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EX-31.01 - EXHIBIT 31.01 - PYXUS INTERNATIONAL, INC.aoi20141230-ex3101.htm
EX-32 - EXHIBIT 32 - PYXUS INTERNATIONAL, INC.aoi-20141230xex32.htm
EX-31.02 - EXHIBIT 31.02 - PYXUS INTERNATIONAL, INC.aoi-20141230xex3102.htm
EXCEL - IDEA: XBRL DOCUMENT - PYXUS INTERNATIONAL, INC.Financial_Report.xls


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549
 
 
 
FORM 10-Q
 
 
 

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED December 31, 2014.

[  ] 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 [X] No [ ]

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 [X] No [ ]

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  [ ]                                                                        Accelerated filer  [X]                                           

Non-accelerated filer    [ ]                                                                        Smaller reporting company  [ ]                                 
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
                                               Yes [ ]                                                                              No [X]

As of February 4, 2015, the registrant had 88,525,099 shares outstanding of Common Stock (no par value) excluding 7,853,121 shares owned by a wholly owned subsidiary.

- 1 -



 
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 and Nine Months Ended December 31, 2014 and 2013
3
 
 
 
Condensed Consolidated Statements of Comprehensive Income (Loss)
 
 
Three and Nine Months Ended December 31, 2014 and 2013
4
 
 
 
 
Condensed Consolidated Balance Sheets
 
 
December 31, 2014 and 2013 and March 31, 2014
5
 
 
 
Condensed Statements of Consolidated Stockholders’ Equity
 
 
Nine Months Ended December 31, 2014 and 2013
6
 
 
 
 
Condensed Consolidated Statements of Cash Flows
 
 
Nine Months Ended December 31, 2014 and 2013
7
 
 
 
Notes to Condensed Consolidated Financial Statements
8 – 24
 
 
 
 
Item 2.
Management's Discussion and Analysis
 
 
 
of Financial Condition and Results of Operations
25 – 36
 
 
 
 
 
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
36
 
 
 
 
 
Item 4.
Controls and Procedures
36 – 37
 
 
Part II.
Other Information
 
 
 
 
 
Item 1.
Legal Proceedings
37
 
 
 
 
 
Item 1A.
Risk Factors
37
 
 
 
 
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
37
 
 
 
 
 
Item 3.
Defaults Upon Senior Securities
37
 
 
 
 
 
Item 4.
37
 
 
 
 
 
Item 5.
Other Information
37
 
 
 
 
 
Item 6.
Exhibits
38
 
Signature
39
 
 
Index of Exhibits
40

- 2 -


Part I. Financial Information

Item 1. Financial Statements


Alliance One International, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three and Nine Months Ended December 31, 2014 and 2013
(Unaudited)
 
 
 
 
Three Months Ended
December 31,
Nine Months Ended
December 31,
(in thousands, except per share data)
 
2014
2013
2014
2013
 
 
 
 
 
 
Sales and other operating revenues
 
$
488,921

$
654,550

$
1,327,753

$
1,739,117

Cost of goods and services sold
 
419,217

570,709

1,151,462

1,542,812

Gross profit
 
69,704

83,841

176,291

196,305

Selling, general and administrative expenses
 
38,882

30,156

106,207

100,288

Other income (expense)
 
146

(1,627
)
1,273

(882
)
Restructuring and asset impairment charges
 

1,988

500

4,764

Operating income
 
30,968

50,070

70,857

90,371

Debt retirement expense (income)
 
(338
)
64

(338
)
55,663

Interest expense (includes debt amortization of $2,131 and $2,609 for the three months and $5,693 and $7,811 for the nine months in 2014 and 2013, respectively)
 
28,277

29,052

83,694

89,579

Interest income
 
1,486

1,108

4,411

4,953

Income (loss) before income taxes and other items
 
4,515

22,062

(8,088
)
(49,918
)
Income tax expense
 
4,481

9,423

12,912

20,582

Equity in net income of investee companies
 
1,088

378

1,642

698

Net income (loss)
 
1,122

13,017

(19,358
)
(69,802
)
Less: Net loss attributable to noncontrolling interests
 
(230
)
(270
)
(182
)
(245
)
Net income (loss) attributable to Alliance One International, Inc.
 
