Quarterly Report (10-q)

Date : 02/11/2019 @ 9:38PM
Source : Edgar (US Regulatory)
Stock : Pyxus International, Inc. (PYX)
Quote : 27.82  -1.84 (-6.20%) @ 10:55PM

Quarterly Report (10-q)

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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, 2018.

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______ TO _______.
PYX-20181231_G1.JPG
Pyxus 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, 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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “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   []  
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 January 31, 2019, the registrant had 9,080,984 shares outstanding of Common Stock (no par value) excluding 785,313 shares owned by a wholly owned subsidiary.
-1-


PYX-20181231_G2.JPG
Pyxus International, Inc. and Subsidiaries
Table of Contents 
Page No. 
Part I. 
Item 1. 
Financial Statements (Unaudited)
Three and Nine Months Ended December 31, 2018 and 2017 
Three and Nine Months Ended December 31, 2018 and 2017 
December 31, 2018 and 2017 and March 31, 2018
Nine Months Ended December 31, 2018 and 2017 
Nine Months Ended December 31, 2018 and 2017
Item 2. 
of Financial Condition and Results of Operations 
Item 3. 
Item 4. 
Part II. 
Item 1. 
Item 1A. 
Item 6. 

-2-


Part I. Financial Information

Item 1. Financial Statements


Pyxus International, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three and Nine Months Ended December 31, 2018 and 2017 
(Unaudited)
Three Months Ended December 31, Nine Months Ended December 31,
(in thousands, except per share data)  2018 2017 2018 2017
Sales and other operating revenues $ 524,487  $ 477,783  $ 1,210,351  $ 1,202,115 
Cost of goods and services sold 449,776  404,282  1,045,042  1,030,648 
Gross profit 74,711  73,501  165,309  171,467 
Selling, general, and administrative expenses 41,680  34,283  118,759  102,248 
Other income, net 7,991  1,019  13,473  9,909 
Restructuring and asset impairment charges 1,667  —  3,390  — 
Operating income 39,355  40,237  56,633  79,128 
Debt retirement expense (benefit) (1,281) —  (1,754) (2,975)
Interest expense (includes debt amortization of $2,325 and $2,734 for the three months and $7,020 and $7,921 for the nine months ended December 31, 2018 and 2017, respectively) 33,947  33,564  102,182  101,105 
Interest income 962  601  2,587  2,295 
Income (loss) before income taxes and other items 7,651  7,274  (41,208) (16,707)
Income tax expense (benefit) 17,354  (73,282) 26,900  (66,233)
Equity in net income of investee companies 4,701  7,770  6,852  7,121 
Net (loss) income (5,002) 88,326  (61,256) 56,647 
Net income (loss) attributable to noncontrolling interests 93  (130) (769) (289)
Net (loss) income attributable to Pyxus International, Inc. $ (5,095) $ 88,456  $ (60,487) $ 56,936 
(Loss) earnings per share:
Basic  $ (0.56) $ 9.83  $ (6.69) $ 6.34 
Diluted  $ (0.56) $ 9.80  $ (6.69) $ 6.32 
Weighted average number of shares outstanding:
Basic  9,068  9,001  9,048  8,982 
Diluted  9,068  9,029  9,048  9,009 
See "Notes to Condensed Consolidated Financial Statements"


-3-



Pyxus International, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
Three and Nine Months Ended December 31, 2018 and 2017 
(Unaudited)
Three Months Ended December 31, Nine Months Ended December 31,
(in thousands)  2018 2017 2018 2017
Net (loss) income $ (5,002) $ 88,326  $ (61,256) $ 56,647 
Other comprehensive (loss) income, net of tax:
Currency translation adjustment (2,310) 725  (7,628) 6,817 
Defined benefit pension amounts reclassified to income 285  459  853  1,376 
Change in pension liability for settlements (1,162) —  (391) — 
Change in the fair value of derivatives designated as cash flow hedges (3,752) (64) (3,752) (626)
Amounts reclassified to income for derivatives 2,161  656  1,445  727 
Total other comprehensive (loss) income, net of tax (4,778) 1,776  (9,473) 8,294 
Total comprehensive (loss) income (9,780) 90,102  (70,729) 64,941 
Comprehensive loss attributable to noncontrolling interests (430) (130) (1,216) (289)
Comprehensive (loss) income attributable to Pyxus International, Inc. $ (9,350) $ 90,232  $ (69,513) $ 65,230 
See "Notes to Condensed Consolidated Financial Statements"


-4-


Pyxus International, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS  
(Unaudited)
(in thousands)  December 31, 2018 December 31, 2017
March 31,
2018
ASSETS 
Current assets 
Cash and cash equivalents  $ 209,160  $ 209,490  $ 264,660 
Restricted cash  6,335  2,210  2,984 
Trade receivables, net  268,747  222,451  285,554 
Other receivables  21,305  18,366  18,845 
Accounts receivable, related parties  5,077  9,832  8,188 
Inventories  827,782  905,680  698,087 
Advances to tobacco suppliers  51,135  69,872  30,482 
Recoverable income taxes  8,538  19,025  5,994 
Prepaid expenses  17,325  17,730  17,181 
Other current assets  16,212  16,774  17,628 
Total current assets  1,431,616  1,491,430  1,349,603 
Restricted cash  389  539  389 
Investments in unconsolidated affiliates  68,351  67,069  68,151 
Goodwill  34,109  16,463  27,546 
Other intangible assets  70,074  41,837  70,724 
Deferred income taxes, net  106,610  128,979  130,520 
Long-term recoverable income taxes  898  —  1,795 
Other deferred charges  2,634  3,848  3,388 
Other noncurrent assets  44,256  54,552  60,234 
Property, plant, and equipment, net  264,782  249,471  254,281 
Total assets  $ 2,023,719  $ 2,054,188  $ 1,966,631 
LIABILITIES AND STOCKHOLDERS’ EQUITY 
Current liabilities 
Notes payable to banks  $ 583,407  $ 536,170  $ 427,277 
Accounts payable  49,373  46,678  76,506 
Accounts payable, related parties  18,372  22,939  14,835 
Advances from customers  45,900  31,646  24,128 
Accrued expenses and other current liabilities  98,233  92,446  88,380 
Income taxes payable  6,513  14,902  6,767 
Current portion of long-term debt  165  142  164 
Total current liabilities  801,963  744,923  638,057 
Long-term taxes payable  10,718  15,110  10,027 
Long-term debt  897,195  918,820  920,143 
Deferred income taxes  12,437  15,649  28,937 
Liability for unrecognized tax benefits  11,026  10,522  11,191 
Pension, postretirement, and other long-term liabilities  72,013  76,442  75,448 
Total liabilities  1,805,352  1,781,466  1,683,803 
Commitments and contingencies 
Stockholders’ equity  December 31, 2018 December 31, 2017
March 31,
2018
Common Stock—no par value: 
Authorized shares  250,000  250,000  250,000 
Issued shares  9,866  9,794  9,808  474,603  473,156  473,476 
Retained deficit  (213,905) (151,848) (156,348)
Accumulated other comprehensive loss  (57,218) (51,753) (45,262)
Total stockholders’ equity of Pyxus International, Inc.  203,480  269,555  271,866 
Noncontrolling interests  14,887  3,167  10,962 
Total stockholders’ equity  218,367  272,722  282,828 
Total liabilities and stockholders’ equity  $ 2,023,719  $ 2,054,188  $ 1,966,631 
See "Notes to Condensed Consolidated Financial Statements"


