Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549
 
 
 
FORM 10-Q
 
 
 

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED September 30, 2016.

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______ TO _______.
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Alliance One International, Inc.
(Exact name of registrant as specified in its charter)
Virginia
001-13684
54-1746567
________________
_____________________________
____________________
(State or other jurisdiction of incorporation)
(Commission File Number)
(I.R.S. Employer
Identification No.)

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

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

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes [X] No [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.                                                                                                                                               

Large accelerated filer  [ ]                                                                        Accelerated filer  [X]                                           

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

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

As of October 31, 2016, the registrant had 8,941,875 shares outstanding of Common Stock (no par value) excluding 785,313 shares owned by a wholly owned subsidiary.

- 1 -




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Alliance One International, Inc. and Subsidiaries
 
 
Table of Contents
 
 
 
Page No.
Part I.
Financial Information
 
 
 
 
Item 1.
Financial Statements (Unaudited)
 
 
 
 
Condensed Consolidated Statements of Operations
 
 
Three and Six Months Ended September 30, 2016 and 2015
4
 
 
 
Condensed Consolidated Statements of Comprehensive Income (Loss)
 
 
Three and Six Months Ended September 30, 2016 and 2015
5
 
 
 
 
Condensed Consolidated Balance Sheets
 
 
September 30, 2016 and 2015 and March 31, 2016
6
 
 
 
Condensed Statements of Consolidated Stockholders’ Equity
 
 
Six Months Ended September 30, 2016 and 2015
7
 
 
 
 
Condensed Consolidated Statements of Cash Flows
 
 
Six Months Ended September 30, 2016 and 2015
8
 
 
 
Notes to Condensed Consolidated Financial Statements
9 – 30
 
 
 
 
Item 2.
Management's Discussion and Analysis
 
 
 
of Financial Condition and Results of Operations
31 – 40
 
 
 
 
 
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
40
 
 
 
 
 
Item 4.
Controls and Procedures
40 – 41
 
 
Part II.
Other Information
 
 
 
 
 
Item 1.
Legal Proceedings
42
 
 
 
 
 
Item 1A.
Risk Factors
42
 
 
 
 
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
42
 
 
 
 
 
Item 3.
Defaults Upon Senior Securities
42
 
 
 
 
 
Item 4.
42
 
 
 
 
 
Item 5.
Other Information
42
 
 
 
 
 
Item 6.
Exhibits
43
 
Signature
44
 
 
Index of Exhibits
45

- 2 -


Part I. Financial Information

Item 1. Financial Statements

Alliance One International, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three and Six Months Ended September 30, 2016 and 2015
(Unaudited)
 
 
 
 
Three Months Ended September 30,
 
Six Months Ended September 30,
(in thousands, except per share data)
 
2016
 
2015
 
2016
 
2015
 
 
 
 
 
 
 
 
 
Sales and other operating revenues
 
$
389,423

 
$
414,853

 
$
650,524

 
$
681,135

Cost of goods and services sold
 
339,142

 
359,979

 
566,192

 
596,864

Gross profit
 
50,281

 
54,874

 
84,332

 
84,271

Selling, general and administrative expenses
 
33,362

 
27,948

 
72,167

 
57,862

Other income (expense)
 
2,104

 
(1,029
)
 
1,624

 
(469
)
Restructuring and asset impairment charges (recovery)
 
577

 
(386
)
 
619

 
2,562

Operating income
 
18,446

 
26,283

 
13,170

 
23,378

Interest expense (includes debt amortization of $3,087 and $2,383 for the three months and $6,197 and $4,626 for the six months in 2016 and 2015, respectively)
 
31,904

 
28,782

 
62,507

 
56,555

Interest income
 
2,204

 
1,274

 
4,042

 
2,648

Loss before income taxes and other items
 
(11,254
)
 
(1,225
)
 
(45,295
)
 
(30,529
)
Income tax expense (benefit)
 
3,627

 
22,902

 
(204
)
 
19,687

Equity in net income (loss) of investee companies
 
(732
)
 
3,004

 
(2,061
)
 
3,136

Net loss
 
(15,613
)
 
(21,123
)
 
(47,152
)
 
(47,080
)
Less: Net income (loss) attributable to noncontrolling interests
 
44

 
(58
)
 
11

 
(65
)
Net loss attributable to Alliance One International, Inc.
 
$
(15,657
)
 
$
(21,065
)
 
$
(47,163
)
 
$
(47,015
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loss per share:
 
 
 
 
 
 
 
 
Basic
 
$
(1.75
)
 
$
(2.37
)
 
$
(5.29
)
 
$
(5.30
)
Diluted
 
$
(1.75
)
 
$
(2.37
)
 
$
(5.29
)
 
$
(5.30
)
 
 
 
 
 
 
 
 
 
Weighted average number of shares outstanding:
 
 
 
 
 
 
 
 
Basic
 
8,923

 
8,883

 
8,914

 
8,873

Diluted
 
8,923

 
8,883

 
8,914

 
8,873

 
 
 
 
 
 
 
 
 
 
 
 
See notes to condensed consolidated financial statements
 
 
 

- 3 -


Alliance One International, Inc. and Subsidiaries
 
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
 
Three and Six Months Ended September 30, 2016 and 2015
 
(Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended September 30,
 
Six Months Ended September 30,
 
(in thousands)
 
2016
 
2015
 
2016
 
2015
 
 
 
 
 
 
 
 
 
 
 
Net loss
 
$
(15,613
)
 
$
(21,123
)
 
$
(47,152
)
 
$
(47,080
)
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
 
 
Currency translation adjustment
 
(585
)
 
(1,664
)
 
(2,859
)
 
643

 
Defined benefit pension amounts reclassified to income:
 
 
 
 
 
 
 
 
 
Negative plan amendment/reclassified to liability
 

 
4,461

 

 
4,686

 
Amounts reclassified to income
 
460

 
1,000

 
921

 
2,000

 
Defined benefit plan adjustment
 
460

 
5,461

 
921

 
6,686

 
Total other comprehensive income (loss), net of tax
 
(125
)
 
3,797

 
(1,938
)
 
7,329

 
Total comprehensive loss
 
(15,738
)
 
(17,326
)
 
(49,090
)
 
(39,751
)
 
Comprehensive income (loss) attributable to noncontrolling interests
 
45

 
(58
)
 
11

 
(65
)
 
Comprehensive loss attributable to Alliance One International, Inc.
 
$
(15,783
)
 
$
(17,268
)
 
$
(49,101
)
 
$
(39,686
)
 
 
 
 
 
See notes to condensed consolidated financial statements
 
 
 

- 4 -


Alliance One International, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS 
(Unaudited)
(in thousands)
September 30, 2016
 
September 30, 2015
 
March 31, 2016
ASSETS
 
 
 
 
 
Current assets
 
 
 
 
 
Cash and cash equivalents
$
159,297

 
$
150,825

 
$
199,720

Trade receivables, net
195,954

 
246,137

 
303,907

Other receivables
88,775

 
98,377

 
97,101

Accounts receivable, related parties
8,965

 
8,489

 
1,920

Inventories
944,012

 
963,390

 
791,340

Advances to tobacco suppliers
57,091

 
46,897

 
41,837

Recoverable income taxes
18,619

 
5,809

 
13,421

Current deferred taxes, net

 
13,742

 

Prepaid expenses
26,005

 
21,721

 
20,016

Other current assets
16,162

 
13,827

 
21,096

Total current assets
1,514,880

 
1,569,214

 
1,490,358

Other assets
 
 
 
 
 
Investments in unconsolidated affiliates
55,655

 
54,814

 
58,259

Goodwill
16,463

 
2,794

 
16,463

Other intangible assets
48,402

 
27,304

 
50,571

    Long-term recoverable income taxes
8,990

 
7,530

 
8,686

Deferred income taxes, net
48,144

 
25,247

 
38,773

Other deferred charges
889

 
6,115

 
3,934

Other noncurrent assets
37,634

 
20,688

 
23,629

 
216,177

 
144,492

 
200,315

Property, plant and equipment, net
267,667

 
232,414

 
277,525

 
$
1,998,724

 
$
1,946,120

 
$
1,968,198

 
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
 
Current liabilities
 
 
 
