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, 2017.

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______ TO _______.
logo20151231a06.jpg
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,” and "emerging growth company' in Rule 12b-2 of the Exchange Act. (Check one):           
                                                                
Large Accelerated Filer   []    Accelerated Filer   [X]    Non-Accelerated filer   []   (Do not check if a smaller reporting company)
Smaller Reporting Company   []    Emerging Growth Company   [] 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transaction period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. []
                         
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 27, 2017, the registrant had 9,001,255 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.
 
 
 
 
Item 1.
Financial Statements (Unaudited)
 
 
 
 
 
 
Three and Six Months Ended September 30, 2017 and 2016
 
 
 
 
 
Three and Six Months Ended September 30, 2017 and 2016
 
 
 
 
 
 
September 30, 2017 and 2016 and March 31, 2017
 
 
 
 
 
Six Months Ended September 30, 2017 and 2016
 
 
 
 
 
 
Six Months Ended September 30, 2017 and 2016
 
 
 
 
 
 
 
Item 2.
 
 
 
of Financial Condition and Results of Operations
 
 
 
 
 
Item 3.
 
 
 
 
 
Item 4.
 
 
Part II.
 
 
 
 
 
Item 1.
 
 
 
 
 
Item 1A.
 
 
 
 
 
Item 2.
 
 
 
 
 
Item 3.
 
 
 
 
 
Item 4.
 
 
 
 
 
Item 5.
 
 
 
 
 
Item 6.
 
 
 

- 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, 2017 and 2016
(Unaudited)
 
 
 
Three Months Ended September 30,
 
Six Months Ended September 30,
(in thousands, except per share data)
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
 
Sales and other operating revenues
 
$
447,339

 
$
389,423

 
$
724,332

 
$
650,524

Cost of goods and services sold
 
378,008

 
339,142

 
626,366

 
566,192

Gross profit
 
69,331

 
50,281

 
97,966

 
84,332

Selling, general and administrative expenses
 
34,806

 
33,362

 
68,649

 
72,167

Other income
 
4,587

 
2,104

 
8,889

 
1,624

Restructuring and asset impairment charges
 
—

 
577

 
—

 
619

Operating income
 
39,112

 
18,446

 
38,206

 
13,170

Debt retirement expense
 
—

 
—

 
(2,975
)
 
—

Interest expense (includes debt amortization of $2,668 and $3,087 for the three months and $4,892 and $6,197 for the six months in 2017 and 2016, respectively)
 
32,756

 
31,904

 
66,856

 
62,507

Interest income
 
727

 
2,204

 
1,694

 
4,042

Income (loss) before income taxes and other items
 
7,083

 
(11,254
)
 
(23,981
)
 
(45,295
)
Income tax expense (benefit)
 
6,403

 
3,627

 
7,049

 
(204
)
Equity in net income (loss) of investee companies
 
276

 
(732
)
 
(649
)
 
(2,061
)
Net income (loss)
 
956

 
(15,613
)
 
(31,679
)
 
(47,152
)
Less: Net income (loss) attributable to noncontrolling interests
 
(68
)
 
44

 
(159
)
 
11

Net income (loss) attributable to Alliance One International, Inc.
 
$
1,024

 
$
(15,657
)
 
$
(31,520
)
 
$
(47,163
)
 
 
 
 
 
 
 
 
 
Earnings (loss) per share:
 
 
 
 
 
 
 
 
Basic
 
$
0.11

 
$
(1.75
)
 
$
(3.51
)
 
$
(5.29
)
Diluted
 
$
0.11

 
$
(1.75
)
 
$
(3.51
)
 
$
(5.29
)
 
 
 
 
 
 
 
 
 
Weighted average number of shares outstanding:
 
 
 
 
 
 
 
 
Basic
 
8,982

 
8,923

 
8,973

 
8,914

Diluted
 
9,010

 
8,923

 
8,973

 
8,914

 
 
 
 
 
 
 
 
 
 
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, 2017 and 2016
 
(Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended September 30,
 
Six Months Ended September 30,
 
(in thousands)
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
 
 
 
Net income (loss)
 
$
956

 
$
(15,613
)
 
$
(31,679
)
 
$
(47,152
)
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
 
 
Currency translation adjustment
 
2,349

 
(585
)
 
6,091

 
(2,859
)
 
Defined benefit pension amounts reclassified to income
 
459

 
460

 
918

 
921

 
Change in fair value of derivatives accounted for as hedges, net of tax
 
—

 
—

 
(562
)
 
—

 
Amounts reclassified to income for derivatives
 
71

 
—

 
71

 
—

 
Total other comprehensive income (loss), net of tax
 
2,879


(125
)

6,518

 
(1,938
)
 
Total comprehensive income (loss)
 
3,835

 
(15,738
)
 
(25,161
)
 
(49,090
)
 
Comprehensive income (loss) attributable to noncontrolling interests
 
(68
)
 
44

 
(159
)
 
11

 
Comprehensive income (loss) attributable to Alliance One International, Inc.
 
$
3,903

 
$
(15,782
)
 
$
(25,002
)
 
$
(49,101
)
 
 
 
 
 
See "Notes to Condensed Consolidated Financial Statements"
 
 
 

- 4 -

Alliance One International, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS 
(Unaudited)
(in thousands)
September 30, 2017
 
September 30, 2016
 
March 31, 2017
ASSETS
 
 
 
 
 
Current assets
 
 
 
 
 
Cash and cash equivalents
$
188,936

 
$
159,297

 
$
473,110

Trade receivables, net
215,113

 
195,954

 
239,558

Other receivables
15,654

 
88,775

 
14,627

Accounts receivable, related parties
5,325

 
8,965

 
8,133

Inventories
928,931

 
944,012

 
678,325

Advances to tobacco suppliers
65,639

 
57,091

 
54,713

Recoverable income taxes
6,102

 
18,619

 
7,389

Prepaid expenses
24,439

 
26,005

 
17,924

Current derivative asset
64

 
—

 
943

Other current assets
18,448

 
16,162

 
15,354

Total current assets
1,468,651

 
1,514,880

 
1,510,076

 
 
