AOI-2015.03.31-10K

UNITED STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED March 31, 2015

[ ] 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, North Carolina 27560-8417
(Address of principal executive offices)

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

Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Name of Exchange On Which Registered
Common Stock (no par value)
New York Stock Exchange

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

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes [ ] No[X]                                                             
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Exchange Act.                                                                  Yes [ ] No [X]

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    [X]

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. (Check one):           
                                                                
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 September 30, 2014, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was approximately $161.5 million based on the closing sale price of the common stock as reported on the New York Stock Exchange. As of June 1, 2015, there were 88,583,099 shares of Common Stock outstanding (no par value) excluding 7,853,121 shares owned by a wholly owned subsidiary.

DOCUMENTS INCORPORATED BY REFERENCE
Certain information contained in the Proxy Statement for the Annual Meeting of Shareholders (to be held August 13, 2015) of the registrant is incorporated by reference into Part III hereof.



TABLE OF CONTENTS
PART I
 
ITEM 1.
ITEM 1A.
ITEM 1B.
ITEM 2.
ITEM 3.
ITEM 4.
 
 
PART II
 
ITEM 5.
ITEM 6.
ITEM 7.
ITEM 7A.
ITEM 8.
 
 
 
 
 
 
 
ITEM 9.
ITEM 9A.
ITEM 9B.
 
 
PART III
 
ITEM 10.
ITEM 11.
ITEM 12.
ITEM 13.
ITEM 14.
 
 
PART IV
 
ITEM 15.

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PART I

ITEM 1. BUSINESS

A. The Company

Alliance One International, Inc. ("we," "Alliance One" or the "Company") is a Virginia corporation with revenues of approximately $2.1 billion and operating income of approximately $110.8 million for the year ended March 31, 2015. Our common stock has been traded on the New York Stock Exchange since 1995. Through our predecessor companies, we have a long operating history in the leaf tobacco industry with some customer relationships beginning in the early 1900s. Alliance One is one of only two global publicly held leaf tobacco merchants, each with similar global market shares. We have broad geographic processing capabilities, a diversified product offering and an established customer base, including all of the major consumer tobacco product manufacturers. Our goal is to be the preferred supplier of quality tobacco products and innovative solutions to the world’s manufacturers and marketers of tobacco products.

Additional Information
We are required to file annual, quarterly and current reports, proxy statements and other information with the U.S. Securities and Exchange Commission (“SEC”). The public may read and copy any materials that we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. Information on the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an internet site that contains reports, proxy and information statements, and other information regarding issuers that file with the SEC at http://www.sec.gov.
          Our website address is http://www.aointl.com. We make available free of charge through our website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. The information contained on our website shall not be deemed part of this annual report on Form 10-K for any reason.

B. The Business

Leaf tobacco merchants purchase, process, pack, store and ship tobacco to manufacturers of cigarettes and other consumer tobacco products throughout the world. In an increasing number of markets, we also provide agronomy expertise for growing leaf tobacco. Our revenues are primarily comprised of sales of processed tobacco and fees charged for processing and related services to these manufacturers of tobacco products. Processing and other revenues are approximately 5% of our total revenues. We do not manufacture cigarettes or other consumer tobacco products.
          We deal primarily in flue-cured, burley, and oriental tobaccos that are used in international brand cigarettes. Several of the large multinational cigarette manufacturers have operations throughout the world, particularly in Asia, Eastern Europe and the former Soviet Union, in order to access and penetrate the international brand cigarette markets. As cigarette manufacturers expand their global operations, we believe that demand will increase for local sources of leaf tobacco and local tobacco processing and distribution, primarily due to beneficial tariff rates and lower freight costs. We believe that for some large multinational cigarette manufacturers, international expansion will cause them to place greater reliance on the services of leaf tobacco merchants with the ability to source and process tobacco on a global basis and to help develop higher quality local sources of tobacco by improving local agronomic practices. For other large multinational cigarette manufacturers, international expansion also includes vertical integration of their operations, either through acquisition of the operations of existing leaf tobacco merchants, establishing new operations or contracting directly with suppliers. In fiscal 2014, we completed the formation of a joint venture in Brazil with China Tobacco International, Inc. The joint venture entity had previously operated as one of our subsidiaries since its formation in 2012. In recent years, Japan Tobacco, Inc. (“JTI”) enhanced their direct leaf procurement capabilities with the acquisition of small leaf processors in Malawi and Brazil and the formation a joint venture for tobacco leaf in the United States. Philip Morris International, Inc. (“PMI”) has also strengthened their direct leaf procurement capabilities with the acquisition of supplier contracts and the related assets from Alliance One and from another tobacco merchant in Brazil. In addition, some customers have entered into joint venture arrangements to secure their future leaf requirements. We will continue to work with our customers to meet all their needs as their buying patterns and business models change while continuing to be a provider of quality tobacco products and innovative solutions.

Purchasing
Tobacco is primarily purchased directly from suppliers with small quantities still sold at auction. In non-auction markets, we purchase tobacco directly from suppliers and we assume the risk of matching the quantities and grades required by our customers to the entire crop we must purchase under contract. In other non-auction markets, such as China, we buy tobacco from local entities that have purchased tobacco from suppliers and supervise the processing of that tobacco by those local entities. Principal auction markets include India, Malawi and Zimbabwe and our network of tobacco operations and buyers allows us to cover the major auctions of flue-cured and burley tobacco throughout the world. In the United States and other locations, a number of our customers purchase tobacco directly from the suppliers in addition to the leaf merchants. Although our facilities process the tobacco purchased directly from suppliers by these customers, we do not take ownership of that tobacco and do not record sales revenues associated with its resale.



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Purchasing (continued)
          Our arrangements with suppliers vary from locale to locale depending on our predictions of future supply and demand, local historical practice and availability of capital. In certain jurisdictions, we purchase seeds, fertilizer, pesticides and other products related to growing tobacco and advance them to suppliers, which represents prepaid inventory. The suppliers then utilize these inputs to grow tobacco, which we are contractually obligated to purchase. The advances of inputs for the current crop generally include the original cost of the inputs plus a mark-up and interest as it is earned. Where contractually permitted, we charge interest to the suppliers during the period the current crop advance is outstanding. We generally advance inputs at a price greater than our cost, which results in a mark-up on the inputs. We account for our advances to tobacco suppliers using a cost accumulation model, which results in us reporting our advances at the lower of cost or recoverable amounts excluding the mark-up and interest. The mark-up and interest on our advances are recognized when the tobacco is delivered as a decrease in our cost of the current crop. Upon delivery of tobacco, part of the purchase price paid to the supplier is paid in cash and part through a reduction of the advance balance. The advances applied to the delivery are reclassified out of advances and into unprocessed inventory. We advance inputs only to suppliers with whom we have purchase contracts. For example, in Brazil, we generally contract to purchase a supplier's entire tobacco crop at the market price per grade at the time of harvest based on the quality of the tobacco delivered. Pursuant to these purchase contracts, we provide suppliers with fertilizer and other materials necessary to grow tobacco and may guarantee Brazilian rural credit loans to suppliers to finance the crop. Under longer-term arrangements with suppliers, we may advance or guarantee financing on suppliers' capital assets, which are also recovered through the delivery of tobacco to us by our suppliers.
          In these jurisdictions, our agronomists maintain frequent contact with suppliers prior to and during the growing and curing seasons to provide technical assistance to improve the quality and yield of the crop. As a result of various factors including weather, not all suppliers are able to settle the entire amount of advances through delivery of tobacco in a given crop year. Throughout the crop cycle, we monitor events that may impact the suppliers’ ability to deliver tobacco. If we determine we will not be able to recover the original cost of the advances with deliveries of the current crop, or future crop deliveries, the unit cost of tobacco actually received is increased when unrecoverable costs are within a normal range which is based on our historical results or expensed immediately when they are above a normal range based on our historical results. We account for the unrecoverable costs in this manner to ensure only costs within a normal range are capitalized in inventory and costs that are above a normal range are expensed immediately as current period charges.
          Alliance One has developed an extensive international network through which we purchase, process and sell tobacco and we hold a leading position in most tobacco growing regions in the world. We purchase tobacco in more than 35 countries. During the three years ended March 31, 2015, 2014 and 2013, approximately 22%, 31% and 30%, respectively, of our purchases of tobacco were from the South America operating segment, approximately 7%, 5% and 5%, respectively, were from the Value Added Services operating segment and approximately 71%, 64% and 65%, respectively, were from the Other Regions operating segment. Within the Other Regions operating segment, approximately 52%, 46% and 44% of our total purchases for the three years ended March 31, 2015, 2014 and 2013 respectively, were from China, the United States, Turkey and the Africa Region.

Processing
We process tobacco to meet each customer's specifications as to quality, yield, chemistry, particle size, moisture content and other characteristics. Unprocessed tobacco is a semi-perishable commodity that generally must be processed within a relatively short period of time to prevent fermentation or deterioration in quality. The processing of leaf tobacco facilitates shipping and prevents spoilage and is an essential service to our customers because the quality of processed leaf tobacco substantially affects the quality of the manufacturer’s end product. Accordingly, we have located our production facilities in proximity to our principal sources of tobacco.
          We process tobacco in more than 35 owned and third-party facilities around the world including Argentina, Brazil, China, Zimbabwe, Jordan, Guatemala, India, Tanzania, the United States, Malawi, Thailand, Germany, Indonesia, Macedonia, Bulgaria and Turkey. These facilities encompass all leading export locations of flue-cured, burley and oriental tobaccos. In addition, we have entered into contracts, joint ventures and other arrangements for the purchase of tobacco grown in substantially all other countries that produce export-quality flue-cured and burley tobacco.
          Upon arrival at our processing plants, flue-cured and burley tobacco is first reclassified according to grade. Most of that tobacco is then blended to meet customer specifications regarding color, body and chemistry, threshed to remove the stem from the leaf and further processed to produce strips of tobacco and sieve out small scrap. We also sell a small amount of processed but unthreshed flue-cured and burley tobacco in loose-leaf and bundle form to certain customers. Oriental tobaccos are handled and processed in a similar manner other than that the tobaccos are not threshed to remove stems.
          Processed flue-cured, burley and oriental tobacco is redried to remove excess moisture so that it can be held in storage by customers or us for long periods of time. After redrying, whole leaves, bundles, strips or stems and scrap where applicable are separately packed in cases, bales, cartons or hogsheads for storage and shipment. Packed flue-cured, burley and oriental tobacco generally is transported in the country of origin by truck or rail, and exports are moved by ship. Prior to and during processing, steps are taken to ensure consistent quality of the tobacco, including the regrading and removal of undesirable leaves, dirt and other non-tobacco related material. Customer representatives are frequently present at our facilities to monitor the processing of their particular orders. Throughout the processing, our technicians use quality control laboratory test equipment to ensure that the product meets all customer specifications.



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Selling
We ship tobacco to manufacturers of cigarettes and other consumer tobacco products located in approximately 90 countries around the world as designated by these manufacturers. We recognize sales revenue when persuasive evidence of an arrangement exists, the price to the customer is fixed, collectability is reasonably assured and title and risk of ownership is passed to the customer, which is upon either shipment or delivery. In certain countries we also use commissioned agents to supplement our selling efforts. Individual shipments may be large, and since the customer typically specifies shipping dates, our financial results may vary significantly between reporting periods due to timing of sales. In some markets, principally the United States, we process tobacco that is owned by our customers, and revenue is recognized when the processing is completed.
          The consumer tobacco business is dominated by a relatively small number of large multinational cigarette manufacturers and by government controlled entities. Including their respective affiliates, accounting for more than 10% of our revenues were each of PMI and China Tobacco International, Inc. for the years ended March 31, 2015 and 2014; and PMI, JTI, Imperial Tobacco Group PLC and China Tobacco International Inc. for the year ended March 31, 2013.
          In 2015, Alliance One delivered approximately 42% of its tobacco sales to customers in Europe and approximately 18% to customers in the United States. One customer directs shipments to its Belgium storage and distribution center before shipment to its manufacturing facilities in Europe and Asia. In 2015, these Belgium sales accounted for 7% of sales to customers in Europe. The remaining sales are to customers located in Asia, Africa and other geographic regions of the world.

Seasonality
The purchasing and processing activities of our tobacco business are seasonal. Flue-cured tobacco grown in the United States is purchased, processed and marketed generally during the five-month period beginning in July and ending in November. U.S. grown burley tobacco is purchased, processed and marketed usually from late November through January or February. Tobacco grown in Brazil is usually purchased, processed and marketed from January through July and in Africa from April through September. Other markets around the world have similar purchasing periods, although at different times of the year.
          During the purchasing, processing and marketing seasons, inventories of unprocessed tobacco, inventories of redried tobacco and trade accounts receivable normally reach peak levels in succession. Current liabilities, particularly advances from customers and short-term notes payable to banks, normally reach their peak in this period as a means of financing the seasonal expansion of current assets. At March 31, the end of our fiscal year, the seasonal components of our working capital reflect primarily the operations related to foreign grown tobacco.

Competition
Alliance One is one of only two global publicly held leaf tobacco merchants, with substantially similar global market shares in markets in which we both operate. We hold a leading position in most major tobacco growing regions in the world, including the principal export markets for flue-cured, burley and oriental tobacco and, as a result of our scale, global reach, and financial resources, we believe we are well-suited to serve the needs of all manufacturers of cigarettes and other consumer tobacco products.
          The leaf tobacco industry is highly competitive and competition is based primarily on the price charged for products and services as well as the merchant's ability to meet customer specifications in the buying, processing, residue compliance and financing of tobacco. In addition to the primary global independent leaf tobacco merchants, there are a number of other independent global, regional or national competitors. Local independent leaf merchants with low fixed costs and overhead also supply cigarette manufacturers. Recent vertical integration initiatives and other changes in customer buying patterns have resulted in a more dynamic and competitive operating environment. There is also competition in all countries to buy the available leaf tobacco and in many areas, total leaf tobacco processing capacity exceeds demand.

Reportable Segments
The purchasing, processing, selling and storing of leaf tobacco is similar throughout our business. However, we maintain regional operating and financial management in North America, South America, Europe, Africa, Asia and Value Added Services to monitor our various operations in these areas. In reviewing these operations, we have concluded that the economic characteristics of South America and Value Added Services are dissimilar from the other operating regions. Based on this fact, we disclose South America and Value Added Services separately and aggregate the remaining four operating segments, Africa, Asia, Europe and North America into one reportable segment “Other Regions.” Our financial performance is reviewed at this level and these regions represent our operating segments. See Note 14 “Segment Information” to the “Notes to Consolidated Financial Statements” for financial information attributable to our reportable segments.

C. Other

Research and Development
We routinely cooperate with both our customers and the manufacturers of the equipment used in our processing facilities to improve processing technologies. However, no material amounts are expended for research and development, and we hold no material patents, licenses, franchises, or concessions.




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Alliance One Employees
Alliance One's consolidated entities employed approximately 3,281 persons, excluding seasonal employees, in our worldwide operations at March 31, 2015. In the Other Regions operating segment, Alliance One's consolidated entities employed approximately 2,429 employees at March 31, 2015 excluding approximately 4,256 seasonal employees. During processing periods, most seasonal employees as well as approximately 121 full-time factory personnel in the United States are covered by collective bargaining agreements. In the Value Added Services operating segment, Alliance One's consolidated entities employed approximately 232 persons, excluding approximately 8 seasonal employees, at March 31, 2015. Of those, approximately 69 hourly paid factory workers in the United States are covered by a collective bargaining agreement. In the South America operating segment, Alliance One's consolidated entities employed approximately 620 persons, excluding approximately 2,843 seasonal employees, at March 31, 2015. We consider Alliance One's employee relations to be satisfactory.

Government Regulation and Environmental Compliance
See Item 1A. “Risk Factors” for a discussion of government regulation. Currently there are no material estimated capital expenditures related to environmental control facilities. In addition, there is no material effect on capital expenditures, results of operations or competitive position anticipated as a result of compliance with current or pending federal or state laws and regulations relating to protection of the environment.

EXECUTIVE OFFICERS OF ALLIANCE ONE INTERNATIONAL, INC.

The following information is furnished with respect to the Company's executive officers as of April 1, 2015, and the capacities in which they serve. These officers serve at the pleasure of the Board of Directors and are elected at each annual organizational meeting of the Board.

