Edgar Filing: ALLIANCE ONE INTERNATIONAL, INC.

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 December 31, 2016.

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______ TO _______.

Alliance One International, Inc.

(Exact name of registrant as specified in its charter)



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

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

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [X] No [ ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes [X] No [ ]

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

Large accelerated filer [ ] Accelerated filer [X]

Non-accelerated filer [ ] Smaller reporting company [ ]

(Do not check if a smaller reporting company)

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

As of January 31, 2017, the registrant had 8,949,345 shares outstanding of Common Stock (no par value) excluding 785,313 shares owned by a wholly owned subsidiary.

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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 Nine Months Ended December 31, 2016 and 2015	3

		Condensed Consolidated Statements of Comprehensive Income (Loss)
		Three and Nine Months Ended December 31, 2016 and 2015	4

		Condensed Consolidated Balance Sheets
		December 31, 2016 and 2015 and March 31, 2016	5

		Condensed Statements of Consolidated Stockholders’ Equity
		Nine Months Ended December 31, 2016 and 2015	6

		Condensed Consolidated Statements of Cash Flows
		Nine Months Ended December 31, 2016 and 2015	7

		Notes to Condensed Consolidated Financial Statements	8 – 27

	Item 2.	Management's Discussion and Analysis
		of Financial Condition and Results of Operations	28 – 38

	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	38

	Item 4.	Controls and Procedures	38 – 39

Part II.	Other Information

	Item 1.	Legal Proceedings	40

	Item 1A.	Risk Factors	40

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	40

	Item 3.	Defaults Upon Senior Securities	40

	Item 4.	Mine Safety Disclosures	40

	Item 5.	Other Information	40

	Item 6.	Exhibits	41

Signature			42

Index of Exhibits			43

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Part I. Financial Information

Item 1. Financial Statements



Alliance One International, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three and Nine Months Ended December 31, 2016 and 2015
(Unaudited)


	Three Months Ended December 31,						Nine Months Ended December 31,
(in thousands, except per share data)	2016			2015			2016			2015

Sales and other operating revenues	$	454,535		$	491,139		$	1,105,060		$	1,172,274
Cost of goods and services sold	389,383			422,401			955,576			1,019,265
Gross profit	65,152			68,738			149,484			153,009
Selling, general and administrative expenses	28,736			29,124			100,904			86,986
Other income	2,688			594			4,311			125
Restructuring and asset impairment charges	450			1,525			1,068			4,087
Operating income	38,654			38,683			51,823			62,061
Debt retirement expense	2,339			—			2,339			—
Interest expense (includes debt amortization of $2,649 and $2,497 for the three months and $8,846 and $7,123 for the nine months in 2016 and 2015, respectively)	35,129			30,356			97,635			86,911
Interest income	1,845			2,744			5,888			5,393
Income (loss) before income taxes and other items	3,031			11,071			(42,263		)	(19,457		)
Income tax expense	20,977			1,930			20,774			21,617
Equity in net income of investee companies	2,351			2,544			290			5,679
Net income (loss)	(15,595		)	11,685			(62,747		)	(35,395		)
Less: Net loss attributable to noncontrolling interests	(138		)	(50		)	(127		)	(115		)
Net income (loss) attributable to Alliance One International, Inc.	$	(15,457	)	$	11,735		$	(62,620	)	$	(35,280	)


Income (loss) per share:
Basic	$	(1.73	)	$	1.32		$	(7.02	)	$	(3.97	)
Diluted	$	(1.73	)	$	1.32		$	(7.02	)	$	(3.97	)

Weighted average number of shares outstanding:
Basic	8,941			8,889			8,923			8,878
Diluted	8,941			8,889			8,923			8,878



See notes to condensed consolidated financial statements

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Alliance One International, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Three and Nine Months Ended December 31, 2016 and 2015
(Unaudited)


	Three Months Ended December 31,						Nine Months Ended December 31,
(in thousands)	2016			2015			2016			2015

Net Income (loss)	$	(15,595	)	$	11,685		$	(62,747	)	$	(35,395	)

Other comprehensive income (loss), net of tax:
Currency translation adjustment	(4,529		)	(1,075		)	(7,388		)	(432		)
Defined benefit pension amounts reclassified to income:
Negative plan amendment/reclassified to liability	—			2,534			—			7,220
Curtailment	—			1,062			—			1,062
Settlement	1,120			—			1,120			—
Amounts reclassified to income	461			725			1,382			2,725
Defined benefit plan adjustment	1,581			4,321			2,502			11,007
Total other comprehensive income (loss), net of tax	(2,948		)	3,246			(4,886		)	10,575
Total comprehensive income (loss)	(18,543		)	14,931			(67,633		)	(24,820		)
Comprehensive loss attributable to noncontrolling interests	(138		)	(50		)	(127		)	(115		)
Comprehensive income (loss) attributable to Alliance One International, Inc.	$	(18,405	)	$	14,981		$	(67,506	)	$	(24,705	)