 
 
 
 
Investments in unconsolidated affiliates
52,606

 
55,655

 
52,328

Goodwill
16,463

 
16,463

 
16,463

Other intangible assets
43,388

 
48,402

 
46,136

    Long-term recoverable income taxes
—

 
8,990

 
—

Deferred income taxes, net
42,113

 
48,144

 
38,507

Other deferred charges
4,364

 
889

 
5,397

Other noncurrent assets
55,112

 
37,634

 
46,454

    Property, plant and equipment, net
252,506

 
267,667

 
256,511

Total assets
$
1,935,203

 
$
1,998,724

 
$
1,971,872

 
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
 
Current liabilities
 
 
 
 
 
Notes payable to banks
$
549,045

 
$
581,891

 
$
475,863

Accounts payable
56,352

 
51,809

 
89,434

Due to related parties
21,117

 
17,357

 
9,773

Advances from customers
15,079

 
15,205

 
30,925

Accrued expenses and other current liabilities
83,513

 
72,857

 
91,332

Income taxes
—

 
6,114

 
5,377

Long-term debt current
142

 
10,355

 
10,046

Total current liabilities
725,248

 
755,588

 
712,750

 
 
 
 
 
 
Long-term debt
917,491

 
901,575

 
942,959

Deferred income taxes
21,549

 
25,349

 
17,608

Liability for unrecognized tax benefits
10,603

 
10,169

 
10,073

Pension, postretirement and other long-term liabilities
78,220

 
79,630

 
81,772

Total liabilities
1,753,111

 
1,772,311

 
1,765,162

 
 
 
 
 
 
 
 
 
Commitments and contingencies


—



 


Stockholders’ equity
September 30, 2017
September 30, 2016
March 31, 2017
 
 
 
 
 
Common Stock—no par value:
 
 
 
 
 
 
 
 
Authorized shares
250,000

250,000

250,000

 
 
 
 
 
Issued shares
9,781

9,716

9,748

472,892

 
471,661

 
472,349

Retained deficit
(240,304
)
 
(193,019
)
 
(208,784
)
Accumulated other comprehensive loss
(53,529
)
 
(55,786
)
 
(60,047
)
Total stockholders’ equity of Alliance One International, Inc.
179,059

 
222,856

 
203,518

Noncontrolling interests
3,033

 
3,557

 
3,192

Total stockholders’ equity
182,092

 
226,413

 
206,710

Total liabilities and stockholders’ equity
$
1,935,203

 
$
1,998,724

 
$
1,971,872

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
Loss on Derivatives, Net of Tax
Noncontrolling
Interests
Total
Equity
 
 
 
 
 
 
 
 
Balance, March 31, 2016
$
470,830

$
(145,856
)
$
(14,046
)
$
(39,802
)
$
—

$
3,546

$
274,672

Net income (loss)
—

(47,163
)
—

—

—

11

(47,152
)
Stock-based compensation
845

—

—

—

—

—

845

Restricted stock surrendered
(14
)
—

—

—

—

—

(14
)
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

 
 
 
 
 
 
 
 
Balance, March 31, 2017
$
472,349

$
(208,784
)
$
(22,293
)
$
(36,654
)
$
(1,100
)
$
3,192

$
206,710

Net loss
—

(31,520
)
—

—

—

(159
)
(31,679
)
Stock-based compensation
545

—

—

—

—

—

545

Restricted stock surrendered
(2
)
—

—

—

—

—

(2
)
Other comprehensive income (loss), net of tax
—

—

6,091

918

(491
)
—

6,518

Balance, September 30, 2017
$
472,892

$
(240,304
)
$
(16,202
)
$
(35,736
)
$
(1,591
)
$
3,033

$
182,092

 
 
 
 
 
 
 
 
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, 2017 and 2016
(Unaudited)
 
 
(in thousands)
 
September 30, 2017
 
September 30, 2016
 
 
 
 
 
Operating activities
 
 
 
 
   Net loss
 
$
(31,679
)
 
$
(47,152
)
   Adjustments to reconcile net loss to net cash used by operating activities:
 
 
 
 
      Depreciation and amortization
 
16,671

 
17,353

      Debt amortization/interest
 
6,235

 
6,987

      Debt retirement
 
(2,975
)
 
—

     Loss (gain) on foreign currency transactions
 
4,678

 
(4,536
)
      Restructuring and asset impairment charges
 
—

 
619

      Equity in net loss of unconsolidated affiliates, net of dividends
 
2,745

 
2,252

      Stock-based compensation
 
598

 
965

      Changes in operating assets and liabilities, net
 
(289,285
)
 
(110,833
)
      Other, net
 
919

 
79

   Net cash used by operating activities
 
(292,093
)
 
(134,266
)
 
 
 
 
 
Investing activities
 
 
 
 
   Purchases of property, plant and equipment
 
(13,318
)
 
(7,202
)
   Proceeds from sale of property, plant and equipment
 
1,660

 
431

   Payments to acquire equity method investments
 
(3,000
)
 
—

   Restricted cash
 
(352
)
 
(256
)
   Other, net
 
153

 
(4
)
   Net cash used by investing activities
 
(14,857
)
 
(7,031
)
 
 
 
Financing activities
 
 
 
 
   Net proceeds from short-term borrowings
 
62,287

 
108,057

   Proceeds from long-term borrowings
 
—

 
200,000

   Repayment of long-term borrowings
 
(34,961
)
 
(200,355
)
   Debt issuance cost
 
(4,910
)
 
(6,451
)
   Debt retirement cost
 
(72
)
 
—

   Net cash provided by financing activities
 
22,344

 
101,251

 
 
 
 
 
Effect of exchange rate changes on cash
 
432

 
(377
)
 
 
 
Decrease in cash and cash equivalents
 
(284,174
)
 
(40,423
)
Cash and cash equivalents at beginning of period
 
473,110

 
199,720

Cash and cash equivalents at end of period
 
$
188,936

 
$
159,297

 
Other information:
 
 
 
 
      Cash paid for income taxes
 
$
10,040

 
$
4,736

      Cash paid for interest
 
63,000

 
57,845

      Cash received from interest
 
(1,690
)
 
(4,042
)
 
 
 
 
 
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, 2017.
      