-5-


Pyxus International, Inc. and Subsidiaries
CONDENSED STATEMENTS OF CONSOLIDATED STOCKHOLDERS' EQUITY
Nine Months Ended December 31, 2018 
(Unaudited)
Attributable to Pyxus 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 Stockholders' Equity  
Balance, March 31, 2018 $ 473,476  $ (156,348) $ (12,682) $ (32,580) $ —  $ 10,962  $ 282,828 
Net loss  —  (759) —  —  —  (654) (1,413)
Stock-based compensation  295  —  —  —  —  —  295 
Purchase of investment in subsidiary  —  —  —  —  —  5,531  5,531 
Other comprehensive (loss) income, net of tax  —  —  (5,136) 366  (1,496) (175) (6,441)
Balance, June 30, 2018  473,771  (157,107) (17,818) (32,214) (1,496) 15,664  280,800 
Net loss  —  (54,634) —  —  —  (208) (54,842)
Restricted stock surrender  (8) —  —  —  —  —  (8)
Stock-based compensation  458  —  —  —  —  —  458 
Other comprehensive (loss) income, net of tax  —  —  (257) 973  780  251  1,747 
Balance, September 30, 2018  474,221  (211,741) (18,075) (31,241) (716) 15,707  228,155 
Net (loss) income  —  (5,095) —  —  —  93  (5,002)
Restricted stock surrender  (20) —  —  —  —  —  (20)
Stock-based compensation  402  —  —  —  —  —  402 
Dividends paid  —  —  —  —  —  (390) (390)
Impact of adoption of ASU 2018-02  —  2,931  —  (2,931) —  —  — 
Other comprehensive loss, net of tax  —  —  (1,787) (877) (1,591) (523) (4,778)
Balance, December 31, 2018 $ 474,603  $ (213,905) $ (19,862) $ (35,049) $ (2,307) $ 14,887  $ 218,367 


-6-


Pyxus International, Inc. and Subsidiaries
CONDENSED STATEMENTS OF CONSOLIDATED STOCKHOLDERS' EQUITY
Nine Months Ended December 31, 2017 
(Unaudited)
Attributable to Pyxus 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 Stockholders' Equity  
Balance, March 31, 2017 $ 472,349  $ (208,784) $ (22,293) $ (36,654) $ (1,100) $ 3,192  $ 206,710 
Net loss —  (32,543) —  —  —  (90) (32,633)
Stock-based compensation 291  —  —  —  —  —  291 
Other comprehensive income (loss), net of tax —  —  3,742  459  (562) —  3,639 
Balance, June 30, 2017 472,640  (241,327) (18,551) (36,195) (1,662) 3,102  178,007 
Net income (loss) —  1,024  —  —  —  (68) 956 
Restricted stock surrender (2) —  —  —  —  —  (2)
Stock-based compensation 253  —  —  —  —  —  253 
Other comprehensive income, net of tax —  —  2,349  459  71  —  2,879 
Balance, September 30, 2017* 472,892  (240,304) (16,202) (35,736) (1,591) 3,033  182,092 
Net income (loss)  —  88,456  —  —  —  (130) 88,326 
Restricted stock surrender  (6) —  —  —  —  —  (6)
Stock-based compensation  270  —  —  —  —  —  270 
Purchase of additional investment in subsidiary  —  —  —  —  —  264  264 
Other comprehensive income, net of tax  —  —  726  458  592  —  1,776 
Balance, December 31, 2017 $ 473,156  $ (151,848) $ (15,476) $ (35,278) $ (999) $ 3,167  $ 272,722 
*Amounts may not equal column totals due to rounding
See "Notes to Condensed Consolidated Financial Statements"