$
1,352

$
13,287

$
(19,176
)
$
(69,557
)
 
 
 
 
 
 
 
 
 
 
 
 
Income (loss) per share:
 
 
 
 
 
Basic
 
$
.02

$
.15

$
(.22
)
$
(.79
)
Diluted
 
$
.02

$
.14

$
(.22
)
$
(.79
)
 
 
 
 
 
 
Weighted average number of shares outstanding:
 
 
 
 
 
Basic
 
88,409

87,878

88,212

87,641

Diluted
 
88,409

98,939

88,212

87,641

 
 
 
 
 
 
 
 
 
See notes to condensed consolidated financial statements
 
 
 

- 3 -



Alliance One International, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Three and Nine Months Ended December 31, 2014 and 2013
(Unaudited)
 
 
 
 
 
 
 
 
 
 
Three Months Ended
December 31,
Nine Months Ended
December 31,
(in thousands)
 
2014
2013
2014
2013
 
 
 
 
 
 
Net income (loss)
 
$
1,122

$
13,017

$
(19,358
)
$
(69,802
)
 
 
 
 
 
 
Other comprehensive income (loss), net of tax:
 
 
 
 
 
Currency translation adjustment
 
(2,095
)
889

(6,174
)
3,499

Defined benefit pension amounts reclassified to income
 
413

522

1,240

1,566

Total other comprehensive income (loss), net of tax
 
(1,682
)
1,411

(4,934
)
5,065

Total comprehensive income (loss)
 
(560
)
14,428

(24,292
)
(64,737
)
Comprehensive income (loss) attributable to noncontrolling interests
 
(230
)
(270
)
(182
)
(245
)
Comprehensive income (loss) attributable to Alliance One International, Inc.
 
$
(330
)
$
14,698

$
(24,110
)
$
(64,492
)
 
 
See notes to condensed consolidated financial statements
 

- 4 -


Alliance One International, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS 
(Unaudited)
(in thousands)
December 31, 2014
 
December 31, 2013
 
March 31, 2014
ASSETS
 
 
 
 
 
Current assets
 
 
 
 
 
Cash and cash equivalents
$
235,009

 
$
303,658

 
$
234,742

Trade and other receivables, net
221,128

 
206,411

 
176,459

Accounts receivable, related parties
63,491

 
68,194

 
44,869

Inventories
961,064

 
770,435

 
760,607

Advances to tobacco suppliers
81,016

 
126,856

 
49,598

Recoverable income taxes
6,673

 
4,023

 
4,789

Current deferred taxes
10,204

 
24,245

 
10,013

Prepaid expenses
27,105

 
25,415

 
27,667

Other current assets
11,840

 
14,157

 
12,053

Total current assets
1,617,530

 
1,543,394

 
1,320,797

Other assets
 
 
 
 
 
Investments in unconsolidated affiliates
53,769

 
24,861

 
50,876

Goodwill and other intangible assets
32,739

 
35,369

 
34,725

    Long-term recoverable income taxes
5,992

 
4,253

 
5,423

Deferred income taxes
35,952

 
46,540

 
40,927

Other deferred charges
17,426

 
21,072

 
19,038

Other noncurrent assets
31,876

 
43,008

 
42,255

 
177,754

 
175,103

 
193,244

Property, plant and equipment, net
240,554

 
260,892

 
261,246

 
$
2,035,838

 
$
1,979,389

 
$
1,775,287

 
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
 
Current liabilities
 
 
 
 
 
Notes payable to banks
$
506,822

 
$
544,235

 
$
212,669

Accounts payable
59,682

 
73,888

 
115,177

Due to related parties
24,767

 
18,455

 
63,384

Advances from customers
57,290

 
69,014

 
22,133

Accrued expenses and other current liabilities
107,029

 
97,660

 
72,694

Income taxes
9,194

 
7,764

 
10,784

Long-term debt current
2,894

 
56,066

 
4,556

Total current liabilities
767,678

 
867,082

 
501,397

 
 
 
 
 
 
Long-term debt
923,618

 
721,846

 
900,363

Deferred income taxes
4,997

 
6,782

 
5,788

Liability for unrecognized tax benefits
9,292

 
8,622

 
9,436

Pension, postretirement and other long-term liabilities
75,293

 
95,531

 
81,415

 
1,013,200

 
832,781

 
997,002

Commitments and contingencies


 


 


Stockholders’ equity
December 31, 2014
 
December 31, 2013
 
March 31, 2014
 
 
 
 
 
Common Stock—no par value:
 
 
 
 
 
 
 
 
 
 
Authorized shares
250,000

 
250,000

 
250,000

 
 
 
 
 
Issued shares
96,378

 
96,004

 
96,012

467,934

 
463,146

 
465,682

Retained deficit
(173,164
)
 
(136,886
)
 
(153,988
)
Accumulated other comprehensive loss
(43,035
)
 
(50,127
)
 
(38,101
)
Total stockholders’ equity of Alliance One International, Inc.
251,735

 
276,133

 
273,593

Noncontrolling interests
3,225

 
3,393

 
3,295

Total equity
254,960

 
279,526

 
276,888

 
$
2,035,838

 
$
1,979,389

 
$
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 loss

(69,557
)