 
 
Notes payable to banks
$
581,891

 
$
504,478

 
$
475,989

Accounts payable
51,809

 
49,179

 
81,649

Due to related parties
17,357

 
44,121

 
20,490

Advances from customers
15,205

 
51,681

 
9,895

Accrued expenses and other current liabilities
72,857

 
93,358

 
74,425

Income taxes
6,114

 
12,934

 
12,022

Long-term debt current
10,355

 
32,894

 
356

Total current liabilities
755,588

 
788,645

 
674,826

 
 
 
 
 
 
Long-term debt
901,575

 
893,612

 
910,214

Deferred income taxes
25,349

 
2,740

 
16,924

Liability for unrecognized tax benefits
10,169

 
9,825

 
9,809

Pension, postretirement and other long-term liabilities
79,630

 
95,367

 
81,753

 
1,016,723

 
1,001,544

 
1,018,700

Commitments and contingencies


 


 


Stockholders’ equity
September 30, 2016
 
September 30, 2015
 
March 31, 2016
 
 
 
 
 
Common Stock—no par value:
 
 
 
 
 
 
 
 
 
 
Authorized shares
250,000

 
250,000

 
250,000

 
 
 
 
 
Issued shares
9,716

 
9,674

 
9,685

471,661

 
469,982

 
470,830

Retained deficit
(193,019
)
 
(258,403
)
 
(145,856
)
Accumulated other comprehensive loss
(55,786
)
 
(59,057
)
 
(53,848
)
Total stockholders’ equity of Alliance One International, Inc.
222,856

 
152,522

 
271,126

Noncontrolling interests
3,557

 
3,409

 
3,546

Total equity
226,413

 
155,931

 
274,672

 
$
1,998,724

 
$
1,946,120

 
$
1,968,198

See notes to condensed consolidated financial statements

- 5 -



Alliance One International, Inc. and Subsidiaries
CONDENSED STATEMENTS OF CONSOLIDATED STOCKHOLDERS’ EQUITY
(Unaudited)
 
 
 
 
 
Attributable to Alliance One International, Inc.
 
 
 
 
 
 
 
 
 
 
 
 
Accumulated Other Comprehensive Loss
 
 
(in thousands)
Common
Stock
Retained
Deficit
Currency Translation Adjustment
Pensions, Net of Tax
Noncontrolling
Interests
Total
Equity
 
 
 
 
 
 
 
Balance, March 31, 2015
$
468,564

$
(211,388
)
$
(14,154
)
$
(52,232
)
$
3,274

$
194,064

Net loss

(47,015
)


(65
)
(47,080
)
Acquisition of noncontrolling interest




200

200

Stock-based compensation
1,472





1,472

Restricted stock surrendered
(54
)




(54
)
Other comprehensive income, net of tax


643

6,686


7,329

 
 
 
 
 
 
 
Balance, September 30, 2015
$
469,982

$
(258,403
)
$
(13,511
)
$
(45,546
)
$
3,409

$
155,931

 
 
 
 
 
 
 
Balance, March 31, 2016
$
470,830

$
(145,856
)
$
(14,046
)
$
(39,802
)
$
3,546

$
274,672

Net income (loss)

(47,163
)


11

(47,152
)
Restricted stock surrendered
(14
)




(14
)
Stock-based compensation
845





845

Other comprehensive income (loss), net of tax


(2,859
)
921


(1,938
)
 
 
 
 
 
 
 
Balance, September 30, 2016
$
471,661

$
(193,019
)
$
(16,905
)
$
(38,881
)
$
3,557

$
226,413

 
 
 
 
 
 
 
See notes to condensed consolidated financial statements

- 6 -


Alliance One International, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS 
Six Months Ended September 30, 2016 and 2015
(Unaudited)
 
 
(in thousands)
 
September 30, 2016
 
September 30, 2015
 
 
 
 
 
Operating activities
 
 
 
 
   Net loss
 
$
(47,152
)
 
$
(47,080
)
   Adjustments to reconcile net loss to net cash used by operating activities:
 
 
 
 
      Depreciation and amortization
 
17,353

 
13,961

      Debt amortization/interest
 
6,987

 
5,339

     (Gain) loss on foreign currency transactions
 
(4,536
)
 
12,676

      Restructuring and asset impairment charges
 
619

 
2,562

      Equity in net (income) loss of unconsolidated affiliates, net of dividends
 
2,252

 
(1,098
)
      Stock-based compensation
 
965

 
1,805

      Changes in operating assets and liabilities, net
 
(110,833
)
 
(346,878
)
      Other, net
 
79

 
(254
)
   Net cash used by operating activities
 
(134,266
)
 
(358,967
)
 
 
 
 
 
Investing activities
 
 
 
 
   Purchases of property, plant and equipment
 
(7,202
)
 
(9,852
)
   Proceeds from sale of property, plant and equipment
 
431

 
662

   Surrender of life insurance policies
 

 
1,407

   Other, net
 
(260
)
 
(308
)
   Net cash used by investing activities
 
(7,031
)
 
(8,091
)
 
 
 
Financing activities
 
 
 
 
   Net proceeds from short-term borrowings
 
108,057

 
183,762

   Proceeds from long-term borrowings
 
200,000

 
195,000

   Repayment of long-term borrowings
 
(200,355
)
 
(242
)
   Debt issuance cost
 
(6,451
)
 
(5,113
)
   Other, net
 

 
200

   Net cash provided by financing activities
 
101,251

 
373,607

 
 
 
 
 
Effect of exchange rate changes on cash
 
(377
)
 
427

 
 
 
Increase (decrease) in cash and cash equivalents
 
(40,423
)
 
6,976

Cash and cash equivalents at beginning of period
 
199,720

 
143,849

Cash and cash equivalents at end of period
 
$
159,297

 
$
150,825

 
Other information:
 
 
 
 
      Cash paid for income taxes
 
$
4,736

 
$
8,589

      Cash paid for interest
 
57,845

 
53,221

      Cash received from interest
 
(4,042
)
 
(2,861
)
 
 
 
 
 
See notes to condensed consolidated financial statements

- 7 -

Alliance One International, Inc. and Subsidiaries

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

1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

Because of the seasonal nature of the Company’s business, the results of operations for any fiscal quarter will not necessarily be indicative of results to be expected for other quarters or a full fiscal year. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair statement of financial position, results of operation and cash flows at the dates and for the periods presented have been included. The unaudited information included in this Form 10-Q should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2016.
      In fiscal 2006, the Company deconsolidated its Zimbabwe subsidiary, Mashonaland Tobacco Company LTD ("MTC") in accordance with accounting requirements that apply to foreign subsidiaries that are subject to foreign exchange controls and other government restrictions that casted significant doubt on the parent's ability to control the subsidiary. As of March 31, 2016, the Company determined that significant doubt about its ability to control MTC was eliminated due to changes in the political landscape and the recent issuance of clarifications to the indigenization laws within Zimbabwe. As a result, the Company reconsolidated MTC on March 31, 2016. Beginning April 1, 2016, the financial results of MTC are included in the consolidated statements of operations, consolidated balance sheet and consolidated statement of cash flows.
Prior to March 31, 2016, the Company accounted for its investment in MTC on the cost method and had been reporting it in Investments in Unconsolidated Affiliates in the Consolidated Balance Sheets since March 31, 2006 and had written its investment in MTC down to zero in fiscal 2007.