NAME
AGE
TITLE
J. Pieter Sikkel
51
President and Chief Executive Officer
 
 
 
Graham J. Kayes
50
Executive Vice President - Business Relationship Management and Leaf
 
 
 
Jose Maria Costa Garcia
49
Executive Vice President - Global Operations and Supply Chain
 
 
 
Joel L. Thomas
48
Executive Vice-President - Chief Financial Officer
 
 
 
William L. O’Quinn, Jr.
46
Senior Vice President - Chief Legal Officer and Secretary

The business experience summaries provided below for the Company's executive officers describe positions held by the named individuals during the last five years.

J. Pieter Sikkel has served as President and Chief Executive Officer of Alliance One International, Inc., since March 2013, having previously served as President from December 14, 2010 through February 2013, Executive Vice President - Business Strategy and Relationship Management from May 2007 through December 13, 2010, and as Regional Director of Asia from May 2005 through April 2007.

Graham J. Kayes has served as Executive Vice President - Business Relationship Management and Leaf since July 2014, having previously served as Regional Director - Africa from February 2011 through June 2014, and as Managing Director of the Company's Tanzanian subsidiary from June 2007 through January 2011.

Jose Maria Costa Garcia has served as Executive Vice President - Global Operations and Supply Chain since August 2012, having previously served as Regional Director - Europe from September 2008 through July 2012, and as Regional Financial Director - Europe from April 2005 through August 2008.

Joel L. Thomas has served as Executive Vice President - Chief Financial Officer since January 2014, having previously served as Vice President - Treasurer from December 2005 through December 2013.

William L. O’Quinn, Jr. has served as Senior Vice President - Chief Legal Officer and Secretary since April 2011, having previously served as Senior Vice President - Assistant General Counsel and Secretary from January 2011 through March 2011, and as Assistant General Counsel and Assistant Secretary from August 2005 through December 2010.


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ITEM 1A. RISK FACTORS

The following risk factors should be read carefully in connection with evaluating our business and the forward-looking statements contained in this Annual Report on Form 10-K. Any of the following risks could materially adversely affect our business, our operating results, our financial condition and the actual outcome of matters as to which forward-looking statements are made in this Annual Report.
          We may from time to time make written or oral forward-looking statements, including statements contained in filings with the SEC, in reports to stockholders and in press releases and investor calls and webcasts. You can identify these forward-looking statements by use of words such as “strategy,” “expects,” “continues,” “plans,” “anticipates,” “believes,” “will,” “estimates,” “intends,” “projects,” “goals,” “targets” and other words of similar meaning. You can also identify them by the fact that they do not relate strictly to historical or current facts.
          We cannot guarantee that any forward-looking statement will be realized, although we believe we have been prudent in our plans and assumptions. Achievement of future results is subject to risks, uncertainties and inaccurate assumptions. Should known or unknown risks or uncertainties materialize, or should underlying assumptions prove inaccurate, actual results could vary materially from those anticipated, estimated or projected. Investors should bear this in mind as they consider forward-looking statements and whether to invest in or remain invested in Alliance One International, Inc. securities. In connection with the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, we are identifying important risk factors that, individually or in the aggregate, could cause actual results and outcomes to differ materially from those contained in any forward-looking statements made by us; any such statement is qualified by reference to the following cautionary statements. We elaborate on these and other risks we face throughout this document. You should understand that it is not possible to predict or identify all risk factors. Consequently, you should not consider the following to be a complete discussion of all potential risks or uncertainties. We do not undertake to update any forward-looking statement that we may make from time to time.

Risks Relating to Our Operations

Our reliance on a small number of significant customers may adversely affect our financial statements.
Our customers are manufacturers of cigarette and other tobacco products. Several of these customers individually account for a significant portion of our sales in a normal year.
          For the year ended March 31, 2015, each of Philip Morris International, Inc. and China Tobacco International Inc., including their respective affiliates, accounted for more than 10% of our revenues from continuing operations. In addition, tobacco product manufacturers have experienced consolidation and further consolidation among our customers could decrease such customers’ demand for our leaf tobacco or processing services. The loss of any one or more of our significant customers could have a material adverse effect on our financial statements.

Continued vertical integration by our customers could materially adversely affect our financial statements.
Demand for our leaf tobacco or processing services could be materially reduced if cigarette manufacturers continue to significantly vertically integrate their operations, either through acquisition of our competitors, establishing new operations or contracting directly with suppliers. During fiscal 2014, we completed the formation of a joint venture in Brazil with China Tobacco International Inc. The joint venture entity had previously operated as one of our subsidiaries since its formation in 2012. In recent years, Japan Tobacco, Inc. vertically integrated operations in Malawi, Brazil and the United States. In addition, Philip Morris International, Inc. acquired supplier contracts and related assets in Brazil in order to procure leaf directly. In general, our results of operations have been adversely affected by vertical integration initiatives. Further vertical integration by our customers could have a material adverse effect on our financial statements.

Global shifts in sourcing customer requirements may negatively impact our organizational structure and asset base.
The global leaf tobacco industry has experienced shifts in the sourcing of customer requirements for tobacco. For example, significant tobacco production volume decreases have occurred in the United States, Zimbabwe and Western Europe from historical levels. At the same time, production volumes in other sourcing origins, such as Brazil and other areas of Africa, have stabilized. Additional shifts in sourcing may occur as a result of currency fluctuations, including devaluation of the U.S. dollar. A shift in sourcing origins in Europe has been influenced by modifications to the tobacco price support system in the European Union (EU). Customer requirements have changed due to these variations in production, which could influence our ability to plan effectively for the longer term in Europe.
          We may not be able to timely or efficiently adjust to shifts in sourcing origins, and adjusting to shifts may require changes in our production facilities in certain origins and changes in our fixed asset base. We have incurred, and may continue to incur, restructuring charges as we continue to adjust to shifts in sourcing. Adjusting our capacity and adjusting to shifts in sourcing may have an adverse impact on our ability to manage our costs, and could have an adverse effect on our financial performance.









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Risks Relating to Our Operations (continued)

Our financial results will vary according to growing conditions, customer indications and other factors, which reduces your ability to gauge our quarterly and annual financial performance.
Our financial results, particularly the quarterly financial results, may be significantly affected by fluctuations in tobacco growing seasons and crop sizes which affect the supply of tobacco. Crop sizes may be affected by, among other things, crop infestation and disease, the volume of annual tobacco plantings and yields realized by supplier and suppliers elections to grow crops other than tobacco. The cultivation period for tobacco is dependent upon a number of factors, including the weather and other natural events, such as hurricanes or tropical storms, and our processing schedule and results of operations for any quarterly period can be significantly altered by these factors.
          The cost of acquiring tobacco can fluctuate greatly due to crop sizes and increased competition in certain markets in which we purchase tobacco. For example, short crops in periods of high demand translate into higher average green prices, higher throughput costs and less volume to sell. Furthermore, large crops translate into lower average green prices, lower throughput costs and excess volume to sell.
          Further, the timing and unpredictability of customer indications, orders and shipments cause us to keep tobacco in inventory, increase our risk and result in variations in quarterly and annual financial results. The timing of shipments can be materially impacted by shortages of containers and vessels for shipping as well as infrastructure and accessibility issues in ports we use for shipment. We may from time to time in the ordinary course of business keep a significant amount of processed tobacco in inventory for our customers to accommodate their inventory management and other needs. Sales recognition by us and our subsidiaries is based on the passage of ownership, usually with shipment of product. Because individual shipments may represent significant amounts of revenue, our quarterly and annual financial results may vary significantly depending on our customers’ needs and shipping instructions. These fluctuations result in varying volumes and sales in given periods, which also reduces your ability to compare our financial results in different periods or in the same periods in different years.

Suppliers who have historically grown tobacco and from whom we have purchased tobacco may elect to grow other crops instead of tobacco, which affects the world supply of tobacco and may impact our quarterly and annual financial performance.
Increases in the prices for other crops have led and may in the future lead suppliers who have historically grown tobacco, and from whom we have purchased tobacco, to elect to grow these other, more profitable items instead of tobacco. A decrease in the volume of tobacco available for purchase may increase the purchase price of such tobacco. As a result, we could experience an increase in tobacco crop acquisition costs which may impact our quarterly and annual financial performance.

Our advancement of inputs to tobacco suppliers could expose us to losses.
We advance seeds, fertilizer, pesticides and other products related to growing tobacco to our suppliers, which represent prepaid inventory, in many countries to allow the suppliers to grow tobacco, which we are contractually obligated to purchase. The advances to tobacco suppliers are settled as part of the consideration paid upon the suppliers delivering us unprocessed tobacco at market prices. Two primary factors determine the market value of the tobacco suppliers deliver to us: the quantity of tobacco delivered and the quality of the tobacco delivered. Unsatisfactory quantities or quality of the tobacco delivered could result in losses with respect to advances to our tobacco suppliers or the deferral of those advances.

When we purchase tobacco directly from suppliers, we bear the risk that the tobacco will not meet our customers’ quality and quantity requirements.
In countries where we contract directly with tobacco suppliers, including Argentina, Brazil, the United States and certain African countries, we bear the risk that the tobacco delivered will not meet quality and quantity requirements of our customers. If the tobacco does not meet such market requirements, we may not be able to sell the tobacco we agreed to buy and may not be able to meet all of our customers’ orders, which would have an adverse effect on our profitability and results of operations.

Weather and other conditions can affect the marketability of our inventory.
Like other agricultural products, the quality of tobacco is affected by weather and the environment, which can change the quality or size of the crop. If a weather event is particularly severe, such as a major drought or hurricane, the affected crop could be destroyed or damaged to an extent that it would be less desirable to our customers, which would result in a reduction in revenues. If such an event is also widespread, it could affect our ability to acquire the quantity of products required by customers. In addition, other items can affect the marketability of tobacco, including, among other things, the presence of:

non-tobacco related material;
genetically modified organisms; and
excess residues of pesticides, fungicides and herbicides.

          A significant event impacting the condition or quality of a large amount of any of the tobacco crops we buy could make it difficult for us to sell such tobacco or to fill our customers’ orders. In addition, in the event of climate change, adverse weather patterns could develop in the growing regions in which we purchase tobacco. Such adverse weather patterns could result in more permanent disruptions in the quality and size of the available crop, which could adversely affect our business.

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Risks relating to Our Operations (continued)

We face increased risks of doing business due to the extent of our international operations.
We do business in more than 35 countries, some of which do not have stable economies or governments. Our international operations are subject to international business risks, including unsettled political conditions, uncertainty in the enforcement of legal obligations, including the collection of accounts receivable, expropriation, import and export restrictions, exchange controls, inflationary economies, currency risks and risks related to the restrictions on repatriation of earnings or proceeds from liquidated assets of foreign subsidiaries. These risks are exacerbated in countries where we have advanced substantial sums or guaranteed local loans or lines of credit for the purchase of tobacco from suppliers. For example, in 2006 as a result of the political environment, economic instability, foreign currency controls and governmental regulations in Zimbabwe, we deconsolidated our Zimbabwe subsidiaries.
          Our international operations are in areas where the demand is for the export of lower priced tobacco. We have significant investments in our purchasing, processing and exporting operations in Argentina, Brazil, Malawi, Tanzania and Turkey.
          In recent years, economic problems in certain African countries have received wide publicity related to devaluation and appreciation of the local currency and inflation. Devaluation and appreciation can affect our purchase costs of tobacco and our processing costs. In addition, we conduct business with suppliers and customers in countries that have recently had or may be subject to dramatic political regime change, such as Egypt. In the event of such dramatic changes in the government of such countries, we may be unable to continue to operate our business, or adequately enforce legal obligations, after the change in a manner consistent with prior practice.
          We are subject to potentially inconsistent actions by the governments of certain foreign countries in which we operate which may have a significant impact on our financial results. For example, in 2006, our concession to promote tobacco production in the Chifunde district of Mozambique was terminated by the government. Thereafter, we assessed our remaining Mozambique operations without the Chifunde district and determined that it was not in our economic interest to remain in Mozambique without this strategic district. Consequently, we discontinued our operations within Mozambique after the 2006 crop.

We are subject to the Foreign Corrupt Practices Act (the “FCPA”) and operate in jurisdictions that pose a high risk of potential FCPA violations.
We are subject to the FCPA, which generally prohibits companies and their intermediaries from making improper payments to foreign officials for the purpose of obtaining or keeping business and/or other benefits. We operate in a number of jurisdictions that pose a high risk of potential FCPA violations. Although our corporate policy prohibits foreign bribery and we have adopted procedures to promote compliance, there is no assurance that our policy or procedures will work effectively all of the time or protect us against liability under the FCPA for actions taken by our agents, employees and intermediaries with respect to our business or any businesses that we acquire. Failure to comply with the FCPA, other anti-corruption laws and other laws governing the conduct of business with government entities (including local laws) could lead to criminal and civil penalties and other remedial measures (including further changes or enhancements to our procedures, policies, and controls, the imposition of a compliance monitor at our expense and potential personnel changes and/or disciplinary actions), any of which could have an adverse impact on our business, financial condition, results of operations and liquidity. Any investigation of any potential violations of the FCPA or other anti-corruption laws by U.S. or foreign authorities also could have an adverse impact on our business, financial condition and results of operations.
          In 2010, we entered into settlements with the SEC and the U.S. Department of Justice to resolve their investigations regarding potential criminal and civil violations of the FCPA. The settlements resulted in the disgorgement in profits and fines totaling $19.45 million, which have been paid. Both settlements also required us to retain an independent compliance monitor for a three year term that was completed September 30, 2013.

Our exposure to changes in foreign tax regimes could adversely impact our business.
We do business in countries that have tax regimes in which the rules are not clear, are not consistently applied and are subject to sudden change. This is especially true with regard to international transfer pricing. Our earnings could be reduced by the uncertain and changing nature of these tax regimes.

Fluctuations in foreign currency exchange and interest rates could adversely affect our results of operations.
We conduct our business in many countries around the world. Our business is generally conducted in U.S. dollars, as is the business of the leaf tobacco industry as a whole. However, we generally must purchase tobacco in non-U.S. countries using local currency. As a result, local country operating costs, including the purchasing and processing costs for tobaccos, are subject to the effects of exchange fluctuations of the local currency against the U.S. dollar. When the U.S. dollar weakens against foreign currencies, our costs for purchasing and processing tobacco in such currencies increases. We attempt to minimize such currency risks by matching the timing of our working capital borrowing needs against the tobacco purchasing and processing funds requirements in the currency of the country where the tobacco is grown. Fluctuations in the value of foreign currencies can significantly affect our operating results.




- 9-


Risks relating to Our Operations (continued)

Fluctuations in foreign currency exchange and interest rates could adversely affect our results of operations. (continued)
          In addition, the devaluation of foreign currencies has resulted and may in the future result in reduced purchasing power from customers whose capital resources are denominated in those currencies. We may incur a loss of business as a result of the devaluation of these currencies now or in the future.

Low investment performance by our defined benefit pension plan assets may increase our pension expense, and may require us to fund a larger portion of our pension obligations, thus, diverting funds from other potential uses.
We sponsor defined benefit pension plans that cover certain eligible employees. Our pension expense and required contributions to our pension plans are directly affected by the value of plan assets, the projected rate of return on plan assets, the actual rate of return on plan assets, and the actuarial assumptions we use to measure the defined benefit pension plan obligations.
          If plan assets perform below the assumed rate of return used to determine pension expense, future pension expense will increase. Further, as a result of the global economic instability or other economic market events, our pension plan investment portfolio may experience significant volatility.
          The proportion of pension assets to liabilities, which is called the funded status, determines the level of contribution to the plan that is required by law. In recent years, we have funded the plan in amounts as required, but changes in the plan’s funded status related to the value of assets or liabilities could increase the amount required to be funded. We cannot predict whether changing market or economic conditions, regulatory changes or other factors will further increase our pension funding obligations, diverting funds that would otherwise be available for other uses.

