEIVABLES

The Company sells trade receivables to unaffiliated financial institutions under three accounts receivable securitization programs.  Under the first program, the Company continuously sells a designated pool up to $250,000 trade receivables to a special purpose entity, which in turn sells 100% of the receivables to an unaffiliated financial institution.  This program allows the Company to receive a cash payment and a deferred purchase price receivable for sold receivables.  Following the sale and transfer of the receivables to the special purpose entity, the receivables are isolated from the Company and its affiliates, and upon the sale and transfer of the receivables from the special purpose entity to the unaffiliated financial institution effective control of the receivables is passed to the unaffiliated financial institution, which has all rights, including the right to pledge or sell the receivables.  This program requires a minimum level of deferred purchase price to be retained by the Company in connection with the sales.  The Company services, administers and collects the receivables on behalf of the special purpose entity and receives a servicing fee of .5% of serviced receivables per annum.  As the Company estimates the fee it receives in return for its obligation to service these receivables at fair value, no servicing assets or liabilities are recognized.  Servicing fees recognized were not material and are recorded as a reduction of Selling, General and Administrative Expenses within the Condensed Consolidated Statements of Operations.
 
 
18

 
 
Alliance One International, Inc. and Subsidiaries
 
16.  SALE OF RECEIVABLES (continued)

          The agreements for the second and third securitization programs also allow the Company to receive a cash payment and a deferred purchase price receivable for sold receivables.  These are uncommitted programs, whereby the Company offers receivables for sale to the respective unaffiliated financial institution, which are then subject to acceptance by the unaffiliated financial institution.  Following the sale and transfer of the receivables to the unaffiliated financial institution, the receivables are isolated from the Company and its affiliates, and effective control of the receivables is passed to the unaffiliated financial institution, which has all rights, including the right to pledge or sell the receivables.  The Company receives no servicing fee from the unaffiliated financial institution and as a result, has established a servicing liability based upon unobservable inputs, primarily discounted cash flow.  This liability is recorded in Accrued Expenses and Other Current Liabilities in the Condensed Consolidated Balance Sheets.  The investment limits under these agreements are $35,000 and $100,000.
          Under the programs, all of the receivables sold for cash are removed from the Condensed Consolidated Balance Sheets and the net cash proceeds received by the Company are included as cash provided by operating activities in the Condensed Consolidated Statements of Cash Flows.  A portion of the purchase price for the receivables is paid by the unaffiliated financial institutions in cash and the balance is a deferred purchase price receivable, which is paid as payments on the receivables are collected from account debtors.  The deferred purchase price receivable represents a continuing involvement and a beneficial interest in the transferred financial assets and is recognized at fair value as part of the sale transaction.  The deferred purchase price receivables are included in Trade and Other Receivables, Net in the Condensed Consolidated Balance Sheets and are valued using unobservable inputs (i.e., level three inputs), primarily discounted cash flow.  As servicer of these facilities, the Company may receive funds that are due to the unaffiliated financial institutions which are net settled on the next settlement date.  Trade and Other Receivables, Net in the Condensed Consolidated Balance Sheets has been reduced by $13,721, $4,659 and $16,575 as a result of the net settlement as of June 30, 2014 and 2013 and March 31, 2014, respectively.  See Note 17 "Fair Value Measurements" to the "Notes to Condensed Consolidated Financial Statements" for further information.
          The difference between the carrying amount of the receivables sold under these programs and the sum of the cash and fair value of the other assets received at the time of transfer is recognized as a loss on sale of the related receivables and recorded in Other Income (Expense) in the Condensed Consolidated Statements of Operations.

          The following table summarizes the Company’s accounts receivable securitization information as of the dates shown:

   
June 30,
   
March 31,
 
   
2014
   
2013
   
2014
 
Receivables outstanding in facility
  $ 70,506     $ 60,774     $ 204,364  
Beneficial interest
  $ 24,883     $ 21,349     $ 35,559  
Servicing liability
  $ 43     $ 43     $ 69  
   Cash proceeds for the three months ended June 30:
                       
   Cash purchase price
  $ 41,637     $ 80,278          
   Deferred purchase price
    38,502       43,465          
   Service fees
    172       93          
   Total
  $ 80,311     $ 123,836          

17.  FAIR VALUE MEASUREMENTS

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants.  A three-level valuation hierarchy based upon observable and non-observable inputs is utilized.  Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company's market assumptions.  Preference is given to observable inputs.  These two types of inputs create the following fair value hierarchy:

  
Level 1 - Quoted prices for identical assets or liabilities in active markets.
  
Level 2 - Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.
  
Level 3 - Significant inputs to the valuation model are unobservable.