Restatement of Previously Reported Financial Information
During the year ended March 31, 2016, the Company identified certain immaterial errors in previously issued financial statements related to inventory, cost of goods sold and income tax. In addition, the Company corrected the classification of amounts between line items on the Consolidated Balance Sheets included in the previously issued financial statements. The correction of these immaterial errors and reclassification between line items at March 31, 2015 also impact the previously reported balances at September 30, 2015. For the three months and six months ended September 30, 2015, cost of goods sold was adjusted by $636. For the six months ended September 30, 2015, inventory was adjusted by $744, recoverable income tax was adjusted by $1,824 and retained earnings was adjusted by $2,568. In addition, reclassifications of $11,808 between "Accounts receivable, related parties" and "Pension, postretirement and other long-term liabilities" were made. The Company has evaluated the effect of the above misstatements on its condensed consolidated financial statements for the three months and six months ended September 30, 2015 in accordance with the guidance provided by SEC Staff Accounting Bulletin No. 108, codified as SAB Topic 1.N, “Considering the Effects of Prior Year Misstatement When Quantifying Misstatements in the Current Year Financial Statements,” and concluded that the three months and six months ended September 30, 2015 were not materially misstated. See Note 21 "Restatement of Previously Reported Financial Information" to the "Notes to Condensed Consolidated Financial Statements" for the impact of this change on selected financial amounts.

Taxes Collected from Customers
Certain subsidiaries are subject to value added taxes on local sales. These amounts have been included in sales and cost of sales and were $6,406 and $2,847 for the three months ended September 30, 2016 and 2015, respectively and $12,591 and $8,611 for the six months ended September 30, 2016 and 2015, respectively.

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

New Accounting Standards

Recent Adopted Accounting Pronouncements
In April 2015, the Financial Accounting Standards Board ("FASB") issued new accounting guidance that changed the presentation of debt issuance costs in financial statements. The primary objective of this accounting guidance was to present these costs in the balance sheet as a direct deduction from the related debt liability rather than as an asset. Amortization of the costs is still reported as interest expense. The Company adopted this guidance on April 1, 2016 on a retrospective basis. On the condensed consolidated balance sheets, $10,810 and $9,875 were reclassified from Other Deferred Charges to Long-Term Debt at September 30, 2015 and March 31, 2016, respectively. See Note 21 "Restatement of Previously Reported Financial Information" to the "Notes to Condensed Consolidated Financial Statements."

- 8 -

Alliance One International, Inc. and Subsidiaries

1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)

Recent Accounting Pronouncements Not Yet Adopted
In May 2014, the FASB issued new accounting guidance that outlines a single comprehensive model to use in accounting for revenue from contracts with customers. The primary objective of this accounting guidance is to recognize revenue that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which an entity expects to be entitled in exchange for those goods or services. This accounting guidance, as amended, is effective for the Company on April 1, 2018. The Company is currently evaluating the impact of this new guidance.
     In August 2014, the FASB issued new accounting guidance on determining when and how to disclose going concern uncertainties in the financial statements. The primary objective of this accounting guidance is for management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date the financial statements are issued and provide certain disclosures if conditions or events raise substantial doubt about the entity’s ability to continue as a going concern. This accounting guidance is effective for the Company on March 31, 2017. The Company is currently evaluating the impact of this new guidance.
In May 2015, the FASB issued new accounting guidance for disclosures of investments that calculate net asset value per share (or its equivalent). The primary objective is to reduce the diversity in practice on how these investments are categorized in the fair value hierarchy. This accounting guidance is effective for the Company on March 31, 2017. The Company is currently evaluating the impact of this new guidance.
In July 2015, the FASB issued new accounting guidance that simplifies the measurement of inventory. Under the previous accounting guidance, an entity measured inventory at the lower of cost or market with market defined as one of three different measures. The primary objective of this accounting guidance is to require a single measurement of inventory at the lower of cost and net realizable value. This accounting guidance is effective for the Company on April 1, 2017. The Company is currently evaluating the impact of this new guidance.
    In January 2016, the FASB issued new accounting guidance regarding certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The primary objective of this accounting guidance is to provide users of financial statements with more decision-useful information. The accounting guidance will be effective for the Company on April 1, 2018. The Company is currently evaluating the impact of this guidance.
In February 2016, the FASB issued new accounting guidance regarding the treatment of leases. The primary objective of this accounting guidance is to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. This accounting guidance will be effective for the Company April 1, 2020. The Company is currently evaluating the impact of this new guidance.
In March 2016, the FASB issued new accounting guidance for simplifying the treatment of employee share-based payments. The primary objective is improve areas of GAAP for which cost and complexity can be reduced while maintaining or improving the usefulness of information provided to users of financial statements. This accounting guidance will be effective for the Company on April 1, 2017. The Company is currently evaluating the impact of this new guidance.
In June 2016, the FASB issued new accounting guidance on the measurement of credit losses on financial instruments. The primary objective is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. This accounting guidance will be effective for the Company on April 1, 2020. The Company is currently evaluating the impact of this new guidance.
In August of 2016, the FASB issued new accounting guidance that clarifies the classification of certain cash receipts and cash payments. The primary objective is to reduce the diversity in practice on how these activities are presented on the statement of cash flows. This accounting guidance will be effective for the Company on March 31, 2018. The company is currently evaluating the impact of this new guidance.

2. INCOME TAXES

Accounting for Uncertainty in Income Taxes
As of September 30, 2016, the Company’s unrecognized tax benefits totaled $16,707, all of which would impact the Company’s effective tax rate if recognized.
         The Company recognizes interest and penalties related to unrecognized tax benefits in income tax expense. As of September 30, 2016, accrued interest and penalties totaled $1,507 and $965 respectively.
         The Company expects to continue accruing interest expense related to the unrecognized tax benefits described above. Additionally, the Company may be subject to fluctuations in the unrecognized tax liability due to currency exchange rate movements.
         The Company does not foresee any reasonably possible changes in the unrecognized tax benefits in the next twelve months but acknowledges circumstances can change due to unexpected developments in the law. In certain jurisdictions, tax authorities have challenged positions that the Company has taken that resulted in recognizing benefits that are material to its financial statements. The Company believes it is more likely than not that it will prevail in these situations and accordingly has not recorded

- 9 -

Alliance One International, Inc. and Subsidiaries

2. INCOME TAXES (continued)

liabilities for these positions. The Company expects the challenged positions to be settled at a time greater than twelve months from its balance sheet date.
         The Company and its subsidiaries file a U.S. federal consolidated income tax return as well as returns in several U.S. states and a number of foreign jurisdictions. As of September 30, 2016, the Company’s earliest open tax year for U.S. federal income
tax purposes is its fiscal year ended March 31, 2013; however, the Company's net operating loss carryovers from prior periods remain subject to adjustment. Open tax years in state and foreign jurisdictions generally range from three to six years.

Provision for the Six Months Ended September 30, 2016
The effective tax rate used for the six months ended September 30, 2016 was 0.5% compared to (64.5)% for the six months ended September 30, 2015. The effective tax rates for these periods are based on the current estimate of full year results including the effect of taxes related to discrete events which are recorded in the interim period in which they occur. The difference in the effective tax rate in one year compared to another is the result of many factors that include, but are not limited to, differences in forecasted income for the respective years, differences in year-to-date income for the periods, certain losses for which no tax benefit is recorded; and, differences between discrete items recognized for the periods that include changes in valuation allowances, net exchanges losses on income tax accounts and net exchange gains related to liabilities for unrecognized tax benefits.
         For the six months ended September 30, 2016, the Company recorded a discrete event adjustment benefit of $2,836, bringing the effective tax rate estimated for the six months of (5.8)% to 0.5%. This discrete event adjustment benefit relates primarily to net exchange losses on income tax accounts and net exchange gains related to liabilities for unrecognized tax benefits. For the six months ended September 30, 2015, the Company recorded a discrete event adjustment expense of $9,264, bringing the effective tax rate estimated for the six months of (34.1)% to (64.5)%. This discrete event adjustment expense relates primarily to net exchange losses on income tax accounts and net exchange gains related to liabilities for unrecognized tax benefits. The significant difference in the estimated effective tax rate for the six months ended September 30, 2016 from the U.S. federal statutory rate is primarily due to net exchange losses on income tax accounts, foreign income tax rates lower than the U.S. rate and certain losses for which no benefit is currently recorded.