Competition could erode our earnings.
The leaf tobacco industry is highly competitive. We are one of two global publicly held competitors in the leaf tobacco industry, each with similar global market shares. Competition is based primarily on the prices charged for products and services as well as the merchant’s ability to meet customer specifications in the buying, processing and financing of tobacco. In addition, there is competition in all countries to buy the available tobacco. The loss or substantial reduction of any large or significant customer could reduce our earnings.
          In addition to the two primary global independent leaf tobacco merchants, the cigarette manufacturers increasingly buy tobacco directly from suppliers. We also face increasing competition from new local and regional independent leaf merchants with low fixed costs and overhead and good customer connections at the local level, particularly Brazil and parts of Africa, where the new entrants have been able to capitalize in the global transition to those markets. Any of these sources of new competition may result in less tobacco available for us to purchase and process in the applicable markets.

We rely on internal and externally hosted information technology systems and disruption, failure or security breaches of these systems could adversely affect our business.
We rely on information technology (IT) systems, including systems hosted by service providers. The enterprise resource planning system (SAP) we are implementing in stages throughout the company, for example, is hosted by Capgemini and our domestic employee payroll system is hosted by Ceridian. Although we have disaster recovery plans and several intrusion preventive mitigating tools and services in place, which are active inline services or are tested routinely, our portfolio of hardware and software products, solutions and services and our enterprise IT systems, including those hosted by service providers, may be vulnerable to damage or disruption caused by circumstances beyond our control, such as catastrophic events, power outages, natural disasters, computer system or network failures, computer viruses or other malicious software programs and cyber-attacks, including system hacking and other cyber-security breaches. The failure or disruption of our IT systems to perform as anticipated for any reason could disrupt our business and result in decreased performance, significant remediation costs, transaction errors, loss of data, processing inefficiencies, downtime, litigation, and the loss of suppliers or customers. A significant disruption or failure could have a material adverse effect on our business operations, financial performance and financial condition.

We have identified material weaknesses related to our internal controls in the past, and there can be no assurance that material weaknesses will not be identified in the future.
Prior to fiscal 2009, we identified certain matters involving our internal control over financial reporting that we and our independent registered public accounting firm determined to be material weaknesses under standards established by the Public Company Accounting Oversight Board. We remediated those material weaknesses in internal control over financial reporting, and we believe that our internal control over financial reporting was effective at March 31, 2015 as reported elsewhere in this Annual Report. Although we intend to continue to monitor and improve our internal controls, we cannot assure you that other material weaknesses will not occur in the future. Any failure to implement required new or improved controls, or difficulties encountered in their implementation, could cause us to fail to meet our reporting obligations or result in misstatements in our financial statements in amounts that could be material. Inferior internal controls could cause investors to lose confidence in our reported financial information, which could have a negative effect on the value of our common stock and could also require additional restatements of our prior reported financial information.



- 10-


Risks Relating to Our Capital Structure

We may not continue to have access to the capital markets to obtain long-term and short-term financing on acceptable terms and conditions.
We access the short-term capital markets and, from time to time, the long-term markets to obtain financing. Although we believe that we can continue to access the capital markets in fiscal 2016 on acceptable terms and conditions, our access and the availability of acceptable terms and conditions are impacted by many factors, including: (i) our credit ratings; (ii) the liquidity and volatility of the overall capital markets; and (iii) the current state of the economy, including the tobacco industry. There can be no assurances that we will continue to have access to the capital markets on terms acceptable to us.

We may not have access to available capital to finance our local operations in non-U.S. jurisdictions.
We have typically financed our non-U.S. local operations with uncommitted short-term operating credit lines at the local level. These operating lines are typically seasonal in nature, normally extending for a term of 180 to 270 days corresponding to the tobacco crop cycle in that location. These facilities are typically uncommitted in that the lenders have the right to cease making loans or demand payment of outstanding loans at any time. In addition, each of these operating lines must be renewed with each tobacco crop season in that jurisdiction. Although our foreign subsidiaries are the borrowers under these lines, many of them are guaranteed by us.
          As of March 31, 2015, we had approximately $330.3 million drawn and outstanding on short-term foreign seasonal lines with maximum capacity totaling $795.7 million subject to limitations under our senior secured credit facility. Additionally against these lines there was $10.9 million available in unused letter of credit capacity with $6.3 million issued but unfunded.
          Because the lenders under these operating lines typically have the right to cancel the loan at any time and each line must be renewed with each crop season, there can be no assurance that this capital will be available to our subsidiaries. If a number of these lenders cease lending to our subsidiaries or dramatically decrease such lending, it could have a material adverse affect on our liquidity.

Failure of foreign banks in which our subsidiaries deposit funds or the failure to transfer funds or honor withdrawals may affect our results of operations.
Funds held by our foreign subsidiaries are often deposited in their local banks. Banks in certain foreign jurisdictions may be subject to a higher rate of failure or may not honor withdrawals of deposited funds. In addition, the countries in which these local banks operate may lack sufficient regulatory oversight or suffer from structural weaknesses in the local banking system. Due to uncertainties and risks relating to the political stability of certain foreign governments, these local banks also may be subject to exchange controls and therefore unable to perform transfers of certain currencies. If our ability to gain access to these funds was impaired, it could have a material adverse effect on our results of operations.

We have substantial debt which may adversely affect us by limiting future sources of financing, interfering with our ability to pay interest and principal on the senior notes and subjecting us to additional risks.
We have a significant amount of indebtedness and debt service obligations. As of March 31, 2015, we had approximately $1,072.1 million of indebtedness. In addition, the indenture governing the senior secured second lien notes allows us to incur additional indebtedness under certain circumstances. If we add new indebtedness to our current indebtedness levels, the related risks that we now face could increase.
          Our substantial debt will have important consequences, including:

that our indebtedness may make it more difficult for us to satisfy our obligations with respect to the senior notes and our other obligations;
that our indebtedness may limit our ability to obtain additional financing on satisfactory terms and to otherwise fund working capital, capital expenditures, debt refinancing, acquisitions and other general corporate requirements;
that a significant portion of our cash flow from operations must be dedicated to paying interest on and the repayment of the principal of our indebtedness. This reduces the amount of cash we have available for making principal and interest payments under the senior notes and for other purposes and makes us more vulnerable to a decrease in demand for leaf tobacco, increases in our operating costs or general economic or industry conditions;
that our ability to adjust to changing market conditions and to compete with other global leaf tobacco merchants may be hampered by the amount of debt we owe;
increasing our vulnerability to general adverse economic and industry conditions;
placing us at a competitive disadvantage compared to our competitors that have less debt or are less leveraged;
limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; and
restricting us from making strategic acquisitions or exploiting business opportunities.






- 11-


Risks Relating to Our Capital Structure (continued)

We have substantial debt which may adversely affect us by limiting future sources of financing, interfering with our ability to pay interest and principal on the senior notes and subjecting us to additional risks. (continued)
          In addition, the indenture governing the senior secured second lien notes and our senior secured credit facility each contain financial and other restrictive covenants that will limit our ability to engage in activities that may be in our long-term best interests. Our failure to comply with those covenants could result in an event of default which, if not cured or waived, could result in the acceleration of all of our debt. Also, a substantial portion of our debt, including borrowings under our senior secured credit facility, bears interest at variable rates. If market interest rates increase, variable-rate debt will create higher debt service requirements, which would adversely affect our cash flow. While we may enter into agreements limiting our exposure to higher debt service requirements, any such agreements may not offer complete protection from this risk.

Despite current indebtedness levels, we may still be able to incur substantially more debt. This could exacerbate further the risks associated with our significant leverage.
We may be able to incur substantial additional indebtedness in the future. The terms of the indenture governing our publicly traded senior secured second lien notes and our credit agreement restrict, but do not completely prohibit, us from doing so. Our senior secured credit facility provides for a revolving credit line of $210.3 million. There were no borrowings outstanding under this facility at March 31, 2015. If new debt is added to our current debt levels, the related risks we now face could intensify.

The indentures governing the senior notes and our senior secured credit facility contain, and in the future could contain additional, covenants and tests that limit our ability to take actions or cause us to take actions we may not normally take.
The indenture governing the senior secured second lien notes and our senior secured credit facility contain a number of significant covenants. These covenants limit our ability to, among other things:

incur additional indebtedness;
issue preferred stock;
merge, consolidate or dispose of substantially all of our assets;
grant liens on our assets;
pay dividends, redeem stock or make other distributions or restricted payments;
repurchase or redeem capital stock or prepay subordinated debt;
make certain investments;
agree to restrictions on the payment of dividends to us by our subsidiaries;
sell or otherwise dispose of assets, including equity interests of our subsidiaries;
enter into transactions with our affiliates; and
enter into certain sale and leaseback transactions.

          Our senior secured credit facility and the indenture require us to meet certain financial tests. Complying with these covenants and tests may cause us to take actions that we otherwise would not take or not take actions that we otherwise would take. The failure to comply with these covenants and tests would cause a default under the credit facility and, under the indenture, would prevent us from taking certain actions, such as incurring additional debt, paying dividends or redeeming senior notes or subordinated debt. A default, if not waived, could result in the debt under our senior secured credit facility and the indenture becoming immediately due and payable and could result in a default or acceleration of our other indebtedness with cross-default provisions. If this occurs, we may not be able to pay our debt or borrow sufficient funds to refinance it. Even if new financing is available, it may not be on terms that are acceptable to us.

We may not be able to satisfy the covenants included in our financing arrangements which could result in the default of our outstanding debt obligations.
In the recent past, we have sought and obtained waivers and amendments under our then existing financing arrangements to avoid future non-compliance with financial covenants and cure past defaults under restrictive covenants. We also paid significant fees to obtain these waivers and consents. You should consider this in evaluating our ability to comply with restrictive covenants in our debt instruments and the financial costs of our ability to do so. Any future defaults for which we do not obtain waivers or amendments could result in the acceleration of a substantial portion of our indebtedness, much of which is cross-defaulted to other indebtedness.









- 12-


Risks Relating to Our Capital Structure (continued)

We will require a significant amount of cash to service our indebtedness. Our ability to generate cash depends on many factors beyond our control.
Our ability to make payments on and to refinance our indebtedness, including the notes, and to fund planned capital expenditures will depend on our ability to generate cash in the future. This is subject to general economic, financial, competitive and other factors that may be beyond our control. We cannot assure you that our business will generate sufficient cash flow from operations or that future borrowings will be available to us under our senior secured credit facility or otherwise in an amount sufficient to enable us to pay our indebtedness, including the senior secured second lien notes, or to fund our other liquidity needs. We may need to refinance all or a portion of our indebtedness, including the senior secured second lien notes, on or before maturity. We cannot assure you that we will be able to refinance any of our debt, including our senior secured credit facility or the senior secured second lien notes, on commercially reasonable terms or at all. Additionally, to the extent permitted under our senior secured credit agreement and indenture, we may repurchase, repay or tender for our bank debt or our senior secured second lien notes, which may place pressure on future cash requirements to the extent that the debt repurchased, repaid or tendered cannot be redrawn.

If we refinance our current credit facilities, we may not be able to obtain the same credit availability or at interest rates similar to our current credit facilities.
If credit market conditions worsen, it could have a material adverse impact on our ability to refinance our current credit facilities on similar or better terms than our current credit facility.

Risks Related to Global Financial and Credit Markets

Volatility and disruption of global financial and credit markets may negatively impact our ability to access financing and expose us to unexpected risks.
Global financial and credit markets exposes us to a variety of risks as we fund our business with a combination of cash from operations, short-term seasonal credit lines, our revolving credit facility, long-term debt securities and customer advances. We have financed our non-U.S. operations with uncommitted unsecured short term seasonal lines of credit at the local level. These local operating lines typically extend for a term of up to one year and are typically uncommitted in that the lenders have the right to cease making loans and demand repayment of loans at any time. As of March 31, 2015, we had approximately $330.3 million drawn and outstanding on short-term foreign seasonal lines with maximum capacity totaling $795.7 million. Changes in the global financial and credit markets could create uncertainty as to whether local seasonal lines will continue to be available to finance our non-U.S. operations to the extent or on terms similar to what has been available in the past and whether repayment of existing loans under these lines will be demanded prior to maturity. To the extent that local seasonal lines cease to be available at levels necessary to finance our non-U.S. operations or we are required to repay loans under the lines prior to maturity, we may be required to seek alternative financing sources beyond our existing committed sources of funding. Based on the current financial and credit markets, we cannot assure you that such alternative funding will be available to us on terms and conditions acceptable to us, or at all. In the event that we may be required to support our non-U.S. operations by borrowing U.S. dollars under our existing senior secured credit facility, we may be exposed to additional currency exchange risk that we may be unable to successfully hedge. Further, there is additional risk that certain banks that are lenders in the U.S. senior secured credit facility could be unable to meet contractually obligated borrowing requests in the future if their financial condition were to deteriorate. In addition, we maintain deposit accounts with numerous financial institutions around the world in amounts that exceed applicable governmental deposit insurance levels. While we actively monitor our deposit relationships, we are subject to risk of loss in the event of the unanticipated failure of a financial institution in which we maintain deposits, which loss could be material to our results of operations and financial condition.

Derivative transactions may expose us to potential losses and counterparty risk.
We have entered into certain derivative transactions, including interest rate swaps and foreign exchange contracts. Changes in the fair value of these derivative financial instruments that are not accounted for as cash flow hedges are reported as income, and accordingly could materially affect our reported income in any period. In addition, the counterparties to these derivative transactions are financial institutions or affiliates of financial institutions, and we are subject to risks that these counterparties default under these transactions. In some of these transactions, our exposure to counterparty credit risk is not secured by any collateral. Global economic conditions over the last few years have resulted in the actual or perceived failure or financial difficulties of many financial institutions, including bankruptcy. If one or more of the counterparties to one or more of our derivative transactions not secured by any collateral becomes subject to insolvency proceedings, we will become an unsecured creditor in those proceedings with a claim equal to our exposure at the time under those transactions. We can provide no assurances as to the financial stability or viability of any of our counterparties.






- 13-


Risks Relating to the Tobacco Industry

Reductions in demand for consumer tobacco products could adversely affect our results of operations.
The tobacco industry, both in the United States and abroad, continues to face a number of issues that may reduce the consumption of cigarettes and adversely affect our business, sales volume, results of operations, cash flows and financial condition.
          These issues, some of which are more fully discussed below, include:

governmental actions seeking to ascribe to tobacco product manufacturers liability for adverse health effects associated with smoking and exposure to environmental tobacco smoke;
smoking and health litigation against tobacco product manufacturers;
increased consumer acceptance of electronic cigarettes;
tax increases on consumer tobacco products;
current and potential actions by state attorneys general to enforce the terms of the Master Settlement Agreement, or MSA, between state governments in the United States and tobacco product manufacturers;
governmental and private bans and restrictions on smoking;
actual and proposed price controls and restrictions on imports in certain jurisdictions outside the United States;
restrictions on tobacco product manufacturing, marketing, advertising and sales;
the diminishing social acceptance of smoking;
increased pressure from anti-smoking groups;
other tobacco product legislation that may be considered by Congress, the states, municipalities and other countries; and
the impact of consolidation among multinational cigarette manufacturers.

Tobacco product manufacturer litigation may reduce demand for our products and services.
Our primary customers, the leading cigarette manufacturers, face thousands of lawsuits brought throughout the United States and, to a lesser extent, the rest of the world. These lawsuits have been brought by plaintiffs, including (1) individuals and classes of individuals alleging personal injury and/or misleading advertising, (2) governments (including governmental and quasi-governmental entities in the United States and abroad) seeking recovery of health care costs allegedly caused by cigarette smoking, and (3) other groups seeking recovery of health care expenditures allegedly caused by cigarette smoking, including third-party health care payors, such as unions and health maintenance organizations. Damages claimed in some of the smoking and health cases range into the billions of dollars. There have been several jury verdicts in tobacco product litigation during the past several years. Additional plaintiffs continue to file lawsuits. The effects of the lawsuits on our customers could reduce their demand for tobacco from us.