(245
)
(69,802
)
Restricted stock surrendered
(323
)




(323
)
Stock-based compensation
2,555





2,555

Other comprehensive income, net of tax


3,499

1,566


5,065

 
 
 
 
 
 
 
Balance, December 31, 2013
$
463,146

$
(136,886
)
$
(2,225
)
$
(47,902
)
$
3,393

$
279,526

 
 
 
 
 
 
 
Balance, March 31, 2014
$
465,682

$
(153,988
)
$
(1,640
)
$
(36,461
)
$
3,295

$
276,888

Net loss

(19,176
)


(182
)
(19,358
)
Acquisition of noncontrolling interest




112

112

Restricted stock surrendered
(145
)




(145
)
Stock-based compensation
2,397





2,397

Other comprehensive loss, net of tax


(6,174
)
1,240


(4,934
)
 
 
 
 
 
 
 
Balance, December 31, 2014
$
467,934

$
(173,164
)
$
(7,814
)
$
(35,221
)
$
3,225

$
254,960

 
 
 
 
 
 
 
See notes to condensed consolidated financial statements

- 6 -


Alliance One International, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS 
Nine Months Ended December 31, 2014 and 2013
(Unaudited)
 
 
(in thousands)
 
December 31, 2014
 
December 31, 2013
 
 
 
 
 
Operating activities
 
 
 
 
   Net loss
 
$
(19,358
)
 
$
(69,802
)
   Adjustments to reconcile net loss to net cash provided (used) by operating activities:
 
 
 
 
      Depreciation and amortization
 
22,247

 
24,781

      Debt amortization/interest
 
6,691

 
9,748

     Debt retirement
 
(338
)
 
55,663

     Loss on foreign currency transactions
 
5,167

 
13,267

      Restructuring and asset impairment charges
 
500

 
4,764

      Gain on sale of property, plant and equipment
 
(1,322
)
 
(195
)
      Bad debt expense
 
12,417

 
14

      Equity in net income of unconsolidated affiliates, net of dividends
 
(1,642
)
 
145

      Stock-based compensation
 
2,562

 
2,492

      Changes in operating assets and liabilities, net
 
(343,219
)
 
132,291

      Other, net
 
729

 
1,616

   Net cash provided (used) by operating activities
 
(315,566
)
 
174,784

 
 
 
 
 
Investing activities
 
 
 
 
   Purchases of property, plant and equipment
 
(19,585
)
 
(15,291
)
   Proceeds from sale of property, plant and equipment
 
15,063

 
709

   Payments to acquire equity method investments
 
(1,655
)
 

   Surrender of life insurance policies
 
1,194

 
2,482

   Other, net
 
(733
)
 
(1,002
)
   Net cash used by investing activities
 
(5,716
)
 
(13,102
)
 
 
 
Financing activities
 
 
 
 
   Net proceeds from short-term borrowings
 
306,540

 
182,083

   Proceeds from long-term borrowings
 
210,000

 
885,300

   Repayment of long-term borrowings
 
(188,864
)
 
(961,121
)
   Debt issuance cost
 
(4,963
)
 
(22,579
)
   Debt retirement costs
 

 
(34,411
)
   Other, net
 
415

 
111

   Net cash provided by financing activities
 
323,128

 
49,383

 
 
 
 
 
Effect of exchange rate changes on cash
 
(1,579
)
 
567

 
 
 
Increase in cash and cash equivalents
 
267

 
211,632

Cash and cash equivalents at beginning of period
 
234,742

 
92,026

Cash and cash equivalents at end of period
 
$
235,009

 
$
303,658

 
Other information:
 
 
 
 
      Cash paid for income taxes
 
$
11,728

 
$
13,901

      Cash paid for interest
 
50,971

 
56,805

      Cash received from interest
 
4,554

 
6,782

 
 
 
 
 
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 for the three months and nine months ended December 31, 2014 is a pretax charge of approximately $8,000 and $12,000, respectively, primarily resulting from increased reserves on customer receivables. Included in Operating Income for the nine months ended December 31, 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 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 December 31, 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 December 31, 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 $3,468 and $4,848 for the three months ended December 31, 2014 and 2013, respectively and $17,956 and $15,810 for the nine months ended December 31, 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.
          In August 2014, the FASB issued new accounting guidance on determining when and how to disclose going concern uncertainties in the financial statements. The primary objective of this accounting guidance is for management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date the financial statements are issued and provide certain disclosures if conditions or events raise substantial doubt about the entity’s ability to continue as a going concern. This accounting guidance is effective for the Company on March 31, 2017. The Company is currently evaluating the impact of this new guidance and does not expect it to have a material impact on its financial condition or results of operations.



