News Column

ALLIANCE ONE INTERNATIONAL, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

August 5, 2014

EXECUTIVE OVERVIEW

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

Financial Results

Volumes and revenues declined this year due to challenging weather conditions in some regions and global tobacco markets that have entered oversupply. Both have delayed buying and are in line with internal expectations. Additionally, prices paid for green tobacco are lower than last year. As anticipated, gross profit and gross profit as a percentage of sales, improved, mainly driven by enhanced operating performance including reduced unrecovered farmer advances. Selling, general and administrative expenses decreased primarily due to lower incentive compensation, professional fees and amortization related to internally developed software, while restructuring costs did not occur this year, resulting in increased operating income. Additionally, net interest costs decreased compared to last year's quarter, primarily related to lower average borrowing levels.



Liquidity

Our liquidity requirements are impacted by various factors including crop seasonality, foreign currency exchange rates, interest rates, green tobacco prices, customer mix, crop size and quality. We monitor and adjust funding sources based on a number of industry, business and financial market considerations. In fiscal 2014, we extended our U.S. revolving credit facility maturity to April 2017. At the same time we issued $735.0 million of new eight year senior secured second lien notes that refinanced our $635.0 million senior notes, effectively extending the maturity on this tranche to 2021. Additionally, we retired approximately $113.9 million of our $115.0 million 5.5% convertible senior subordinated notes. The collective refinancing extended the majority of our long-term debt and reduced uncertainty related to the capital markets, while providing a solid base for the business. We will continue to monitor capital markets and utilize various short-term funding sources to enhance and drive various business opportunities that maintain flexibility and meet cost expectations.



Outlook

We expect full year revenue to be similar to last year despite the slow start that reduced first quarter sales and is expected to have the same impact through the second quarter. In addition, we anticipate various profitability measurements to be improved over the prior year. Working capital efficiency and improving our cash cycle are important again this year and combined with enhanced factory efficiencies, should further improve our operating results. Inventories are well positioned below last year's quarter end that benefited from the deconsolidation of a Brazilian subsidiary, following finalizing a joint venture in March 2014 and uncommitted inventories within our stated range. Further, we are working to reduce year-end inventory levels versus the prior year based on disciplined buying that is anticipated to reduce net debt levels. Our global plan includes continued focus on sustainability with further roll out of our integrated production system, which is important to our customers. Our integrated production system enhances our dedicated global supplier base, improves product quality, increases farm family income, supports local communities where we operate and reduces the impact our business has on the environment. Success in these areas, combined with attention to our customers' evolving longer term requirements in a cost effective manner, are anticipated to improve our results and enhance long-term shareholder value. 23 --------------------------------------------------------------------------------



Alliance One International, Inc. and Subsidiaries

Item 2. Management's Discussion and Analysis of

Financial Condition and Results of Operations

RESULTS OF OPERATIONS: Three Months Ended June 30, Change 2014 $ % 2013 Kilos sold 47.7 (28.6 ) (37.5 ) 76.3 Tobacco sales and other operating revenues: Sales and other operating revenues $ 232.2$ (138.5 ) (37.4 ) $ 370.7 Average price per kilo 4.87 0.01 0.2 4.86 Processing and other revenues 16.8 3.6 27.3 13.2



Total sales and other operating revenues 249.0 (134.9 )

(35.1 ) 383.9 Tobacco cost of goods sold: Tobacco costs 195.4 (126.8 ) (39.4 322.2 Transportation, storage and other period costs 10.9 (8.8 ) (44.7 ) 19.7 Derivative financial instrument and exchange (gains) losses (1.2 ) (8.6 ) (116.2 ) 7.4 Total tobacco cost of goods sold 205.1 (144.2 ) (41.3 ) 349.3 Average cost per kilo 4.30 (0.28 ) (6.1 ) 4.58 Processing and other revenues cost of services sold 8.8 2.7 44.3 6.1



Total cost of goods and services sold 213.9 (141.5 )

(39.8 ) 355.4 Gross profit 35.1 6.6 23.2 28.5 Selling, general and administrative expenses 31.3 (4.2 ) (11.8 ) 35.5 Other income 0.8 (0.4 ) (33.3 ) 1.2 Restructuring and asset impairment charges - (2.2 ) (100.0 ) 2.2 Operating income (loss) 4.6 12.5 * 158.2 (7.9 ) * Interest expense 26.9 (1.9 ) (6.6 ) 28.8 Interest income 1.4 (0.6 ) (30.0 ) 2.0 Income tax expense (benefit) (2.9 ) (3.8 ) (422.2 ) 0.9 Equity in net loss of investee companies (0.5 ) 0.5 50.0 (1.0 ) Income attributable to noncontrolling interests - (0.1 ) (100.0 ) 0.1 Loss attributable to Alliance One International, Inc. $ (18.6 )$ 18.3