Taxes Collected from Customers
Certain subsidiaries are subject to value-added taxes on local sales. These amounts have been included in Sales and Other Operating Revenues and Cost of Goods and Services Sold and were $7,244 and $6,406 for the three months ended September 30, 2017 and 2016, respectively, and $11,098 and $12,591 for the six months ended September 30, 2017 and 2016, respectively.

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

Cash and Cash Equivalents
At September 30, 2017, the Company held $3,921 in the Zimbabwe Real Time Gross Settlement (“RTGS”) System.  RTGS is a local currency equivalent that is exchanged 1:1 with the U.S. Dollar ("USD"). In order to convert these units to USD, the Company must obtain foreign currency resources from the Reserve Bank of Zimbabwe subject to the monetary and exchange control policy in Zimbabwe.

New Accounting Standards

Recent Adopted Accounting Pronouncements
In July 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update ("ASU") No. 2015-11, Inventory. ASU 2015-11 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. The Company adopted this guidance on April 1, 2017. There was no impact on the consolidated financial statements and related disclosures.

Recent Accounting Pronouncements Not Yet Adopted
In May 2014, the FASB issued ASU No. 2014-09, Revenue Recognition (Topic 606), Revenue from Contracts with Customers. ASU 2014-09 outlines a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. The guidance also requires additional disclosure about the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer contracts. This guidance is effective for the Company on April 1, 2018 and the full retrospective approach upon adoption is expected. The implementation group for this ASU is continuing to evaluate the impact of this guidance on the consolidated financial statements and related disclosures, business processes, systems, and controls. The Company has identified certain revenue streams for which the timing of revenue recognition could be impacted by this new ASU; however, the Company does not expect there to be a material impact to the consolidated financial statements as a result.
In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments - Recognition and Measurement of Financial Assets and Liabilities. ASU 2016-01 requires equity investments (excluding equity method investments) to be measured at fair value with changes in fair value recognized in net income. This guidance is effective for the Company on April 1, 2018. The Company does not expect the adoption of this guidance to have a material impact on its consolidated financial statements and related disclosures.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). ASU 2016-02 requires lessees to recognize the assets and liabilities arising from leases on the balance sheet. This guidance also requires disclosures about the amount, timing, and uncertainty of cash flows arising from leases. The guidance must be adopted using a modified retrospective approach and is effective for the Company on April 1, 2020. Early adoption is permitted. The Company is currently evaluating the effect that adoption of this guidance will have on its consolidated financial statements and related disclosures.


- 8 -
Alliance One International, Inc. and Subsidiaries

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

Recent Accounting Pronouncements Not Yet Adopted (continued)
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 provides 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 guidance is effective for the Company on April 1, 2020. The Company is currently evaluating the effect that adoption of this guidance will have on its consolidated financial statements and related disclosures.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 clarifies the classification of certain cash receipts and cash payments to reduce the diversity in practice on how these activities are presented on the statement of cash flows. This guidance is effective for the Company on April 1, 2018. The Company does not expect the adoption of this guidance to have a material impact on its consolidated financial statements and related disclosures.
In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. ASU 2016-18 clarifies the presentation of restricted cash on the statement of cash flows to reduce diversity in practice on how restricted cash is presented on the statement of cash flows. This guidance is effective for the Company on April 1, 2018. The Company does not expect the adoption of this guidance to have a material impact on its consolidated financial statements and related disclosures.
In January 2017, the FASB issued ASU No. 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. ASU 2017-04 eliminates the requirement to determine implied goodwill in measuring an impairment loss. Upon adoption, goodwill impairment will be measured as the excess of the reporting unit’s carrying value over fair value, limited to the amount of goodwill. This guidance is effective for the Company on April 1, 2020. Early adoption is permitted. The Company does not expect the adoption of this guidance to have a material impact on its consolidated financial statements and related disclosures.
In March 2017, the FASB issued ASU No. 2017-07, Compensation-Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. ASU 2017-07 was issued to increase the consistency, transparency, and usefulness of financial information of retirement benefits by disaggregating the service cost component from the other components of net benefit cost. This guidance is effective for the Company on April 1, 2019. Early adoption is permitted. The Company is currently evaluating the effect that adoption of this guidance will have on its consolidated financial statements and related disclosures.
In August 2017, the FASB issued ASU No. 2017-12, Derivative and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. ASU 2017-12 was issued to better align risk and management activities to financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. The amendments to cash flow and net investment hedge relationships that exist on the date of adoption are applied using a modified retrospective approach. The presentation and disclosure requirements apply prospectively. This guidance is effective for the Company on April 1, 2019. Early adoption is permitted. The Company is currently evaluating the effect that adoption of this guidance will have on its consolidated financial statements and related disclosures.


2. INCOME TAXES

Accounting for Uncertainty in Income Taxes
As of September 30, 2017, the Company’s unrecognized tax benefits totaled $15,235, 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, 2017, accrued interest and penalties totaled $1,749 and $1,104, 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 benefit due to currency exchange rate movements.
The Company does not foresee any reasonably possible changes in the unrecognized tax benefits in the next twelve months but acknowledges circumstances can change due to unexpected developments in the law. In certain jurisdictions, tax authorities have challenged positions that the Company has taken that resulted in recognizing benefits that are material to its financial statements. The Company believes it is more likely than not that it will prevail in these situations and accordingly has not recorded liabilities for these positions. The Company expects the challenged positions to be settled at a time greater than twelve months from its balance sheet date.