See notes to condensed consolidated financial statements

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Alliance One International, Inc. and Subsidiaries CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(in thousands)				December 31, 2016			December 31, 2015			March 31, 2016
ASSETS
Current assets
Cash and cash equivalents				$	296,490		$	195,230		$	199,720
Trade receivables, net				175,860			230,159			303,907
Other receivables				94,321			98,863			97,101
Accounts receivable, related parties				12,015			7,058			1,920
Inventories				845,133			935,600			791,340
Advances to tobacco suppliers				97,037			62,648			41,837
Recoverable income taxes				16,065			12,987			13,421
Current deferred taxes, net				—			7,773			—
Prepaid expenses				18,012			23,257			20,016
Other current assets				15,615			13,529			21,096
Total current assets				1,570,548			1,587,104			1,490,358
Other assets
Investments in unconsolidated affiliates				52,797			57,698			58,259
Goodwill				16,463			2,794			16,463
Other intangible assets				47,317			26,454			50,571
Long-term recoverable income taxes				—			7,786			8,686
Deferred income taxes, net				45,079			24,208			38,773
Other deferred charges				4,819			5,049			3,934
Other noncurrent assets				37,490			20,812			23,629
				203,965			144,801			200,315
Property, plant and equipment, net				261,802			228,786			277,525
				$	2,036,315		$	1,960,691		$	1,968,198

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Notes payable to banks				$	558,095		$	522,538		$	475,989
Accounts payable				50,400			57,548			81,649
Due to related parties				7,258			30,137			20,490
Advances from customers				17,504			20,661			9,895
Accrued expenses and other current liabilities				90,372			109,044			74,425
Income taxes				10,562			5,961			12,022
Long-term debt current				10,356			30,269			356
Total current liabilities				744,547			776,158			674,826

Long-term debt				969,253			909,444			910,214
Deferred income taxes				25,298			2,341			16,924
Liability for unrecognized tax benefits				10,220			9,872			9,809
Pension, postretirement and other long-term liabilities				78,809			91,518			81,753
				1,083,580			1,013,175			1,018,700
Commitments and contingencies
Stockholders’ equity	December 31, 2016	December 31, 2015	March 31, 2016
Common Stock—no par value:
Authorized shares	250,000	250,000	250,000
Issued shares	9,735	9,680	9,685	471,979			470,480			470,830
Retained deficit				(208,476		)	(246,668		)	(145,856		)
Accumulated other comprehensive loss				(58,734		)	(55,811		)	(53,848		)
Total stockholders’ equity of Alliance One International, Inc.				204,769			168,001			271,126
Noncontrolling interests				3,419			3,357			3,546
Total equity				208,188			171,358			274,672
				$	2,036,315		$	1,960,691		$	1,968,198
See notes to condensed consolidated financial statements

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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	—			(35,280		)	—			—			(115		)	(35,395		)
Increase in capitalization of non-controlling interest	—			—			—			—			198			198
Stock-based compensation	2,075			—			—			—			—			2,075
Restricted stock surrendered	(159		)	—			—			—			—			(159		)
Other comprehensive loss, net of tax	—			—			(432		)	11,007			—			10,575

Balance, December 31, 2015	$	470,480		$	(246,668	)	$	(14,586	)	$	(41,225	)	$	3,357		$	171,358

Balance, March 31, 2016	$	470,830		$	(145,856	)	$	(14,046	)	$	(39,802	)	$	3,546		$	274,672
Net income (loss)	—			(62,620		)	—			—			(127		)	(62,747		)
Restricted stock surrendered	(31		)	—			—			—			—			(31		)
Stock-based compensation	1,180			—			—			—			—			1,180
Other comprehensive income (loss), net of tax	—			—			(7,388		)	2,502			—			(4,886		)

Balance, December 31, 2016	$	471,979		$	(208,476	)	$	(21,434	)	$	(37,300	)	$	3,419		$	208,188

See notes to condensed consolidated financial statements

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Alliance One International, Inc. and Subsidiaries CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Nine Months Ended December 31, 2016 and 2015 (Unaudited)


(in thousands)	December 31, 2016			December 31, 2015

Operating activities
Net loss	$	(62,747	)	$	(35,395	)
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation and amortization	25,859			21,018
Debt amortization/interest	10,142			8,207
Debt retirement	2,339			—
(Gain) loss on foreign currency transactions	(10,780		)	16,713
Restructuring and asset impairment charges	1,068			4,087
Gain on sale of property, plant and equipment	(490		)	(496		)
Bad debt expense (recovery)	(2,801		)	(181		)
Equity in net income of unconsolidated affiliates, net of dividends	4,194			(3,710		)
Stock-based compensation	1,360			2,323
Changes in operating assets and liabilities, net	(10,588		)	(358,192		)
Other, net	180			620
Net cash used by operating activities	(42,264		)	(345,006		)

Investing activities
Purchases of property, plant and equipment	(9,483		)	(13,356		)
Proceeds from sale of property, plant and equipment	771			1,072
Surrender of life insurance policies	—			1,657
Other, net	66			(266		)
Net cash used by investing activities	(8,646		)	(10,893		)