49.6 $ (36.9 ) *

Three Months Ended June 30, 2014 Compared to Three Months Ended June 30, 2013 Summary Total sales and other operating revenues decreased 35.1% to $249.0 million primarily due to a 37.5% decrease in volumes. Reduced volumes were primarily from Brazil due to the delay in the purchasing and processing of the current crop there due to weather related issues, the impact of an oversupply of tobacco in the global market, opportunistic sales in the prior year and shipments in the prior year that had been delayed from fiscal 2013 in other regions. As a result of the oversupply, prices paid to tobacco suppliers in Brazil and Africa are lower this year which has lowered our average sales prices and average tobacco costs on a per kilo basis. However, due to product mix and customer mix in Asia and Europe, average sales prices remained consistent with the prior year. Because the higher costs per kilo of the prior crop were not fully passed on to our customers in Brazil and Africa last year, the impact of lower prices paid to tobacco suppliers on our average tobacco cost per kilo significantly improved our gross margin. Average tobacco costs per kilo were further decreased due to lower period costs primarily from prior year losses in Zambia related to reduced recoveries of advances to tobacco suppliers that did not recur and the impact of currency movements on derivative and exchange losses in the prior year compared to gains in the current year. Processing revenues and cost of services increases were primarily due to increased customer demand. Although volumes decreased this year, the impact of higher green costs not fully recovered from customers, the losses in Zambia and currency losses in the prior year that did not occur in the current year resulted in a 23.2% increase in gross margin to $35.1 million and an improvement in our gross margin as a percentage of sales from 7.4% to 14.1%. Selling, general and administrative expense ("SG&A") improvement was primarily from lower incentive compensation, 24 --------------------------------------------------------------------------------



Alliance One International, Inc. and Subsidiaries

Item 2. Management's Discussion and Analysis of

Financial Condition and Results of Operations (continued)

Results of Operations (continued)

Three Months Ended June 30, 2014 Compared to Three Months Ended June 30, 2013 (continued)

Summary (continued) professional fees and amortization related to internally developed software. The prior year included restructuring and asset impairment charges primarily attributable to our agreement for a joint processing venture in Turkey. Due to the changes in our results for the quarter, operating income increased 158.2% to $4.6 million when compared with the prior year. Our interest costs decreased from the prior year related primarily due to lower average borrowings partially offset by higher average rates. Our effective tax rate was 13.9% this year compared to (2.5)% last year. The variance in the effective tax rate between this year and last year is mainly related to net exchange losses on income tax accounts, lower foreign income tax rates and certain losses for which no tax benefit has been recorded.



South America Region

South America Region Supplemental Information

Three Months



Ended

June 30, Change (in millions, except per kilo amounts) 2014 $ % 2013 Kilos sold 11.0 (21.0 ) (65.6 ) 32.0 Tobacco sales and other operating revenues: Sales and other operating revenues $ 52.1$ (127.1 ) (70.9 ) $ 179.2 Average price per kilo 4.74 (0.86 ) (15.4 ) 5.60 Processing and other revenues 10.0 1.9 23.5 8.1 Total sales and other operating revenues 62.1 (125.2 ) (66.8 ) 187.3 Tobacco cost of goods sold Tobacco costs 40.1 (116.5 ) (74.4 ) 156.6 Transportation, storage and other period costs 4.2 (1.0 )



(19.2 ) 5.2

Derivative financial instrument and exchange (gains) losses (2.4 ) (7.4 )



(148.0 ) 5.0

Total tobacco cost of goods sold 41.9 (124.9 )