- 9 -
Alliance One International, Inc. and Subsidiaries

2. INCOME TAXES (continued)

Accounting for Uncertainty in Income Taxes (continued)
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, 2017, the Company’s earliest open tax year for U.S. federal income tax purposes is its fiscal year ended March 31, 2014. 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, 2017
The effective tax rate used for the six months ended September 30, 2017 was (29.4)% compared to 0.5% for the six months ended September 30, 2016. 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, differences between discrete items recognized for the periods that include changes in 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, 2017, the Company recorded a discrete event adjustment expense of $692, bringing the effective tax rate estimated for the six months of (26.5)% to (29.4)%. This discrete event adjustment expense relates primarily to net exchange losses on income tax accounts and 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 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, 2017 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, 2017
 
September 30, 2016
 
March 31, 2017
Amounts guaranteed (not to exceed)
$
125,060

 
$
206,923

 
$
194,656

Amounts outstanding under guarantee
98,748

 
89,822

 
106,465

Fair value of guarantees
2,770

 
4,467

 
7,126


Of the guarantees outstanding at September 30, 2017, 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, 2017, the Company had $20,860 due to local banks on behalf of suppliers included in Accounts Payable in the Condensed Consolidated Balance Sheets. There were no similar balances as of September 30, 2017 and 2016.


4. 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 impairment may have occurred. The Company has chosen the first day of the last quarter of its fiscal year as the date to perform its annual goodwill impairment test.



- 10 -
Alliance One International, Inc. and Subsidiaries

4. GOODWILL AND INTANGIBLES (continued)

The Company has no intangible assets with indefinite useful lives. It does have intangible assets, which are amortized. The following table summarizes the changes in the Company’s goodwill and other intangibles for the 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, 2017
 


 
11.31

 
4.14

 
2.09

 

March 31, 2016 balance
 
 
 
 
 
 
 
 
 
 
Gross carrying amount
 
$
16,463

 
$
58,530

 
$
14,893

 
$
18,502

 
$
108,388

Accumulated amortization
 
—

 
(18,324
)
 
(6,611
)
 
(16,419
)
 
(41,354
)
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

Additions
 
—


—


—


79


79

Amortization expense
 
—

 
(1,670
)
 
(314
)
 
(361
)
 
(2,345
)
Net March 31, 2017
 
16,463

 
36,866

 
7,850

 
1,420

 
62,599

Amortization expense
 
—

 
(835
)
 
(518
)
 
(167
)
 
(1,520
)
Net June 30, 2017
 
16,463

 
36,031

 
7,332

 
1,253

 
61,079

Amortization expense
 
—

 
(836
)
 
(224
)
 
(168
)
 
(1,228
)
Net September 30, 2017
 
$
16,463

 
$
35,195

 
$
7,108

 
$
1,085

 
$
59,851

 
(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, 2017 through March 31, 2018
 
$
1,669


$
748


$
311


$
2,728

2019
 
3,340


1,467


427


5,234

2020
 
3,340


1,401


247


4,988

2021
 
3,340


1,397


86


4,823

2022
 
3,340


1,397


14


4,751

Later
 
20,166


698


—


20,864

 
 
$
35,195

 
$
7,108

 
$
1,085

 
$
43,388

*  Estimated amortization expense for the internally developed software is based on costs accumulated as of September 30, 2017. These estimates will change as new costs are incurred and until the software is placed into service in all locations.


5. VARIABLE INTEREST ENTITIES

The Company holds variable interests in eight 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 guarantees two of its joint ventures' borrowings which represent 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, 2017 and 2016, and March 31, 2017, the Company’s investment in these joint ventures was $51,825, $54,639, and



- 11 -
Alliance One International, Inc. and Subsidiaries

5. VARIABLE INTEREST ENTITIES (continued)

$51,443, 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, 2017 and 2016, and March 31, 2017, respectively, were $5,325,
$8,965, and $8,133 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 $75,625, $94,054, and $96,378 at September 30, 2017 and 2016, and March 31, 2017, respectively. The investments, advances, and guarantees in these joint ventures represent the Company’s maximum exposure to loss.


6. 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. 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, 2017 and 2016:       
 
Three Months Ended September 30,
 
Six Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Sales and other operating revenues:
 
 
 
 
 
 
 
    North America
$
59,331

 
$
58,823

 
$
124,618

 
$
108,760

    Other regions
388,008

 
330,600

 
599,714

 
541,764

    Total revenue
$
447,339

 
$
389,423

 
$
724,332

 
$
650,524

 
 
 
 
 
 
 
 
Operating income:
 
 
 
 
 
 
 
    North America
$
7,772

 
$
3,659

 
$
6,123

 
$
2,681

    Other regions
31,340

 
14,787

 
32,083

 
10,489

Total operating income
39,112

 
18,446

 
38,206

 
13,170

    Debt retirement expense
—

 
—

 
(2,975
)
 
—

    Interest expense
32,756

 
31,904

 
66,856

 
62,507

    Interest income
727

 
2,204

 
1,694

 
4,042

Income (loss) before income taxes and other items
$
7,083

 
$
(11,254
)
 
$
(23,981
)
 
$
(45,295
)

Analysis of Segment Assets
September 30, 2017
 
September 30, 2016
 
March 31, 2017
Segment assets:
 
 
 
 
 
 
North America
$
382,940

 
$
396,413

 
$
375,782

 
Other regions
1,552,263

 
1,602,311

 
1,596,090

 
Total assets
$
1,935,203

 
$
1,998,724

 
$
1,971,872



7. 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, 2017 and 2016. This subsidiary waives its right to receive dividends and it does not have the right to vote.
          



- 12 -
Alliance One International, Inc. and Subsidiaries

7. EARNINGS PER SHARE (continued)

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 427 at a weighted average exercise price of $60.00 per share at September 30, 2017 and 461 at a weighted average exercise price of $61.09 per share at September 30, 2016.

The following table summarizes the computation of earnings per share for the three months and six months ended September 30, 2017 and 2016.
 