- 8 -

Alliance One International, Inc. and Subsidiaries

2. INCOME TAXES

Accounting for Uncertainty in Income Taxes
As of December 31, 2014, the Company’s unrecognized tax benefits totaled $9,878, of which $7,383 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 December 31, 2014, accrued interest and penalties totaled $850 and $1,057 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.
         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 December 31, 2014, the Company’s earliest open tax year for U.S. federal income tax purposes is its fiscal year ended March 31, 2012; however, the Company's net operating loss carryovers from prior periods remain subject to adjustment. Open tax years in state and foreign jurisdictions generally range from three to six years.

Provision for the Nine Months Ended December 31, 2014
The effective tax rate used for the nine months ended December 31, 2014 was (159.6)% compared to (41.2)% for the nine months ended December 31, 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 difference in the effective tax rate in one year compared to another is the result of many factors that include, but are not limited to, differences in forecasted income for the respective years, differences in year-to-date income for the periods, certain losses for which no tax benefit is recorded; and, differences between discrete items recognized for the periods that include changes in valuation allowances, net exchanges losses on income tax accounts and net exchange gains related to liabilities for unrecognized tax benefits. The Company expects the tax rate for the year ended March 31, 2015 to be 187.4% after absorption of discrete items.
         For the nine months ended December 31, 2014, the Company recorded a discrete event adjustment expense of $5,659, bringing the effective tax rate estimated for the nine months of (89.7)% to (159.6)%. 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. For the nine months ended December 31, 2013 , the Company recorded a discrete event adjustment expense of $9,876, bringing the effective tax rate estimated for the nine months of (21.4)% to (41.2)%. 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 nine months ended December 31, 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:
 
December 31, 2014

 
December 31, 2013

 
March 31, 2014
Amounts guaranteed (not to exceed)
$
310,006

 
$
167,914

 
$
301,870

Amounts outstanding under guarantee
202,391

 
144,435

 
218,847

Fair value of guarantees
8,507

 
6,671

 
7,344


         Of the guarantees outstanding at December 31, 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 is included in Accounts Receivable, Related Parties.



- 9 -

Alliance One International, Inc. and Subsidiaries

3. GUARANTEES (continued)
         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 December 31, 2014 and 2013 and March 31, 2014, respectively, the Company had balances of $558, $188 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.


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 $2,745 in connection with the reduction in workforce including the effect on the Company's defined benefit pension plans of $1,261. Asset impairment charges of $680 were recorded for certain processing equipment in connection with the new venture. During the nine months ended December 31, 2013, employee separation charges of $580 and asset impairment charges of $759 were incurred as the Company continues to respond to changes in its business. As a result of the construction of a new U.S. cut rag facility with state of the art machinery and equipment, the Company recorded a $500 asset impairment charge for certain machinery and equipment at the previous facility during the nine months ended December 31, 2014.
         The following table summarizes the restructuring charges recorded in the Company’s reporting segments during the three months and nine months ended December 31, 2014 and 2013, respectively:
 
Three Months Ended
December 31,
Nine Months Ended
December 31,
Restructuring and Asset Impairment Charges
2014
2013
2014
2013
Employee separation and other cash charges:
 
 
 
 
Beginning balance
$

$
1,048

$
397

$
668

Period charges:
 
 
 
 
Severance charges

852


2,064

Total period charges

852


2,064

Payments through December 31

(1,587
)
(397
)
(2,419
)
Ending balance December 31
$

$
313

$

$
313

Asset impairment and other non-cash charges
$

$
1,136

$
500

$
2,700

Total restructuring charges for the period
$

$
1,988

$
500

$
4,764


 
Three Months Ended
December 31,
Nine Months Ended
December 31,
Employee Separation and Other Cash Charges
2014
2013
2014
2013
Beginning balance:
$

$
1,048

$
397

$
668

   South America




   Value added services




   Other regions

1,048

397

668

Period charges:
$

$
852

$

$
2,064

   South America



433

   Value added services




   Other regions

852


1,631

Payments through December 31
$

$
(1,587
)
$
(397
)
$
(2,419
)
   South America



(433
)
   Value added services




   Other regions

(1,587
)
(397
)
(1,986
)
Ending balance December 31
$

$
313

$

$
313

   South America




   Value added services




   Other regions

313


313


- 10 -

Alliance One International, Inc. and Subsidiaries

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.
         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 and nine months ended December 31, 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 December 31, 2014
 

 
10.25

 
6.00

 

 
 
March 31, 2013 balance
 
 
 
 
 
 
 
 
 
 
Gross carrying amount
 
$
2,794

 
$
33,700

 
$
7,893

 
$
16,918

 
$
61,305

Accumulated amortization
 

 
(13,269
)
 