          The Company's financial assets and liabilities measured at fair value include derivative instruments, securitized beneficial interests and guarantees.  The application of the fair value guidance to the non-financial assets and liabilities primarily includes assessments of investments in subsidiaries, goodwill and other intangible assets and long-lived assets for potential impairment.
          Following are descriptions of the valuation methodologies the Company uses to measure different assets or liabilities at fair value.
 
 
19

 
 
Alliance One International, Inc. and Subsidiaries
 
17.  FAIR VALUE MEASUREMENTS (continued)

Debt
The fair value of debt is measured for purpose of disclosure.  Debt is shown at historical value in the Condensed Consolidated Balance Sheets.  When possible, to measure the fair value of its debt the Company uses quoted market prices of its own debt with approximately the same remaining maturities.  When this is not possible, the fair value of debt is calculated using discounted cash flow models with interest rates based upon market based expectations, the Company's credit risk and the contractual terms of the debt instrument.  The Company also has portions of its debt with maturities of one year or less for which book value is a reasonable approximation of the fair value of this debt.  The fair value of debt is considered to fall within Level 2 of the fair value hierarchy as significant value drivers such as interest rates are readily observable.  The carrying value and estimated fair value of the Company's Long-Term Debt are shown in the table below.

   
June 30, 2014
   
June 30, 2013
   
March 31, 2014
 
Carrying value
  $ 829,752     $ 867,753     $ 904,919  
Estimated fair value
    864,938       892,423       919,435  

Derivative financial instruments
The Company's derivatives consist of foreign currency contracts.  The fair value of the derivatives are determined using a discounted cash flow analysis on the expected future cash flows of each derivative.  This analysis utilizes observable market data including forward yield curves and implied volatilities to determine the market's expectation of the future cash flows of the variable component.  The fixed and variable components of the derivative are then discounted using calculated discount factors developed based on the LIBOR swap rate and are netted to arrive at a single valuation for the period.  The Company also incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty's nonperformance risk in the fair value measurements.  As of June 30, 2014 and 2013 and March 31, 2014 the inputs used to value the Company's derivatives fall within Level 2 of the fair value hierarchy.  However, credit valuation adjustments associated with its derivatives could utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties.  Should the use of such credit valuation adjustment estimates result in a significant impact on the overall valuation, this would require reclassification to Level 3.

Securitized beneficial interests
The fair value of securitized beneficial interests is based upon a valuation model that calculates the present value of future expected cash flows using key assumptions for payment speeds and discount rates.  The assumptions for payment speed are based on the Company's historical experience.  The discount rates are based upon market trends and anticipated performance relative to the particular assets securitized which have been assumed to be commercial paper rate plus a margin or LIBOR plus a margin.  Due to the use of the Company's own assumptions and the uniqueness of these transactions, securitized beneficial interests fall within Level 3 of the fair value hierarchy.  Since the discount rate and the payment speed are components of the same equation, a change in either by 10% or 20% would change the value of the recorded beneficial interest at June 30, 2014 by $23 and $46, respectively.

Guarantees
The Company guarantees funds issued to tobacco suppliers by third party lending institutions and also guarantees funds borrowed by a deconsolidated subsidiary.  The fair value of guarantees is based upon either the premium the Company would require to issue the same inputs or historical loss rates and as such these guarantees fall into Level 3 of the fair value hierarchy.

          Tobacco supplier guarantees - The Company provides guarantees to third parties for indebtedness of certain tobacco suppliers to finance their crops.  The fair value of these guarantees is determined using historical loss rates on both guaranteed and non-guaranteed tobacco supplier loans.  Should the loss rates change 10% or 20%, the fair value of the guarantee at June 30, 2014 would change by $338 or $676, respectively.

          Deconsolidated subsidiary guarantees - The fair value of these guarantees is determined using a discounted cash flow model based on the differential between interest rates available with and without the guarantees.  The fair value of these guarantees is most closely tied to the theoretical interest rate differential.  Should interest rates used in the model change by 10% or 20%, the fair value of the guarantee, at June 30, 2014 would change by $388 or $776, respectively.
 