-7-


Pyxus International, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS  
Nine Months Ended December 31, 2018 and 2017
(Unaudited)
(in thousands)  December 31, 2018 December 31, 2017
OPERATING ACTIVITIES: 
Net (loss) income $ (61,256) $ 56,647 
Adjustments to reconcile net income to net cash used by operating activities:
Depreciation and amortization 26,887  24,845 
Debt amortization/interest 8,739  9,514 
Debt retirement benefit (1,754) (2,975)
(Gain) loss on foreign currency transactions  (1,220) 4,951 
Restructuring and asset impairment charges 3,390  — 
Gain on sale of property, plant, and equipment (2,155) (89)
Gain on insurance proceeds received for destroyed buildings (6,460) — 
Equity in net income of unconsolidated affiliates, net of dividends (1,486) (5,025)
Bad debt expenses (recovery) 2,136  (122)
Stock-based compensation 1,155  869 
Changes in operating assets and liabilities, net (317,612) (519,946)
Other, net 11,143  1,129 
Net cash used by operating activities (338,493) (430,202)
INVESTING ACTIVITIES: 
Purchases of property, plant, and equipment (35,327) (17,395)
Proceeds from sale of property, plant, and equipment 5,179  1,832 
Collections on beneficial interests on securitized trade receivables 171,565  183,610 
Insurance proceeds received for destroyed buildings 6,460  — 
Payments to acquire controlling interests, net of cash acquired (8,692) — 
Payments to acquire equity method investment —  (10,000)
Other, net (886) (119)
Net cash provided by investing activities 138,299  157,928 
FINANCING ACTIVITIES: 
Net proceeds from short-term borrowings 173,548  48,159 
Repayment of long-term borrowings (25,132) (34,961)
Debt issuance cost (5,072) (5,010)
Other, net (459) (72)
Net cash provided by financing activities 142,885  8,116 
Effect of exchange rate changes on cash 5,160  978 
Decrease in cash, cash equivalents, and restricted cash (52,149) (263,180)
Cash and cash equivalents at beginning of period 264,660  473,110 
Restricted cash at beginning of period 3,373  2,309 
Cash, cash equivalents, and restricted cash at end of period $ 215,884  $ 212,239 
Other information:
Cash paid for income taxes $ 19,650  $ 12,719 
Cash paid for interest 81,622  79,083 
Cash received from interest (2,340) (1,647)
Non-cash amounts obtained as a beneficial interest in exchange for transferring
trade receivables in a securitization transaction
161,943  177,259 
See "Notes to Condensed Consolidated Financial Statements"

-8-


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

1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The Company changed its name from Alliance One International, Inc. to Pyxus International, Inc. on September 12, 2018. Due to the seasonal nature of the Company’s business, the results of operations for any fiscal quarter are not necessarily indicative of the operating results that may be attained for other quarters or a full fiscal year. In the opinion of management, all normal and recurring adjustments necessary for fair statement of financial position, results of operations, and cash flows at the dates and for the periods presented have been included. All intercompany accounts and transactions have been eliminated.

These financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) for interim information and with the instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for annual financial statements. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2018.
 
Segments

During the three months ended December 31, 2018, the Company realigned its reportable segments to reflect changes to how the business is managed and results are reviewed by the Company's chief operating decision maker. In connection with the "One Tomorrow Transformation" initiative, the Company changed its organizational structure to support its diversified business lines. Prior to the realignment, the Company assessed financial information based on geographic regions. The Company's diversification efforts have resulted in management placing emphasis on data by business line in addition to the historical focus by geography. As a result of this realignment, the reportable segments now include Leaf - North America, Leaf - Other Regions, and Other Products and Services. Prior period segment financial information has been revised to conform to the current year presentation.

Taxes Collected from Customers

Certain subsidiaries are subject to value-added taxes on local sales. The amounts included in sales and other operating revenues and cost of goods and services sold were $4,858 and $2,703 for the three months ended December 31, 2018 and 2017, respectively, and $14,692 and $13,801 for the nine months ended December 31, 2018 and 2017, respectively.

Restricted Cash

As of December 31, 2018 and 2017, and March 31, 2018, $1,220, $2,006 and $1,261 of cash was held on deposit as a compensating balance for short-term borrowings, respectively. As of December 31, 2018 and 2017, and March 31, 2018, zero, zero, and $1,487 of cash was restricted for capital investment, respectively. As of December 31, 2018 and 2017, and March 31, 2018, $2,314, zero, and zero of cash was held in escrow from receipt of customer payments.

As of December 31, 2018, the Company held $2,644 in the Zimbabwe Real Time Gross Settlement (“RTGS”) system. RTGS is a local currency equivalent that provides for exchange 1:1 with the U.S. Dollar ("USD"). In order to exchange RTGS 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.

Property, Plant, and Equipment

Total property and equipment purchases for the nine months ended December 31, 2018 and 2017 included $1,501 and $279 that were unpaid and included in accounts payable, respectively. Property and equipment sales for the nine months ended December 31, 2018 and 2017 included $1,473 and zero that were uncollected and included in receivables, respectively.

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

Capitalized Interest

Interest is capitalized on significant construction in progress using the weighted average interest rate during the capitalization period. Interest of $1,578 and zero was capitalized for the three months and nine months ended December 31, 2018 and 2017, respectively. Capitalized interest of $1,197 is included in property, plant, and equipment, net in the condensed consolidated balance sheets. Capitalized interest of $381 is included in investments in unconsolidated affiliates in the condensed consolidated balance sheets.

Recently Adopted Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update ("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. The Company adopted this guidance on April 1, 2018 for all contracts using the modified retrospective approach. The adoption of this guidance did not have a material impact on the condensed consolidated financial statements. The adoption of this guidance resulted in additional disclosures. See "Note 2. Revenue Recognition" for more information.

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. The Company adopted this guidance on April 1, 2018 using the retrospective approach. The adoption of this guidance resulted in the following changes as of December 31, 2017 to the condensed consolidated statement cash flows: cash collections from beneficial interests of $183,610 was reclassified from operating activities to investing activities and $177,259 obtained as a beneficial interest for transferring trade receivables in a securitization transaction has been added as a non-cash disclosure.

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. The Company adopted this guidance on April 1, 2018 using the retrospective approach. The adoption of this guidance resulted in the following changes: a reclassification of $2,749 and $3,373 from other current and other long-term assets in total to separately stated line items for restricted cash in the condensed consolidated balance sheets as of December 31, 2017 and March 31, 2018, respectively; the change in restricted cash of $440 presented in investing activities in the consolidated statements of cash flows is eliminated as of December 31, 2017; and the inclusion of $2,749 of restricted cash in the calculation of cash, cash equivalents, and restricted cash at the end of the period in the condensed consolidated statements of cash flows as of December 31, 2017.

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. The Company adopted this guidance on April 1, 2018 using the retrospective approach. The adoption of this guidance resulted in a reclassification of $342 and $1,026 from selling, general, and administrative expenses to interest expense in the condensed consolidated statement of operations for the three months and nine months ended December 31, 2017, respectively. See "Note 13. Pension and Other Postretirement Benefits" for more information.