Legislation and regulatory and other governmental initiatives could impose burdensome restrictions on the tobacco industry and reduce consumption of consumer tobacco products and demand for our services.
The Family Smoking Prevention and Tobacco Control Act extends the authority of the Food and Drug Administration ("FDA") to regulate tobacco products. This act authorizes the FDA to adopt product standards for tobacco products, including the level of nicotine yield and the reduction or elimination of other constituents of the products, along with provisions for the testing of products against these standards. The act imposes further restrictions on advertising of tobacco products, authorizes the FDA to limit the sales of tobacco products to face-to-face transactions permitting the verification of the age of the purchaser, authorizes a study to determine whether the minimum age for the purchase of tobacco products should be increased and requires submission of reports from manufacturers of tobacco products to the FDA regarding product ingredients and other matters, including reports on health, toxicological, behavioral, or physiologic effects of tobacco products and their constituents. The act also mandates warning labels and requires packaging to indicate the percentage of domestically grown tobacco and foreign grown tobacco included in the product. The FDA has adopted regulations under the act establishing requirements for the sale, distribution and marketing of cigarettes, as well as package warnings and advertising limitations.
          In addition, the act directs the FDA to promulgate regulations requiring that the methods used in, and the facilities and controls used for, the manufacture, preproduction design validation, packing, and storage of a tobacco product conform to current good manufacturing practice. The act does not apply to tobacco leaf that is not in the possession of a manufacturer of tobacco products, or to the producers of tobacco leaf, including tobacco suppliers, tobacco warehouses, and tobacco supplier cooperatives unless those entities are controlled by a tobacco product manufacturer. The FDA has adopted regulations to implement only certain of these provisions. The full impact of these provisions of the legislation, adopted and proposed regulations and any future regulatory action to implement these provisions is uncertain. However, if the effect of such legislation is a significant reduction in consumption of tobacco products, it could materially adversely affect our business, volume, results of operations, cash flows and financial condition.







- 14-


Risks Relating to the Tobacco Industry (continued)

Legislation and regulatory and other governmental initiatives could impose burdensome restrictions on the tobacco industry and reduce consumption of consumer tobacco products and demand for our services. (continued)
          Reports with respect to the harmful physical effects of cigarette smoking have been publicized for many years, and the sale, promotion and use of cigarettes continue to be subject to increasing governmental regulation. Since 1964, the Surgeon General of the United States and the Secretary of Health and Human Services have released a number of reports linking cigarette smoking with a broad range of health hazards, including various types of cancer, coronary heart disease and chronic lung disease, and recommending various governmental measures to reduce the incidence of smoking. More recent reports focus upon the addictive nature of cigarettes, the effects of smoking cessation, the decrease in smoking in the United States, the economic and regulatory aspects of smoking in the Western Hemisphere, and cigarette smoking by adolescents, particularly the addictive nature of cigarette smoking in adolescence. Numerous state and municipal governments have taken and others may take actions to diminish the social acceptance of smoking of tobacco products, including banning smoking in certain public and private locations.
          A number of foreign nations also have taken steps to restrict or prohibit cigarette advertising and promotion, to increase taxes on cigarettes and to discourage cigarette smoking. In some cases, such restrictions are more onerous than those in the United States. For example, advertising and promotion of cigarettes has been banned or severely restricted for a number of years in Australia, Canada, Finland, France, Italy, Singapore and other countries. Further, in February 2005, the World Health Organization (“WHO”) treaty, the Framework Convention for Tobacco Control (“FCTC”), entered into force. This treaty, to which 180 nations were parties at March 31, 2015, requires signatory nations to enact legislation that would require, among other things, specific actions to prevent youth smoking; restrict or prohibit tobacco product marketing; inform the public about the health consequences of smoking and the benefits of quitting; regulate the content of tobacco products; impose new package warning requirements including the use of pictorial or graphic images; eliminate cigarette smuggling and counterfeit cigarettes; restrict smoking in public places; increase and harmonize cigarette excise taxes; abolish duty-free tobacco sales; and permit and encourage litigation against tobacco product manufacturers.
          Due to the present regulatory and legislative environment, a substantial risk exists that past growth trends in tobacco product sales may not continue and that existing sales may decline. A significant decrease in worldwide tobacco consumption brought about by existing or future governmental laws and regulations would reduce demand for tobacco products and services and could have a material adverse effect on our results of operations.

Government actions can have a significant effect on the sourcing of tobacco. If some of the current efforts are successful, we could have difficulty obtaining sufficient tobacco to meet our customers’ requirements, which could have an adverse effect on our performance and results of operations.
The WHO, through the FCTC, created a formal study group to identify and assess crop diversification initiatives and alternatives
to leaf tobacco growing in countries whose economies depend upon tobacco production. The study group began its work in February 2007. In its initial report published later that year, the study group indicated that the FCTC did not aim to phase out tobacco growing, but the study group's focus on alternatives to tobacco crops was in preparation for its anticipated eventual decrease in demand resulting from the FCTC's other tobacco control initiatives.
          If the objective of the FCTC study group were to change to seek to eliminate or significantly reduce leaf tobacco production and certain countries were to partner with the study group in pursuing this objective, we could encounter difficulty in sourcing leaf tobacco to fill customer requirements, which could have an adverse effect on our results of operations.
          In addition, continued government and public emphasis on environmental issues, including climate change, conservation, and natural resource management, could result in new or more stringent forms of regulatory oversight of industry activities, which may lead to increased levels of expenditures for environmental controls, land use restrictions affecting us or our suppliers, and other conditions that could have a material adverse effect on our business, financial condition, and results of operations. For example, certain aspects of our business generate carbon emissions. Regulatory restrictions on greenhouse gas emissions have been proposed in certain countries in which we operate. These may include limitations on such emissions, taxes or emission allowance fees on such emissions, various restrictions on industrial operations, and other measures that could affect land-use decisions, the cost of agricultural production, and the cost and means of processing and transporting our products. These actions could adversely affect our business, financial condition, and results of operations.

We have been subject to governmental investigations into, and litigation concerning, leaf tobacco industry buying and other payment practices.
The leaf tobacco industry, from time to time, has been the subject of government investigations regarding trade practices. For example, we were the subject of an investigation by the Antitrust Division of the United States Department of Justice into certain buying practices alleged to have occurred in the industry, we were named defendants in an antitrust class action litigation alleging a conspiracy to rig bids in the tobacco auction markets, and we were the subject of an administrative investigation into certain tobacco buying and selling practices alleged to have occurred within the leaf tobacco industry in some countries within the European Union, including Spain, Italy, Greece and potentially other countries.




- 15-



ITEM 1B. UNRESOLVED STAFF COMMENTS

None.


ITEM 2. PROPERTIES

Following is a description of Alliance One’s material properties as of March 31, 2015.

Corporate
Our corporate headquarters are located in Morrisville, North Carolina and are leased under an agreement that expires in May 2021.

Facilities

We own a total of 11 production facilities in 7 countries. We operate each of our tobacco processing plants for seven to nine months during the year to correspond with the applicable harvesting season. While we believe our production facilities have been efficiently utilized, we continually compare our production capacity and organization with the transitions occurring in global sourcing of tobacco. We also believe our domestic production facilities and certain foreign production facilities have the capacity to process additional volumes of tobacco if required by customer demand.
          The following is a listing of the various material properties used in operations all of which are owned by Alliance One:
LOCATION
USE
SOUTH AMERICA SEGMENT
 
SOUTH AMERICA
 
VENANCIO AIRES, BRAZIL
FACTORY/STORAGE
ARARANGUA, BRAZIL
FACTORY/STORAGE
EL CARRIL, ARGENTINA
FACTORY/STORAGE
VALUE ADDED SERVICES
 
UNITED STATES
 
WILSON, N.C.
FACTORY/STORAGE
OTHER REGIONS SEGMENT
 
UNITED STATES
 
WILSON, N.C.
FACTORY/STORAGE
FARMVILLE, N.C.
FACTORY/STORAGE
DANVILLE, VA
STORAGE
AFRICA
 
LILONGWE, MALAWI
FACTORY/STORAGE
MOROGORO, TANZANIA
FACTORY/STORAGE
EUROPE
 
KARLSRUHE, GERMANY
FACTORY/STORAGE
ASIA
 
NGORO, INDONESIA
FACTORY/STORAGE

- 16-


ITEM 3. LEGAL PROCEEDINGS

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 7.4 million 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 0.05 million.  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.



ITEM 4. MINE SAFETY DISCLOSURES

N/A


PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES

Alliance One’s common stock is traded on the New York Stock Exchange, under the ticker symbol "AOI."
          The following table sets forth for the periods indicated the high and low reported sales prices of our common stock as reported by the NYSE and the amount of dividends declared per share for the periods indicated.
 
High
Low
Dividends
Declared
Year Ended March 31, 2015
 
 
 
Fourth Quarter
$
1.63

$
0.83

$—
Third Quarter
2.10

1.52

Second Quarter
2.74

1.93

First Quarter
3.01

2.30

Year Ended March 31, 2014
 
 
 
Fourth Quarter
$
3.10

$
2.41

$—
Third Quarter
3.25

2.81

Second Quarter
4.23

2.79

First Quarter
3.99

3.41

          As of March 31, 2015, there were 4,995 shareholders, including 4,243 non-objecting beneficial holders of our common stock.
          The payment of dividends by Alliance One is subject to the discretion of our board of directors and will depend on business conditions, compliance with debt agreements, achievement of anticipated cost savings, financial condition and earnings, regulatory considerations and other factors. Our senior secured credit facility and the indenture governing our senior secured second lien notes restrict our ability to pay dividends. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources – Dividends.”











- 17-


ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES (continued)

Alliance One International, Inc. Comparison of Cumulative Total Return to Shareholders

The following line graph and table presents the cumulative total shareholder return of a $100 investment including reinvestment of dividends and price appreciation over the last five years in each of the following: Alliance One International, Inc. (AOI) common stock, the S&P 500 Index, the S&P 600 Small Cap Index and an index of peer companies. The sole company in the peer group is Universal Corporation (UVV).
*$100 invested on 3/31/10 in stock or index, including reinvestment of dividends.
Fiscal year ending March 31.

Copyright ©2015 S&P, a division of McGraw Hill Financial. All rights reserved.

Cumulative Total Return
 
 
 
 
 
03/31/2010

03/31/2011

03/31/2012

03/31/2013

03/31/2014

03/31/2015

Alliance One International, Inc.
$
100.00

$
78.98

$
74.07

$
76.42

57.37

21.61

S&P 500
$
100.00

$
115.65

$
125.52

$
143.05

174.31

196.51

S&P Smallcap 600
$
100.00

$
125.26

$
131.56

$
152.80

195.29

212.32

Custom Peer Group
$
100.00

$
86.34

$
96.80

$
121.15

125.39

110.55









ITEM 6. SELECTED FINANCIAL DATA

FIVE YEAR FINANCIAL STATISTICS
Alliance One International, Inc. and Subsidiaries
 
 
Years Ended March 31,
(in thousands, except per share amount, ratio and number of stockholders)
2015
2014
2013
2012
2011
Summary of Operations
 
 
 
 
 
   Sales and other operating revenues
$
2,065,850

$
2,354,956

$
2,243,816

$
2,150,767

$
2,094,062

   Restructuring and asset impairment charges
     (recoveries)
9,118

5,111

(55
)
1,006

23,467

   Operating income
110,835

119,059

160,272

154,813

132,874

   Debt retirement expense (income) (1)
(771
)
57,449

1,195


4,584

   Net income (loss)
(15,597
)
(87,002
)
24,712

29,191

(72,148
)
   Net income (loss) attributable to
      Alliance One International, Inc.
(15,425
)
(86,659
)
24,013

29,451

(71,551
)
Earnings Per Share Attributable to Alliance
       One International, Inc.:
 
 
 
 
 
   Basic earnings (loss) per share
$
(0.17
)
$
(0.99
)
$
0.27

$
0.34

$
(0.81
)
 
 
 
 
 
 
   Diluted earnings (loss) per share (2)
$
(0.17
)
$
(0.99
)
$
0.25

$
0.30

$
(0.81
)
 
 
 
 
 
 
   Cash dividends paid





 
 
 
 
 
 
Balance Sheet Data
 
 
 
 
 
   Working capital
$
672,236

$
819,400

$
843,803

$
828,681

$
846,860

   Total assets
1,664,589

1,775,287

1,911,579

1,949,845

1,808,300

   Long-term debt
738,943

900,363

830,870

821,453

884,371

   Stockholders’ equity attributable to
      Alliance One International, Inc.
232,990

273,593

338,393

327,482

312,813

 
 
 
 
 
 
Other Data
 
 
 
 
 
   Ratio of earnings to fixed charges
1.04


1.43

1.49

1.30

   Coverage deficiency
n/a

47,277

n/a

n/a

n/a

   Common shares outstanding at year end (3)
88,583

88,159

87,641

87,381

87,085

   Number of stockholders at year end (4)
4,995

5,346

5,582

6,380

8,849


(1) For the year ended March 31, 2014, the Company refinanced its credit facility and long-term debt which resulted in recognition of significant costs to retire existing debt and accelerated recognition of related deferred financing costs and original issue discounts. For the year ended March 31, 2013, the Company terminated a long-term foreign seasonal borrowing which resulted in accelerated recognition of related deferred financing costs.
(2) For the years ended March 31, 2015, 2014 and 2011, 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 years ended March 31, 2015, 2014 and 2011, assumed conversion of convertible notes at the beginning of the period has an antidultive effect on the loss per share.
(3) Excluding 7,853 shares owned by a wholly owned subsidiary.
(4) Includes the number of stockholders of record and non-objecting beneficial owners.


- 18-


ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

The following discussions should be read in conjunction with the other sections of this report, including the consolidated financial statements and related notes contained in Item 8 of this Form 10-K:

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

Financial Results
Fiscal year 2015 volume and sales were impacted by global oversupply as a result of customers that modified inventory positions due to reduced consumer demand in some markets over the last 36 months, as well as the deconsolidation of a former Brazilian subsidiary in March 2014. However, primarily as a result of product mix, exchange rate movement and the non-recurrence of Zambia losses in the prior year, gross profit improved 6.3% and our gross profit as a percentage of sales improved from 10.2% to 12.3%. SG&A increased 2.2% as increased reserves for customer receivables were substantially offset by lower compensation costs, professional fees and amortization related to internally developed software. Other income decreased mainly due to the prior year gain of $20.4 million from the sale of a 51% interest in a Brazilian subsidiary to complete the formation of a new joint venture. Restructuring and asset impairment charges in the current year are primarily related to employee severance costs in connection with our restructuring and cost reduction plan announced during the quarter ended March 31, 2015. Although operating income decreased by 7.0% from the prior year mainly driven by the non-recurrence of the Brazilian other income gain last year, our pretax income improved 109.4% from $(48.1) million to $4.5 million and was impacted by the non-recurrence of debt retirement costs associated with our refinancing last year.


Liquidity
Our liquidity requirements are affected by various factors including crop seasonality, foreign currency and 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 dynamics. We utilize surplus cash to reduce long-term debt and during the year purchased and canceled $15.0 million of our 9.875% Senior Secured Second Lien Notes, leaving $720.0 million of face value outstanding at year end. Our goal as we move forward is to reduce the amount of this debt by continuing to utilize surplus cash. Additionally, our liquidity position at March 31, 2015 remained strong and in line with our internal expectations at $813.2 million, comprised of $143.9 million of cash and $669.4 million of available credit, with $10.9 exclusively for letters of credit. We will continue to monitor the capital markets and utilize various short-term funding sources to enhance and drive various business opportunities that maintain flexibility and meet cost expectations.


Outlook
Planned global crop production is beginning to decrease in line with world-wide demand. It will likely take another crop cycle to achieve equilibrium or potentially undersupply in certain qualities, although the market has already begun to tighten in some origins. We will continue to monitor our customers’ requirements, as we further strengthen our operations, improve our global footprint and move further up the supply chain to meet our customers’ evolving sourcing parameters and simplification strategies. Partial vertical integration strategies by some manufactures are beginning to reverse as the efficiency benefits and costs savings of further leveraging compliant leaf merchants’ capabilities are presenting opportunities for growth. We will continue to focus on enhancing best agricultural practices globally and improving sustainability programs essential to our Company and customers.
Phase one of our restructuring and efficiency improvement program that commenced implementation in March 2015 is on track to deliver $30.0 million to$35.0 million of anticipated recurring annualized savings with approximately 75.0% to 80.0% of the actions targeted enacted by the end of September 2015. In addition to reducing our cost structure, we plan to further optimize our global footprint including rationalizing certain markets that are neither meeting internal performance expectations nor part of our customers’ future planning, while improving core markets where we have invested. We believe growth opportunities exist, and we are taking the steps required to strengthen our position as a preferred supplier to the world’s manufacturers. Execution on plans to address challenges and customer requirements are anticipated to improve shareholder value.