Financing activities
Net proceeds from short-term borrowings	93,552			203,968
Proceeds from long-term borrowings	472,484			210,000
Repayment of long-term borrowings	(400,355		)	(2,867		)
Debt issuance cost	(17,618		)	(5,325		)
Debt retirement cost	(73		)	—
Other, net	—			303
Net cash provided by financing activities	147,990			406,079

Effect of exchange rate changes on cash	(310		)	1,201

Increase in cash and cash equivalents	96,770			51,381
Cash and cash equivalents at beginning of period	199,720			143,849
Cash and cash equivalents at end of period	$	296,490		$	195,230

Other information:
Cash paid for income taxes	$	7,147		$	12,445
Cash paid for interest	64,322			58,240
Cash received from interest	5,888			5,606

See notes to condensed consolidated financial statements

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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 December 31, 2015. For the three months and nine months ended December 31, 2015, cost of goods sold was adjusted by $165 and $801, respectively. For the nine months ended December 31, 2015, inventory was adjusted by $581, recoverable income tax was adjusted by $1,822 and retained earnings was adjusted by $2,403. 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 nine months ended December 31, 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 nine months ended December 31, 2015 were not materially misstated. See Note 20 "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 $5,412 and $5,796 for the three months ended December 31, 2016 and 2015, respectively and $18,003 and $14,408 for the nine months ended December 31, 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, $10,343 and $9,875 were reclassified from Other Deferred Charges to Long-Term Debt at December 31, 2015 and March 31, 2016, respectively. See Note 20 "Restatement of Previously Reported Financial Information" to the "Notes to Condensed Consolidated Financial Statements."

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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 evaluating alternative methods of adoption and the effect on its financial statements and related disclosures.

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 does not expect this new guidance to have a material impact on its financial condition or results of operations.

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 does not expect this new guidance to have a material impact on its financial condition or results of operations.

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 does not expect this new guidance to have a material impact on its financial condition or results of operations.

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 does not expect this new guidance to have a material impact on its financial condition or results of operations.

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.

In November of 2016, the FASB issued new accounting guidance that clarifies the presentation of restricted cash on the statement of cash flows. The primary objective is to reduce diversity in practice on how restricted cash is presented on the statement of cash flows. This accounting guidance will be effective for the Company on April 1, 2018. The Company is currently evaluating the impact of this new guidance.

2. INCOME TAXES

Accounting for Uncertainty in Income Taxes

As of December 31, 2016, the Company’s unrecognized tax benefits totaled $16,682, 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 December 31, 2016, accrued interest and penalties totaled $1,588 and $960 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. During the three months ended December 31, 2016, the Zimbabwe High Court of Harare rejected the Company's appeal relating to the recovery of an income tax receivable for certain withholding taxes which were assessed against the Company's subsidiary in Switzerland. As a

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Alliance One International, Inc. and Subsidiaries

2. INCOME TAXES (continued)

Accounting for Uncertainty in Income Taxes (continued)

result, the Company concluded it was no longer more-likely-than-not that the receivable will be realized and a non-cash tax provision of approximately $9,000 was recorded as a discrete adjustment to tax expense. The tax expense recognized this quarter does not impact cash flow as the Company had previously made a deposit of the amount due as part of the appeal process. The Company plans to appeal the adverse decision to the Supreme Court of Zimbabwe.

The Company does not foresee any reasonably possible changes in the unrecognized tax benefits in the next twelve months but acknowledges circumstances can change due to unexpected developments in the law. In certain jurisdictions, tax authorities have challenged positions that the Company has taken that resulted in recognizing benefits that are material to its financial statements. The Company believes it is more likely than not that it will prevail in these situations and accordingly has not recorded liabilities for these positions. The Company expects the challenged positions to be settled at a time greater than twelve months from its balance sheet date.

The Company and its subsidiaries file a U.S. federal consolidated income tax return as well as returns in several U.S. states and a number of foreign jurisdictions. As of December 31, 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 Nine Months Ended December 31, 2016

The effective tax rate used for the nine months ended December 31, 2016 was (49.2)% compared to (111.1)% for the nine months ended December 31, 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 exchange losses on income tax accounts and net exchange gains related to liabilities for unrecognized tax benefits.

For the nine months ended December 31, 2016, the Company recorded a discrete event adjustment expense of $6,821, bringing the effective tax rate estimated for the nine months of (33.0)% to (49.2)%. This discrete event adjustment expense relates primarily to net exchange gains on income tax accounts, net exchange losses related to liabilities for unrecognized tax benefits and the release of uncertain tax positions. For the nine months ended December 31, 2015, the Company recorded a discrete event adjustment expense of $9,492, bringing the effective tax rate estimated for the nine months of (62.3)% to (111.1)%. This discrete event adjustment expense relates primarily to net exchange losses on income tax accounts and net exchange gains related to liabilities for unrecognized tax benefits. The significant difference in the estimated effective tax rate for the nine months ended December 31, 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:



	December 31, 2016		December 31, 2015		March 31, 2016
Amounts guaranteed (not to exceed)	$	184,096	$	256,300	$	210,703
Amounts outstanding under guarantee	86,218		131,706		107,615
Fair value of guarantees	4,759		5,852		7,350

Of the guarantees outstanding at December 31, 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 December 31, 2016 and 2015, there were no amounts due. These amounts are included in Accounts Payable in the Condensed Consolidated Balance Sheets.