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 Company early adopted this guidance on April 1, 2018 using the modified retrospective approach. The adoption of this guidance did not have a material impact on the condensed consolidated financial statements and related disclosures.

-10-


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

In February 2018, the FASB issued ASU No. 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. ASU 2018-02 allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Job Acts (the "Tax Act"). The tax effects unrelated to the Tax Act are released from accumulated other comprehensive income using either the specific identification approach or the portfolio approach based on the nature of the underlying item. The Company adopted this guidance on December 31, 2018 using modified retrospective approach. The adoption of this guidance resulted in a reclassification of $2,931 of stranded tax effects from accumulated other comprehensive loss to retained deficit due to reduction in federal corporate tax rate. The stranded tax effects are derived from the deferred tax balance on pension obligations as a result of the lower U.S. Federal Corporate tax rate.

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement . ASU 2018-13 eliminates, adds, and modifies certain disclosure requirements for fair value measurements. The Company adopted this guidance prospectively on September 30, 2018. The adoption of this guidance resulted in the addition of the weighted average of the significant observable inputs used to develop Level 3 fair value measurements in its disclosures. See "Note 17. Fair Value Measurements" for more information.

Recent Accounting Pronouncements Not Yet Adopted

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). Subsequently, the FASB has issued ASUs which further clarify this guidance. ASU 2016-02 requires lessees to recognize right-of-use assets and liabilities arising from leases on the balance sheet. In addition, leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. This guidance also requires disclosures about the amount, timing, and uncertainty of cash flows arising from leases. This guidance will be adopted using a modified retrospective approach and is effective for the Company on April 1, 2019. The Company has formed a project team to evaluate and implement this guidance. The Company has completed a scoping assessment of leasing arrangements and service agreements. The Company has elected to adopt an accounting policy for all asset classes to include both the lease and non-lease components as a single component and account for it as a lease. The Company has elected to utilize the transition practical expedients, as prescribed in ASC 842-10-65-1(f). The adoption of this guidance is expected to materially increase assets and liabilities on the consolidated balance sheets. The impact on our results of operations and cash flows is not expected to be material. The Company does not expect the adoption of this guidance to have a material impact on its existing debt covenants.

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 will be adopted using a modified retrospective approach and is effective for the Company on April 1, 2020. The Company is evaluating the effect that adoption of this guidance will have on its consolidated financial statements and related disclosures.

In August 2018, the FASB issued ASU No. 2018-14, Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans . ASU 2018-14 removes disclosures, clarifies specific disclosure requirements, and adds disclosure requirements. This guidance will be adopted using a retrospective approach and is effective for the Company on March 31, 2020. The Company is evaluating the effect that adoption of this guidance will have on its consolidated financial statements and related disclosures.

In October 2018, the FASB issued ASU No. 2018-17, Consolidation (Topic 810): Targeted Improvements to the Related Party Guidance for Variable Interest Entities. ASU 2018-17 changes how entities evaluate decision-making fees under the variable interest entity guidance. To determine whether decision-making fees represent a variable interest, an entity considers indirect interests held through related parties under common control on a proportional basis, rather than in their entirety. This guidance will be adopted using a retrospective approach and is effective for the Company on April 1, 2020. The Company is evaluating the effect that adoption of this guidance will have on its consolidated financial statements and related disclosures.

2. REVENUE RECOGNITION

The Company derives revenue from contracts with customers, primarily from the sale of processed tobacco and fees charged for processing and related services to the manufacturers of tobacco products. The Company does not disclose information related to its unsatisfied performance obligations with an expected duration of one year or less. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer. The Company’s performance obligations are satisfied when the transfer of control of the distinct product or service to the customer occurs. For products, control is transferred and revenue is recognized at a point in time, in accordance with the shipping terms of the contract. For services, control is transferred and
-11-


2. REVENUE RECOGNITION (continued)

revenue is recognized over time using the input method based on a kilogram of packed tobacco. The Company applied a practical expedient to account for shipping and handling costs as costs to fulfill its performance obligations, irrespective of when control transfers. A kilogram of processed tobacco (or tobacco processing services resulting in a kilogram of processed tobacco) is the material and distinct performance obligation for the Company’s tobacco revenue streams; therefore, consideration is attributed to the performance of this obligation. Revenue is measured as the amount of consideration to which the Company expects to be entitled to receive in exchange for transferring goods or providing services. Contract costs primarily include labor, material, shipping and handling, and overhead expenses. 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.

The following disaggregates sales and other operating revenues by major source:

Three Months Ended December 31, 2018 Nine Months Ended December 31, 2018
Leaf - North America:
Product revenue $ 60,280  $ 152,725 
Processing and other revenues 17,570  29,039 
Total sales and other operating revenues 77,850  181,764 
Leaf - Other Regions:
Product revenue 432,423  977,503 
Processing and other revenues 9,296  40,752 
Total sales and other operating revenues 441,719  1,018,255 
Other Products and Services:
Total sales and other operating revenues 1
4,918  10,332 
Total sales and other operating revenues $ 524,487  $ 1,210,351 
(1) Other products and services is primarily composed of revenue from the sale of legal cannabis in Canada and e-liquids product revenue.

Product revenue is primarily processed tobacco sold to the customer. Processing and other revenues are mainly contracts to process green tobacco owned and provided by the customers. During processing, ownership remains with the customers and the Company is engaged to perform processing services.

Assets Recognized from the Costs to Obtain a Contract with a Customer

The Company records product and supply contract intangible assets for the incremental costs of obtaining a contract with a customer if the Company expects the benefit of those costs to be longer than one year, and if such costs are material. The Company applied a practical expedient to expense costs as incurred for costs to obtain a contract when the amortization period would have been one year or less. Capitalized costs to obtain a contract as of December 31, 2018 were $4,896 and classified as other intangible assets. See "Note 5. Goodwill and Intangibles” for more information.