 
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Alliance One International, Inc. and Subsidiaries
 
17.  FAIR VALUE MEASUREMENTS (continued)

Input Hierarchy of Items Measured at Fair Value on a Recurring Basis

The following table summarizes the items measured at fair value on a recurring basis:
 
   
June 30, 2014
   
June 30, 2013
   
March 31, 2014
 
               
Total Assets /
               
Total Assets /
               
Total Assets /
 
               
Liabilities
               
Liabilities
               
Liabilities
 
   
Level 2
   
Level 3
   
at Fair Value
   
Level 2
   
Level 3
   
at Fair Value
   
Level 2
   
Level 3
   
at Fair Value
 
Assets
                                                     
Derivative financial instruments
  $ 1,550     $     $ 1,550     $ 127     $     $ 127     $     $     $  
Securitized beneficial interests
          24,883       24,883             21,349       21,349             35,559       35,559  
Total Assets
  $ 1,550     $ 24,883     $ 26,433     $ 127     $ 21,349     $ 21,476     $     $ 35,559     $ 35,559  
Liabilities
                                                                       
Guarantees
  $     $ 7,262     $ 7,262     $     $ 6,176     $ 6,176     $     $ 7,344     $ 7,344  
Derivative financial instruments
                                        169             169  
Total liabilities
  $     $ 7,262     $ 7,262     $     $ 6,176     $ 6,176     $ 169     $ 7,344     $ 7,513  

Reconciliation of Change in Recurring Level 3 Balances

The following tables present the changes in Level 3 instruments measured on a recurring basis.
 
   
Three Months Ended
 June 30, 2014
   
Securitized
Beneficial Interests
   
Guarantees
Beginning Balance March 31, 2014
  $ 35,559     $ 7,344  
   Issuances of guarantees/sales of receivables
    21,513       4,281  
   Settlements
    (31,725 )     (4,363 )
   Losses recognized in earnings
    (464 )      
Ending Balance June 30, 2014
  $ 24,883     $ 7,262  
 
   
Three Months Ended
June 30, 2013
   
Securitized
 Beneficial Interest
   
Guarantees
Beginning Balance March 31, 2013
  $ 31,992     $ 6,367  
   Issuances of guarantees/sales of receivables
    42,141       3,867  
   Settlements
    (52,816 )     (4,058 )
   Gains recognized in earnings
    32        
Ending Balance June 30, 2013
  $ 21,349     $ 6,176  

The amount of unrealized losses relating to assets still held at the respective dates of June 30, 2014 and 2013 and March 31, 2014 were $509, $496 and $1,572 on securitized beneficial interests.
          Gains and losses included in earnings are reported in Other Income.
 
 
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Alliance One International, Inc. and Subsidiaries
 
17.  FAIR VALUE MEASUREMENTS (continued)

Information About Fair Value Measurements Using Significant Unobservable Inputs

The following table summarizes significant unobservable inputs and the valuation techniques thereof for the period ended June 30, 2014:
 
   
Fair Value at
6/30/2014
Unobservable Input
Range (Weighted Average)
               
Securitized 
Beneficial Interests
  $ 24,883  
Discounted Cash Flow
Discount Rate
Payment Speed
2.66% to 2.78%
20 to 56 days
Tobacco Supplier
Guarantees
  $ 2,558  
Historical Loss
Historical Loss
6.00% to 8.98%
Tobacco Supplier
Guarantees
  $ 822  
Discounted Cash Flow
Market Interest Rate
6.14% to 46.0%
Deconsolidated Subsidiary
Guarantees
  $ 3,882  
Discounted Cash Flow
Market Interest Rate
12%
 
18.  RELATED PARTY TRANSACTIONS

The Company’s operating subsidiaries engage in transactions with related parties in the normal course of business.  The following is a summary of balances and transactions with related parties of the Company:
 
   
June 30, 2014
   
June 30, 2013
   
March 31, 2014
 
Balances:
                 
Accounts receivable
  $ 76,672     $ 108,898     $ 44,869  
Accounts payable
    8,824       12,893       63,384  
 
   
Three Months Ended
 June 30,
   
2014
   
2013
 
Transactions:
           
   Purchases
  $ 18,100     $ 27,943  

          The Company’s operating subsidiaries have entered into transactions with affiliates of the Company for the purpose of procuring inventory.
          The Company’s balances due to and from related parties are primarily with its deconsolidated Zimbabwe subsidiary.  The remaining related party balances and transactions relate to the Company’s equity basis investments in companies located in Asia, South America, North America and Europe which purchase and process tobacco.

19.  INVESTEE COMPANIES

The Company has equity method investments in companies in India, Thailand, Turkey and Brazil that purchase and process tobacco. The investees and ownership percentages are as follows:  Transcontinental Leaf Tobacco India Private Ltd. (India) 49%, Siam Tobacco Export Company (Thailand) 49%, Adams International Ltd. (Thailand) 49%, Oryantal Tutun Paketleme 50%, and China Brasil Tobacos Exportadora SA (“CBT”) 49%.  On April 2, 2014, the Company completed the purchase of a 50% interest in Purilum, LLC, a U.S. company that develops, produces, and sells consumable e-liquids to manufacturers and distributors of e-vapor products.
          On March 26, 2014, upon the disposition of 51% interest in CBT, the difference between the book basis of the Company’s 49% interest and the fair value of the investment recorded created a basis difference of $15,460.  The Company evaluated the contributed assets and identified basis differences in certain accounts, including inventory, intangible assets, deferred taxes, and goodwill. The basis differences (except goodwill) are being amortized over the respective estimated lives of these assets and liabilities, which range from one to ten years. The Company’s earnings from the equity method investment are reduced by amortization expense related to these basis differences. At June 30, 2014, the basis difference was $14,910.
 