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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 December 31, 2016, the Company recorded $420 for employee severance charges, primarily related to certain operations in Africa, and $30 for other cash charges. During the nine months ended December 31, 2016, severance charges were $483, other cash charges were $90 and asset impairment charges, primarily related to the Company's formerly used cut rag facility, were $495. During the three months ended December 31, 2015, the Company recorded $127 of employee severance charges and $1,398 of asset impairment charges primarily related to changes in certain U.S. pension plans and equipment located in Bulgaria. During the nine months ended December 31, 2015, the Company recorded $116 of employee severance charges and $3,971 of asset impairment charges in connection with the restructuring of certain operations primarily in Africa and Bulgaria and changes to certain U.S. pension plans.

The following table summarizes the restructuring charges recorded during the three months and nine months ended December 31, 2016 and 2015, respectively:



	Three Months Ended December 31,						Nine Months Ended December 31,
Restructuring and Asset Impairment Charges	2016			2015			2016			2015
Employee separation and other cash charges:
Beginning balance	$	80		$	1,563		$	398		$	8,087
Period charges:
Severance charges	420			127			483			116
Other cash charges	30			—			90			—
Total period charges	450			127			573			116
Payments through December 31	(62		)	(1,052		)	(503		)	(7,565		)
Ending balance December 31	$	468		$	638		$	468		$	638
Asset impairment and other non-cash charges	$	—		$	1,398		$	495		$	3,971
Total restructuring charges for the period	$	450		$	1,525		$	1,068		$	4,087

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 nine months ended December 31, 2016 and 2015:



	Three Months Ended December 31,						Nine Months Ended December 31,
Employee Separation and Other Cash Charges	2016			2015			2016			2015
Beginning balance:	$	80		$	1,563		$	398		$	8,087
North America	—			—			—			—
Other regions	80			1,563			398			8,087
Period charges:	$	450		$	127		$	573		$	116
North America	45			—			45			—
Other regions	405			127			528			116
Payments through December 31	$	(62	)	$	(1,052	)	$	(503	)	$	(7,565	)
North America	—			—			—			—
Other regions	(62		)	(1,052		)	(503		)	(7,565		)
Ending balance December 31	$	468		$	638		$	468		$	638
North America	45			—			45			—
Other regions	423			638			423			638

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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 December 31, 2016	—		12.25			4.00			—			—
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	—		(842		)	(542		)	(409		)	(1,793		)
Net September 30, 2015	2,794		16,219			8,565			2,520			30,098
Amortization expense	—		(421		)	(237		)	(192		)	(850		)
Net December 31, 2015	2,794		15,798			8,328			2,328			29,248
Additions	13,669		24,830			—			—			38,499
Amortization expense	—		(422		)	(46		)	(245		)	(713		)
Net March 31, 2016	16,463		40,206			8,282			2,083			67,034
Amortization expense	—		(1,670		)	(118		)	(381		)	(2,169		)
Net September 30, 2016	16,463		38,536			8,164			1,702			64,865
Amortization expense	—		(835		)	(67		)	(183		)	(1,085		)
Net December 31, 2016	16,463		37,701			8,097			1,519			63,780

(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
January 1, 2017 through March 31, 2017	$	835	$	1,097	$	284	$	2,216
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
	$	37,701	$	8,097	$	1,519	$	47,317

* Estimated amortization expense for the internally developed software is based on costs accumulated as of December 31, 2016. These estimates will change as new costs are incurred and until the software is placed into service in all locations.

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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 December 31, 2016 and 2015, and March 31, 2016, the Company’s investment in these joint ventures was $51,781, $56,682, 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 December 31, 2016 and 2015, and March 31, 2016, respectively were $12,015, $3,484 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 $85,004, $95,486 and $100,238 at December 31, 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 nine months ended December 31, 2016 and 2015:



	Three Months Ended December 31,				Nine Months Ended December 31,
	2016		2015		2016			2015
Sales and other operating revenues:
North America	$	108,869	$	148,971	$	217,629		$	244,101
Other regions	345,666		342,168		887,431			928,173
Total revenue	$	454,535	$	491,139	$	1,105,060		$	1,172,274

Operating income:
North America	$	5,685	$	8,642	$	8,366		$	15,061
Other regions	32,969		30,041		43,457			47,000
Total operating income	38,654		38,683		51,823			62,061
Debt retirement expense	2,339		—		2,339			—
Interest expense	35,129		30,356		97,635			86,911
Interest income	1,845		2,744		5,888			5,393
Income (loss) before income taxes and other items	$	3,031	$	11,071	$	(42,263	)	$	(19,457	)



Analysis of Segment Assets		December 31, 2016		December 31, 2015		March 31, 2016
Segment assets:
	North America	$	465,925	$	514,524	$	338,833
	Other regions	1,570,390		1,446,167		1,629,365
	Total assets	$	2,036,315	$	1,960,691	$	1,968,198

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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 December 31, 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 459 at a weighted average exercise price of $61.05 per share at December 31, 2016 and 471 at a weighted average exercise price of $60.70 per share at December 31, 2015.