- 19-


ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)

Results of Operations


Condensed Consolidated Statements of Operations and Supplemental Information
 
 
 
 
 
 
 
Twelve Months Ended March 31,
 
 
 
 
Change
 
 
Change
 
 
(in millions, except per kilo amounts)
2015
 
$
 
%
2014
 
$
 
%
2013
 
Kilos sold
378.4

 
(46.4
)
 
(10.9
)
424.8

 
0.6

 
0.1

424.2

 
Tobacco sales and other operating revenues:
 
 
 
 
 
 
 
 
 
 
 
 
     Sales and other operating revenues
$
1,947.5

 
$
(321.5
)
 
(14.2
)
$
2,269.0

 
$
120.3

 
5.6

$
2,148.7

 
     Average price per kilo
5.15

 
(0.19
)
 
(3.6
)
5.34

 
0.27

 
5.3

5.07

 
Processing and other revenues
118.4

 
32.5

 
37.8

85.9

 
(9.2
)
 
(9.7
)
95.1

 
          Total sales and other operating revenues
2,065.9

 
(289.0
)
 
(12.3
)
2,354.9

 
111.1

 
5.0

2,243.8

 
Tobacco cost of goods sold:
 
 
 
 
 
 
 
 
 
 
 
 
     Tobacco costs
1,670.1

 
(302.2
)
 
(15.3
)
1,972.3

 
156.2

 
8.6

1,816.1

 
     Transportation, storage and other period
          costs
68.7

 
(13.6
)
 
(16.5
)
82.3

 
7.0

 
9.3

75.3

 
     Derivative financial instrument and
          exchange (gains) losses
(0.1
)
 
(8.2
)
 
(101.2
)
8.1

 
(3.0
)
 
(27.0
)
11.1

 
     Total tobacco cost of goods sold
1,738.7

 
(324.0
)
 
(15.7
)
2,062.7

 
160.2

 
8.4

1,902.5

 
     Average cost per kilo
4.59

 
(0.27
)
 
(5.5
)
4.86

 
0.38

 
8.5

4.48

 
Processing and other revenues cost of services
     sold
72.1

 
19.9

 
38.1

52.2

 
(3.9
)
 
(7.0
)
56.1

 
Total cost of goods and services sold
1,810.8

 
(304.1
)
 
(14.4
)
2,114.9

 
156.3

 
8.0

1,958.6

 
Gross profit
255.1

 
15.1

 
6.3

240.0

 
(45.2
)
 
(15.8
)
285.2

 
Selling, general, and administrative expenses
137.0

 
2.9

 
2.2

134.1

 
(11.7
)
 
(8.0
)
145.8

 
Other income
1.9

 
(16.3
)
 
(89.6
)
18.2

 
(2.5
)
 
(12.1
)
20.7

 
Restructuring and asset impairment charges
     (recoveries)
9.1

 
4.0

 
78.4

5.1

 
5.2

 
5,200.0

(0.1
)
 
Operating income
110.8

*
(8.3
)
*
(7.0
)
119.1

*
(41.2
)
 
(25.7
)
160.3

*
Debt retirement expense (income)
(0.8
)
 
(58.2
)
 
(101.4
)
57.4

 
56.2

 
4,683.3

1.2

 
Interest expense
113.4

 
(3.4
)
 
(2.9
)
116.8

 
2.2

 
1.9

114.6

 
Interest income
6.3

 
(0.8
)
 
(11.3
)
7.1

 
0.6

 
9.2

6.5

 
Income tax expense
22.9

 
(16.0
)
 
(41.1
)
38.9

 
10.9

 
38.9

28.0

 
Equity in net income of investee companies
2.8

 
2.7

 
2,700.0

0.1

 
(1.5
)
 
(93.8
)
1.6

 
Income (loss) attributable to noncontrolling
     interests
(0.2
)
 
0.1

 
33.3

(0.3
)
 
(1.0
)
 
(142.9
)
0.7

 
Income (loss) attributable to Alliance One
     International, Inc.
$
(15.4
)
 
$
71.3

*
82.2

$
(86.7
)
*
$
(110.7
)
*
(461.3
)
$
24.0

*
*Amounts do not equal column totals due to rounding.






















- 20-


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)

Results of Operations (continued)

Comparison of the Year Ended March 31, 2015 to the Year Ended March 31, 2014

Summary
Total sales and other operating revenues decreased 12.3% to $2,065.9 million primarily due to a 10.9% decrease in volumes and a 3.6% decrease in average sales price. Processing revenues and cost of services increases were primarily due to processing for our former Brazilian subsidiary that is now deconsolidated following the completion of a joint venture in March 2014 and increased customer requirements due to a larger U.S. flue cured crop this year. Reduced volumes were primarily from Brazil due to the deconsolidation of the former Brazilian subsidiary as well as the impact of an oversupply of tobacco in the global market. Lower average sales prices and average tobacco costs on a per kilo basis were primarily the result of product mix, lower prices paid to tobacco suppliers across most regions in response to the oversupply market and exchange rate movement. Average tobacco costs per kilo were further decreased due to lower period costs primarily from the non-recurrence of prior year losses in Zambia related to reduced recoveries from tobacco suppliers. The decreases in tobacco costs more than offset the decreases in tobacco revenues and gross profit increased 6.3% to $255.1 million. Although volumes decreased this year, the impact of product mix, higher green costs not fully recovered from customers in the prior year, the non-recurrence of Zambia losses and improvement in currency movements, our gross profit as a percentage of sales improved from 10.2% to 12.3%. SG&A increased primarily from increased reserves for customer receivables that were substantially offset by lower compensation costs, professional fees and amortization related to internally developed software. Other income decreased primarily due to the prior year gain of $20.4 million from the sale of 51% interest in a Brazilian subsidiary to complete the formation of a new joint venture. Restructuring and asset impairment charges in the current year are primarily related to employee severance costs in connection with our restructuring and cost reduction plan announced during the quarter ended March 31, 2015. The prior year included restructuring and asset impairment charges primarily attributable to our agreement for a joint processing venture in Turkey and equipment charges in Africa. Primarily due to the non-recurrence of the prior year Brazil other income gain, operating income decreased 7.0% compared with the prior year.
          In the prior year, we refinanced our 10% senior notes and purchased $60.0 million of our convertible notes. As a result, one-time debt retirement costs of $57.4 million were recorded including $21.3 million of accelerated amortization of debt issuance costs and recognition of original issue discount related to the 10% senior notes. Our interest costs decreased from the prior year related primarily due to lower amortization of debt costs and average borrowings partially offset by higher average rates. Our effective tax rate was 507.6% this year compared to (80.9)% last year. The variance in the effective tax rate between this year and last year is mainly related to certain losses for which no tax benefit is recorded, net exchanges losses on income tax accounts, the accrual of U.S. taxes on unremitted foreign earnings and lower foreign income tax rates.

South America Region

South America Region Supplemental Information
 
Twelve Months Ended March 31,
 
 
Change
 
(in millions, except per kilo amounts)
2015
$
 
%
2014
Kilos sold
87.2

(49.4
)
 
(36.2
)
136.6

Tobacco sales and other operating revenues:
 
 
 
 
 
     Sales and other operating revenues
$
438.0

$
(292.0
)
 
(40.0
)
$
730.0

     Average price per kilo
5.02

(0.32
)
 
(6.0
)
5.34

Processing and other revenues
33.9

20.1

 
145.7

13.8

          Total sales and other operating revenues
471.9

(271.9
)
 
(36.6
)
743.8

Tobacco cost of goods sold
 
 
 
 
 
     Tobacco costs
376.6

(246.1
)
 
(39.5
)
622.7

     Transportation, storage and other period costs
16.9

(7.9
)
 
(31.9
)
24.8

     Derivative financial instrument and exchange losses
7.5

0.3

 
4.2

7.2

     Total tobacco cost of goods sold
401.0

(253.7
)
 
(38.8
)
654.7

     Average cost per kilo
4.60

(0.19
)
 
(4.0
)
4.79

Processing and other revenues costs of services sold
21.5

16.5

 
333.0

5.0

          Total cost of goods and services sold
422.5

(237.2
)
 
(36.0
)
659.7

Gross profit
49.4

(34.7
)
 
(41.3
)
84.1

Selling, general and administrative expenses
31.1

(14.4
)
 
(31.6
)
45.5

Other income
4.7

(17.6
)
 
(78.9
)
22.3

Restructuring and asset impairment charges
2.3

1.9

 
475.0

0.4

Operating income
$
20.7

$
(39.8
)
 
(65.8
)
$
60.5


- 21-


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)

Results of Operations (continued)

Comparison of the Year Ended March 31, 2015 to the Year Ended March 31, 2014 (continued)

South America Region (continued)

Total sales and other operating revenues decreased 36.6% to $471.9 million due to a 36.2% decrease in volumes primarily due to the impact of an oversupply of tobacco in the global market and the deconsolidation of a Brazilian subsidiary following completion of a joint venture in March 2014. Average sales prices and average tobacco costs per kilo decreased primarily from lower prices paid to tobacco suppliers. Average sales prices were also negatively impacted by the downward pressure on sales prices due to an oversupply in the market and product mix. Processing and other revenue and cost increases this year were the result of processing for the former Brazilian subsidiary that is now deconsolidated and the delay in delivery of the current crop. As a result of lower volumes this year, gross profit decreased 41.3% to $49.4 million compared to last year. The impact of the pressure on sales prices this year and product mix resulted in a decrease in gross profit as a percentage of sales from 11.3% last year to 10.5% this year. Reductions in SG&A were attributable to allocations for general corporate services and favorable exchange rate movement. Other income decreased primarily due to the prior year gain of $20.4 million from the sale of 51% interest in a Brazilian subsidiary to complete the formation of a new joint venture. The increase in restructuring and asset impairment charges is from employee severance costs as part of our restructuring and cost reduction plan announced during the quarter ended March 31, 2015. Operating income declined 65.8% from the prior year as a result of the impact of the change in results for the region.

Value Added Services

Value Added Services Supplemental Information
 
Twelve Months Ended March 31,
 
 
Change
 
(in millions, except per kilo amounts)
2015
$
 
%
2014
Kilos sold
25.3

3.1

 
14.0

22.2

Tobacco sales and other operating revenues:
 
 
 
 
 
     Sales and other operating revenues
$
127.2

$
13.7

 
12.1

$
113.5

     Average price per kilo
5.03

(0.08
)
 
(1.6
)
5.11

Processing and other revenues
9.8

(0.5
)
 
(4.9
)
10.3

          Total sales and other operating revenues
137.0

13.2

 
10.7

123.8

Tobacco cost of goods sold
 
 
 
 
 
     Tobacco costs
101.6

10.8

 
11.9

90.8

     Transportation, storage and other period costs
5.3

1.1

 
26.2

4.2

     Derivative financial instrument and exchange (gains) losses


 


     Total tobacco cost of goods sold
106.9

11.9

 
12.5

95.0

     Average cost per kilo
4.23

(0.05
)
 
(1.2
)
4.28

Processing and other revenues costs of services sold
7.4


 

7.4

          Total cost of goods and services sold
114.3

11.9

 
11.6

102.4

Gross profit
22.7

1.3

 
6.1

21.4

Selling, general and administrative expenses
12.3

2.5

 
25.5

9.8

Other income


 


Restructuring and asset impairment charges
0.5

0.3

 
150.0

0.2

Operating income
$
9.9

$
(1.5
)
 
(13.2
)
$
11.4


Total sales and other operating revenues increased 10.7% to $137.0 million primarily due to a 14.0% increase in volumes primarily from increased demand for our cut rag and specialty blend products that were partially offset by a 1.6% decrease in average selling prices due to product mix. Increased tobacco costs of sales primarily from the increased volumes sold were partially offset by lower costs per kilo attributable to increased throughput, which lowered conversion costs, as well as product mix. As a result, gross profit improved 6.1% to $22.7 million, while gross profit as a percentage of sales decreased slightly from 17.3% to 16.6%. SG&A increases were due to reserves for customer receivables during the current year. With the construction of a new U.S. cut rag facility with state of the art machinery and equipment, an asset impairment charge of $0.5 million was taken during the current year related to machinery and equipment at the previous facility. Primarily as a result of increased reserves for customer receivables and the asset impairment charge, operating income decreased $1.5 million to $9.9 million compared to last year.



- 22-


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)

Results of Operations (continued)

Comparison of the Year Ended March 31, 2015 to the Year Ended March 31, 2014 (continued)

Other Regions

Other Regions Supplemental Information
 
Twelve Months Ended March 31,
 
 
Change
 
 
(in millions, except per kilo amounts)
2015
$
 
%
 
2014
Kilos sold
265.9

(0.1
)
 

 
266.0

Tobacco sales and other operating revenues:
 
 
 
 
 
 
     Sales and other operating revenues
$
1,382.3

$
(43.2
)
 
(3.0
)
 
$
1,425.5

     Average price per kilo
5.20

(0.16
)
 
(3.0
)
 
5.36

Processing and other revenues
74.7

12.9

 
20.9

 
61.8

          Total sales and other operating revenues
1,457.0

(30.3
)
 
(2.0
)
 
1,487.3

Tobacco cost of goods sold
 
 
 
 
 
 
     Tobacco costs
1,191.9

(66.9
)
 
(5.3
)
 
1,258.8

     Transportation, storage and other period costs
46.5

(6.8
)
 
(12.8
)
 
53.3

     Derivative financial instrument and exchange (gains) losses
(7.6
)
(8.5
)
 
(944.4
)
 
0.9

     Total tobacco cost of goods sold
1,230.8

(82.2
)
 
(6.3
)
 
1,313.0

     Average cost per kilo
4.63

(0.31
)
 
(6.3
)
 
4.94

Processing and other revenues costs of services sold
43.2

3.4

 
(8.5
)
 
39.8

          Total cost of goods and services sold
1,274.0

(78.8
)
 
(5.8
)
 
1,352.8

Gross profit
183.0

48.5

 
36.1

 
134.5

Selling, general and administrative expenses
93.6

14.8

 
18.8

 
78.8

Other income (expense)
(2.8
)
1.3

 
31.7

 
(4.1
)
Restructuring and asset impairment charges
6.3

1.8

 
40.0

 
4.5

Operating income
$
80.3

$
33.2

 
70.5

 
$
47.1



Total sales and other operating revenues decreased 2.0% to $1,457.0 million due to decreased tobacco sales revenue. Processing revenues and cost of services increases were due to additional customer demand as well as increased customer volumes in the United States from a larger crop this year. Lower tobacco revenues and costs are primarily the result of lower average sales prices and costs on a per kilo basis due to product mix, lower prices paid to tobacco suppliers as well as the oversupply of tobacco in the global market. The impact on average tobacco revenues and costs from volume decreases from the timing of prior year shipments in North America as well as the impact of the oversupply market across most regions were offset by increased customer demand for Asian tobacco. Currency movements in Euro-denominated sales and costs also lowered average sales prices and tobacco costs on a per kilo basis. Average tobacco costs per kilo were further lowered by the non-recurrence of the prior year charge for lower recoveries from Zambian tobacco suppliers of approximately $11.0 million. The decrease in tobacco costs more than offset the decrease in revenues. As a result, gross profit increased 36.1% to $183.0 million and gross profit as a percentage of sales increased from 9.0% to 12.6%. Increases in SG&A are associated with allocations for general corporate services and increased reserves for customer receivables which were partially offset by lower compensation costs, professional fees and amortization related to internally developed software. Restructuring and asset impairment charges in the current year are employee severance costs as part of our restructuring and cost reduction plan announced during the quarter ended March 31, 2015. The prior year restructuring and asset impairment charges were related to a joint processing venture in Turkey and equipment charges in Africa. As a result of the changes in results for the region, operating income increased 70.5% to $80.3 million this year.