(3,657
)
 
(12,908
)
 
(29,834
)
Net March 31, 2013
 
2,794

 
20,431

 
4,236

 
4,010

 
31,471

Additions
 

 

 

 
563

 
563

Amortization expense
 

 
(843
)
 
(433
)
 
(1,510
)
 
(2,786
)
Net September 30, 2013
 
2,794

 
19,588

 
3,803

 
3,063

 
29,248

Additions
 

 

 
7,000

 
39

 
7,039

Amortization expense
 

 
(421
)
 
(332
)
 
(165
)
 
(918
)
Net December 31, 2013
 
2,794

 
19,167

 
10,471

 
2,937

 
35,369

Additions
 

 

 

 
284

 
284

Amortization expense
 

 
(421
)
 
(330
)
 
(177
)
 
(928
)
Net March 31, 2014
 
2,794

 
18,746

 
10,141

 
3,044

 
34,725

Additions
 

 

 

 
395

 
395

Amortization expense
 

 
(843
)
 
(333
)
 
(394
)
 
(1,570
)
Net September 30, 2014
 
2,794

 
17,903

 
9,808

 
3,045

 
33,550

Additions
 

 

 

 
132

 
132

Amortization expense
 

 
(421
)
 
(317
)
 
(205
)
 
(943
)
Net December 31, 2014
 
$
2,794

 
$
17,482

 
$
9,491

 
$
2,972

 
$
32,739

(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 future intangible asset amortization expense:
For Fiscal
Years Ended
 
Customer
Relationship
Intangible
 
Production
and Supply
Contract
Intangible
 
Internally
Developed
Software
Intangible*
 
Total
January 1, 2015 through March 31, 2015
 
421

 
523

 
682

 
$
1,626

2016
 
1,685

 
2,319

 
881

 
4,885

2017
 
1,685

 
1,405

 
706

 
3,796

2018
 
1,685

 
1,403

 
477

 
3,565

2019
 
1,685

 
1,397

 
226

 
3,308

Subsequent years
 
10,321

 
2,444

 

 
12,765

 
 
$
17,482

 
$
9,491

 
$
2,972

 
$
29,945

*  Estimated amortization expense for the internally developed software is based on costs accumulated as of December 31, 2014. These estimates will change as new costs are incurred and until the software is placed into service in all locations.




- 11 -

Alliance One International, Inc. and Subsidiaries

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 primarily procure or process 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 two of its joint venture’s borrowings which also represents a variable interest in those joint ventures. 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 December 31, 2014 and 2013, and March 31, 2014, the Company’s investment in these joint ventures was $52,752, $23,841, 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 December 31, 2014 and 2013, and March 31, 2014, respectively were $4,728, $915 and $10 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 $111,065, $18,527 and $142,904 at December 31, 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.

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 reported its remaining 49% interest under the equity method accounting at March 31, 2014. As a result, the information for the three months and nine months ended December 31, 2014 does not include the assets or results of operations for this subsidiary which were included in the information for the three months and nine months ended December 31, 2013.
          The following table presents the summary segment information for the three months and nine months ended December 31, 2014 and 2013:       

 
Three Months Ended
December 31,
 
Nine Months Ended
December 31,
 
2014
 
2013
 
2014
 
2013
Sales and other operating revenues:
 
 
 
 
 
 
 
    South America
$
65,867

 
$
140,571

 
$
366,030

 
$
674,453

Value added services
35,412

 
32,600

 
102,636

 
93,537

    Other regions
387,642

 
481,379

 
859,087

 
971,127

    Total revenue
$
488,921

 
$
654,550

 
$
1,327,753

 
$
1,739,117

 
 
 
 
 
 
 
 
Operating income (loss):
 
 
 
 
 
 
 
    South America
$
(1,343
)
 
$
12,992

 
$
17,949

 
$
42,534

Value added services
2,093

 
3,818

 
5,886

 
9,347

    Other regions
30,218

 
33,260

 
47,022

 
38,490

Total operating income
30,968

 
50,070

 
70,857

 
90,371

 
 
 
 
 
 
 
 
    Debt retirement expense (income)
(338
)
 
64

 
(338
)
 
55,663

    Interest expense
28,277

 
29,052

 
83,694

 
89,579

    Interest income
1,486

 
1,108

 
4,411

 
4,953

Income (loss) before income taxes and other items
$
4,515

 
$
22,062

 
$
(8,088
)
 
$
(49,918
)

Analysis of Segment Assets
December 31, 2014
December 31, 2013
March 31, 2014

Segment assets:
 
 
 
 
South America
$
472,837

$
555,994

$
457,585

 
Value added services
198,971

207,302

194,562

 
Other regions
1,364,030

1,216,093

1,123,140

 
Total assets
$
2,035,838

$
1,979,389

$
1,775,287


- 12 -

Alliance One International, Inc. and Subsidiaries

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 December 31, 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 6,617 at a weighted average exercise price of $6.04 per share at December 31, 2014 and 6,885 at a weighted average exercise price of $6.04 per share at December 31, 2013.
          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 were designed 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 exceeded 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 Convertible Notes matured during the three months ended September 30, 2014.
          The following table summarizes the computation of earnings per share for the three months and nine months ended December 31, 2014 and 2013, respectively.
 