3. GUARANTEES

The Company and certain of its foreign subsidiaries guarantee bank loans to suppliers to finance their crops. Under longer-term arrangements, the Company may also guarantee financing on suppliers’ construction of curing barns or other tobacco production assets. Guaranteed loans are generally repaid concurrent with the delivery of tobacco to the Company. The Company is obligated to repay any guaranteed loan should the supplier default. If default occurs, the Company has recourse against the supplier. The Company also guarantees bank loans of certain unconsolidated subsidiaries in Asia and Brazil.

         The following table summarizes amounts guaranteed and the fair value of those guarantees:
 
September 30, 2016
 
September 30, 2015
 
March 31, 2016
Amounts guaranteed (not to exceed)
$
206,923

 
$
236,045

 
$
210,703

Amounts outstanding under guarantee
89,822

 
133,897

 
107,615

Fair value of guarantees
4,467

 
4,865

 
7,350


         Of the guarantees outstanding at September 30, 2016, all expire within one year. The fair value of guarantees is recorded in Accrued Expenses and Other Current Liabilities in the Condensed Consolidated Balance Sheets and included in crop costs except for the joint venture in Brazil which is included in Accounts Receivable, Related Parties.
In Brazil, certain suppliers obtain government subsidized rural credit financing from local banks that is guaranteed by the Company. The Company withholds amounts owed to suppliers related to the rural credit financing of the supplier upon delivery of tobacco to the Company. The Company remits payments to the local banks on behalf of the guaranteed suppliers. Terms of rural credit financing are such that repayment is due to local banks based on contractual due dates. As of March 31, 2016, the Company had a balance of $16,699 that was due to local banks on behalf of suppliers. As of September 30, 2016 and 2015, there are no amounts due. These amounts are included in Accounts Payable in the Condensed Consolidated Balance Sheets.








- 10 -

Alliance One International, Inc. and Subsidiaries

4. RESTRUCTURING AND ASSET IMPAIRMENT CHARGES

During the quarter ended March 31, 2015, the Company announced the first phase of a global restructuring plan focusing on efficiency and cost improvements. The Company reviewed origin and corporate operations, and initiatives were implemented to increase operational efficiency and effectiveness. These initiatives continue to be implemented as the Company restructures certain operations not meeting strategic business objectives and performance metrics. During the three months ended September 30, 2016, the Company recorded $57 for employee severance charges, $25 for other cash charges and $495 for impairment charges related to facilities formerly utilized by its U.S. cut rag facility. During the six months ended September 30, 2016, severance charges were $64, other cash charges were $60 and asset impairment charges were $495. During the three months ended September 30, 2015, the Company recorded $(386) for recoveries of employee severance charges. During the six months ended September 30, 2015, the Company recorded $(11) for recoveries of employee severance charges and $2,573 of asset impairment charges in connection with the restructuring of certain operations primarily in Africa. The $2,573 asset impairment charges are for unrecoverable tobacco supplier advances and tobacco production property and equipment due to exiting and redefining the Company’s position in certain African markets.

The following table summarizes the restructuring charges recorded during the three months and six months ended September 30, 2016 and 2015, respectively:
 
Three Months Ended September 30,
 
Six Months Ended September 30,
Restructuring and Asset Impairment Charges
2016
 
2015
 
2016
 
2015
Employee separation and other cash charges:
 
 
 
 
 
 
 
Beginning balance
$
99

 
$
7,216

 
$
398

 
$
8,087

Period charges:
 
 
 
 
 
 
 
Severance charges (recoveries)
57

 
(386
)
 
64

 
(11
)
Other cash charges
25

 

 
60

 

Total period charges (recoveries)
82

 
(386
)
 
124

 
(11
)
Payments through September 30
(101
)
 
(5,267
)
 
(442
)
 
(6,513
)
Ending balance September 30
$
80

 
$
1,563

 
$
80

 
$
1,563

Asset impairment and other non-cash charges
$
495

 
$

 
$
495

 
$
2,573

Total restructuring charges (recoveries) for the period
$
577

 
$
(386
)
 
$
619

 
$
2,562


The following table summarizes the employee separations and other cash charges recorded in the Company's North America and Other Regions segment during the three months and six months ended September 30, 2016 and 2015:
 
Three Months Ended September 30,
 
Six Months Ended September 30,
Employee Separation and Other Cash Charges
2016
 
2015
 
2016
 
2015
Beginning balance:
$
99

 
$
7,216

 
$
398

 
$
8,087

   North America

 

 

 

   Other regions
99

 
7,216

 
398

 
8,087

Period charges:
$
82

 
$
(386
)
 
$
124

 
$
(11
)
   North America

 

 

 

   Other regions
82

 
(386
)
 
124

 
(11
)
Payments through September 30
$
(101
)
 
$
(5,267
)
 
$
(442
)
 
$
(6,513
)
   North America

 

 

 

   Other regions
(101
)
 
(5,267
)
 
(442
)
 
(6,513
)
Ending balance September 30
$
80

 
$
1,563

 
$
80

 
$
1,563

   North America

 

 

 

   Other regions
80

 
1,563

 
80

 
1,563










- 11 -

Alliance One International, Inc. and Subsidiaries

5. GOODWILL AND INTANGIBLES

Goodwill represents costs in excess of fair values assigned to the underlying net assets of acquired businesses. Goodwill is not subject to amortization, but rather is tested for impairment annually or whenever events and circumstances indicate that an impairment may have occurred. The Company has chosen the first day of the last quarter of its fiscal year as the date to perform its annual goodwill impairment test.
         The Company has no intangible assets with indefinite useful lives. It does have intangible assets which are amortized. The following table summarizes the changes in the Company’s goodwill and other intangibles for the periods provided below:
 
 
 
 
Amortizable Intangibles
 
 
 
Goodwill (1)
 
Customer
Relationship
Intangible
 
Production
and Supply
Contract
Intangibles
 
Internally
Developed
Software
Intangible
 
Total
Weighted average remaining useful
    life in years as of September 30, 2016
 
 
12.50

 
4.25

 

 
March 31, 2015 balance
 
 
 
 
 
 
 
 
 
 
Gross carrying amount
 
$
2,794

 
$
33,700

 
$
14,893

 
$
18,502

 
$
69,889

Accumulated amortization
 

 
(16,639
)
 
(5,786
)
 
(15,573
)
 
(37,998
)
Net March 31, 2015
 
2,794

 
17,061

 
9,107

 
2,929

 
31,891

Amortization expense
 

 
(421
)
 
(270
)
 
(206
)
 
(897
)
Net June 30, 2015
 
2,794

 
16,640

 
8,837

 
2,723

 
30,994

Amortization expense
 

 
(421
)
 
(272
)
 
(203
)
 
(896
)
Net September 30, 2015
 
2,794

 
16,219

 
8,565

 
2,520

 
30,098

Additions
 
13,669

 
24,830

 

 

 
38,499

Amortization expense
 

 
(843
)
 
(283
)
 
(437
)
 
(1,563
)
Net March 31, 2016
 
16,463

 
40,206

 
8,282

 
2,083

 
67,034

Amortization expense
 

 
(836
)
 
(110
)
 
(193
)
 
(1,139
)
Net June 30, 2016
 
16,463

 
39,370

 
8,172

 
1,890

 
65,895

Amortization expense
 

 
(834
)
 
(8
)
 
(188
)
 
(1,030
)
Net September 30, 2016
 
16,463

 
38,536

 
8,164

 
1,702

 
64,865

 
(1) Goodwill of $2,794 relates to the North America segment and $13,669 relates to the Other Regions segment.

         The following table summarizes the estimated future intangible asset amortization expense:
    
For Fiscal
Years Ended
 
Customer
Relationship
Intangible
 
Production
and Supply
Contract
Intangible
 
Internally
Developed
Software
Intangible*
 
Total
October 1, 2016 through March 31, 2017
 
$
1,670

 
$
1,164

 
$
467

 
$
3,301

2018
 
3,340

 
1,405

 
620

 
5,365

2019
 
3,340

 
1,405

 
367

 
5,112

2020
 
3,340

 
1,397

 
248

 
4,985

2021
 
3,340

 
1,397

 

 
4,737

Later
 
23,506

 
1,396

 

 
24,902

 
 
$
38,536

 
$
8,164

 
$
1,702

 
$
48,402

*  Estimated amortization expense for the internally developed software is based on costs accumulated as of September 30, 2016. These estimates will change as new costs are incurred and until the software is placed into service in all locations.