- 23-


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)

Results of Operations (continued)

Comparison of the Year Ended March 31, 2014 to the Year Ended March 31, 2013

Summary
Total sales and other operating revenues increased 5.0% to $2,354.9 million due to increased tobacco sales revenue. Tobacco sales revenue and tobacco cost increases were mainly the result of larger crop sizes, higher prices and shipments delayed from the prior fiscal year. Volumes improved slightly with increased volumes of South America byproducts and larger crop sizes in Africa offset by the change in sales from our investee operation in Thailand and the timing of Asian shipments. Increased average sales prices primarily resulted from higher green costs across all regions partially offset by the change in product mix. Increased average costs per kilo mainly resulted from higher green costs which were not fully passed on to our customers and losses in Zambia primarily related to lower recoveries of advances to tobacco suppliers. Partially offsetting the higher costs were lower derivative losses in Brazil net of increased exchange losses due to appreciating currencies in Africa compared to the prior year. Reduced customer volumes in Brazil, the delay in the purchasing and processing of the current Brazil crop and smaller weather-related crop sizes in the United States led to lower processing revenues and cost of services. The impact of higher green costs not fully recovered from customers and the losses in Zambia was a 15.8% decrease in gross margin to $240.0 million and a reduction in our gross margin as a percentage of sales from 12.7% to 10.2%. SG&A improvement, primarily from lower incentive compensation, professional fees and amortization related to internally developed software, was partially offset mainly by increased restructuring and asset impairment charges primarily attributable to our agreement for a joint processing venture in Turkey and reductions in other income from Brazil. Mainly as a result of gross margin decreases, operating income decreased 25.7% to $119.1 million when compared with the prior year.
         During 2014, we refinanced our 10% senior notes and purchased $113.9 million of our convertible notes. As a result, associated debt retirement costs of $57.4 million were recorded, including $21.3 million of accelerated amortization of debt issuance costs and recognition of original issue discount related to the 10% senior notes. Our interest costs increased from the prior year related primarily due to higher average borrowings and our effective tax rate was (80.9)% this year compared to 54.8% last year. The variance in the effective tax rate between this year and last year is mainly related to net exchange losses on income tax accounts, lower foreign income tax rates and certain losses for which no tax benefit has been recorded.

South America Region

South America Region Supplemental Information
 
Twelve Months Ended March 31,
 
 
Change
 
(in millions, except per kilo amounts)
2014
$
 
%
2013
Kilos sold
136.6

4.9

 
3.7

131.7

Tobacco sales and other operating revenues:
 
 
 
 
 
     Sales and other operating revenues
$
730.0

$
65.6

 
9.9

$
664.4

     Average price per kilo
5.34

0.30

 
6.0

5.04

Processing and other revenues
13.8

(6.7
)
 
(32.7
)
20.5

          Total sales and other operating revenues
743.8

58.9

 
8.6

684.9

Tobacco cost of goods sold
 
 
 
 
 
     Tobacco costs
622.7

80.2

 
14.8

542.5

     Transportation, storage and other period costs
24.8

2.1

 
9.3

22.7

     Derivative financial instrument and exchange losses
7.2

(8.4
)
 
(53.8
)
15.6

     Total tobacco cost of goods sold
654.7

73.9

 
12.7

580.8

     Average cost per kilo
4.79

0.38

 
8.7

4.41

Processing and other revenues costs of services sold
5.0

(4.9
)
 
(49.5
)
9.9

          Total cost of goods and services sold
659.7

69.0

 
11.7

590.7

Gross profit
84.1

(10.1
)
 
(10.7
)
94.2

Selling, general and administrative expenses
45.5

(3.2
)
 
(6.6
)
48.7

Other income
22.3

(1.7
)
 
(7.1
)
24.0

Restructuring and asset impairment charges (recoveries)
0.4

0.5

 
500.0

(0.1
)
Operating income
$
60.5

$
(9.1
)
 
(13.1
)
$
69.6





- 24-


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)

Results of Operations (continued)

Comparison of the Year Ended March 31, 2014 to the Year Ended March 31, 2013 (continued)

South America Region (continued)

Total sales and other operating revenues improved 8.6% to $743.8 million due to increased tobacco sales revenue partially offset by lower processing revenues due to reduced customer volumes and the delay in the purchasing of the current crop in Brazil. Tobacco sales revenues and tobacco costs increased primarily due to higher prices paid to tobacco suppliers which were not fully passed on to our customers as well as a larger crop of better quality in Argentina that is now being sold. Volume increases in Argentina due to the larger current crop are offset by delayed buying and processing of the current crop in Brazil. As a result, the higher volumes sold this year are mainly byproducts. This change in product mix partially offsets the impact of higher green costs on our average sales prices and costs per kilo. Also offsetting the impact of higher green costs on our costs per kilo was a reduction in derivative losses due to currency movements. However, cost per kilo increases still exceeded sales price increases. As a result, our gross margin decreased by 10.7% to $84.1 million and our gross margin as a percentage of sales decreased from 13.8% to 11.3%. Reductions in SG&A were attributable to allocations for general corporate services. In 2014, other income included a gain of $20.4 million from the sale of 51% interest in a Brazilian subsidiary to complete the formation of a new joint venture. In 2013, other income included a gain of $24.1 million for a Brazilian excise tax based on a court ruling on March 7, 2013. The impact of the change in results for the region was a 13.1% decrease in operating income to $60.5 million.

Value Added Services

Value Added Services Supplemental Information
 
Twelve Months Ended March 31,
 
 
Change
 
(in millions, except per kilo amounts)
2014
$
 
%
2013
Kilos sold
22.2

(1.1
)
 
(4.7
)
23.3

Tobacco sales and other operating revenues:
 
 
 
 
 
     Sales and other operating revenues
$
113.5

$
(6.3
)
 
(5.3
)
$
119.8

     Average price per kilo
5.11

(0.03
)
 
(0.6
)
5.14

Processing and other revenues
10.3

(0.3
)
 
(2.8
)
10.6

          Total sales and other operating revenues
123.8

(6.6
)
 
(5.1
)
130.4

Tobacco cost of goods sold
 
 
 
 
 
     Tobacco costs
90.8

2.2

 
2.5

88.6

     Transportation, storage and other period costs
4.2

(4.3
)
 
(50.6
)
8.5

     Derivative financial instrument and exchange (gains) losses


 


     Total tobacco cost of goods sold
95.0

(2.1
)
 
(2.2
)
97.1

     Average cost per kilo
4.28

0.11

 
2.6

4.17

Processing and other revenues costs of services sold
7.4


 

7.4

          Total cost of goods and services sold
102.4

(2.1
)
 
(2.0
)
104.5

Gross profit
21.4

(4.5
)
 
(17.4
)
25.9

Selling, general and administrative expenses
9.8

(1.0
)
 
(9.3
)
10.8

Other income

(0.1
)
 
(100.0
)
0.1

Restructuring and asset impairment charges
0.2

0.2

 
100.0


Operating income
$
11.4

$
(3.8
)
 
(25.0
)
$
15.2


Total sales and other operating revenues decreased 5.1% to $123.8 million primarily due to a 5.3% decrease in tobacco sales revenues to $113.5 million while tobacco costs of sales decreased 2.2% to $95.0 million. Tobacco sales revenue decreases were mainly from reduced quantities sold due to a competitive environment in the United States. Customer mix and product mix resulted in comparable average sales prices however the impact to cost per kilo was much greater. With our Jordan location becoming fully operational this year, most of those period costs in the prior year are capitalized as part of tobacco costs this year. As a result, our gross margin declined 17.4% to $21.4 million and our gross margin as a percentage of sales decreased from 19.9% to 17.3%. SG&A improved due to allocations for general corporate services. For the year, our operating income decreased 25.0% to $11.4 million compared to last year.



- 25-


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)

Results of Operations (continued)

Comparison of the Year Ended March 31, 2014 to the Year Ended March 31, 2013 (continued)

Other Regions

Other Regions Supplemental Information
 
Twelve Months Ended March 31,
 
 
Change
 
(in millions, except per kilo amounts)
2014
$
 
%
2013
Kilos sold
266.0

(3.2
)
 
(1.2
)
269.2

Tobacco sales and other operating revenues:
 
 
 
 
 
     Sales and other operating revenues
$
1,425.5

$
61.0

 
4.5

$
1,364.5

     Average price per kilo
5.36

0.29

 
5.7

5.07

Processing and other revenues
61.8

(2.2
)
 
(3.4
)
64.0

          Total sales and other operating revenues
1,487.3

58.8

 
4.1

1,428.5

Tobacco cost of goods sold
 
 
 
 
 
     Tobacco costs
1,258.8

73.8

 
6.2

1,185.0

     Transportation, storage and other period costs
53.3

9.2

 
20.9

44.1

     Derivative financial instrument and exchange (gains) losses
0.9

5.4

 
120.0

(4.5
)
     Total tobacco cost of goods sold
1,313.0

88.4

 
7.2

1,224.6

     Average cost per kilo
4.94

0.39

 
8.6

4.55

Processing and other revenues costs of services sold
39.8

1.0

 
2.6

38.8

          Total cost of goods and services sold
1,352.8

89.4

 
7.1

1,263.4

Gross profit
134.5

(30.6
)
 
(18.5
)
165.1

Selling, general and administrative expenses
78.8

(7.5
)
 
(8.7
)
86.3

Other expense
(4.1
)
(0.7
)
 
(20.6
)
(3.4
)
Restructuring and asset impairment charges
4.5

4.5

 
100.0


Operating income
$
47.1

$
(28.3
)
 
(37.5
)
$
75.4


Total sales and other operating revenues improved 4.1% to $1,487.3 million due to increased tobacco sales revenue. Processing revenues were down 3.4% while cost of services increased 2.6% resulting from smaller crop sizes in the United States due to excessive rainfall. Tobacco sales revenue and cost increases were mainly from larger crop sizes in Africa, higher prices across all regions, the timing of shipments in North America, and product mix. Lower volumes resulted from the change in sales from our investee operation in Thailand partially offset by the larger crop sizes in Malawi. While there is no impact to net income for the change of the selling organization, Thailand tobacco is now sold directly to the customer by our investee operation and reported through equity in investee companies rather than through sales and cost of sales. Higher prices were paid to tobacco suppliers across all regions which increased average sales prices and costs per kilo. Costs per kilo also increased due to other period costs of $11.0 million expensed in Zambia in the current year primarily related to reduced recoveries of advances to tobacco suppliers. The negative impact of appreciating African currencies compared to significant depreciation throughout fiscal 2013, partially offset by a stronger Euro, also contributed to the increase in costs per kilo. These costs are not fully recoverable from customers. The impact was average costs increasing $0.39 per kilo while average sales prices only increasing $0.29 per kilo which resulted in a gross margin decrease of 18.5% to $134.5 million and gross margin as a percentage of sales declining from 11.6% to 9.0%. Decreases in SG&A associated with reductions in incentive compensation, professional fees and amortization related to internally developed software were primarily offset by restructuring and asset impairment charges related to a joint processing venture in Turkey and equipment charges in Africa. Mainly a result of lower gross margin, operating income decreased 37.5% to $47.1 million compared to last year.














- 26-


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)

Liquidity and Capital Resources

Overview
Historically we have needed capital in excess of cash flow from operations to finance accounts receivable, inventory and advances to suppliers for tobacco crops in certain foreign countries. Purchasing, processing and selling activities of our business are seasonal and our need for capital fluctuates with corresponding peaks where outstanding indebtedness may be greater or less as a result. Our long-term borrowings consist of senior secured second lien notes and a senior secured revolving credit facility. We also have a combination of short-term and long term seasonal lines of credit available with a number of banks throughout the world that finances seasonal working capital and corresponds to regional peak requirements.
          At March 31, 2015, we had $143.8 million in cash on our balance sheet, $210.3 million available under the senior secured revolving credit facility, $360.3 million outstanding under short-term and long term foreign lines with an additional $448.3 million available under those lines and $4.1 million outstanding of other debt for a total of $802.4 million of debt availability and cash on hand around the world, excluding $6.3 million in issued but unfunded letters of credit with $10.9 million available. Another source of liquidity as of March 31, 2015 was $223.4 million funded under our accounts receivable sale programs. Additionally, customer advances were $18.9 million in 2015 compared to $22.1 million in 2014. To the extent that these customers do not provide this advance funding, we must provide financing for their inventories. Should customers pre-finance less in the future for committed inventories, this action could impact our short-term liquidity. We believe that the sources of capital we have access to are sufficient to fund our anticipated needs for fiscal year 2016. Effective March 31, 2015, we did not meet the fixed charge coverage ratio of 2.0 to 1.0 required under the indenture governing our senior secured second lien notes to permit us to access the restricted payments basket for the purchase of common stock and other actions under that basket. From time to time we may not satisfy the required ratio. See Note 7 “Short-term Borrowing Arrangements” and Note 17 “Sale of Receivables” to the “Notes to Consolidated Financial Statements” for further information.
          Seasonal liquidity beyond cash flow from operations is provided by our senior secured credit facility, seasonal working capital lines throughout the world, advances from customers and sale of accounts receivable. For the years ended March 31, 2015 and 2014, our average short-term borrowings, aggregated peak short-term borrowings outstanding and weighted-average interest rate on short-term borrowings were as follows:

        
(dollars in millions)
2015

2014

Average short-term borrowings
$
454.8

$
517.0

Aggregated peak short-term borrowings outstanding
$
662.5

$
736.7

Weighted-average interest rate on short-term borrowings
5.12
%
4.33
%

          Aggregated peak borrowings for 2015 were during the third quarter of 2015 compared to during the second quarter for 2014. The peak borrowings occurred in the third quarter of 2015 due to the timing of repayments in the Africa region as compared to 2014. Peak borrowings for 2015 and 2014 were repaid with cash provided by operating activities.
          As of March 31, 2015, we are in our working capital build. In South America we are in the process of purchasing and processing the most recent crop, while the peak tobacco sales season for South America is at its beginning stages. Africa is also in the middle of its buying, processing and selling season and is utilizing working capital funding as well. North America and Europe are still selling and planning for the next crop that is now being grown.

Working Capital
Our working capital decreased to $672.3 million at March 31, 2015 from $819.4 million at March 31, 2014. Our current ratio was 2.2 to 1 at March 31, 2015 compared to 2.6 to 1 at March 31, 2014. The decrease in working capital is primarily related to higher notes payable due to the timing of repayment of loans and lower cash balances. Lower cash balances are due to the timing of sales and collection of accounts receivable as well as the timing of payments for expenses and accounts payable in accordance with terms.












- 27-


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)

Liquidity and Capital Resources (continued)

Working Capital (continued)
          The following table is a summary of items from the Consolidated Balance Sheets and Consolidated Statements of Cash Flows. Approximately $66.0 million of our outstanding cash balance at March 31, 2015 was held in foreign jurisdictions. If these funds in foreign jurisdictions were repatriated, due to the valuation allowance on U.S. tax loss carryovers and foreign tax credit carryovers, the cost of repatriation would not have a material financial impact.

 
As of March 31,
 
 
Change
 
Change
 
(in millions except for current ratio)
2015
$
%
2014
$
%
2013
Cash and cash equivalents
$
143.8

$
(90.9
)
(38.7
)
$
234.7

$
142.7

155.1

$
92.0

Net trade receivables
200.4

23.9

13.5

176.5

(47.7
)
(21.3
)
224.2

Inventories and advances to tobacco
   suppliers
811.2

1.0

0.1

810.2

(203.3
)
(20.1
)
1,013.5

Total current assets
1,256.3

(64.5
)
(4.9
)
1,320.8

(144.0
)
(9.8
)
1,464.8

Notes payable to banks
330.3

117.6

55.3

212.7

(144.1
)
(40.4
)
356.8

Accounts payable
73.4

(41.8
)
(36.3
)
115.2

(20.1
)
(14.9
)
135.3

Advances from customers
18.9

(3.2
)
(14.5
)
22.1

5.3

31.5

16.8

Total current liabilities
584.0

82.6

16.5

501.4

(119.6
)
(19.3
)
621.0

Current ratio
2.2 to 1

 
 
2.6 to 1



 
2.4 to 1

Working capital
672.3

(147.1
)
(18.0
)
819.4

(24.4
)
(2.9
)
843.8

Total long term debt
738.9

(161.5
)
(17.9
)
900.4

69.5

8.4

830.9

Stockholders’ equity attributable to
   Alliance One International, Inc.
233.0

(40.6
)
(14.8
)
273.6

(64.8
)
(19.1
)
338.4

 
 
 
 
 
 
 
 
Net cash provided (used) by:
 
 
 
 
 
 
 
      Operating activities
$
(55.2
)
$
(317.6
)
 
$
262.4

$
264.0

 
$
(1.6
)
      Investing activities
(11.7
)
8.7

 
(20.4
)
(7.2
)
 
(13.2
)
      Financing activities
(23.4
)
77.1

 
(100.5
)
(86.4
)
 
(14.1
)

Operating Cash Flows
Net cash provided by operating activities decreased $317.6 million in 2015 compared to 2014 which increased $264.0 million compared to 2013. The decrease in cash provided in 2015 compared to 2014 is primarily due to increased inventory and advances to suppliers due to the impact of an oversupply in the global market, increased accounts receivable due to the timing of sales in the fourth quarter in accordance with terms and decreased accounts payable due to the timing of payments in accordance with terms. The increase in cash provided in 2014 compared to 2013 is primarily related to the decrease in inventory and advances to suppliers as this year's crop which included higher green costs and processing costs was sold. The decrease in inventory and advances to suppliers was partially offset by decreased margins on sales of this year's crop as the higher costs were not fully passed on to our customers. Also increasing cash provided in 2014 was an increase in amounts payable to our Zimbabwe operation due to the timing of purchases from that deconsolidated subsidiary and the change in deferred items.
Investing Cash Flows
Net cash used by investing activities decreased $8.7 million in 2015 compared to 2014 which increased $7.2 million compared to 2013. The decrease in cash used in 2015 is primarily due to higher proceeds from the sale of property. Lower purchases of intangible assets in 2015 were offset by lower proceeds from surrender of life insurance policies and net cash received from the sale of 51% interest in a Brazilian subsidiary in 2014, and increased restrictions on cash primarily for social responsibility programs. The increase in cash used in 2014 is primarily related to the change in restrictions on cash in accordance with terms of the related agreements. Partially offsetting the increased cash usage was less purchase of property and intangibles due to the timing of capital asset investments and increased proceeds from the sale of property and surrender of life insurance policies.