The following table summarizes the computation of earnings per share for the three months and nine months ended December 31, 2016 and 2015, respectively.



	Three Months Ended December 31,						Nine Months Ended December 31,
(in thousands, except per share data)	2016				2015		2016				2015
BASIC INCOME (LOSS)
Net income (loss) attributable to Alliance One International, Inc.	$	(15,457	)		$	11,735	$	(62,620	)		$	(35,280	)

SHARES
Weighted average number of shares outstanding	8,941				8,889		8,923				8,878

BASIC INCOME (LOSS) PER SHARE	$	(1.73	)		$	1.32	$	(7.02	)		$	(3.97	)

DILUTED INCOME (LOSS)
Net income (loss) attributable to Alliance One International, Inc.	$	(15,457	)		$	11,735	$	(62,620	)		$	(35,280	)

SHARES
Weighted average number of common shares outstanding	8,941				8,889		8,923				8,878
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	8,941				8,889		8,923				8,878
DILUTED INCOME (LOSS) PER SHARE	$	(1.73	)		$	1.32	$	(7.02	)		$	(3.97	)

* 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 $395 and $518 for the three months ended December 31, 2016 and 2015, respectively, of which $60 and $(82), respectively were with respect to stock-based awards payable in cash, and $1,360 and $2,323 for the nine months ended December 31, 2016 and 2015, respectively, of which $180 and $249, 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 nine months ended December 31, 2016 and 2015, respectively, the Company made the following stock-based compensation awards:

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Alliance One International, Inc. and Subsidiaries

9. STOCK-BASED COMPENSATION (continued)



	Three Months Ended December 31,				Nine Months Ended December 31,
(in thousands, except grant date fair value)	2016		2015		2016		2015
Restricted Stock
Number Granted	8		5		21		17
Grant Date Fair Value	$	19.20	$	11.47	$	18.15	$	18.70
Restricted Stock Units
Number Granted	—		28		56		28
Grant Date Fair Value	$	—	$	19.65	$	17.76	$	19.65
Cash-Settled Restricted Stock Units
Number Granted	—		1		—		1
Grant Date Fair Value	$	—	$	19.65	$	—	$	19.65
Performance-Based Stock Units
Number Granted	—		—		28		—
Grant Date Fair Value	$	—	$	—	$	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 nine months ended December 31, 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 effected on June 26, 2015. The exchange offer was consummated 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 $4,042 and the total assessment including penalties and interest at December 31, 2016 is $12,973. 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 $2,707 at December 31, 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

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Alliance One International, Inc. and Subsidiaries

10. CONTINGENCIES AND OTHER INFORMATION (continued)

federal tax liabilities using IPI credits and recorded a liability in Pension, Postretirement and Other Long-Term Liabilities to reflect that the credits were not realizable at that time due to the prevalent legal uncertainty. On March 7, 2013, the Brazilian Supreme Court rendered a final decision in favor of the Company that recognized the validity of the IPI credits and secured the Company's right to benefit from the IPI credits earned from March 1983 to October 1990. This final decision expressly stated the Company

has the right to the IPI credits. The Company estimated the total amount of the IPI credits to be approximately $94,316 at March

31, 2013. Since the March 2013 ruling definitively (without the government's ability to appeal) granted the Company the ownership of the IPI credits generated between 1983 and 1990 the Company believed the amount of IPI credits that were used to offset other

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

realized.

Other

Mindo, S.r.l., the purchaser in 2004 of the Company's Italian subsidiary Dimon Italia, S.r.l., asserted claims against a subsidiary of the Company arising out of that sale transaction in an action filed before the Court of Rome on April 12, 2007. The claim involved a guaranty letter issued by a consolidated subsidiary of the Company in connection with the sale transaction, and sought the recovery of €7,400 plus interest and costs. On November 11, 2013, the court issued its judgment in favor of the Company’s subsidiary, rejecting the claims asserted by Mindo, S.r.l., and awarding the Company’s subsidiary legal costs of €48. On December 23, 2014, Mindo, S.r.l. appealed the judgment of the Court of Rome to the Court of Appeal of Rome. A hearing before the Court of Appeal of Rome 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

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 (the “ABL Credit Agreement”) with certain bank lenders establishing a senior secured revolving asset-based lending facility (the “ABL 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 Company’s then existing senior secured revolving credit facility. Upon such repayment, Alliance One terminated the senior secured revolving credit facility.