Three Months Ended
December 31,
 
Nine Months Ended
December 31,
 
(in thousands, except per share data)
2014
 
2013
 
2014
 
2013
 
BASIC INCOME (LOSS)
 
 
 
 
 
 
 
 
Net income (loss) attributable to Alliance One International, Inc.
$
1,352

 
$
13,287

 
$
(19,176
)
 
$
(69,557
)
 
 
 
 
 
 
 
 
 
 
SHARES
 
 
 
 
 
 
 
 
   Weighted average number of shares outstanding
88,409

 
87,878

 
88,212

 
87,641

 
 
 
 
 
 
 
 
 
 
BASIC INCOME (LOSS) PER SHARE
$
.02

 
$
.15

 
$
(.22
)
 
$
(.79
)
 
 
 
 
 
 
 
 
 
 
DILUTED INCOME (LOSS)
 
 
 
 
 
 
 
 
   Net income (loss) attributable to Alliance One International, Inc.
$
1,352

 
$
13,287

 
$
(19,176
)
 
$
(69,557
)
 
   Plus interest expense on 5 1/2% convertible notes,
   net of tax

 
492

 

*

*
   Net income (loss) attributable to Alliance One International, Inc.
         as adjusted
$
1,352

 
$
13,779

 
$
(19,176
)
 
$
(69,557
)
 
 
 
 
 
 
 
 
 
 
SHARES
 
 
 
 
 
 
 
 
   Weighted average number of common shares
   outstanding
88,409

 
87,878

 
88,212

 
87,641

 
   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

 
122

 

*

*
              Assuming conversion of 5 1/2% convertible
              notes at the time of issuance

 
10,939

 

*

*
             Shares applicable to stock warrants

**

**

**

**
   Adjusted weighted average number of common
  shares outstanding
88,409

 
98,939

 
88,212

 
87,641

 
DILUTED INCOME (LOSS) PER SHARE
$
.02

 
$
.14

 
$
(.22
)
 
$
(.79
)
 
 
 
 
 
 
 
 
 
 
* 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 and nine months ended December 31, 2014 and 2013, the warrants were not assumed exercised because the exercise price was more than the average price for the periods presented. The warrants began expiring October 15, 2014. They will be fully expired on April 8, 2015.

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 $824 and $780 for the three months ended December 31, 2014 and 2013, respectively and $2,562 and $2,492 for the nine months ended December 31, 2014 and 2013, respectively.

- 13 -

Alliance One International, Inc. and Subsidiaries

9. STOCK-BASED COMPENSATION (continued)
          The Company’s shareholders approved amendments to the 2007 Incentive Plan (the “2007 Plan”) at its annual meetings of shareholders held 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.
          During the three months and nine months ended December 31, 2014 and 2013, respectively, the Company made the following stock-based compensation awards:
 
Three Months Ended
December 31,
Nine Months Ended
December 31,
  (in thousands, except grant date fair value)
2014
2013
2014
2013
  Restricted Stock
 
 
 
 
            Number Granted



198

            Grant Date Fair Value
$

$

$

$
3.80

  Unrestricted Stock
 
 
 
 
           Number Granted
117


211


           Grant Date Fair Value
$
1.58

$

$
1.75

$

  Restricted Stock Units
 
 
 
 
           Number Granted


220

643

           Grant Date Fair Value
$

$

$
2.72

$
3.85

  Cash-Settled Restricted Stock Units
 
 
 
 
            Number Granted


458


             Grant Date Fair Value
$

$

$
2.70

$

  Performance Based Stock Units
 
 
 
 
            Number Granted


220

643

            Grant Date Fair Value
$

$

$
2.72

$
3.85

  Cash-Settled Performance Based Stock Units
 
 
 
 
             Number Granted


458


             Grant Date Fair Value
$

$

$
2.70

$


          Under the terms of the Performance Based Stock Units, shares ultimately issued will be contingent upon specified business performance goals. Unrestricted stock consists of shares issued to non-employee directors of the Company which are not subject to a minimum vesting period.