- 12 -

Alliance One International, Inc. and Subsidiaries

6. VARIABLE INTEREST ENTITIES

The Company holds variable interests in seven joint ventures that are accounted for under the equity method of accounting. These joint ventures primarily procure or process inventory on behalf of the Company and the other joint venture partners. The variable interests relate to equity investments and advances made by the Company to the joint ventures. In addition, the Company also guarantees two of its joint ventures' borrowings which also represents a variable interest in those joint ventures. The Company is not the primary beneficiary, as it does not have the power to direct the activities that most significantly impact the economic performance of the entities as a result of the entities’ management and board of directors' structure. Therefore, these entities are not consolidated. At September 30, 2016 and 2015, and March 31, 2016, the Company’s investment in these joint ventures was $54,639, $53,798, and $57,243, respectively and is classified as Investments in Unconsolidated Affiliates in the Condensed Consolidated Balance Sheets. The Company’s advances to these joint ventures at September 30, 2016 and 2015, and March 31, 2016, respectively were $8,965, $5,623 and $1,920 and are classified as Accounts Receivable, Related Parties in the Condensed Consolidated Balance Sheets. The Company guaranteed an amount to two joint ventures not to exceed $94,054, $94,602 and $100,238 at September 30, 2016 and 2015, and March 31, 2016, respectively. The investments, advances and guarantees in these joint ventures represent the Company’s maximum exposure to loss.

7. SEGMENT INFORMATION

The Company purchases, processes, sells and stores leaf tobacco. Tobacco is purchased in more than 35 countries and shipped to approximately 90 countries. The sales, logistics and billing functions of the Company are primarily concentrated in service centers outside of the producing areas to facilitate access to its major customers. Within certain quality and grade constraints, tobacco is fungible and, subject to these constraints, customers may choose to fulfill their needs from any of the areas where the Company purchases tobacco.
Selling, logistics, billing, and administrative overhead, including depreciation, which originates primarily from the Company’s corporate and sales offices, are allocated to the segments based upon segment operating income. The Company reviews performance data from the purchase of the product or the service provided through sale based on the source of the product or service and all intercompany transactions are allocated to the operating segment that either purchases or processes the tobacco.

The following table presents the summary segment information for the three months and six months ended September 30, 2016 and 2015:       
 
Three Months Ended September 30,
 
Six Months Ended September 30,
 
2016
 
2015
 
2016
 
2014
Sales and other operating revenues:
 
 
 
 
 
 
 
    North America
$
58,823

 
$
64,830

 
$
108,760

 
$
95,130

    Other regions
330,600

 
350,023

 
541,764

 
586,005

    Total revenue
$
389,423

 
$
414,853

 
$
650,524

 
$
681,135

 
 
 
 
 
 
 
 
Operating income:
 
 
 
 
 
 
 
    North America
$
3,659

 
$
5,547

 
$
2,681

 
$
6,418

    Other regions
14,787

 
20,736

 
10,489

 
16,960

Total operating income
18,446

 
26,283

 
13,170

 
23,378

    Interest expense
31,904

 
28,782

 
62,507

 
56,555

    Interest income
2,204

 
1,274

 
4,042

 
2,648

Loss before income taxes and other items
$
(11,254
)
 
$
(1,225
)
 
$
(45,295
)
 
$
(30,529
)

Analysis of Segment Assets
September 30, 2016
 
September 30, 2015
 
March 31, 2016
Segment assets:
 
 
 
 
 
 
North America
$
396,413

 
$
400,884

 
$
338,833

 
Other regions
1,602,311

 
1,545,236

 
1,629,365

 
Total assets
$
1,998,724

 
$
1,946,120

 
$
1,968,198








- 13 -

Alliance One International, Inc. and Subsidiaries

8. EARNINGS PER SHARE

The weighted average number of common shares outstanding is reported as the weighted average of the total shares of common stock outstanding net of shares of common stock held by a wholly owned subsidiary. Shares of common stock owned by the subsidiary were 785 at September 30, 2016 and 2015. This subsidiary waives its right to receive dividends and it does not have the right to vote.
          Certain potentially dilutive options were not included in the computation of earnings per diluted share because their exercise prices were greater than the average market price of the shares of common stock during the period and their effect would be antidilutive. These shares totaled 461 at a weighted average exercise price of $61.09 per share at September 30, 2016 and 646 at a weighted average exercise price of $60.49 per share at September 30, 2015.
          The following table summarizes the computation of earnings per share for the three months and six months ended September 30, 2016 and 2015, respectively.

 
Three Months Ended September 30,
 
Six Months Ended September 30,
 
(in thousands, except per share data)
2016
 
2015
 
2016
 
2015
 
BASIC LOSS
 
 
 
 
 
 
 
 
Net loss attributable to Alliance One International, Inc.
$
(15,657
)
 
$
(21,065
)
 
$
(47,163
)
 
$
(47,015
)
 
 
 
 
 
 
 
 
 
 
SHARES
 
 
 
 
 
 
 
 
   Weighted average number of shares outstanding
8,923

 
8,883

 
8,914

 
8,873

 
 
 
 
 
 
 
 
 
 
BASIC LOSS PER SHARE
$
(1.75
)
 
$
(2.37
)
 
$
(5.29
)
 
$
(5.30
)
 
 
 
 
 
 
 
 
 
 
DILUTED LOSS
 
 
 
 
 
 
 
 
   Net loss attributable to Alliance One International, Inc.
$
(15,657
)
 
$
(21,065
)
 
$
(47,163
)
 
$
(47,015
)
 
 
 
 
 
 
 
 
 
 
SHARES
 
 
 
 
 
 
 
 
   Weighted average number of common shares
   outstanding
8,923

 
8,883

 
8,914

 
8,873

 
   Plus: Restricted shares issued and shares applicable to
              stock options and restricted stock units, net of
             shares assumed to be purchased from proceeds
             at average market price

*

*

*

*
   Adjusted weighted average number of common
  shares outstanding
8,923

 
8,883

 
8,914

 
8,873

 
DILUTED LOSS PER SHARE
$
(1.75
)
 
$
(2.37
)
 
$
(5.29
)
 
$
(5.30
)
 
 
 
 
 
 
 
 
 
 
* 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.

9. STOCK-BASED COMPENSATION

The Company recorded stock-based compensation expense related to stock-based awards granted under its various employee and non-employee stock incentive plans of $528 and $701 for the three months ended September 30, 2016 and 2015, respectively, of which $75 and $40, respectively were with respect to stock-based awards payable in cash, and $965 and $1,805 for the six months ended September 30, 2016 and 2015, respectively, of which $120 and $331, respectively, were with respect to stock-based awards payable in cash.
          The Company’s shareholders approved amendments to the 2007 Incentive Plan (the “2007 Plan”) at its annual meetings of shareholders held on August 11, 2011 and August 6, 2009, and approved the 2016 Incentive Plan (the "2016 Plan") at its annual meeting of shareholders held on August 11, 2016. Each of the 2016 Plan and the 2007 Plan is an omnibus plan that provides the flexibility to grant a variety of equity awards including stock options, stock appreciation rights, stock awards, stock units, performance awards and incentive awards to officers, directors and employees of the Company.
          During the three months and six months ended September 30, 2016 and 2015, respectively, the Company made the following stock-based compensation awards:







- 14 -

Alliance One International, Inc. and Subsidiaries

9. STOCK-BASED COMPENSATION (continued)

 
Three Months Ended September 30,
 
Six Months Ended September 30,
  (in thousands, except grant date fair value)
2016
 
2015
 
2016
 
2015
  Restricted Stock
 
 
 
 
 
 
 
           Number Granted
7

 
6

 
13

 
12

           Grant Date Fair Value
$
19.12

 
$
20.38

 
$
17.55

 
$
22.15

  Restricted Stock Units
 
 
 
 
 
 
 
           Number Granted
56

 

 
56

 

           Grant Date Fair Value
$
17.76

 
$

 
$
17.76

 
$

  Performance-Based Stock Units
 
 
 
 
 
 
 
           Number Granted
28

 

 
28

 

           Grant Date Fair Value
$
17.76

 
$

 
$
17.76

 
$


          Restricted stock consists of shares issued to non-employee directors of the Company which are not subject to a minimum vesting period. Restricted stock units differ from restricted stock in that zero shares are issued until restrictions lapse. Restricted stock units granted during the three months ended September 30, 2016 vest ratably over a three-year period. Under the terms of the Performance-Based Stock Units, shares ultimately issued will be contingent upon specified business performance goals.