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 First Lien Notes and its outstanding senior secured second lien notes due 2021 contain similar restrictions and also prohibit the payment of dividends and other distributions if the Company fails to satisfy a ratio of consolidated EBITDA to fixed charges of at least 2.0 to 1.0. At December 31, 2016, the Company did not satisfy this fixed charge coverage ratio. The Company may from time to time not satisfy this ratio.

The terms of the First Lien Notes and the ABL Facility, and certain effects of these refinancing transactions, are summarized below:

First Lien Notes

The First Lien Notes, which bear interest at a rate of 8.500% per year, are payable semi-annually in arrears in cash on April 15 and October 15 of each year, beginning April 15, 2017, to holders of record at the close of business on the preceding April 1 and October 1, respectively. The First Lien Notes mature on April 15, 2021. The First Lien Notes are initially guaranteed on a senior secured basis by Alliance One’s subsidiary, Alliance One Specialty Products, LLC (the “Initial Guarantor”), and each of its future material domestic subsidiaries are required to guarantee the First Lien Notes on a senior secured basis. The Initial Guarantor is

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Alliance One International, Inc. and Subsidiaries

11. DEBT ARRANGEMENTS (continued)

not a material domestic subsidiary, and Alliance One currently has no material domestic subsidiaries. The Initial Guarantor and any future guarantors of the First Lien Notes are referred to as the “guarantors.”

Alliance One’s and the guarantors’ obligations under the First Lien Notes and any guarantee of the First Lien Notes (and certain related obligations) and under the ABL Facility and any guarantee of the ABL Facility (and certain related obligations and obligations in respect of certain hedging arrangements) are secured by first-priority liens on substantially all of Alliance One’s and the guarantors’ tangible and intangible assets, subject to certain exceptions and permitted liens (the “Collateral”). Alliance One’s and the guarantors’ obligations under the First Lien Notes and any guarantee of the First Lien Notes (and certain related obligations) have first-priority in the waterfall set forth in a senior lien intercreditor agreement entered into in connection with the issuance of the First Lien Notes and the establishment of the ABL Facility (the “Senior Lien Intercreditor Agreement”) in respect of the liens on the Collateral that is not ABL Priority Collateral (as defined below), including owned material real property in the United States, capital stock of subsidiaries owned directly by Alliance One or a guarantor (except that, in the case of foreign subsidiaries, only capital stock of only direct foreign subsidiaries that are material are to be pledged and only 65% of the voting

capital stock and 100% of the non-voting capital stock are to be pledged), existing and after acquired intellectual property rights, equipment, related general intangibles and instruments and certain other related assets of the foregoing and proceeds of the foregoing (collectively, the “Notes Priority Collateral”). Alliance One’s and the guarantors’ obligations under the ABL Facility and any guarantee of the ABL Facility (and certain related obligations and obligations in respect of certain hedging arrangements) have second-priority in the waterfall set forth in the Senior Lien Intercreditor Agreement in respect of the liens on the Notes Priority Collateral. Alliance One’s and the guarantors’ obligations under the First Lien Notes and any guarantee of the First Lien Notes (and certain related obligations) have second-priority in the waterfall set forth in the Senior Lien Intercreditor Agreement in respect of the liens on the Collateral consisting of accounts receivable, inventories, cash (other than identifiable cash proceeds of the Notes Priority Collateral), deposit accounts, related general intangibles and instruments, certain other related assets of the foregoing and proceeds of the foregoing (collectively, the “ABL Priority Collateral”). Alliance One’s and the guarantors’ obligations under the ABL Facility and any guarantee of the ABL Facility (and certain related obligations and obligations in respect of certain hedging arrangements) have first-priority in the waterfall set forth in the Senior Lien Intercreditor Agreement in respect of the liens on the ABL Priority Collateral.

If a change of control (as defined in the indenture governing the First Lien Notes) occurs at any time, holders of the First Lien Notes will have the right, at their option, to require the Company to repurchase all or a portion of the First Lien Notes for cash at a price equal to 101% of the principal amount of First Lien Notes being repurchased, plus accrued and unpaid interest, to, but excluding, the date of repurchase. The indenture governing the First 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.

ABL Facility

The ABL Facility may be used for revolving credit loans, swingline loans and letters of credit from time to time up to an initial maximum principal amount of $60,000, subject to the limitations described below in this paragraph. Under certain conditions, Alliance One may solicit the ABL Facility lenders or other prospective lenders to provide additional revolving loan commitments under the ABL Facility in an aggregate amount not to exceed $15,000 (less the aggregate principal amount of any notes exceeding $275,000 issued under the First Lien Notes Indenture). The maximum amount available under the revolving credit facility is limited by a borrowing base consisting of eligible accounts receivable and inventory as follows:


•	85% of eligible accounts receivable, plus


•	the lesser of (i) 85% of the appraised net-orderly-liquidation value of eligible inventory or (ii) 65% of eligible inventory valued at the lower of cost (based on a first-in first-out basis) and market value thereof (net of intercompany profits).