(74.9 ) 166.8

Average cost per kilo 3.81 (1.40 ) (26.9 ) 5.21 Processing and other revenues costs of services sold 4.6 1.4 43.8 3.2 Total cost of goods and services sold 46.5 (123.5 ) (72.6 ) 170.0 Gross profit 15.6 (1.7 ) (9.8 ) 17.3 Selling, general and administrative expenses 10.0 (1.5 ) (13.0 ) 11.5 Other income 1.0 (0.1 ) (9.1 ) 1.1 Restructuring and asset impairment charges - - - - Operating income $ 6.6$ (0.3 ) (4.3 ) $ 6.9 Total sales and other operating revenues decreased 66.8% to $62.1 million due to a 65.6% decrease in volumes primarily due to the delay in the purchasing of the current crop in Brazil as well as the impact of an oversupply of tobacco in the global market. As a result of the oversupply, prices paid to tobacco suppliers are lower this year which has lowered our average sales prices and average tobacco costs on a per kilo basis. As a result of not fully passing on the higher cost of the prior crop to our customers last year, the impact of lower average tobacco cost per kilo this year greatly improved our gross margin. Also decreasing our costs per kilo this year was the impact of derivative gains in the current year from currency movements compared to losses in the prior year. Despite lower volumes this year, our gross margin only decreased $1.7 million to $15.6 million compared to last year when we were not able to fully pass on the higher costs of the crop to our customers. With our gross margin remaining relatively consistent with the prior year, our gross margin as a percentage of sales improved from 9.2% last year to 25.1% this year. Reductions in SG&A were attributable to currency movement and allocations for general corporate services. Operating income remained comparable to the prior year as a result of the impact of the change in results for the region. 25 --------------------------------------------------------------------------------



Alliance One International, Inc. and Subsidiaries

Item 2. Management's Discussion and Analysis of

Financial Condition and Results of Operations (continued)

RESULTS OF OPERATIONS: (continued)

Three Months Ended June 30, 2014 Compared to Three Months Ended June 30, 2013 (continued)

Value Added Services



Value Added Services Supplemental Information

Three Months



Ended

June 30, Change (in millions, except per kilo amounts) 2014 $ % 2013 Kilos sold 5.8 0.4 (65.6 ) 5.4 Tobacco sales and other operating revenues: Sales and other operating revenues $ 29.0$ 0.4 (1.4 ) $ 28.6 Average price per kilo 5.00 (0.30 ) (537 ) 5.30 Processing and other revenues 2.4 - - 2.4 Total sales and other operating revenues 31.4 0.4 ) 1.3 31.0 Tobacco cost of goods sold Tobacco costs 22.7 (0.1 ) (0.4 ) 22.8 Transportation, storage and other period costs 1.0 (0.2 ) (16.7 ) 1.2 Derivative financial instrument and exchange (gains) losses - - - - Total tobacco cost of goods sold 23.7 (0.3 ) (1.3 ) 24.0 Average cost per kilo 4.09 (0.35 ) (7.9 ) 4.44 Processing and other revenues costs of services sold 1.8 0.1 5.9 1.7 Total cost of goods and services sold 25.5 (0.2 ) (0.8 ) 25.7 Gross profit 5.9 0.6 11.3 5.3 Selling, general and administrative expenses 3.0 0.3 11.1 2.7 Other income - - - - Restructuring and asset impairment charges - - - - Operating income $ 2.9$ 0.3 11.5 $ 2.6 Total sales and other operating revenues increased 1.3% to $31.4 million primarily due to a 7.4% increase in volumes as our Jordan location begins its second full year of operations that were partially offset by a 5.7% decrease in average selling prices due to product mix. Decreases in tobacco costs of sales and costs per kilo were attributable to increased throughput which lowered our conversion costs as well as product mix. As a result, our gross margin improved 11.3% to $5.9 million and our gross margin as a percentage of sales increased from 17.1% to 18.8%. SG&A increases were due to allocations for general corporate services. For the quarter, our operating income increased 11.5% to $2.9 million compared to same quarter last year. 26 --------------------------------------------------------------------------------



Alliance One International, Inc. and Subsidiaries

Item 2. Management's Discussion and Analysis of

Financial Condition and Results of Operations (continued)

Results of Operations (continued)

Three Months Ended June 30, 2014 Compared to Three Months Ended June 30, 2013 (continued)