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 $4,959 and the total assessment including penalties and interest at December 31, 2014 is $13,797. 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 Santa Catarina. This jurisdiction permits the sale or transfer of excess credits to third parties, however approval must be obtained from the tax authorities. The Company has an agreement with the state government regarding the amounts and timing of credits that can be sold. The tax credits have a carrying value of $8,161 at December 31, 2014, 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.









- 14 -

Alliance One International, Inc. and Subsidiaries

10. CONTINGENCIES AND OTHER INFORMATION (continued)

Non-Income Tax (continued)

          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.

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, and sought the recovery of €7,400 plus interest and costs.  On November 11, 2013, the court issued its judgment in favor of the Company’s subsidiary, rejecting the claims asserted by Mindo, S.r.l., and awarding the Company’s subsidiary legal costs of €48.  On December 23, 2014, Mindo, S.r.l. appealed the judgment of the Court of Rome to the Court of Appeal of Rome.  A hearing before the Court of Appeal of Rome has been set for June 12, 2015.  The outcome of, and timing of a decision on, the appeal are uncertain.
          In addition to the above-mentioned matter, certain of the Company’s subsidiaries are involved in other litigation or legal matters incidental to their business activities, including tax matters.  While the outcome of these matters cannot be predicted with certainty, the Company is vigorously defending them and does not currently expect that any of them will have a material adverse effect on its business or financial position. However, should one or more of these matters be resolved in a manner adverse to its current expectation, the effect on the Company’s results of operations for a particular fiscal reporting period could be material.
          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 $294,153 from March 31, 2014 due to the seasonal financing for the purchasing and processing of the North America and Africa crops.
          On April 15, 2014, the Company’s senior secured revolving 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 December 31, 2014, $180,000 was outstanding under the senior secured revolving credit facility. The Company continuously monitors its compliance with the covenants of its senior secured revolving 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 revolving 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.




- 15 -

Alliance One International, Inc. and Subsidiaries

11. DEBT ARRANGEMENTS (continued)
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.
          During the three months ended December 31, 2014, the Company purchased $10,000 of its senior notes on the open market. All purchased securities were cancelled leaving $725,000 of the 9.875% senior notes outstanding at December 31, 2014. Associated costs paid were $25 and related discounts were $(710) resulting in net cash repayment of $9,315 and recorded in Repayment of Long-Term Borrowings in the Condensed Consolidated Statements of Cash Flows. Deferred financing costs and amortization of original issue discount of $347 were accelerated.
          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 December 31, 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.
           The following table summarizes the fair value of the Company’s derivatives by type at December 31, 2014 and 2013, and March 31, 2014.
 
 
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 December 31, 2014
 
Other Current Assets
 
$
409

 
Accrued Expenses and Other Current Liabilities
 
$

     Foreign currency contracts at December 31, 2013
 
Other Current Assets
 
$
1,388

 
Accrued Expenses and Other Current Liabilities
 
$
13

     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 and nine months ended December 31, 2014 and 2013.

 
 
 
 
Gain (Loss) Recognized in Income
 
 
 
 
 
 
 
 
 
 
Derivatives Not Designated
as Hedging Instruments
 
Location of Gain (Loss)
Recognized in Income
 
Three Months Ended
December 31,
Nine Months Ended
December 31,
 
 
 
 
2014
 
2013
2014
 
2013
 
 
 
 
 
 
 
 
 
 
Foreign currency contracts
 
Cost of goods and services sold
 
$
(3,111
)
 
$
756

$
(1,584
)
 
$
(1,917
)


- 16 -

Alliance One International, Inc. and Subsidiaries

12. DERIVATIVE FINANCIAL INSTRUMENTS (cont.)

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 Turkey, which has been recorded in Restructuring and Asset Impairment Charges.

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

 
Three Months Ended
December 31,
Nine Months Ended
December 31,
 
2014
 
2013
2014
 
2013
     Service cost
$
510

 
$
530

1,530

 
$
1,608

     Interest expense
1,693

 
1,661

5,080

 
5,044

     Expected return on plan assets
(1,678
)
 
(1,519
)
(5,032
)
 
(4,556
)
     Amortization of prior service cost
48

 
49

145

 
151

     Actuarial loss
558

 
761

1,672

 
2,278

     Curtailment loss

 


 
77

     Special termination benefit

 


 
1,184

     Net periodic pension cost
$
1,131

 
$
1,482

$
3,395

 
$
5,786


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. For the nine months ended December 31, 2014, contributions of $7,264 were made to pension plans for fiscal 2015. Additional contributions to pension plans of approximately $4,399 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 December 31, 2014, contributions of $487 were made to the plans for fiscal 2015. Additional contributions of $415 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.