Three Months Ended September 30,
 
Six Months Ended September 30,
(in thousands, except per share data)
2017
 
2016
 
2017
 
2016
 
BASIC EARNINGS (LOSS)
 
 
 
 
 
 
 
 
Net income (loss) attributable to Alliance One International, Inc.
$
1,024

 
$
(15,657
)
 
$
(31,520
)
 
$
(47,163
)
 
SHARES
 
 
 
 
 
 
 
 
   Weighted average number of shares outstanding
8,982

 
8,923

 
8,973

 
8,914

 
BASIC EARNINGS (LOSS) PER SHARE
$
0.11

 
$
(1.75
)
 
$
(3.51
)
 
$
(5.29
)
 
DILUTED EARNINGS (LOSS)
 
 
 
 
 
 
 
 
   Net income (loss) attributable to Alliance One International, Inc.
$
1,024

 
$
(15,657
)
 
$
(31,520
)
 
$
(47,163
)
 
SHARES
 
 
 
 
 
 
 
 
Weighted average number of common shares outstanding
8,982

 
8,923

 
8,973

 
8,914

 
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
28

 
—

*
—

*
—

*
Adjusted weighted average number of common shares outstanding
9,010

 
8,923

 
8,973

 
8,914

 
DILUTED EARNINGS (LOSS) PER SHARE
$
0.11

 
$
(1.75
)
 
$
(3.51
)
 
$
(5.29
)
 
* 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.


8. 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 $253 and $528 for the three months ended September 30, 2017 and 2016, respectively, of which $0 and $75, respectively, were for stock-based awards payable in cash and $598 and $965 for the six months ended September 30, 2017 and 2016, respectively, of which $54 and $120, respectively, were for stock-based awards payable in cash.
          The Company’s shareholders approved the 2016 Incentive Plan (the "2016 Plan") at its annual meeting on August 12, 2016, which is the successor to the 2007 Incentive Plan (the “2007 Plan”) as amended on August 11, 2011 and August 6, 2009. The 2016 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.

- 13 -
Alliance One International, Inc. and Subsidiaries

8. STOCK-BASED COMPENSATION (continued)

During the three months and six months ended September 30, 2017 and 2016, respectively, the Company made the following stock-based compensation awards:

 
Three Months Ended September 30,
 
Six Months Ended September 30,
  (in thousands, except grant date fair value)
2017
 
2016
 
2017
2016
  Restricted Stock
 
 
 
 
 
 
           Number Granted
7

 
7

 
14

13

           Grant Date Fair Value
$
10.90

 
$
19.12

 
$
12.65

$
17.55

  Restricted Stock Units
 
 
 
 
 
 
           Number Granted
—

 
56

 
57

56

           Grant Date Fair Value
$
—

 
$
17.76

 
$
11.75

$
17.76

  Performance-Based Stock Units
 
 
 
 
 
 
           Number Granted
—

 
28

 
29

28

           Grant Date Fair Value
$
—

 
$
17.76

 
$
11.75

$
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, 2017 vest ratably over a three-year period. Under the terms of the performance-based stock units, shares ultimately issued will be contingent upon the achievement of specified business performance goals.


9. 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 $4,158 and the total assessment including penalties and interest at September 30, 2017 is $13,821. 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 $1,926 at September 30, 2017, which is net of impairment charges based on management’s expectations about future realization. The intrastate trade tax credits will continue to be monitored for impairment in future periods based on market conditions and the Company’s ability to use or sell the tax credits.
          In 1969, the Brazilian government created a tax credit program that allowed companies to earn IPI tax credits (“IPI credits”) based on the value of their exports. The government began to phase out this program in 1979, which resulted in numerous lawsuits between taxpayers and the Brazilian government. The Company has a long legal history with respect to credits it earned while the IPI credit program was in effect. In 2001, the Company won a claim related to certain IPI credits it earned between 1983 and 1990. The Brazilian government appealed this decision and numerous rulings and appeals were rendered on behalf of both the government and the Company from 2001 through 2013. Because of this favorable ruling, the Company began to use these earned
IPI credits to offset federal taxes in 2004 and 2005, until it received a Judicial Order to suspend the IPI offsetting in 2005. The value of the federal taxes offset in 2004 and 2005 was $24,142 and the Company established a reserve on these credits at the time of offsetting as they were not yet realizable due to the legal uncertainty that existed. Specifically, the Company extinguished other federal tax liabilities using IPI credits and recorded a liability in Pension, Postretirement and Other Long-Term Liabilities to reflect that the credits were not realizable at that time due to the prevalent legal uncertainty. On March 7, 2013, the Brazilian Supreme Court rendered a final decision in favor of the Company that recognized the validity of the IPI credits and secured the Company's right to benefit from the IPI credits earned from March 1983 to October 1990. This final decision expressly stated the Company has the right to the IPI credits. The Company estimated the total amount of the IPI credits to be approximately $94,316 at March
31, 2013. Since the March 2013 ruling definitively (without the government's ability to appeal) granted the Company the ownership of the IPI credits generated between 1983 and 1990 the Company believed the amount of IPI credits that were used to offset other
federal taxes in 2004 and 2005 were realizable beyond a reasonable doubt. Accordingly, and at March 31, 2013, the Company recorded the $24,142 IPI credits it realized in the Statements of Consolidated Operations in Other Income. No further benefit has been recognized pending the outcome of the judicial procedure to ascertain the final amount as those amounts have not yet been
realized.

- 14 -
Alliance One International, Inc. and Subsidiaries

9. CONTINGENCIES AND OTHER INFORMATION (continued)

Other
Mindo, S.r.l., the purchaser in 2004 of the Company's Italian subsidiary Dimon Italia, S.r.l., asserted claims against a subsidiary of the Company arising out of that sale transaction in an action filed before the Court of Rome on April 12, 2007.  The claim involved a guaranty letter issued by a consolidated subsidiary of the Company in connection with the sale transaction, 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.


10. DEBT ARRANGEMENTS

ABL 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 its outstanding 8.5% senior secured first lien notes due 2021 and its outstanding 9.875% 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 September 30, 2017, the Company did not satisfy this fixed charge coverage ratio. The Company may from time to time not satisfy this ratio and failure to meet this fixed charge coverage ratio does not constitute an event of default.

Senior Secured Second Lien Notes
During the six months ended September 30, 2017, the Company purchased $28,645 of its existing $691,591 of the 9.875% senior secured second lien notes on the open market. All purchased securities were canceled leaving $662,946 of the 9.875% senior secured second lien notes outstanding at September 30, 2017. Related discounts were $3,730 resulting in net cash repayment of $24,915 and were recorded in Repayment of Long-Term Borrowings in the Condensed Consolidated Statements of Cash Flows. Associated costs paid were $72, and deferred financing costs and amortization of original issue discount of $683 were accelerated.