On August 13, 2015, the Company’s shareholders approved an exchange offer that allowed certain employees to surrender options and receive restricted stock units in exchange for these options. The offer was made on September 14, 2015 and applied only to grants made during fiscal years 2012 and 2013 having a pre-reverse stock split exercise price of $6.00 which became $60.00 per share after the reverse stock split. The offer expired on October 13, 2015. This exchange was based on exchange of options that would vest as a fulfilment of service obligation to restricted stock units that will vest upon satisfaction of service obligations and the expense recognized in this exchange was based upon the original grant.

10. CONTINGENCIES AND OTHER INFORMATION

Non-Income Tax
The government in the Brazilian State of Parana (“Parana”) issued a tax assessment on October 26, 2007 with respect to local intrastate trade tax credits that result primarily from tobacco transferred between states within Brazil. The assessment for intrastate trade tax credits taken is $4,058 and the total assessment including penalties and interest at September 30, 2016 is $12,808. The Company believes it has properly complied with Brazilian law and will contest any assessment through the judicial process. Should the Company lose in the judicial process, the loss of the intrastate trade tax credits would have a material impact on the financial statements of the Company.  The Company also has local intrastate trade tax credits in the Brazilian State of Santa Catarina and the State of Rio Grande do Sul. These jurisdictions permit the sale or transfer of excess credits to third parties, however approval must be obtained from the tax authorities. The Company has an agreement with the state governments regarding the amounts and timing of credits that can be sold. The tax credits have a carrying value of $3,157 at September 30, 2016, which is net of impairment charges based on management’s expectations about future realization. The intrastate trade tax credits will continue to be monitored for impairment in future periods based on market conditions and the Company’s ability to use or sell the tax credits.
          In 1969, the Brazilian government created a tax credit program that allowed companies to earn IPI tax credits (“IPI credits”) based on the value of their exports. The government began to phase out this program in 1979, which resulted in numerous lawsuits between taxpayers and the Brazilian government. The Company has a long legal history with respect to credits it earned while the IPI credit program was in effect. In 2001, the Company won a claim related to certain IPI credits it earned between 1983 and 1990. The Brazilian government appealed this decision and numerous rulings and appeals were rendered on behalf of both the government and the Company from 2001 through 2013. Because of this favorable ruling, the Company began to use these earned
IPI credits to offset federal taxes in 2004 and 2005, until it received a Judicial Order to suspend the IPI offsetting in 2005. The value of the federal taxes offset in 2004 and 2005 was $24,142 and the Company established a reserve on these credits at the time of offsetting as they were not yet realizable due to the legal uncertainty that existed. Specifically, the Company extinguished other federal tax liabilities using IPI credits and recorded a liability in Pension, Postretirement and Other Long-Term Liabilities to reflect that the credits were not realizable at that time due to the prevalent legal uncertainty. On March 7, 2013, the Brazilian Supreme Court rendered a final decision in favor of the Company that recognized the validity of the IPI credits and secured the Company's right to benefit from the IPI credits earned from March 1983 to October 1990. This final decision expressly stated the Company
has the right to the IPI credits. The Company estimated the total amount of the IPI credits to be approximately $94,316 at March
31, 2013. Since the March 2013 ruling definitively (without the government's ability to appeal) granted the Company the ownership of the IPI credits generated between 1983 and 1990 the Company believed the amount of IPI credits that were used to offset other


- 15 -

Alliance One International, Inc. and Subsidiaries

10. CONTINGENCIES AND OTHER INFORMATION (continued)

federal taxes in 2004 and 2005 were realizable beyond a reasonable doubt. Accordingly, and at March 31, 2013, the Company recorded the $24,142 IPI credits it realized in the Statements of Consolidated Operations in Other Income. No further benefit has been recognized pending the outcome of the judicial procedure to ascertain the final amount as those amounts have not yet been
realized.

Other
Mindo, S.r.l., the purchaser in 2004 of the Company's Italian subsidiary Dimon Italia, S.r.l., asserted claims against a subsidiary of the Company arising out of that sale transaction in an action filed before the Court of Rome on April 12, 2007.  The claim involved a guaranty letter issued by a consolidated subsidiary of the Company in connection with the sale transaction, and sought the recovery of €7,400 plus interest and costs.  On November 11, 2013, the court issued its judgment in favor of the Company’s subsidiary, rejecting the claims asserted by Mindo, S.r.l., and awarding the Company’s subsidiary legal costs of €48.  On December 23, 2014, Mindo, S.r.l. appealed the judgment of the Court of Rome to the Court of Appeal of Rome.  A hearing before the Court of Appeal of Rome was held on June 12, 2015, which was adjourned pending a further hearing set for February 2018.  The outcome of, and timing of a decision on, the appeal are uncertain and therefore no amounts have been recorded.
          In addition to the above-mentioned matter, certain of the Company’s subsidiaries are involved in other litigation or legal matters incidental to their business activities, including tax matters.  While the outcome of these matters cannot be predicted with certainty, the Company is vigorously defending them and does not currently expect that any of them will have a material adverse effect on its business or financial position. However, should one or more of these matters be resolved in a manner adverse to its current expectation, the effect on the Company’s results of operations for a particular fiscal reporting period could be material.
          In accordance with generally accepted accounting principles, the Company records all known asset retirement obligations (“ARO”) for which the liability can be reasonably estimated. Currently, it has identified an ARO associated with one of its facilities that requires it to restore the land to its initial condition upon vacating the facility. The Company has not recognized a liability under generally accepted accounting principles for this ARO because the fair value of restoring the land at this site cannot be reasonably estimated since the settlement date is unknown at this time. The settlement date is unknown because the land restoration is not required until title is returned to the government, and the Company has no current or future plans to return the title. The Company will recognize a liability in the period in which sufficient information is available to reasonably estimate its fair value.

11. DEBT ARRANGEMENTS

At September 30, 2016, $200,000 was outstanding under the senior secured revolving credit facility. On October 14, 2016, the Company issued $275,000 in aggregate principal amount of 8.5% senior secured first lien notes due 2021 (the “First Lien Notes”), at an issue price of 99.085% of the face amount thereof, entered into an ABL credit agreement with certain bank lenders establishing a senior secured revolving asset-based lending facility of $60,000 subject to a borrowing base composed of its eligible accounts receivable and inventory, and used a portion of the net proceeds from the offering of the First Lien Notes to repay in full all outstanding indebtedness and accrued and unpaid interest owed under the existing senior secured revolving credit facility. Upon such repayment, Alliance One terminated the senior secured revolving credit facility. See Note 20 "Subsequent Event" of Notes to Condensed Consolidated Financial Statements for further information.
         The ABL credit agreement restricts the Company from paying any dividends during the term of this facility subject to the satisfaction of specified financial ratios. In addition, the indentures governing the Company's First Lien Notes and its senior secured second lien notes due 2021 contain similar restrictions and also prohibits the payment of dividends and other distributions if the Company fails to satisfy a ratio of consolidated EBITDA to fixed charges of at least 2.0 to 1.0. At September 30, 2016, the Company did not satisfy this fixed charge coverage ratio. The Company may from time to time not satisfy this ratio.
