 
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Alliance One International, Inc. and Subsidiaries
 
Item 2.    Management’s Discussion and Analysis of
                Financial Condition and Results of Operations

EXECUTIVE OVERVIEW

The following executive overview is intended to provide significant highlights of the discussion and analysis that follows.

Financial Results

Volumes and revenues declined this year due to challenging weather conditions in some regions and global tobacco markets that have entered oversupply. Both have delayed buying and are in line with internal expectations. Additionally, prices paid for green tobacco are lower than last year.  As anticipated, gross profit and gross profit as a percentage of sales, improved, mainly driven by enhanced operating performance including reduced unrecovered farmer advances. Selling, general and administrative expenses decreased primarily due to lower incentive compensation, professional fees and amortization related to internally developed software, while restructuring costs did not occur this year, resulting in increased operating income. Additionally, net interest costs decreased compared to last year’s quarter, primarily related to lower average borrowing levels.

Liquidity

Our liquidity requirements are impacted by various factors including crop seasonality, foreign currency exchange rates, interest rates, green tobacco prices, customer mix, crop size and quality.  We monitor and adjust funding sources based on a number of industry, business and financial market considerations. In fiscal 2014, we extended our U.S. revolving credit facility maturity to April 2017. At the same time we issued $735.0 million of new eight year senior secured second lien notes that refinanced our $635.0 million senior notes, effectively extending the maturity on this tranche to 2021. Additionally, we retired approximately $113.9 million of our $115.0 million 5.5% convertible senior subordinated notes.  The collective refinancing extended the majority of our long-term debt and reduced uncertainty related to the capital markets, while providing a solid base for the business. We will continue to monitor capital markets and utilize various short-term funding sources to enhance and drive various business opportunities that maintain flexibility and meet cost expectations.

Outlook

We expect full year revenue to be similar to last year despite the slow start that reduced first quarter sales and is expected to have the same impact through the second quarter. In addition, we anticipate various profitability measurements to be improved over the prior year. Working capital efficiency and improving our cash cycle are important again this year and combined with enhanced factory efficiencies, should further improve our operating results.  Inventories are well positioned below last year’s quarter end that benefited from the deconsolidation of a Brazilian subsidiary, following finalizing a joint venture in March 2014 and uncommitted inventories within our stated range. Further, we are working to reduce year-end inventory levels versus the prior year based on disciplined buying that is anticipated to reduce net debt levels.
          Our global plan includes continued focus on sustainability with further roll out of our integrated production system, which is important to our customers. Our integrated production system enhances our dedicated global supplier base, improves product quality, increases farm family income, supports local communities where we operate and reduces the impact our business has on the environment. Success in these areas, combined with attention to our customers’ evolving longer term requirements in a cost effective manner, are anticipated to improve our results and enhance long-term shareholder value.
 
 
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Alliance One International, Inc. and Subsidiaries
 
Item 2.    Management’s Discussion and Analysis of
                Financial Condition and Results of Operations

RESULTS OF OPERATIONS:
 
   
Three Months Ended June 30,
 
         
Change
       
   
2014
     $       %       2013  
Kilos sold
    47.7       (28.6     (37.5    
76.3
 
Tobacco sales and other operating revenues:
                               
Sales and other operating revenues
  $ 232.2     $ (138.5 )     (37.4   $
370.7
 
     Average price per kilo
    4.87       0.01       0.2      
4.86
 
Processing and other revenues
    16.8       3.6       27.3      
13.2
 
Total sales and other operating revenues
    249.0       (134.9     (35.1    
383.9
 
Tobacco cost of goods sold:
                               
Tobacco costs
    195.4       (126.8    
(39.4
     
322.2
 
Transportation, storage and other period costs
    10.9       (8.8    
(44.7
)    
19.7
 
Derivative financial instrument and exchange (gains) losses
    (1.2     (8.6    
(116.2
)    
7.4
 
Total tobacco cost of goods sold
    205.1       (144.2    
(41.3
)    
349.3
 
Average cost per kilo
    4.30       (0.28    
(6.1
)    
4.58
 
Processing and other revenues cost of services sold
    8.8       2.7      
44.3
     
6.1
 
Total cost of goods and services sold