11. DERIVATIVE FINANCIAL INSTRUMENTS

Derivative Financial Instruments
The Company uses 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, processing costs, and selling, general and administrative costs. Derivative financial instruments are recognized on the balance sheet as assets and liabilities and are measured at fair value. Changes in the fair value of derivative instruments designated as hedging instruments are recorded each period according to the determination of the derivative's effectiveness. The effective portion of changes in the fair value of derivatives designated as cash flow hedges is recorded in Accumulated Other Comprehensive Loss and subsequently reclassified into earnings in the period during which the hedged transaction is recognized in earnings. The ineffective portion of the change in fair value of the derivatives is recognized in Cost of Goods and Services Sold immediately as incurred.
    

- 15 -
Alliance One International, Inc. and Subsidiaries

11. DERIVATIVE FINANCIAL INSTRUMENTS (continued)

Derivative Financial Instruments (continued)
As of September 30, 2017, Other Comprehensive Loss includes $1,591, net of tax, of unrealized gains related to designated cash flow hedges. These contracts did not qualify for hedge accounting as defined by generally accepted accounting principles in the previous years. There were no gains or losses recorded for the three months and six months ended September 30, 2016. The Company recorded losses/(gains) of $283 and ($985) in its Cost of Goods and Services Sold for the three months and six months ended September 30, 2017, respectively. The Company recorded a current derivative asset of $64 and $943 as of September 30, 2017 and March 31, 2017, respectively. There was no current derivative asset as of September 30, 2016.
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 16 “Fair Value Measurements” to the “Notes to Condensed Consolidated Financial Statements” for further information of fair value methodology.       


12. PENSION AND OTHER 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. The Company also provides certain health and life insurance benefits to retired employees, and their eligible dependents, who meet specified age and service requirements.
Additional non-U.S. defined benefit plans sponsored by certain subsidiaries cover certain full-time employees located in Germany, Turkey, and the United Kingdom.

The components of the Company's net periodic benefit cost were as follows:

 
Pension Benefits
 
Three Months Ended September 30,
 
Six Months Ended September 30,
 
2017
 
2016
 
2017
2016
     Service cost
$
116

 
$
120

 
$
232

$
240

     Interest expense
1,063

 
1,176

 
2,126

2,352

     Expected return on plan assets
(1,264
)
 
(1,403
)
 
(2,529
)
(2,806
)
     Amortization of prior service cost
10

 
10

 
21

20

     Actuarial loss
511

 
524

 
1,022

1,048

     Net periodic pension cost
$
436

 
$
427

 
$
872

$
854



 
Other Postretirement Benefits
 
Three Months Ended September 30,
Six Months Ended September 30,
 
2017
 
2016
2017
 
2016
     Service cost
$
3

 
$
3

$
7

 
$
6

     Interest expense
85

 
67

169

 
134

     Amortization of prior service cost
(178
)
 
(177
)
(355
)
 
(354
)
     Actuarial loss
115

 
104

230

 
208

     Net periodic pension cost (benefit)
$
25

 
$
(3
)
$
51

 
$
(6
)

For the six months ended September 30, 2017, contributions of $2,919 and $229 were made to pension plans and postretirement health and life insurance benefits for fiscal 2018, respectively. Additional contributions to pension plans and postretirement health and life insurance benefits of approximately $3,403 and $251, are expected during the remainder of fiscal 2018, respectively.





- 16 -
Alliance One International, Inc. and Subsidiaries

13. INVENTORIES

The following table summarizes the Company’s costs in inventory:
 
September 30, 2017
 
September 30, 2016
 
March 31, 2017
Processed tobacco
$
716,384

 
$
690,805

 
$
424,984

Unprocessed tobacco
192,234

 
223,166

 
220,625

Other
20,313

 
30,041

 
32,716

 
$
928,931

 
$
944,012

 
$
678,325


14. 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
 
Derivatives, Net of Tax
 
Accumulated Other Comprehensive Loss
Balances, March 31, 2017
$
(22,293
)
 
$
(36,654
)
 
$
(1,100
)
 
$
(60,047
)
Other comprehensive income (loss) before reclassifications
3,742

 
—

 
(562
)
 
3,180

Amounts reclassified to net income, net of tax
—

 
459

 
—

 
459

Other comprehensive income (loss), net of tax
3,742

 
459

 
(562
)
 
3,639

Balances, June 30, 2017
(18,551
)
 
(36,195
)
 
(1,662
)
 
(56,408
)
Other comprehensive income before reclassifications
2,349

 
—

 
—

 
2,349

Amounts reclassified to net earnings, net of tax
—

 
459

 
71

 
530

Other comprehensive income, net of tax
2,349

 
459

 
71

 
2,879

Balances, September 30, 2017
$
(16,202
)
 
$
(35,736
)
 
$
(1,591
)
 
$
(53,529
)
 
 
 
 
 
 
 
 
Balances, March 31, 2016
$
(14,046
)
 
$
(39,802
)
 
$
—

 
$
(53,848
)
Other comprehensive loss before reclassifications
(2,274
)
 
—

 
—

 
(2,274
)
Amounts reclassified to net income net of tax
—

 
461

 
—

 
461

Other comprehensive income (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 income, net of tax
—

 
460

 
—

 
460

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

 
—

 
(125
)
Balances, September 30, 2016
$
(16,905
)
 
$
(38,881
)
 
$
—

 
$
(55,786
)

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, 2017 and 2016:
 
Three Months Ended September 30,
Six Months Ended September 30,
 
2017
 
2016
2017
 
2016
Pension and postretirement plans*:
 
 
 
 
 
 
       Actuarial loss
$
626

 
$
627

$
1,252

 
$
1,255

       Amortization of prior service cost
(167
)
 
(167
)
(334
)
 
(334
)
Amounts reclassified from accumulated other comprehensive losses to net income
$
459

 
$
460

$
918

 
$
921

* Amounts are included in net periodic benefit costs for pension and postretirement plans. See Note 12 "Pension and Postretirement Benefits" to the "Notes to Condensed Consolidated Financial Statements" for further information.