- 28-


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)

Liquidity and Capital Resources (continued)

Financing Cash Flows
Net cash used by financing activities decreased $77.1 million in 2015 compared to 2014 which increased $86.4 million compared to 2013. The decrease in cash used in 2015 compared to 2014 is primarily related to lower debt issuance and debt retirement costs due to the debt refinancing in 2014. Cash used in 2015 also decreased due to higher net proceeds from short term borrowings due to the timing of shipments in the fourth quarter which were substantially offset by lower net proceeds from long-term borrowings due to the debt refinancing in 2014. The increase in cash used in 2014 compared to 2013 is primarily related to increased debt issuance, debt retirement and other debt related costs of $51.4 million due to our debt refinancing this year. Increases in cash used in 2014 are also attributable to the net change in short-term borrowings based on the timing of shipments in the fourth quarter. Partially offsetting the increase in cash used in 2014 is less repayment of our revolver during the year due to the higher balance outstanding at year end.
          Certain debt agreements contain certain cross-default or cross-acceleration provisions. The following table summarizes our debt financing as of March 31, 2015:

 
 
March 31, 2015
 
 
 
Outstanding
Lines and
 
 
 
 
  March 31,
2014
March 31,
2015
Letters
Interest
 
Long Term Debt Repayment Schedule by Fiscal Year
(in millions)
Available
Rate
 
2016

2017

2018

2019

2020

Later
Senior secured credit facility:
 
 
 
 
 
 
 
 
 
 
 
   Revolver (1)
$
175.0

$

$
210.3

5.5
%
(2) 
$

$

$

$

$

$

Senior notes:
 
 
 
 
 
 
 
 
 
 
 
   9.875% senior secured
    second lien notes due 2021 (4)
721.1

707.7


9.9
%
 





707.7

 
721.1

707.7


 
 





707.7

5 ½% convertible senior    subordinated notes due 2015
1.1



5.5
%
 






Long-term foreign seasonal borrowings

30.0


2.7
%
(2) 

30.0





Other long-term debt
7.7

4.1


7.8
%
(2) 
2.9

0.3

0.3

0.2

0.2

0.2

Notes payable to banks (3)
212.7

330.3

448.2

5.1
%
(2) 






   Total debt
$
1,117.6

$
1,072.1

658.5

 
 
$
2.9

$
30.3

$
0.3

$
0.2

$
0.2

$
707.9

Short-term
$
212.7

$
330.3

 
 
 
 
 
 
 
 
 
Long-term:
 
 
 
 
 
 
 
 
 
 
 
   Long-term debt current
$
4.5

$
2.9

 
 
 
 
 
 
 
 
 
   Long-term debt
900.4

738.9

 
 
 
 
 
 
 
 
 
 
$
904.9

$
741.8

 
 
 
 
 
 
 
 
 
Letters of credit
$
5.3

$
6.3

10.9

 
 
 
 
 
 
 
 
   Total credit available
 
 
$
669.4

 
 
 
 
 
 
 
 

(1) As of March 31, 2015, pursuant to Section 2.1 (A) (iv) of the Credit Agreement, the full $210.3 million Revolving Committed Amount was available based on the calculation of the lesser of the Revolving Committed Amount and the Working Capital Amount.
(2)  Weighted average rate for the twelve months ended March 31, 2015.
(3)  Primarily foreign seasonal lines of credit.
(4) Repayment of $707.7 million is net of original issue discount of $12.3 million. Total repayment will be $720.0 million.


Senior Secured Credit Facility
On August 1, 2013, the agreement governing the Company's senior secured credit facility was amended and restated to provide for a senior secured revolving credit facility with a syndicate of banks of approximately $303.9 million, that automatically reduced to approximately $210.3 million on April 15, 2014, and will mature in April 15, 2017. The senior secured credit facility was subject to a springing maturity on April 15, 2014 if by that date the Company had not deposited in the Blocked Account (as defined below) sufficient amounts to fund the repayment at maturity of all then outstanding 5½% Convertible Senior Subordinated Notes due 2014 of the Company (the “Convertible Notes”). The Company deposited the requisite amount in the Blocked Account prior to April 15, 2014. Borrowings under the senior secured credit facility initially bear interest at an annual rate of LIBOR plus 3.75% and base rate plus 2.75%, as applicable, though the interest rate under the senior secured credit facility is subject to increase or decrease according to the Company's consolidated interest coverage ratio.

- 29-


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)

Liquidity and Capital Resources (continued)

Senior Secured Credit Facility (continued)
          The agreement governing the senior secured credit facility required the Company to deposit with the lenders, in a segregated account that the Company may not use other than for specified purposes (the “Blocked Account”), the net proceeds from the sale of $735.0 million in aggregate principal amount of the Company's 9.875% Senior Secured Second Lien Notes due 2021 (the “Second Lien Notes”) that were not immediately applied to redeem all of the Company's outstanding 10% Senior Notes due 2016 (the “Senior Notes”). Amounts held in the Blocked Account may be used solely to purchase any and all Convertible Notes tendered in the Company's cash tender offer to purchase up to $60.0 million in aggregate principal amount of the Convertible Notes commenced on July 17, 2013 (the “Convertible Notes Tender Offer”) and, subject to conditions, to retire any remaining Convertible Notes not purchased in the Convertible Notes Tender Offer, including repayment at maturity. All amounts deposited in the Blocked Account from the net proceeds of the sale of the Second Lien Notes were applied to the purchase of Convertible Notes in the Convertible Notes Tender Offer. Borrowings under the senior secured credit facility are secured by a first priority lien on specified property of the Company, including the capital stock of specified subsidiaries, all U.S. accounts receivable, certain U.S. inventory, intercompany notes evidencing loans or advances, certain U.S. fixed assets and the Blocked Account.

First amendment. On May 30, 2014, the Company entered into the First Amendment to the Amended and Restated Credit Agreement (the “First Amendment"), which amended the credit agreement (the “Credit Agreement”) governing the Company’s senior secured credit facility. The First Amendment modified the definition of Consolidated EBIT to permit add backs in connection with dispositions of, and investments in, certain subsidiaries and permitted joint ventures and certain other accounting adjustments, modified the Minimum Consolidated Interest Coverage Ratio to 1.85 to 1.00 for the period ending March 31, 2014 and 1.70 to 1.00 for the periods ending June 30, 2014, September 30, 2014, December 31, 2014 and March 31, 2015, modified the Maximum Consolidated Leverage Ratio to 7.25 to 1.00 for the period ending June 30, 2014 and 7.50 to 1.00 for the period ending September 30, 2014 and increased the basket to $200,000 for permitted Guaranty Obligations that can be incurred by the Company and its subsidiaries with respect to indebtedness of China Brasil Tabacos Exportadora Ltda. (which is the joint venture entity with China Tobacco in Brazil) while striking the requirement that such Guaranty Obligations of the Company and its subsidiaries may not exceed the percentage of the Company’s direct or indirect ownership of China Brasil Tabacos Exportadora Ltda. in relation to all Guaranty Obligations with respect to Indebtedness of China Brasil Tabacos Exportadora Ltda.

Second amendment. On February 6, 2015, the Company entered into the Second Amendment to Amended and Restated Credit Agreement (the “Second Amendment"), which amended the Credit Agreement. The Second Amendment modified the Minimum Consolidated Interest Coverage Ratio (as defined in the Credit Agreement) to 1.50 to 1.00 for the period ended December 31, 2014 and the period ending March 31, 2015 and modified the Maximum Consolidated Leverage Ratio (as defined in the Credit Agreement) to 7.90 to 1.00 for the period ended December 31, 2014.

Third Amendment. On June 2, 2015, the Company entered into the Third Amendment to the Amended and Restated Credit Agreement (the “Third Amendment"), which amended the Credit Agreement. The Third Amendment modified the definition of Consolidated EBIT to permit add backs for specified periods for reserves taken with respect to receivables, restructuring charges and adjustments for applying the rule of lower of cost or market to inventories, modified the Minimum Consolidated Interest Coverage Ratio to 1.60 to 1.00 for the periods ending June 30, 2015 and September 30, 2015, 1.65 to 1.00 for the period ending December 31, 2015 and 1.70 to 1.00 for the period ending March 31, 2016, modified the Maximum Consolidated Leverage Ratio to 7.60 to 1.00 for the periods ending June 30, 2015 and September 30, 2015 and 7.15 to 1.00 for the period ending December 31, 2015, modified the restricted payments covenant to permit repayment of the Company’s Senior Secured Second Lien Notes by up to $50.0 million in any fiscal year, with carry forward of any unused amount into the next fiscal year, modified a covenant to provide a 90-day cure period if Uncommitted Inventories (as defined in the Credit Agreement) exceed the threshold of $250.0 million, but only to the extent that they do not exceed $285.0 million, and provides for first-lien mortgages on the Company’s facilities located in Farmville, King and Wilson, North Carolina.

Financial covenants. After giving effect to the First Amendment, the Second Amendment and the Third Amendment to the Amended and Restated Credit Agreement, the financial covenants and required financial ratios at March 31, 2015 are as follows:

• a minimum consolidated interest coverage ratio of not less than 1.50 to 1.00 for the fiscal quarter ended March 31, 2015 (1.60 to 1.00 for the fiscal quarters ending June 30, 2015 and September 30, 2015, 1.65 to 1.00 for the fiscal quarter ending December 31, 2015 and 1.70 to 1.00 for the fiscal quarter ending March 31, 2016);

• a maximum consolidated leverage ratio specified for each fiscal quarter, which ratio is 5.85 to 1.00 for the fiscal quarter ended March 31, 2015 (7.60 to 1.00 for the fiscal quarters ending June 30, 2015 and September 30, 2015, 7.15 to 1.00 for the fiscal quarter ending December 31, 2015, and 5.85 to 1.00 for the fiscal quarter ending March 31, 2016);



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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)

Liquidity and Capital Resources (continued)

Senior Secured Credit Facility (continued)

Financial covenants (continued)
• a maximum consolidated total senior debt to working capital ratio of not more than 0.80 to 1.00 other than during periods in which the consolidated leverage ratio is less than 4.00 to 1.00 if the consolidated leverage ratio has been less than 4.00 to 1.00 for the prior two consecutive fiscal quarters; and

• a maximum amount of the Company's annual capital expenditures of $51.6 million during the fiscal year ending March 31, 2015 and $40.0 million during any fiscal year thereafter, in each case with a one-year carry-forward (not in excess of $40.0 million) for unused capital expenditures in any fiscal year below the maximum amount.

Certain of these financial covenants are calculated on a rolling twelve-month basis and certain of these financial covenants and required financial ratios adjust over time in accordance with schedules in the agreement governing the senior secured credit facility.

Affirmative and restrictive covenants. The agreement governing the senior secured credit facility contains affirmative and negative covenants (subject, in each case, to exceptions and qualifications), including covenants that limit the Company's ability to, among other things, incur additional indebtedness, incur certain guarantees, merge, consolidate or dispose of substantially all of its assets, grant liens on its assets, pay dividends, redeem stock or make other distributions or restricted payments, create certain dividend and payment restrictions on its subsidiaries, repurchase or redeem capital stock or prepay subordinated debt, make certain investments, agree to restrictions on the payment of dividends to it by its subsidiaries, sell or otherwise dispose of assets, including equity interests of its subsidiaries, enter into transactions with its affiliates, and enter into certain sale and leaseback transactions.

Senior Secured Second Lien Notes
On August 1, 2013, the Company issued $735.0 million in aggregate principal amount of the Second Lien Notes. The Second Lien Notes were sold at 98% of the face value, for gross proceeds of approximately $720.3 million. The Second Lien Notes bear interest at a rate of 9.875% per year, payable semi-annually in arrears in cash on January 15 and July 15 of each year, beginning January 15, 2014, to holders of record at the close of business on the preceding January 1 and July 1, respectively. The Second Lien Notes will mature on July 15, 2021. The Second Lien Notes are secured by a second priority lien on specified property of Alliance One International, Inc. for which the senior secured credit facility is secured by a first priority lien. The indenture governing the Second Lien Notes restricts (subject to exceptions and qualifications) the Company's ability and the ability of its restricted subsidiaries to, among other things, incur additional indebtedness or issue disqualified stock or preferred stock, pay dividends and make other restricted payments (including restricted investments), sell assets, create liens, consolidate, merge, sell or otherwise dispose of all or substantially all of its assets, enter into transactions with its affiliates, enter into certain sale and leaseback transactions, create certain dividend and payment restrictions on its restricted subsidiaries, and designate its subsidiaries as unrestricted subsidiaries.
          The indenture governing the Second Lien Notes requires the Company's existing and future material domestic subsidiaries to guarantee the Second Lien Notes. The Company has no material domestic subsidiaries, and the Second Lien Notes are not presently guaranteed by any subsidiary. If a change of control (as defined in the indenture governing the Second Lien Notes) occurs at any time, holders of the Second Lien Notes will have the right, at their option, to require the Company to repurchase all or a portion of the Second Lien Notes for cash at a price equal to 101% of the principal amount of Second Lien Notes being repurchased, plus accrued and unpaid interest and special interest, if any, to, but excluding, the date of repurchase. In connection with the issuance of the Second Lien Notes, the Company entered into a registration rights agreement that requires the Company to pay additional special interest on the Second Lien Notes, at increasing annual rates up to a maximum of 1.0% per year, if the Company fails to timely comply with its registration obligations thereunder. Pursuant to the registration rights agreement, on December 20, 2013, the Company completed a registered exchange offer in which it offered to exchange for the outstanding Second Lien Notes an equal amount of new Second Lien Notes having identical terms in all material respects.
          During the year ended March 31, 2015, the Company purchased $15.0 million of its senior notes on the open market. All purchased securities were canceled leaving $720.0 million of the 9.875% senior notes outstanding at March 31, 2015. Associated costs paid were $.04 million and related discounts were $(1.3) million resulting in net cash repayment of $13.7 million and recorded in Repayment of Long-Term Borrowings in the Consolidated Statements of Cash Flows. Deferred financing costs and amortization of original issue discount of $.5 million were accelerated.
    
Redemption of Existing Senior Notes
On August 2, 2013, the Company redeemed all $635.0 million in aggregate principal amount of the Company's outstanding 10% Senior Notes due 2016 at a redemption price equal to 105% of the aggregate principal amount thereof, plus accrued and unpaid interest and other costs of which $31.8 million was charged to debt retirement expense. As a result of the redemption of the Senior Notes, the Company accelerated $6.1 million of deferred financing costs and $14.6 million of amortization of original issue discount.