The borrowing base is subject to a $25,000 deduction and customary reserves, which are to be established by the agent for the ABL Facility lenders in its permitted discretion from time to time. At December 31, 2016, no borrowings were outstanding under the ABL Facility and $60,000 was available for borrowing. Borrowing is permitted under the ABL Credit Facility only to the extent that, after consideration of the application of the proceeds of the borrowing, the Company’s unrestricted cash and cash equivalents would not exceed $180,000. At December 31, 2016, the Company’s unrestricted cash and cash equivalents significantly exceeded $180,000.

In addition, loans under the ABL Facility shall not be made if after incurrence of such loans there will be more than $180,000 of unrestricted cash and cash equivalents in the aggregate on the consolidated balance sheet of the Company and its subsidiaries.

The ABL Facility permits both base rate borrowings and LIBOR borrowings. Borrowings under the ABL Facility bear interest at an annual rate equal to LIBOR plus 250 basis points or 150 basis points above base rate, as applicable, with a fee on

- 17 -

Alliance One International, Inc. and Subsidiaries

11. DEBT ARRANGEMENTS (continued)

ABL Facility (continued)

unused borrowings initially at an annual rate of 50 basis points until March 31, 2017 and thereafter at annual rates of either 37.5 or 50 basis points based on average quarterly historical utilization under the ABL Facility. The ABL Facility matures on January 14, 2021.

In addition, customary mandatory prepayments of the loans under the ABL Facility are required upon the occurrence of certain events including, without limitation, certain dispositions of assets outside of the ordinary course of business in respect of certain collateral securing the ABL Facility, unrestricted cash and cash equivalents on the Company’s consolidated balance sheet exceeding $180,000 for a period of seven consecutive business days, and certain casualty and condemnation events.

The Company’s obligations under the ABL Facility (and certain related obligations and obligations in respect of certain hedging arrangements) are (a) guaranteed by the Initial Guarantor and are required to be guaranteed by each material domestic subsidiary of Alliance One (currently there are no material domestic subsidiaries of Alliance One) (collectively with the Company, the “Credit Parties”) and (b) secured by the Collateral.

The liens and other security interests granted by the Credit Parties on the Collateral for the benefit of the ABL Lenders (and certain related secured parties) are, subject to certain permitted liens, secured by first-priority security interests on a pari passu

basis with the security interests securing the First Lien Notes, with respective priorities in a waterfall with respect to portions of the Collateral as set forth in the Senior Lien Intercreditor Agreement described above.

Under the terms of the ABL Facility, if (i) an event of default has occurred and is continuing or (ii) excess borrowing availability under the ABL Facility (based on the lesser of the commitments thereunder and the borrowing base) (the “Excess Availability”) falls below the greater of (x) $12,500 and (y) 25% of the lesser of (A) the commitments under the ABL Facility at such time and (B) the borrowing base at such time (such greater amount being the “Cash Dominion Threshold”) for more than three consecutive business days, the Credit Parties will become subject to cash dominion, which will require daily prepayment of loans under the ABL Facility with the cash deposited in certain deposit accounts of the Credit Parties, including concentration accounts, and will restrict the Credit Parties’ ability to transfer cash from their concentration accounts to their disbursement accounts. Such cash dominion period shall end when (i) if arising as a result of a continuing event of default, such event of default ceases to exist, or (ii) if arising as a result of non-compliance with the Excess Availability threshold, Excess Availability shall be equal to or greater than the Cash Dominion Threshold for a period of 30 consecutive days.

The ABL Credit Agreement governing the ABL Facility contains a springing covenant requiring that the Company’s fixed charge coverage ratio be no less than 1.00 to 1.00 during any period commencing when our Excess Availability is less than the greater of (x) $10,000 and (y) 20% of the lesser of (A) the commitments under the ABL Facility at such time and (B) the borrowing base at such time (such greater amount being the “Financial Covenant Threshold”) until such time as our Excess Availability has been equal to or greater than the Financial Covenant Threshold for a period of 30 consecutive days.

The ABL Credit Agreement governing the ABL Facility contains customary representations and warranties, affirmative and negative covenants (subject, in each case, to exceptions and qualifications) and events of defaults, including covenants that limit the Company’s ability to, among other things incur certain guarantees, merge, consolidate or dispose of substantially all of its assets, grant liens on assets, pay dividends, redeem stock or make other distributions or restricted payments, create certain dividend and payment restrictions on subsidiaries, repurchase or redeem capital stock or prepay subordinated or certain other material debt (including the First Lien Notes and the Company’s senior secured second lien notes due 2021), make certain investments, agree to restrictions on the payment of dividends to Alliance One by its subsidiaries, sell or otherwise dispose of assets, including equity interests of subsidiaries, enter into transactions with affiliates, enter into certain sale and leaseback transactions.

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.