17-
Alliance One International, Inc. and Subsidiaries

15. 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, 2017, the investment limit of this program was adjusted from up to $100,000 trade receivables to up to $155,000 trade receivables. The agreement for the second program 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.
Under the programs, the Company receives a cash payment and a deferred purchase price receivable in exchange for receivables sold. Following the sale and transfer of the receivables to the unaffiliated financial institutions, the receivables are isolated from the Company and its affiliates, and effective control of the receivables is passed to the unaffiliated financial institutions, which have all rights, including the right to pledge or sell the receivables.
Under the programs, all of the receivables sold are removed from the Condensed Consolidated Balance Sheets and the net cash proceeds received by the Company are included in Net Cash Used by Operating Activities in the Condensed Consolidated Statements of Cash Flows. The deferred purchase price receivable is paid as payments on the receivables are collected from account debtors and represents a continuing involvement and a beneficial interest in the transferred financial assets. This beneficial interest is recognized at fair value and is included in Trade and Other Receivables, Net in the Condensed Consolidated Balance Sheets. See Note 16 "Fair Value Measurements" to the "Notes to Condensed Consolidated Financial Statements" for further information.
The Company is servicer of both facilities and may receive funds that are due to the unaffiliated financial institutions, which are net settled on the next settlement date. As a result of the net settlement, Trade and Other Receivables, Net in the Condensed Consolidated Balance Sheets has been reduced by $6,433, $1,531, and $11,985 as a result of the net settlement as of September 30, 2017 and 2016, and March 31, 2017, respectively.
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 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,
 
2017
 
2016
 
2017
Receivables outstanding in facility
$
123,526

 
$
95,030

 
$
200,084

Beneficial interest
$
23,668

 
$
29,371

 
$
38,206

Servicing liability
$
—

 
$
—

 
$
101

 
 
 
 
 
 
   Cash proceeds for the six months ended September 30:
 
 
 
 
 
   Cash purchase price
$
228,930

 
$
246,235

 
$
648,730

   Deferred purchase price
118,118

 
113,509

 
231,658

   Service fees
225

 
286

 
492

   Total
$
347,273

 
$
360,030

 
$
880,880



16. FAIR VALUE MEASUREMENTS

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Inputs utilized in valuation techniques to measure fair value may be observable
or unobservable. Observable inputs reflect market data obtained from independent sources. Unobservable inputs reflect the Company's market assumptions.

The fair value hierarchy categorizes these inputs into the following three levels:
    
•
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.



- 18 -
Alliance One International, Inc. and Subsidiaries

16. FAIR VALUE MEASUREMENTS (continued)

The following table summarizes the items measured at fair value on a recurring basis:    
 
September 30, 2017
 
September 30, 2016
 
March 31, 2017
 
 
Total Assets /
 
 
 
Total Assets /
 
 
 
Total Assets /
 
 
Liabilities
 
 
 
Liabilities
 
 
 
Liabilities
 
Level 2
Level 3
at Fair Value
 
Level 2
Level 3
at Fair Value
 
Level 2
Level 3
at Fair Value
Assets
 
 
 
 
 
 
 
 
 
 
 
Derivative financial instruments
$
64

$
—

$
64

 
$
—

$
—

$
—

 
$
943

$
—

$
943

Securitized beneficial interests
—

23,668

23,668

 
—

29,371

29,371

 
—

38,206

38,206

Total assets
$
64

$
23,668

$
23,732

 
$
—

$
29,371

$
29,371

 
$
943

$
38,206

$
39,149

Liabilities
 
 
 
 
 
 
 
 
 
 
 
Long-term debt
$
852,082

$
—

$
852,082

 
$
803,924

$
—

$
803,924

 
$
867,825

$
—

$
867,825

Guarantees
—

2,770

2,770

 
—

4,467

4,467

 
—

7,126

7,126

Total liabilities
$
852,082

$
2,770

$
854,852

 
$
803,924

$
4,467

$
808,391

 
$
867,825

$
7,126

$
874,951


Level 2 measurements
•
Debt: The fair value of debt is based on the market price for similar financial instruments or model-derived valuations whose inputs are observable. The primary inputs to the valuation include market expectations, the Company's credit risk, and the contractual terms of the debt instrument.
•
Derivatives: The fair value of derivatives is based on the discounted cash flow analysis of the expected future cash flows. The primary inputs to the valuation include forward yield curves, implied volatilities, LIBOR rates, and credit valuation adjustments.

Level 3 measurements
•
Guarantees: The fair value of guarantees is based on the discounted cash flow analysis of the expected future cash flows or historical loss rates. The primary inputs to the discounted cash flow analysis include market interest rates ranging between 15.0% and 35.0% and the Company’s historical loss rates ranging between 2.6% and 8.9% as of September 30, 2017.
•
Securitized beneficial interests: The fair value of securitized beneficial interests is based on the present value of future expected cash flows. The primary inputs to this valuation include payment speeds of 54 days a discount rate of 3.7% as of September 30, 2017.


- 19 -
Alliance One International, Inc. and Subsidiaries

16. FAIR VALUE MEASUREMENTS (continued)

The following table presents the reconciliation of changes in Level 3 instruments measured on a recurring basis:
 
Three Months Ended September 30, 2017
Six Months Ended September 30, 2017
 
Securitized Beneficial Interests
Guarantees
Securitized Beneficial Interests
Guarantees
Beginning balance, March 31, 2017
$
13,199

$
6,388

$
38,206

$
7,126

   Issuances of guarantees/sales of receivables
52,206

1,428

110,763

2,066

   Settlements
(40,503
)
(4,578
)
(124,171
)
(5,954
)
   Losses recognized in earnings
(1,234
)
(468
)
(1,130
)
(468
)
Ending balance, September 30, 2017
$
23,668

$
2,770

$
23,668

$
2,770


 
Three Months Ended September 30, 2016
Six Months Ended September 30, 2016
 
Securitized Beneficial Interest
Guarantees
Securitized Beneficial Interest
Guarantees
Beginning balance, March 31, 2016
$
14,681

$
5,891

$
40,368

$
7,350

   Issuances of guarantees/sales of receivables
41,651

3,122

102,856

4,125

   Settlements
(26,093
)
(4,518
)
(112,727
)
(6,980
)
   Losses recognized in earnings
(868
)
(28
)
(1,126
)
(28
)
Ending balance, September 30, 2016
$
29,371

$
4,467

$
29,371

$
4,467


Unrealized losses for securitized beneficial interests as of September 30, 2017 and 2016, and March 31, 2017 were $747, $639, and $1,722, respectively. Gains and losses included in earnings are reported in Other Income (Expense).