- 16 -

Alliance One International, Inc. and Subsidiaries

12. DERIVATIVE FINANCIAL INSTRUMENTS

Fair Value of Derivative Financial Instruments
The Company recognizes all derivative financial instruments, such as foreign exchange contracts at fair value. Changes in the fair value of derivative financial instruments are either recognized periodically in income or in shareholders’ equity as a component of other comprehensive income depending on whether the derivative financial instrument qualifies for hedge accounting, and if so, whether it qualifies as a fair value hedge or a cash flow hedge. The Company has elected not to offset fair value amounts recognized for derivative instruments with the same counterparty under a master netting agreement. See Note 17 “Fair Value Measurements” to the “Notes to Condensed Consolidated Financial Statements” for further information on fair value methodology.
At September 30, 2016 and 2015, and March 31, 2016, there were no derivatives outstanding.

Earnings Effects of Derivatives
The Company periodically enters into forward or option currency contracts to protect against volatility associated with certain non-U.S. dollar denominated forecasted transactions. These contracts are for green tobacco purchases and processing costs as well as selling, general and administrative costs as the Company deems necessary. These contracts do not meet the requirements for hedge accounting treatment under generally accepted accounting principles, and as such, all changes in fair value are reported in income each period.
          The following table summarizes the earnings effects of derivatives in the Condensed Consolidated Statements of Operations for the three months and six months ended September 30, 2016 and 2015.

 
 
 
 
Gain (Loss) Recognized in Income
 
 
 
 
 
 
 
 
 
 
 
Derivatives Not Designated
as Hedging Instruments
 
Location of Gain (Loss)
Recognized in Income
 
Three Months Ended September 30,
 
Six Months Ended September 30,
 
 
 
 
2016
 
2015
 
2016
 
2015
 
 
 
 
 
 
 
 
 
 
 
Foreign currency contracts
 
Cost of goods and services sold
 
$

 
$
(609
)
 
$

 
$
(2,001
)

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


13. PENSION AND POSTRETIREMENT BENEFITS

The Company has multiple benefit plans at several locations. The Company has a defined benefit plan that provides retirement benefits for substantially all U.S. salaried personnel based on years of service rendered, age and compensation. The Company also maintains various other Excess Benefit and Supplemental Plans that provide additional benefits to (1) certain individuals whose compensation and the resulting benefits that would have actually been paid are limited by regulations imposed by the Internal Revenue Code and (2) certain individuals in key positions. The Company funds these plans in amounts consistent with the funding requirements of federal law and regulations.
Additional non-U.S. defined benefit plans sponsored by certain subsidiaries cover certain full-time employees located in Germany, Turkey, and the United Kingdom.



















- 17 -

Alliance One International, Inc. and Subsidiaries

13. PENSION AND POSTRETIREMENT BENEFITS (continued)

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

 
Three Months Ended September 30,
 
Six Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
     Service cost
$
120

 
$
527

 
$
240

 
$
1,029

     Interest expense
1,176

 
1,462

 
2,352

 
2,924

     Expected return on plan assets
(1,403
)
 
(1,555
)
 
(2,806
)
 
(3,109
)
     Amortization of prior service cost
10

 
41

 
20

 
83

     Actuarial loss
524

 
850

 
1,048

 
1,699

     Net periodic pension cost
$
427

 
$
1,325

 
$
854

 
$
2,626


Employer Contributions
The Company’s investment objectives are to generate consistent total investment return to pay anticipated plan benefits, while minimizing long-term costs. Financial objectives underlying this policy include maintaining plan contributions at a reasonable level relative to benefits provided and assuring that unfunded obligations do not grow to a level to adversely affect the Company’s financial health. For the six months ended September 30, 2016, contributions of $2,916 were made to pension plans for fiscal 2017. Additional contributions to pension plans of approximately $3,544 are expected during the remainder of fiscal 2017. However, this amount is subject to change, due primarily to asset performance significantly above or below the assumed long-term rate of return on pension assets and significant changes in interest rates.

Postretirement Health and Life Insurance Benefits
The Company also provides certain health and life insurance benefits to retired employees, and their eligible dependents, who meet specified age and service requirements. As of September 30, 2016, contributions of $152 were made to the plans for fiscal 2017. Additional contributions of $222 to the plans are expected during the rest of fiscal 2017. The Company retains the right, subject to existing agreements, to modify or eliminate the postretirement medical benefits.

Components of Net Periodic Benefit Cost
Net periodic benefit cost for postretirement health and life insurance benefit plans consisted of the following:
 
Three Months Ended September 30,
 
Six Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
     Service cost
$
3

 
$
10

 
$
6

 
$
20

     Interest expense
67

 
110

 
134

 
221

     Amortization of prior service cost
(177
)
 
(3
)
 
(354
)
 
(6
)
     Actuarial loss
104

 
112

 
208

 
224

     Net periodic pension cost (benefit)
$
(3
)
 
$
229

 
$
(6
)
 
$
459


14. INVENTORIES

The following table summarizes the Company’s costs in inventory:
 
September 30, 2016
 
September 30, 2015
 
March 31, 2016
Processed tobacco
$
690,805

 
$
682,564

 
$
584,158

Unprocessed tobacco
223,166

 
247,465

 
175,933

Other
30,041

 
33,361

 
31,249

 
$
944,012

 
$
963,390

 
$
791,340








- 18 -

Alliance One International, Inc. and Subsidiaries

15. OTHER COMPREHENSIVE INCOME (LOSS)

The following tables set forth the changes in each component of accumulated other comprehensive loss, net of tax, attributable to the Company:
 
Currency Translation Adjustment
 
Pensions, Net of Tax
 
Accumulated Other Comprehensive Loss
Balances, March 31, 2016
$
(14,046
)
 
$
(39,802
)
 
$
(53,848
)
Other comprehensive loss before reclassifications
(2,274
)
 

 
(2,274
)
Amounts reclassified to net earnings, net of tax

 
461

 
461

Other comprehensive earnings (loss), net of tax
(2,274
)
 
461

 
(1,813
)
Balances, June 30, 2016
(16,320
)
 
(39,341
)
 
(55,661
)
Other comprehensive loss before reclassifications
(585
)
 

 
(585
)
Amounts reclassified to net earnings, net of tax

 
460


460

Other comprehensive earnings (loss), net of tax
(585
)
 
460

 
(125
)
Balances, September 30, 2016
(16,905
)
 
(38,881
)
 
(55,786
)
 
 
 
 
 
 
Balances, March 31, 2015
$
(14,154
)
 
$
(52,232
)
 
$
(66,386
)
Other comprehensive earnings before reclassifications
2,307

 
225

 
2,532

Amounts reclassified to net earnings, net of tax

 
1,000

 
1,000

Other comprehensive earnings, net of tax
2,307

 
1,225

 
3,532

Balances, June 30, 2015
(11,847
)
 
(51,007
)
 
(62,854
)
Other comprehensive earnings before reclassifications
(1,664
)
 
4,461

 
2,797

Amounts reclassified to net earnings, net of tax

 
1,000

 
1,000

Other comprehensive earnings, net of tax
(1,664
)
 
5,461

 
3,797

Balances, September 30, 2015
(13,511
)
 
(45,546
)
 
(59,057
)

The following table sets forth amounts by component, reclassified from accumulated other comprehensive loss to earnings for the three months and six months ended September 30, 2016 and 2015:
 
Three Months Ended September 30,
 
Six Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Pension and postretirement plans (*):
 
 
 
 
 
 
 
       Actuarial loss
$
627

 
$
961

 
$
1,255

 
$
1,923

       Amortization of prior service cost
(167
)
 
39

 
(334
)
 
77

Amounts reclassified from accumulated other comprehensive losses to net earnings
$
460

 
$
1,000

 
$
921

 
$
2,000

(*) Amounts are included in net periodic benefit costs for pension and postretirement plans. See Note 13 "Pension and
Postretirement Benefits" to the "Notes to Condensed Consolidated Financial Statements" for further information.