Significant Judgments

The Company has identified two main forms of variable consideration in its contracts with customers: warehousing fees for storing customer-controlled tobacco until the customer requests shipment and claims resulting from tobacco that do not meet customer specifications. Warehousing fees are built into the price of tobacco based on the customers' best estimate of the date they will request shipment or separately charged using a per-day storage rate. When the Company enters into a contract with a customer, the price communicated is the amount of consideration the Company expects to receive. Price adjustments for tobacco not meeting customer specifications for shrinkage, improper blend or chemical makeup, etc. are handled through a claims allowance that is assessed quarterly.

-12-


2. REVENUE RECOGNITION (continued)

The following summarizes activity in the claims allowance:

Three Months Ended December 31, 2018 Nine Months Ended December 31, 2018
Balance, beginning of period $ 1,360  $ 1,100 
Additions 526  2,258 
Payments (476) (1,948)
Balance, end of period $ 1,410  $ 1,410 

Contract Balances

The Company generally records a receivable when revenue is recognized. Timing of revenue recognition may differ from the timing of payment from customers. Payment terms and conditions vary by contract, although terms generally include a requirement of payment within 30 to 60 days. The Company applied a practical expedient not to adjust the transaction price for the effects of financing components as the Company expects that the period between when the Company transfers a promised good or service to a customer and when the customer pays for that good or service will be one year or less. As a result, where the timing of revenue recognition differs from the timing of payment, the Company determined its contracts do not include a significant financing component.

The allowance for doubtful accounts reflects the Company’s best estimate of probable losses inherent in the trade receivables, net balance. The Company determines the allowance based on historical experience, and other currently available information. The following summarizes activity in the allowance for doubtful accounts:

Three Months Ended December 31, 2018 Nine Months Ended December 31, 2018
Balance, beginning of period $ (7,324) $ (7,055)
Additions (1,774) (2,136)
Writes-offs (15) 78 
Balance, end of period (9,113) (9,113)
Trade receivables 277,860  277,860 
Trade receivables, net $ 268,747  $ 268,747 

3. INCOME TAXES

Accounting for Uncertainty in Income Taxes

As of December 31, 2018, the Company’s unrecognized tax benefits totaled $9,153, of which $8,912 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, 2018, accrued interest and penalties totaled $1,176 and $939, respectively. The Company expects to continue accruing interest expense related to the unrecognized tax benefits described above. The Company may be subject to fluctuations in the unrecognized tax benefit due to currency exchange rate movements.

During the nine months ended December 31, 2018, the Company reached an income tax settlement with the Kenyan Revenue Authority for $1,166. An uncertain tax position had previously been recorded of $2,692, which resulted in a favorable adjustment to tax expense (as the amount was settled for less than it was accrued) which totaled $1,526. Furthermore, the Company recorded additional unrecognized tax benefits of $1,987 for a return position taken in Kenya related to currency exchange losses on its amended Kenyan tax return for years 2013 - 2015. In addition, the Company entered into negotiations with the Zimbabwe Revenue Authority during its amnesty program to settle asserted issues. The Company has thus far paid $2,988 and has accrued another $964 in anticipation of the settlement. These amounts have not previously been accrued as an uncertain tax position.

The Company does not currently foresee any changes in the amount of its 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
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3. INCOME TAXES (continued)

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, 2018, the Company’s earliest open tax year for U.S. federal income tax purposes is its fiscal year ended March 31, 2015; 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.

Enactment of Tax Cuts and Jobs Act (“Tax Act”)

In December 2017, the SEC staff issued Staff Accounting Bulletin 118 (“SAB 118”), which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC Topic 740—Income Taxes. As a result of the Tax Act, and in accordance with SAB 118, the Company recorded provisional tax expense in the three months ended December 31, 2017 related to the deemed repatriation tax, the revaluation of deferred tax assets, and adjustments to liabilities related to the repatriation of foreign earnings.

During the nine months ended December 31, 2018, the Company recorded adjustments to the provisional tax expense initially recorded in the December 31, 2017 financial statements upon adoption of the Tax Act. An adjustment of $1,827 was made, increasing the deemed repatriation tax liability. As a result of this adjustment, deferred taxes related to future remittances of foreign earnings were impacted by an immaterial amount. The changes were a result of additional regulatory guidance that was issued, as well as further analysis of the Tax Act and the Company’s facts and circumstances. Additionally, the Company will continue to be impacted by the expanded interest limitation and the tax on Global Intangible Low-Taxed Income (“GILTI”), which the Company has elected to treat as a period cost if and when incurred. As of December 31, 2018, the Company has completed the accounting for the income tax effects of the Tax Act.

Provision for the Nine Months Ended December 31, 2018 

The effective tax rate used for the nine months ended December 31, 2018 and 2017 was (65.3)% and 396.4%, respectively. The primary difference in the effective tax rate this year compared to last year is the impact of U.S. tax reform, which resulted in a change in the taxability of operations, principally due to the impact of the new section 163(j) interest addback and GILTI. The impact was accentuated by the net foreign exchange effects. The significant difference in the effective tax rate for the nine months ended December 31, 2018 from the U.S. federal statutory rate is primarily due to the impact of U.S. tax reform and changes resulting from net foreign exchange effects.

The Company's quarterly provision for income taxes has historically been calculated using the annual effective tax rate method (“AETR method”), which applies an estimated annual effective tax rate to pre-tax income or loss. Consistent with the period ended September 30, 2018, the Company recorded its interim income tax provision using the discrete method as of December 31, 2018, as allowed under ASC 740-270, Accounting for Income Taxes - Interim Reporting. The Company utilized the discrete method, rather than the AETR method, due to significant variations in income tax expense, primarily driven by U.S. tax reform, relative to projected annual pre-tax income (loss) that would have resulted in a disproportionate and unreliable effective tax rate under the AETR method. Using the discrete method, the Company determined current and deferred income tax expense as if the interim period were an annual period.

4. GUARANTEES

The following summarizes amounts guaranteed and the fair value of those guarantees:

December 31, 2018 December 31, 2017 March 31, 2018
Amounts guaranteed (not to exceed) $ 176,762  $ 165,333  $ 150,900 
Amounts outstanding under guarantee 79,336  96,154  126,835 
Fair value of guarantees 2,890  2,913  5,864 

Of the guarantees outstanding at December 31, 2018, most expire within one year. As of December 31, 2018 and 2017, and March 31, 2018, respectively, the Company had balances of zero, zero, and $14,807 due to local banks on behalf of suppliers included in accounts payable in the condensed consolidated balance sheets.