17. RELATED PARTY TRANSACTIONS

The Company’s operating subsidiaries engage in transactions with related parties in the normal course of business. The Company's operating subsidiaries have entered into transactions with affiliates of the Company for the purpose of procuring or processing inventory. The following is a summary of transactions with related parties of the Company:
 
 
September 30, 2017
 
September 30, 2016
 
March 31, 2017
Balances:
 
 
 
 
 
 
   Accounts receivable, related parties
 
$
5,325

 
$
8,965

 
$
8,133

   Due to related parties
 
21,117

 
17,357

 
9,773

 
Three Months Ended September 30,
 
Six Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Transactions:
 
 
 
 
 
 
 
    Sales
$
7,814

 
$
21,674

 
23,056

 
$
38,920

    Purchases
26,423

 
17,496

 
37,937

 
27,544

The Company’s balances due to and from related parties are primarily with its equity method investments located in Asia, South America, North America, and Europe, which purchase and process tobacco or produce consumable e-liquids.




- 20 -
Alliance One International, Inc. and Subsidiaries

18. INVESTEE COMPANIES

The Company has equity method investments in companies in India, Thailand, Turkey, and Brazil that purchase and process tobacco. The investees and ownership percentages are as follows: Alliance One Industries India Private Ltd. (India) 49%, Siam Tobacco Export Company (Thailand) 49%, Adams International Ltd. (Thailand) 49%, Oryantal Tutun Paketleme 50%, and China Brasil Tobacos Exportadora SA (“CBT”) 49%. The Company also has a 50% interest in Purilum, LLC, a U.S. company that develops, produces, and sells consumable e-liquids to manufacturers and distributors of e-vapor products. On August 21, 2017, the Company completed a $3,000 purchase of a 40% interest in an additional e-liquid company. The difference between the book basis of the Company's 40% interest and the fair value of the investment recorded was $2,481. At September 30, 2017, the basis difference remained $2,481.
          On March 26, 2014, upon the disposition of 51% interest in CBT, the difference between the book basis of the Company’s 49% interest and the fair value of the investment recorded created a basis difference of $15,990. The Company evaluated the contributed assets and identified basis differences in certain accounts, including inventory, intangible assets, and deferred taxes. The basis differences are being amortized over the respective estimated lives of these assets and liabilities, which range from one to ten years. The Company’s earnings from the equity method investment are reduced by amortization expense related to these basis differences. At September 30, 2017, the basis difference was $9,451.


- 21 -
Alliance One International, Inc. and Subsidiaries


Item 2.    Management’s Discussion and Analysis of
                Financial Condition and Results of Operations


EXECUTIVE OVERVIEW

The following executive overview for the six months ended September 30, 2017 is intended to provide significant highlights of the discussion and analysis that follows.
    
Financial Results
    
Fiscal year 2018 continues to progress favorably and in line with our expectations. Excluding Malawi, that has a much smaller crop this year, global market conditions are positive and weather patterns are good, supporting better growing conditions with crop sizes that have returned to more normal levels in key markets where we are currently or have completed purchasing. The heavy North American hurricane season has not affected our contracted flue cured crop and qualities are generally good. Total kilos sold this quarter were slightly above last year at 92.0 million. These volumes have been affected by a prolonged shortage of containers in South America and China; however, we do expect to be able to catch up on those shipments through the third and fourth quarters. The second quarter starts the new crop shipping season with the improved marketing conditions showing through in the results. Revenue for the quarter improved 14.9% or $57.9 million to $447.3 million versus last year due to a 12.4% increase in average sales price, driven by higher lamina sales this year versus byproducts when compared to last year’s quarter. Gross profit improved by 37.9% to $69.3 million. Additionally, other income improved $2.5 million mainly related to various factors in South America.

       
Liquidity
    
Our liquidity requirements are affected by various factors including crop seasonality, foreign currency and interest rates, green tobacco prices, customer mix, crop size and quality. Consistent with our plan, we utilized surplus cash to reduce long-term debt with the purchase and cancellation of $28.6 million of our 9.875% senior secured second lien notes, leaving $662.9 million at September 30, 2017. Our liquidity at quarter end was strong with available credit lines and cash of $517.1 million including available lines for letters of credit. We will continue to monitor and adjust funding sources as needed to enhance and drive various business opportunities that maintain flexibility and meet cost expectations.
    
Outlook
    
As we progress into the third quarter, we anticipate that our results will continue to reflect improvement versus last year in both sales and profitability. Our customers are focused on reducing costs, increasing efficiency and enhancing their global supply chains, as well as driving positive change in consumption with increased reduced risk product offerings. Future prospects for our business are bright and we are excited about developing and maximizing future opportunities that should drive improved profitability and enhanced shareholder value. We are taking measured steps to strengthen our preferred supplier role with customers, further developing our position as a key supplier for both traditional requirements as well as next generation reduced risk products.
 


- 22 -
Alliance One International, Inc. and Subsidiaries

Item 2.    Management’s Discussion and Analysis of
        Financial Condition and Results of Operations (continued)

RESULTS OF OPERATIONS:

Condensed Consolidated Statement of Operations and Supplemental Information
 
Three Months Ended September 30,
 
Six Months Ended September 30,
 
(in millions, except per kilo amounts)
 
 
Change
 
 
 
 
Change
 
 
 
(percentage change is calculated based on thousands)
2017

 
$

 
%

 
2016

 
2017

 
$

 
%

 
2016

 
Kilos sold