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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)

Liquidity and Capital Resources (continued)

Convertible Senior Subordinated Notes
On July 2, 2009, the Company issued $100.0 million of Convertible Notes. The initial purchasers of the Convertible Notes were granted an option to purchase up to an additional $15.0 million of Convertible Notes solely to cover over-allotments which was exercised on July 15, 2009. Holders may surrender their Convertible Notes, in integral multiples of $1,000 principal amount, for conversion into shares of the Company’s common stock at the then-applicable conversion rate until the close of business on the second scheduled trading day immediately preceding the maturity date. The initial conversion rate for the Convertible Notes is 198.8862 shares of common stock per $1,000 principal amount of Convertible Notes. The conversion rate is subject to adjustments based on certain events as described in the indenture governing the Convertible Notes. In addition, holders of these notes have certain rights and entitlements upon the occurrence of certain fundamental changes (as defined in the indenture governing the Convertible Notes).
          On August 30, 2013, the Company purchased $60.0 million in aggregate principal amount of its existing $115.0 million Convertible Notes pursuant to a cash tender offer at a purchase price equal to $1.03 per $1.00 principal amount plus accrued and unpaid interest and other costs of which $2.5 million was charged to debt retirement expense. The Company funded the purchase with available cash and a portion of the net proceeds from the issuance of the Second Lien Notes, which proceeds had been held in the Blocked Account. As a result of this purchase, the Company accelerated $0.4 million of deferred financing costs.
          On February 13, 2014, the Company purchased $53.9 million of its then remaining $55.0 million in aggregate principal amount of the Convertible Notes pursuant to a cash tender offer at a purchase price equal to $1.025 per $1.00 principal amount of the Convertible Notes purchased, plus accrued and unpaid interest and other costs of which $1.7 million was charged to debt retirement expense. As a result of this purchase, the Company accelerated $0.2 million of deferred financing costs. The remaining $1.1 million in aggregate principal amount of the Convertible Notes matured on July 1, 2014.

Convertible Note Hedge and Warrant Transactions
In connection with the offering of the Convertible Notes, the Company entered into privately negotiated convertible note hedge transactions with three counterparties (“hedge counterparties”) to cover, subject to customary anti-dilution adjustments, the number of shares of the Company’s common stock that initially underlie the Convertible Notes and expire on the last day that any Convertible Notes remain outstanding. The Company also entered separately into privately negotiated warrant transactions relating to the same number of shares of the Company’s common stock with the hedge counterparties. The convertible note hedge transactions were designed to reduce the potential dilution with respect to the common stock of the Company upon conversion of the Convertible Notes in the event that the value per share of common stock, as measured under the convertible note hedge transactions, during the applicable valuation period, was greater than the strike price of the convertible note hedge transactions, which corresponded to the $5.0280 per share initial conversion price of the Convertible Notes and was similarly subject to customary anti-dilution adjustments. If, however, the price per share of the Company’s common stock, as measured under the warrants, exceeded the strike price of the warrant transactions during the applicable valuation period, there would have been dilution from the issuance of common stock pursuant to the warrants. The warrants had a strike price of $7.3325 per share, which was subject to customary anti-dilution adjustments and the maximum number of shares that could have been issued under the warrant transactions was 45,743,836. The warrants began expiring in daily installments commencing on October 15, 2014 and fully expire on April 8, 2015. Both the convertible note hedge transactions and the warrant transactions required physical net-share settlement and were accounted for as equity instruments.

Foreign Seasonal Lines of Credit
The Company has typically financed its non-U.S. operations with uncommitted unsecured short-term seasonal lines of credit at the local level. These operating lines are seasonal in nature, normally extending for a term of 180 to 270 days corresponding to the tobacco crop cycle in that location. These facilities are typically uncommitted in that the lenders have the right to cease making loans and demand repayment of loans at any time. These loans are typically renewed at the outset of each tobacco season. As of March 31, 2015, the Company had approximately $330.3 million drawn and outstanding on foreign seasonal lines with maximum capacity totaling $795.7 million subject to limitations as provided for in the Credit Agreement. Additionally, against these lines there was $10.9 million available in unused letter of credit capacity with $6.3 million issued but unfunded.
   
Long-Term Foreign Seasonal Borrowings
The Company had foreign seasonal borrowings with original maturities greater than one year. At March 31, 2015, approximately $30.0 million was drawn and outstanding with maximum capacity totaling $30.0 million.







- 32-


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)

Liquidity and Capital Resources (continued)

Dividends
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 Secured Second Lien Notes contains similar restrictions and also prohibits the payment of dividends and other distributions if we fail to satisfy a ratio of consolidated EBITDA to fixed charges of at least 2.0 to 1.0. At March 31, 2015, we did not satisfy this fixed charge coverage ratio. We may from time to time not satisfy this ratio.

                             
Aggregate Contractual Obligations and Off-Balance Sheet Arrangements
We have summarized in the table below our contractual cash obligations and other commercial commitments as of March 31, 2015.
    
 
 
Payments / Expirations by Period
(in millions)
    Total
2016

   Years
2017-2018
   Years
2019-2020
   After
2020
Long-Term Debt Obligations*
$
1,204.9

$
78.5

$
176.6

$
146.9

$
802.9

Other Long-Term Obligations**
52.6

9.4

8.8

9.5

24.9

Operating Lease Obligations
38.6

10.6

15.1

9.3

3.6

Tobacco Purchase Obligations
1,015.0

661.2

353.8



Beneficial Interest in Receivables Sold
40.7

40.7




Amounts Guaranteed for Tobacco Suppliers
300.6

300.6




Total Contractual Obligations and Other
     Commercial Commitments
$
2,652.4

$
1,101.0

$
554.3

$
165.7

$
831.4

* Long-Term Debt Obligations include projected interest for both fixed and variable rate debt. We assume that there will be no drawings on the senior secured credit facility in these calculations. The variable rate used in the projections is the rate that was being charged on our variable rate debt as of March 31, 2015. These calculations also assume that there is no refinancing of debt during any period. These calculations are on Long-Term Debt Obligations only.
**Other long-term obligations consist of accrued pension and postretirement costs. Contributions for funded pension plans are based on the Pension Protection Act and tax deductibility and are not reasonably estimable beyond one year. Contributions for unfunded pension plans and postretirement plans captioned under "After 2020" include obligations during the next five years only. These obligations are not reasonably estimable beyond ten years. In addition, the following long-term liabilities included on the consolidated balance sheet are excluded from the table above: accrued postemployment costs, income taxes and tax contingencies, and other accruals. We are unable to estimate the timing of payments for these items.
  
          We do not have any other off-balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources, as defined under the rules of SEC Release No. FRR-67, Disclosure in Management’s Discussion and Analysis about Off-Balance Sheet Arrangements and Aggregate Contractual Obligations.
  
Lease Obligations
We have operating leases for land, buildings, automobiles and other equipment. In accordance with accounting principles generally accepted in the United States, operating leases are not reflected in the accompanying Consolidated Balance Sheet. Operating assets that are of long-term and continuing benefit are generally purchased.
   
Tobacco Purchase Obligations
Tobacco purchase obligations result from contracts with suppliers, primarily in the United States, Brazil, Malawi and Turkey, to buy either specified quantities of tobacco or the supplier’s total tobacco production. Amounts shown as tobacco purchase obligations are estimates based on projected purchase prices of the future crop tobacco. Payment of these obligations is net of our advances to these suppliers. Our tobacco purchase obligations do not exceed our projected requirements over the related terms and are in the normal course of business.
   
Beneficial Interest in Receivables Sold
We sell accounts receivable under three revolving trade accounts receivable securitization programs. Under the agreements, we receive either 80% or 90% of the face value of the receivable sold, less contractual dilutions which limit the amount that may be outstanding from any one particular customer and insurance reserves that also have the effect of limiting the risk attributable to any one customer. Our beneficial interest is subordinate to the purchaser of the receivables. See Note 17 “Sale of Receivables” to the “Notes to Consolidated Financial Statements” for further information.




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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)

Liquidity and Capital Resources (continued)

Aggregate Contractual Obligations and Off-Balance Sheet Arrangements (continued)

Amounts Guaranteed for Tobacco Suppliers
In Brazil and Malawi, we provide guarantees to ensure financing is available to our tobacco suppliers. In the event these suppliers should default, we would be responsible for repayment of the funds provided to these suppliers. We also provide guarantees for financing by certain unconsolidated subsidiaries in Asia, Brazil, and Zimbabwe. See Note 1 “Significant Accounting Policies – Advances to Tobacco Suppliers” to the “Notes to Consolidated Financial Statements” for further information.

Planned Capital Expenditures
We have projected a total of $19.7 million in capital investments for our 2016 fiscal year. We forecast our capital expenditure needs for routine replacement of equipment as well as investment in assets that will add value to the customer or increase efficiency.

Tax and Repatriation Matters
We are subject to income tax laws in each of the countries in which we do business through wholly owned subsidiaries and through affiliates. We make a comprehensive review of the income tax requirements of each of our operations, file appropriate returns and make appropriate income tax planning analyses directed toward the minimization of our income tax obligations in these countries. Appropriate income tax provisions are determined on an individual subsidiary level and at the corporate level on both an interim and annual basis. These processes are followed using an appropriate combination of internal staff at both the subsidiary and corporate levels as well as independent outside advisors in review of the various tax laws and in compliance reporting for the various operations.
          We regularly review the status of the accumulated unremitted earnings of each of our foreign subsidiaries. We would provide deferred income taxes, net of any foreign tax credits, if applicable, on any earnings that are determined to no longer be indefinitely invested. See Note 12 “Income Taxes” to the “Notes to Consolidated Financial Statements” for further information.

Critical Accounting Estimates
The preparation of financial statements in accordance with generally accepted accounting principles in the United States (GAAP) requires the use of estimates and assumptions that have an impact on the assets, liabilities, revenue and expense amounts reported. These estimates can also affect supplemental disclosures including information about contingencies, risk and financial condition.
          Critical accounting estimates are defined as those that are reflective of significant judgments and uncertainties and potentially yield materially different results under different assumptions or conditions. Given current facts and circumstances, we believe that our estimates and assumptions are reasonable, adhere to GAAP and are consistently applied. Our selection and disclosure of our critical accounting policies and estimates has been reviewed with our Audit Committee. Following is a review of the more significant assumptions and estimates and the accounting policies and methods used in the preparation of our consolidated financial statements. For all of these estimates, we caution that future events rarely develop exactly as forecast, and the best estimates routinely require adjustment. See Note 1 “Significant Accounting Policies” to the “Notes to Consolidated Financial Statements” which discusses the significant accounting policies that we have adopted.

Inventories
Costs included in inventory include processed tobacco inventory, unprocessed tobacco inventory and other inventory costs. Inventories are valued at the lower of cost or market (“LCM”), which requires us to make significant estimates in assessing our inventory balances for potential LCM adjustments. We evaluate our inventories for LCM adjustments by country and type of inventory. Therefore, processed tobacco and unprocessed tobacco are evaluated separately for LCM purposes.  We compare the cost of our processed tobacco to market values based on recent sales of similar grades when evaluating those balances for LCM adjustments. We also consider whether our processed tobacco is committed to a customer, whereby the expected sales price would be utilized in determining the market value for committed tobacco. We also review data on market conditions in performing our LCM evaluation for our unprocessed tobacco.  See Note 1 “Significant Accounting Policies - Inventories” and Note 2 “Inventories” to the “Notes to Consolidated Financial Statements” for further information.








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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)

Critical Accounting Estimates (continued)

Income Taxes
Our annual tax rate is based on our income, statutory tax rates, exchange rates and tax planning opportunities available to us in the various jurisdictions in which we operate. Tax laws are complex and subject to different interpretations by the taxpayer and respective governmental taxing authorities. Significant judgment is required in determining our tax expense and in evaluating our tax positions including evaluating uncertainties under ASC 740. We review our tax positions quarterly and adjust the balances as new information becomes available.
          Deferred income tax assets represent amounts available to reduce income taxes payable on taxable income in future years. Such assets arise because of temporary differences between the financial reporting and tax bases of assets and liabilities, as well as from net operating loss and tax credit carryforwards. We evaluate the recoverability of these future tax deductions by assessing the adequacy of future expected taxable income from all sources, including reversal of taxable temporary differences, forecasted operating earnings and available tax planning strategies. These sources of income inherently rely heavily on estimates. To provide insight, we use our historical experience and our short and long-range business forecasts. We believe it is more likely than not that a portion of the deferred income tax assets may expire unused and have established a valuation allowance against them. Although realization is not assured for the remaining deferred income tax assets, we believe it is more likely than not the deferred tax assets will be fully recoverable within the applicable statutory expiration periods. However, deferred tax assets could be reduced in the near term if our estimates of taxable income are significantly reduced. See Note 12 “Income Taxes” to the “Notes to Consolidated Financial Statements” for further information.

Advances to Tobacco Suppliers
We evaluate our advances to tobacco suppliers, which represent prepaid inventory, for recoverability by crop and country. Our recoverability assessment for our advances to tobacco suppliers and our LCM evaluation for our inventories achieve a similar objective. We reclassify the advances to inventory at the time suppliers deliver tobacco. The purchase price for the tobacco delivered by the suppliers is based on market prices. Two primary factors determine the market value of the tobacco suppliers deliver to us: the quantity of tobacco delivered and the quality of the tobacco delivered. Therefore, and at the time of delivery, we ensure our advances to tobacco suppliers are appropriately stated at the lower of cost or their recoverable amounts.
          Upon delivery of tobacco, part of the purchase price to the supplier is paid in cash and part through a reduction of the advance balance. If a sufficient value of tobacco is not delivered to allow the reduction of the entire advance balance, then we first determine how much of the deficiency for the current crop is recoverable through future crops. This determination is made by analyzing the suppliers’ ability-to-deliver a sufficient supply of tobacco. This analysis includes historical quantity and quality of production with monitoring of crop information provided by our field service technicians related to flood, drought and disease. The remaining recoverable advance balance would then be classified as noncurrent. Any increase in the estimate of unrecoverable advances associated with the noncurrent portion is charged to cost of goods and services sold in the income statement when determined.
          Amounts not expected to be recovered through current or future crops are then evaluated to determine whether the yield is considered to be normal or abnormal. If the yield adjustment is normal, then we capitalize the applicable variance in the current crop of inventory. If the yield adjustment is considered abnormal, then we immediately charge the applicable variance to cost of goods and services sold in the income statement. A normal yield adjustment is based on the range of unrecoverability for the previous three years by country. Our normal yield adjustment in the South America region is 5.0% to 7.0%.
          We account for our advances to tobacco suppliers using a cost accumulation model, which results in reporting our advances at the lower of cost or recoverable amounts exclusive of the mark-up and interest. The mark-up and interest on our advances are recognized upon delivery of tobacco as a decrease in our cost of the current crop.
          The following table illustrates the amounts of favorable and unfavorable variances on current crop advances to tobacco suppliers (prepaid inventory) that will be capitalized into inventory when the crop has been purchased as of March 31, 2015, 2014 and 2013. The current crop is primarily sold in the next fiscal year when the net favorable / (unfavorable) variance is recognized through cost of sales. See Note 1 “Significant Accounting Policies – Advances to Tobacco Suppliers” for further information on the various components noted below. Variances on advances serve to state the tobacco inventory at cost by accumulating actual total cash expended and allocating it to the tobacco received during the crop cycle.

        
(in millions)
2015
2014
2013
Favorable variances (including mark-up)
$
19.8

$
18.2

$
14.5

Unfavorable variances (including unrecoverable advances)
(10.8
)
(15.3
)
(13.4
)
Net favorable variance in crop cost in inventory
$
9.0

$
2.9

$
1.1







- 35-


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)

Critical Accounting Estimates (continued)

Advances to Tobacco Suppliers (continued)

South America Region
The price, and the resulting mark-up, of the inputs we advance is determined at the beginning of each season and depends on various market considerations. The interest rate charged on advances depends on market conditions as well. We purchase and advance the inputs based on an expected crop production. These advances are in the currency of the local market. For 2015, favorable and unfavorable variances decreased primarily due to the deconsolidation of our former Brazilian subsidiary following the completion of a joint venture in March 2014. This decrease in favorable variances was offset by the positive currency impact on this year's prices charged to tobacco suppliers for agricultural products as well as the cost of those agricultural products due to timing that resulted in increased favorable variances on a U.S. dollar basis. We believe the favorable variances relating to the 2015, 2014 and 2013 crops are representative of average favorable variance percentages based on market conditions and currenc