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5. GOODWILL AND INTANGIBLES

The following summarizes goodwill and other intangible assets:  
 
December 31, 2018
  Weighted Average Remaining Useful Life  Beginning Gross Carrying Amount  Additions  Accumulated Amortization  Impact of Foreign Currency Translation  Ending Intangible Assets, Net 
Intangibles subject to amortization: 
Customer relationships  9.77 years $ 58,530  $ 5,450  $ (28,021) $ —  $ 35,959 
Production and supply contracts  3.10 years 14,893  —  (9,997) —  4,896 
Internally developed software  3.66 years 18,812  759  (18,229) —  1,342 
Licenses  19.11 years 30,339  17  (1,277) (1,655) 27,424 
Trade names  7.25 years —  500  (47) —  453 
Intangibles not subject to amortization: 
Goodwill  27,546  7,174  —  (611) 34,109 
Total  $ 150,120  $ 13,900  $ (57,571) $ (2,266) $ 104,183 

March 31, 2018
  Weighted Average Remaining Useful Life  Beginning Gross Carrying Amount  Additions  Accumulated Amortization  Ending Intangible Assets, Net 
Intangibles subject to amortization: 
Customer relationships  10.85 years $ 58,530  $ —  $ (25,005) $ 33,525 
Production and supply contracts  3.82 years 14,893  —  (8,774) 6,119 
Internally developed software  2.82 years 18,581  231  (17,828) 984 
Licenses  19.84 years —  30,339  (243) 30,096 
Intangibles not subject to amortization: 
Goodwill  16,463  11,083  —  27,546 
Total  $ 108,467  $ 41,653  $ (51,850) $ 98,270 

The following summarizes the estimated future intangible asset amortization expense:

For Fiscal
Years Ended
Customer
Relationships 
Production
and Supply
Contracts 
Internally
Developed
Software* 
Licenses Trade Names Total
January 1, 2019 through March 31, 2019  $ 1,005  $ 516  $ 139  $ 360  $ 16  $ 2,036 
2020  4,022  1,741  445  1,439  63  7,710 
2021  4,022  1,397  284  1,439  63  7,205 
2022  4,022  1,242  211  1,437  63  6,975 
2023  4,022  —  179  1,434  63  5,698 
Later  18,866  —  84  21,315  185  40,450 
$ 35,959  $ 4,896  $ 1,342  $ 27,424  $ 453  $ 70,074 
*Estimated amortization expense for the internally developed software is based on costs accumulated as of December 31, 2018. These estimates will change as new costs are incurred and until the software is placed into service in all locations.


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6. VARIABLE INTEREST ENTITIES

The Company holds variable interests in multiple entities that primarily procure or process inventory on behalf of the Company  and other parties or are securitization entities. These variable interests relate to equity investments, advances, guarantees made by the Company, and securitized receivables. The Company is not the primary beneficiary of the majority of its variable interests in variable interest entities, as it does not have the power to direct the activities that most significantly impact the economic performance of the entities due to the entities’ management and board of directors’ structure. As a result, the majority of these variable interest entities are not consolidated. The Company holds a majority voting interest and is the primary beneficiary of its variable interest in Humble Juice Co., LLC, a consolidated entity for which the related intercompany accounts and transactions have been eliminated.

As of December 31, 2018 and 2017, and March 31, 2018, the Company’s investment in variable interest entities was $62,156, $66,287, and $64,208, respectively, and is classified as investments in unconsolidated affiliates in the condensed consolidated balance sheets. The Company’s advances to these variable interest entities as of December 31, 2018 and 2017, and March 31, 2018 were $2,817, $9,832, and $5,895, respectively, and classified as accounts receivable, related parties in the condensed consolidated balance sheets. The Company guaranteed an amount to two variable interest entities not to exceed $73,278, $73,223, and $65,487 as of December 31, 2018 and 2017, and March 31, 2018, respectively. The investments, advances, guarantees, and the deferred purchase price on the sale of securitized receivables disclosed in "Note 16. Sale of Receivables"  in these variable interest entities represent the Company’s maximum exposure to loss.

7. SEGMENT INFORMATION

The Company's operations are managed and reported in ten operating segments that are organized by product category and geographic area and aggregated into three reportable segments for financial reporting purposes: Leaf - North America, Leaf - Other Regions, and Other Products and Services. In reviewing operations, the Company concluded that the economic characteristics of Leaf - North America operations were dissimilar from the other Leaf geographic operating segments in Africa, Asia, Europe, and South America, which have been consolidated into one reportable segment "Leaf - Other Regions". The five other operating segments are aggregated into the "Other Products and Services" reportable segment as they do not meet the quantitative thresholds to be individually reportable. These segment groupings are consistent with information used by the chief operating decision maker to assess performance and allocate resources.

The types of products and services from which each reportable segment derives its revenues are as follows:

Leaf - North America ships tobacco to manufacturer s of cigarettes and other consumer tobacco products around the world. In addition, Leaf - North America is more highly concentrated on processing and other activities compared to the rest of the world.

Leaf - Other Regions ships tobacco to manufacturers of cigarettes and other consumer tobacco products around the world. In addition, the Leaf - Other Regions sell a small amount of processed but un-threshed flue-cured and burley tobacco in loose-leaf and bundle form to certain customers.

Other Pro ducts and Services primarily consists of cannabis and e-liquid products. Cannabis was legalized for adult use in Canada on October 17, 2018. The Company's cannabis products have been sold primarily to municipally-owned retailers in the Canadian market. E-liquids products are sold to consumers via e-commerce platforms and other distribution channels, and retail stores.

The Company evaluates the operating performance of its segments based upon information included in management reports. Corporate general expenses are allocated to the segments based upon segment selling, general, and administrative expenses. Other than those described previously, the accounting policies of each segment are the same and are described in "Note 1. Basis of Presentation and Significant Accounting Policies" .