16. SALE OF RECEIVABLES

The Company sells trade receivables to unaffiliated financial institutions under two accounts receivable securitization programs. Under the first program, the Company continuously sells a designated pool of trade receivables to a special purpose entity, which
in turn sells 100% of the receivables to an unaffiliated financial institution. During the six months ended September 30, 2016, the investment limit of this program was adjusted from up to $150,000 trade receivables to up to $100,000 trade receivables. This program allows the Company to receive a cash payment and a deferred purchase price receivable for sold receivables. Following the sale and transfer of the receivables to the special purpose entity, the receivables are isolated from the Company and its affiliates, and upon the sale and transfer of the receivables from the special purpose entity to the unaffiliated financial institution effective control of the receivables is passed to the unaffiliated financial institution, which has all rights, including the right to pledge or sell the receivables. This program requires a minimum level of deferred purchase price to be retained by the Company in connection with the sales.
         

- 19 -

Alliance One International, Inc. and Subsidiaries

16. SALE OF RECEIVABLES (continued)

The Company services, administers and collects the receivables on behalf of the special purpose entity and receives a servicing fee of 0.5% of serviced receivables per annum. As the Company estimates the fee it receives in return for its obligation to service these receivables at fair value, no servicing assets or liabilities are recognized. Servicing fees recognized were not material and are recorded as a reduction of Selling, General and Administrative Expenses within the Condensed Consolidated Statements of Operations.
The agreement for the second program also allows the Company to receive a cash payment and a deferred purchase price receivable for sold receivables. This is an uncommitted program, whereby the Company offers receivables for sale to the respective unaffiliated financial institution, which are then subject to acceptance by the unaffiliated financial institution. Following the sale and transfer of the receivables to the unaffiliated financial institution, the receivables are isolated from the Company and its affiliates, and effective control of the receivables is passed to the unaffiliated financial institution, which has all rights, including the right to pledge or sell the receivables. The Company receives no servicing fee from the unaffiliated financial institution and as a result, has established a servicing liability based upon unobservable inputs, primarily discounted cash flow. This liability is recorded in Accrued Expenses and Other Current Liabilities in the Condensed Consolidated Balance Sheets. The investment limit under this agreement is $35,000. During fiscal 2016, the company had a third securitization program that operated similar to the second program, with an investment limit of $100,000.
          Under the programs, all of the receivables sold for cash are removed from the Condensed Consolidated Balance Sheets and the net cash proceeds received by the Company are included as cash provided by operating activities in the Condensed Consolidated Statements of Cash Flows. A portion of the purchase price for the receivables is paid by the unaffiliated financial institutions in cash and the balance is a deferred purchase price receivable, which is paid as payments on the receivables are collected from account debtors. The deferred purchase price receivable represents a continuing involvement and a beneficial interest in the transferred financial assets and is recognized at fair value as part of the sale transaction. The deferred purchase price receivables are included in Trade and Other Receivables, Net in the Condensed Consolidated Balance Sheets and are valued using unobservable inputs (i.e., level three inputs), primarily discounted cash flow. As servicer of these facilities, the Company may receive funds that are due to the unaffiliated financial institutions which are net settled on the next settlement date. Trade and Other Receivables, Net in the Condensed Consolidated Balance Sheets has been reduced by $1,531, $4,170, and $9,113 as a result of the net settlement as of September 30, 2016 and 2015 and March 31, 2016, respectively. See Note 17 "Fair Value Measurements" to the "Notes to Condensed Consolidated Financial Statements" for further information.
          The difference between the carrying amount of the receivables sold under these programs and the sum of the cash and fair value of the other assets received at the time of transfer is recognized as a loss on sale of the related receivables and recorded in Other Income (Expense) in the Condensed Consolidated Statements of Operations.
          The following table summarizes the Company’s accounts receivable securitization information as of the dates shown:
 
September 30,
 
March 31,
 
2016
 
2015
 
2016
Receivables outstanding in facility
$
95,030

 
$
101,723

 
$
188,764

Beneficial interest
$
29,371

 
$
21,792

 
$
40,368

Servicing liability
$

 
$
29

 
$
58

   Cash proceeds for the three months ended June 30:
 
 
 
 
 
   Cash purchase price
$
246,235

 
$
201,161

 
$
585,648

   Deferred purchase price
113,509

 
81,181

 
233,753

   Service fees
286

 
298

 
553

   Total
$
360,030

 
$
282,640

 
$
819,954


17. FAIR VALUE MEASUREMENTS

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

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

- 20 -

Alliance One International, Inc. and Subsidiaries

17. FAIR VALUE MEASUREMENTS (continued)

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

Debt
The fair value of debt is measured for purpose of disclosure. Debt is shown at historical value in the Condensed Consolidated Balance Sheets. When possible, to measure the fair value of its debt the Company uses quoted market prices of its own debt with approximately the same remaining maturities. When this is not possible, the fair value of debt is calculated using discounted cash flow models with interest rates based upon market based expectations, the Company's credit risk and the contractual terms of the debt instrument. The Company also has portions of its debt with maturities of one year or less for which book value is a reasonable approximation of the fair value of this debt. The fair value of debt is considered to fall within Level 2 of the fair value hierarchy as significant value drivers such as interest rates are readily observable. The carrying value and estimated fair value of the Company's Long-Term Debt are shown in the table below.
 
September 30, 2016
 
September 30, 2015
 
March 31, 2016
Carrying value
$
911,930

 
$
937,316

 
$
920,444

Estimated fair value
803,924

 
820,783

 
753,038


Derivative financial instruments
The Company's derivatives consist of foreign currency contracts. The fair value of the derivatives are determined using a discounted cash flow analysis on the expected future cash flows of each derivative. This analysis utilizes observable market data including forward yield curves and implied volatilities to determine the market's expectation of the future cash flows of the variable component. The fixed and variable components of the derivative are then discounted using calculated discount factors developed based on the
LIBOR swap rate and are netted to arrive at a single valuation for the period. The Company also incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty's nonperformance risk in the fair value measurements. As of September 30, 2016 and 2015 and March 31, 2016 the inputs used to value the Company's derivatives fall within Level 2 of the fair value hierarchy. However, credit valuation adjustments associated with its derivatives could utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. Should the use of such credit valuation adjustment estimates result in a significant impact on the overall valuation, this would require reclassification to Level 3.

Securitized beneficial interests
The fair value of securitized beneficial interests is based upon a valuation model that calculates the present value of future expected cash flows using key assumptions for payment speeds and discount rates. The assumptions for payment speed are based on the Company's historical experience. The discount rates are based upon market trends and anticipated performance relative to the
particular assets securitized which have been assumed to be commercial paper rate plus a margin or LIBOR plus a margin. Due to the use of the Company's own assumptions and the uniqueness of these transactions, securitized beneficial interests fall within Level 3 of the fair value hierarchy. Since the discount rate and the payment speed are components of the same equation, a change
in either by 10% or 20% would change the value of the recorded beneficial interest at September 30, 2016 by $61 and $123, respectively.

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

          Tobacco supplier guarantees - The Company provides guarantees to certain third parties for indebtedness of certain tobacco suppliers to finance their crops. The fair value of these guarantees is determined using historical loss rates on both guaranteed and non-guaranteed tobacco supplier loans. Should the loss rates change 10% or 20%, the fair value of the guarantee at September 30, 2016 would change by $661 or $1,302, respectively.

        


- 21 -

Alliance One International, Inc. and Subsidiaries

17. FAIR VALUE MEASUREMENTS (continued)

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

The following table summarizes the items measured at fair value on a recurring basis:

 
September 30, 2016
 
September 30, 2015
 
March 31, 2016
 
 
Total Assets /
 
 
 
Total Assets /
 
 
 
Total Assets /
 
 
Liabilities
 
 
 
Liabilities
 
 
 
Liabilities
 
Level 2
Level 3
at Fair Value
 
Level 2
Level 3
at Fair Value
 
Level 2
Level 3
at Fair Value
Assets
 
 
 
 
 
 
 
 
 
 
 
Securitized beneficial interests
$