Other Regions



Other Regions Supplemental Information

Three Months Ended June 30, Change (in millions, except per kilo amounts) 2014 $ % 2013 Kilos sold 30.9 (8.0 ) (20.6 ) 38.9 Tobacco sales and other operating revenues: Sales and other operating revenues $ 151.1$ (11.8 ) (7.2 ) $ 162.9 Average price per kilo 4.89 0.70 16.7 4.19 Processing and other revenues 4.4 1.7 63.0 2.7 Total sales and other operating revenues 155.5 (10.1 ) (6.1 ) 165.6 Tobacco cost of goods sold Tobacco costs 132.6 (10.2 ) (7.1 ) 142.8 Transportation, storage and other period costs 5.7 (7.6 ) (57.1 ) 13.3 Derivative financial instrument and exchange losses 1.2 (1.2 ) (50.0 ) 2.4 Total tobacco cost of goods sold 139.5 (19.0 ) (12.0 ) 158.5 Average cost per kilo 4.51 0.44 10.8 4.07 Processing and other revenues costs of services sold 2.4 1.2 100.0 1.2 Total cost of goods and services sold 141.9 (17.8 ) (11.1 ) 159.7 Gross profit 13.6 7.7 130.5 5.9 Selling, general and administrative expenses 18.3 (3.0 ) (14.1 ) 21.3 Other income (0.2 ) (0.3 ) (300.0 ) 0.1 Restructuring and asset impairment charges - (2.2 ) (100.0 ) 2.2 Operating income (loss) $ (4.9 )$ 12.6 72.0 $ (17.5 ) Total sales and other operating revenues decreased 6.1% to $155.5 million due to decreased tobacco sales revenue. Processing revenues and cost of services increases were due to increased customer volumes in the United States. Tobacco sales revenue and cost decreases were mainly from lower volumes as a result of opportunistic sales in the prior year that did not occur this year as well as shipments in the prior year that had been delayed from fiscal 2013. Total tobacco costs also decreased due to lower period costs as a result of the prior year containing $11.0 million expensed in Zambia primarily related to reduced recoveries of advances to tobacco suppliers. Although prices paid to African tobacco suppliers in the current year are lower in response to the global oversupply market, our average sales price and tobacco cost per kilo increased primarily attributable to product mix and customer mix in Asia and Europe. Although total revenues and costs decreased due to lower volumes, primarily the non-recurrence of the prior year charge for lower recoveries from Zambian tobacco suppliers resulted in a 130.5% increase in gross margin to $13.6 million and an increase in gross margin as a percentage of sales from 3.6% to 8.7%. Decreases in SG&A are associated with reductions in incentive compensation, professional fees and amortization related to internally developed software. The prior year included restructuring and asset impairment charges related to a joint processing venture in Turkey and equipment charges in Africa. As a result of the changes in results for the region, operating income increased 72.0% from $(17.5) million last year to $(4.9) million this year. 27 --------------------------------------------------------------------------------



Alliance One International, Inc. and Subsidiaries

LIQUIDITY AND CAPITAL RESOURCES:

Overview

Our business is seasonal, and purchasing, processing and selling activities have several associated peaks where cash on hand and outstanding indebtedness may be significantly greater or less than at fiscal year-end. We utilize capital in excess of cash flow from operations to finance accounts receivable, inventory and advances to tobacco suppliers in foreign countries, including Argentina, Brazil, Guatemala, Malawi, Tanzania, Turkey and Zambia. In addition, from time to time, we may elect to purchase, redeem, repay, retire or cancel indebtedness prior to stated maturity under our various foreign credit lines, senior secured credit agreement or indentures, as permitted therein. As of June 30, 2014, we are approaching the seasonally adjusted high for our South American crop lines as we are completing purchasing and processing in these markets with shipping stepping into full mode. In Africa, purchasing will continue through August in most sourcing areas while processing and consequently shipping will peak in the second and third quarters. In Asia, the Chinese crop is fully processed and the Thai crops are fully purchased, with significant shipping still to come, while some Indian traditional crop is still left to purchase and process. The Indonesian purchasing season begins in August. Europe has completed purchases of the 2014 crop and is finishing processing with most shipping to come. North America is preparing to begin flue cured purchasing in August with processing and shipping to follow, which will commence its seasonally elevated working capital needs. Fluctuation of the U.S. dollar versus many of the currencies in which we have costs may continue to have an impact on our working capital requirements; as such, we will monitor and hedge foreign currency costs actively, and as needed on a currency-by-currency basis. Working Capital Our working capital decreased from $819.4 million at March 31, 2014 to $731.0 million at June 30, 2014. Our current ratio was 1.9 to 1 at June 30, 2014 compared to 2.6 to 1 at March 31, 2014. The decrease in working capital is primarily attributable to increased notes payable that was partially offset by increased inventories and advances to tobacco suppliers as the South America and Africa crops are currently being purchased and processed. Working capital also decreased due to increased cash used for operations and to reduce payables according to payment terms. The following table is a summary of items from the Condensed Consolidated Balance Sheets and Condensed Statements of Consolidated Cash Flows. Approximately $18.8 million of our outstanding cash balance at June 30, 2014 was held in foreign jurisdictions. As a result of our cash needs abroad, it is our intention to permanently reinvest these funds in foreign jurisdictions regardless of the fact that, due to the valuation allowance on foreign tax credit carryovers, the cost of repatriation would not have a material financial impact.


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Source: Edgar Glimpses


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