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7. SEGMENT INFORMATION (continued)

The following summarizes segment information and includes information for periods other than the three and nine months ended December 31, 2018 and 2017 in light of the segment re-alignment:

Three Months Ended December 31,
2018 2017 2016
Sales and other operating revenues:
Leaf - North America $ 77,850  $ 120,689  $ 108,869 
Leaf - Other Regions 441,719  357,094  345,666 
Other Products and Services 4,918  —  — 
Total sales and other operating revenues $ 524,487  $ 477,783  $ 454,535 
Operating income (loss):
Leaf - North America $ 2,870  $ 7,340  $ 5,685 
Leaf - Other Regions 44,133  32,897  34,390 
Other Products and Services (7,648) —  — 
Total operating income $ 39,355  $ 40,237  $ 40,075 

Nine Months Ended December 31,
2018 2017 2016
Sales and other operating revenues:
Leaf - North America $ 181,764  $ 245,307  $ 217,629 
Leaf - Other Regions 1,018,255  956,808  887,431 
Other Products and Services 10,332  —  — 
Total sales and other operating revenues $ 1,210,351  $ 1,202,115  $ 1,105,060 
Operating income (loss):
Leaf - North America $ 7,888  $ 13,463  $ 8,366 
Leaf - Other Regions 70,010  65,665  45,480 
Other Products and Services (21,265) —  — 
Total operating income $ 56,633  $ 79,128  $ 53,846 

Years Ended March 31,
2018 2017
Sales and other operating revenues:
Leaf - North America $ 451,383  $ 396,217 
Leaf - Other Regions 1,394,048  1,318,533 
Other Products and Services 535  — 
Total sales and other operating revenues $ 1,845,966  $ 1,714,750 
Operating income (loss):
Leaf - North America $ 26,446  $ 15,333 
Leaf - Other Regions 88,742  72,009 
Other Products and Services (3,284) — 
Total operating income $ 111,904  $ 87,342 

-17-


7. SEGMENT INFORMATION (continued)

December 31, 2018 December 31, 2017
Leaf - North America Leaf - Other Regions Other Products and Services Total Leaf - North America Leaf - Other Regions Other Products and Services Total
Total assets $ 318,295  $ 1,598,879  $ 106,545  $ 2,023,719  $ 495,950  $ 1,558,238  $ —  $ 2,054,188 
Trade and other receivables, net 22,724  266,104  1,224  290,052  34,042  206,775  —  240,817 
Goodwill 2,795  13,669  17,645  34,109  2,794  13,669  —  16,463 
Equity in net assets of investee companies —  55,283  12,285  67,568  —  56,808  9,479  66,287 
Depreciation and amortization 5,365  19,398  2,124  26,887  5,572  19,273  —  24,845 
Capital expenditures* 3,011  13,263  18,900  35,174  4,461  12,801  —  17,262 
*Capital expenditures in this table are presented as activity for the nine months ended December 31, 2018 and 2017.

March 31, 2018 March 31, 2017
Leaf - North America Leaf - Other Regions Other Products and Services Total Leaf - North America Leaf - Other Regions Other Products and Services Total
Total assets $ 366,495  $ 1,528,859  $ 71,277  $ 1,966,631  $ 375,782  $ 1,596,090  $ —  $ 1,971,872 
Trade and other receivables, net 46,096  257,968  335  304,399  40,212  213,973  —  254,185 
Goodwill 2,795  13,669  11,082  27,546  2,794  13,669  —  16,463 
Equity in net assets of investee companies —  57,434  9,935  67,369  —  51,832  (389) 51,443 
Depreciation and amortization 7,435  25,754  409  33,598  7,543  26,933  —  34,476 
Capital expenditures 4,649  17,017  1,632  23,298  3,638  9,099  —  12,737 

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 as of December 31, 2018 and 2017. This subsidiary waives its right to receive dividends and it does not have the right to vote these shares.

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 as of December 31, 2018 and 2017. Diluted net loss per share as of December 31, 2018 was the same as basic net loss per share as the effects of potentially dilutive items were antidilutive given the Company’s net loss.
 
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8. EARNINGS PER SHARE (continued)

The following summarizes the computation of earnings per share:

Three Months Ended December 31, Nine Months Ended December 31,
(in thousands, except per share data) 2018 2017 2018 2017
Basic (loss) income per share:
Net (loss) income attributable to Pyxus International, Inc. $ (5,095) $ 88,456  $ (60,487) $ 56,936 
Shares:
Weighted average number of shares outstanding 9,068  9,001  9,048  8,982 
Basic (loss) income per share $ (0.56) $ 9.83  $ (6.69) $ 6.34 
Diluted (loss) income per share:
Net (loss) income attributable to Pyxus International, Inc. $ (5,095) $ 88,456  $ (60,487) $ 56,936 
Shares:
Weighted average number of shares outstanding 9,068  9,001  9,048  8,982 
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  —  27 
Adjusted weighted average number of shares outstanding 9,068  9,029  9,048  9,009 
Diluted (loss) income per share $ (0.56) $ 9.80  $ (6.69) $ 6.32 
*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. 

Net income for the three and nine months ended December 31, 2017 were favorably impacted by a net tax benefit of $73.3 million primarily attributable to the impact of the 2017 U.S. Tax Reform Act.

9. STOCK-BASED COMPENSATION

The following summarizes the Company's stock-based compensation expense related to awards granted under its various employee and non-employee stock incentive plans:

Three Months Ended December 31, Nine Months Ended December 31,
(in thousands) 2018 2017 2018 2017
Stock-based compensation expense $ 402  $ 271  $ 1,155  $ 869 
Stock-based compensation expense payable in cash —  —  —  54 

The following summarizes the Company's stock-based compensation awards:

Three Months Ended December 31, Nine Months Ended December 31,
(in thousands, except grant date fair value)  2018 2017 2018 2017
Restricted stock
Number granted 13  26  22 
Grant date fair value $ 11.86  $ 13.25  $ 17.04  $ 12.85 
Restricted stock units
Number granted —  66  57 
Grant date fair value $ 14.32  $ —  $ 15.94  $ 11.75 
Performance-based stock units
Number granted —  —  30  29 
Grant date fair value $ —  $ —  $ 16.00  $ 11.75 

Restricted stock units granted during the nine months ended December 31, 2018 vest ratably over a three-year period.