- 17 -

Alliance One International, Inc. and Subsidiaries

13. PENSION AND POSTRETIREMENT BENEFITS (continued)

Postretirement Health and Life Insurance Benefits (continued)

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
December 31,
Nine Months Ended
December 31,
 
2014
 
2013
2014
 
2013
     Service cost
$
11

 
$
17

32

 
$
50

     Interest expense
135

 
143

403

 
427

     Amortization of prior service cost
(303
)
 
(410
)
(909
)
 
(1,230
)
     Actuarial loss
111

 
122

333

 
368

     Net periodic pension (benefit)
$
(46
)
 
$
(128
)
$
(141
)
 
$
(385
)

14. INVENTORIES

The following table summarizes the Company’s costs in inventory:
 
December 31, 2014
December 31, 2013
March 31, 2014

Processed tobacco
$
763,910

$
561,936

$
404,683

Unprocessed tobacco
157,838

181,542

309,570

Other
39,316

26,957

46,354

 
$
961,064

$
770,435

$
760,607


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
(4,079
)

(4,079
)
Amounts reclassified to net earnings, net of tax

827

827

Other comprehensive earnings, net of tax
(4,079
)
827

(3,252
)
Balances, September 30, 2014
(5,719
)
(35,634
)
(41,353
)
Other comprehensive earnings before reclassifications
(2,095
)

(2,095
)
Amounts reclassified to net earnings, net of tax

413

413

Other comprehensive earnings, net of tax
(2,095
)
413

(1,682
)
Balances, December 31, 2014
$
(7,814
)
$
(35,221
)
$
(43,035
)
 
 
 
 
Balances, March 31, 2013
$
(5,724
)
$
(49,468
)
$
(55,192
)
Other comprehensive earnings before reclassifications
2,610


2,610

Amounts reclassified to net earnings, net of tax

1,044

1,044

Other comprehensive earnings, net of tax
2,610

1,044

3,654

Balances, September 30, 2013
(3,114
)
(48,424
)
(51,538
)
Other comprehensive earnings before reclassifications
889


889

Amounts reclassified to net earnings, net of tax

522

522

Other comprehensive earnings, net of tax
889

522

1,411

Balances, December 31, 2013
$
(2,225
)
$
(47,902
)
$
(50,127
)




- 18 -

Alliance One International, Inc. and Subsidiaries

15. OTHER COMPREHENSIVE INCOME (LOSS) (continued)

The following table sets forth amounts by component, reclassified from accumulated other comprehensive loss to earnings for the three months and nine months ended December 31, 2014 and 2013:
 
Three Months Ended
December 31,
Nine Months Ended
December 31,
 
2014
2013
2014
2013
Pension and postretirement plans (*):
 
 
 
 
       Actuarial loss
$
669

$
883

$
2,005

$
2,646

       Amortization of prior service cost
(256
)
(361
)
(765
)
(1,080
)
 
$
413

$
522

$
1,240

1,566

 
 
 
 
 
Amounts reclassified from accumulated other comprehensive losses to net earnings
$
413

$
522

$
1,240

$
1,566

(*) 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.
          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, respectively. The $35,000 agreement expired December 31, 2014.
          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 increased by $7,440 as of December 31, 2014 and reduced by $31,531 and $16,575 as a result of the net settlement as of December 31, 2013 and March 31, 2014, respectively. See Note 17 "Fair Value Measurements" to the "Notes to Condensed Consolidated Financial Statements" for further information.




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Alliance One International, Inc. and Subsidiaries

16. SALE OF RECEIVABLES (continued)

          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:
 
December 31,
 
March 31,
 
2014
2013
 
2014
Receivables outstanding in facility
$
80,622

$
218,506

 
$
204,364

Beneficial interest
$
27,221

$
37,207

 
$
35,559

Servicing liability
$
21

$
115

 
$
69

   Cash proceeds for the nine months ended December 31:
 
 
 
 
   Cash purchase price
$
299,243

$
571,067

 


   Deferred purchase price
140,871

198,489

 


   Service fees
460

379

 


   Total
$
440,574

$
769,935

 



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.

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.
 
December 31, 2014
December 31, 2013

March 31, 2014

Carrying value
$
926,512

$
777,912

$
904,919

Estimated fair value
861,499

736,399

919,435






- 20 -

Alliance One International, Inc. and Subsidiaries

17. FAIR VALUE MEASUREMENTS (continued)

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 December 31, 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 December 31, 2014 by $47 and $94, respectively.

Guarantees
The Company guarantees funds issued to tobacco suppliers by third party lending institutions and also guarantees funds borrowed by certain unconsolidated subsidiaries. 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 December 31, 2014 would change by $738 or $1,462, respectively.

          Unconsolidated 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 December 31, 2014 would change by $665 or $1,316, respectively.