Termination of Existing Senior Secured Revolving Credit Facility

On October 14, 2016, the Company terminated its then existing senior secured revolving credit facility and repaid in full all outstanding indebtedness plus accrued and unpaid interest and other costs, of which $73 was charged to debt retirement expense. As a result, the Company accelerated $2,266 of deferred financing costs during the three months ended December 31, 2016.

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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 December 31, 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 nine months ended December 31, 2016 and 2015.



		Gain (Loss) Recognized in Income

Derivatives Not Designated as Hedging Instruments	Location of Gain (Loss) Recognized in Income	Three Months Ended December 31,				Nine Months Ended December 31,
		2016		2015		2016		2015

Foreign currency contracts	Cost of goods and services sold	$	—	$	—	$	—	$	(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.

During the nine months ended December 31, 2016, the Company's activity of cash payments triggered settlement accounting. The settlement accounting resulted in a settlement loss of $1,120 recorded in Selling, General and Administrative Expenses and a reduction in accumulated other comprehensive income as of December 31, 2016.

Additional non-U.S. defined benefit plans sponsored by certain subsidiaries cover certain full-time employees located in Germany, Turkey, and the United Kingdom.

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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 December 31,						Nine Months Ended December 31,
	2016			2015			2016			2015
Service cost	$	120		$	526		$	360		$	1,555
Interest expense	1,176			1,462			3,528			4,386
Expected return on plan assets	(1,403		)	(1,554		)	(4,209		)	(4,663		)
Amortization of prior service cost	10			42			30			125
Actuarial loss	524			849			1,572			2,548
Settlement loss	1,120			—			1,120			—
Curtailment loss	—			1,062			—			1,062
Net periodic pension cost	$	1,547		$	2,387		$	2,401		$	5,013

Employer Contributions

The Company’s investment objectives are to generate consistent total investment return to pay anticipated plan benefits, while minimizing long-term costs. Financial objectives underlying this policy include maintaining plan contributions at a reasonable level relative to benefits provided and assuring that unfunded obligations do not grow to a level to adversely affect the Company’s financial health. For the nine months ended December 31, 2016, contributions of $3,629 were made to pension plans for fiscal 2017. Additional contributions to pension plans of approximately $2,831 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 December 31, 2016, contributions of $227 were made to the plans for fiscal 2017. Additional contributions of $147 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 December 31,						Nine Months Ended December 31,
	2016			2015			2016			2015
Service cost	$	3		$	—		$	9		$	20
Interest expense	67			59			201			280
Amortization of prior service cost	(177		)	(265		)	(531		)	(271		)
Actuarial loss	104			99			312			323
Net periodic pension cost (benefit)	$	(3	)	$	(107	)	$	(9	)	$	352

14. INVENTORIES

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



	December 31, 2016		December 31, 2015		March 31, 2016
Processed tobacco	$	716,743	$	765,388	$	584,158
Unprocessed tobacco	102,668		142,912		175,933
Other	25,722		27,300		31,249
	$	845,133	$	935,600	$	791,340

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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	(2,859		)	—				(2,859		)
Amounts reclassified to net earnings, net of tax	—			921				921
Other comprehensive earnings (loss), net of tax	(2,859		)	921				(1,938		)
Balances, September 30, 2016	(16,905		)	(38,881		)		(55,786		)
Other comprehensive loss before reclassifications	(4,529		)	—				(4,529		)
Amounts reclassified to net earnings, net of tax	—			1,581			—	1,581
Other comprehensive earnings (loss), net of tax	(4,529		)	1,581				(2,948		)
Balances, December 31, 2016	$	(21,434	)	$	(37,300	)		$	(58,734	)

Balances, March 31, 2015	$	(14,154	)	$	(52,232	)		$	(66,386	)
Other comprehensive earnings before reclassifications	643			4,686				5,329
Amounts reclassified to net earnings, net of tax	—			2,000				2,000
Other comprehensive earnings, net of tax	643			6,686				7,329
Balances, September 30, 2015	(13,511		)	(45,546		)		(59,057		)
Other comprehensive earnings before reclassifications	(1,075		)	2,534				1,459
Amounts reclassified to net earnings, net of tax	—			1,787				1,787
Other comprehensive earnings, net of tax	(1,075		)	4,321				3,246
Balances, December 31, 2015	$	(14,586	)	$	(41,225	)		$	(55,811	)

The following table sets forth amounts by component, reclassified from accumulated other comprehensive loss to earnings for the three months and nine months ended December 31, 2016 and 2015:



	Three Months Ended December 31,						Nine Months Ended December 31,
	2016			2015			2016			2015
Pension and postretirement plans (*):
Actuarial loss	$	628		$	948		$	1,883		$	2,871
Amortization of prior service cost	(167		)	(223		)	(501		)	(146		)
Curtailment	—			1,062			—			1,062
Settlement loss	1,120			—			1,120			—
Amounts reclassified from accumulated other comprehensive losses to net earnings	$	1,581		$	1,787		$	2,502		$	3,787

(*) 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 nine months ended December 31, 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.

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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.