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10. CONTINGENCIES AND OTHER INFORMATION

The government in the Brazilian State of 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 $3,399 and the total assessment including penalties and interest at December 31, 2018 is $11,743. 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 $7,138 as of December 31, 2018, 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, net. 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.

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. 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 GAAP, the Company records 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 GAAP 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

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 the Company's 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 
-20-


11. DEBT ARRANGEMENTS (continued)

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. As of December 31, 2018, the Company did not satisfy this fixed charge coverage ratio.

The Company may not satisfy this ratio from time to time and failure to meet this fixed charge coverage ratio does not constitute an event of default.

Senior Secured Second Lien Notes

During the nine months ended December 31, 2018, the Company purchased $27,260 of its existing 9.875% senior secured second lien notes on the open market. The purchased securities were canceled leaving $635,686 of the Second Lien Notes outstanding at December 31, 2018. Related discounts were $2,293 resulting in net cash repayment of $24,967 and recorded in repayment of long-term borrowings in the condensed consolidated statements of cash flows. Associated costs paid were $68 and deferred financing costs and amortization of original issue discount of $472 were accelerated.  

12. DERIVATIVE FINANCIAL INSTRUMENTS

As of December 31, 2018 and 2017, accumulated other comprehensive loss includes $2,307 and $999, net of tax of $613 and zero, for unrealized losses related to designated cash flow hedges, respectively. The Company recorded losses of $458 and $1,445 in its cost of goods and services sold for the three months and nine months ended December 31, 2018, respectively. For the nine months ended December 31, 2018, $987 was from the discontinuance of a portion of the Company’s cash flow hedges. The Company recorded losses of $656 and $598 in its cost of goods and services sold for the three months and nine months ended December 31, 2017, respectively. The Company recorded a current derivative asset of $1,029, zero, and zero as of December 31, 2018 and 2017, and March 31, 2018, respectively, included on the condensed consolidated balance sheets.

13. PENSION AND OTHER POSTRETIREMENT BENEFITS

The following summarizes the components of net periodic benefit cost:

Pension Benefits
Three Months Ended December 31, Nine Months Ended December 31,
2018 2017 2018 2017
Operating expenses:
Service cost $ 120  $ 116  $ 359  $ 349 
Interest expense:
Interest expense 1,155  1,063  3,464  3,189 
Expected return on plan assets (1,286) (1,264) (3,858) (3,793)
Amortization of prior service cost 11  10  32  31 
Settlement loss 91  —  609  — 
Actuarial loss 422  511  1,267  1,533 
Net periodic pension cost $ 513  $ 436  $ 1,873  $ 1,309 

Other Postretirement Benefits
Three Months Ended December 31, Nine Months Ended December 31,
2018 2017 2018 2017
Operating expenses:
Service cost $ $ $ 11  $ 10 
Interest expense:
Interest expense 83  85  248  254 
Amortization of prior service cost (177) (178) (532) (533)
Actuarial loss 109  115  328  345 
Net periodic pension cost $ 19  $ 25  $ 55  $ 76 
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13. PENSION AND OTHER POSTRETIREMENT BENEFITS (continued)

For the nine months ended December 31, 2018, contributions were made to pension plans and postretirement health and life insurance benefits of approximately $4,629 and $261, respectively. Additional contributions to pension plans and postretirement health and life insurance benefits of approximately $2,101 and $256, respectively, are expected during the remainder of fiscal 2019. During the three months and nine months ended December 31, 2018, the Company's cash payments activity triggered settlement accounting, which resulted in $91 and $609 of settlement loss recorded in interest expense, respectively.

14. INVENTORIES

The following summarizes the Company’s costs in inventory:

December 31, 2018 December 31, 2017 March 31, 2018
Processed  $ 697,614  $ 786,227  $ 468,208 
Unprocessed  109,351  98,800  204,149 
Other  20,817  20,653  25,730 
Total inventory  $ 827,782  $ 905,680  $ 698,087 

15. OTHER COMPREHENSIVE (LOSS) INCOME

The movements in accumulated other comprehensive loss and the related tax effects that are due to current period activity and reclassifications to the income statement are shown on the condensed consolidated statements of comprehensive income. The following summarizes the components reclassified from accumulated other comprehensive loss to earnings:

Three Months Ended December 31, Nine Months Ended December 31,
2018 2017 2018 2017
Pension and other postretirement benefits*: 
Actuarial loss $ 534  $ 626  $ 1,601  $ 1,878 
Amortization of prior service cost (167) (167) (502) (502)
Amounts reclassified from accumulated other comprehensive loss to net income, gross 367  459  1,099  1,376 
Tax effects of amounts reclassified from
accumulated other comprehensive loss to net
income
(82) —  (246) — 
Amounts reclassified from accumulated other comprehensive loss to net income, net $ 285  $ 459  $ 853  $ 1,376 
*Amounts are included in net periodic benefit costs for pension and other postretirement benefits. See "Note 13. Pension and Other Postretirement Benefits" for more information.

16. SALE OF RECEIVABLES

The Company sells trade receivables to unaffiliated financial institutions under two accounts receivable securitization facilities. Under the first facility, the Company continuously sells a designated pool of trade receivables to a special purpose entity, which sells 100% of the receivables to an unaffiliated financial institution. During the nine months ended December 31, 2018, the investment limit of this program was decreased from $155,000 trade receivables to $125,000 trade receivables. Under the second facility, the Company offers receivables for sale to an unaffiliated financial institution, which are then subject to acceptance by the unaffiliated financial institution. As of December 31, 2018, the investment limit under the second facility was $125,000 trade receivables.

The Company is the 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 increased by $78 as of December 31, 2018 and reduced by $7,953 and $10,858 as of December 31, 2017 and March 31, 2018, respectively.

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16. SALE OF RECEIVABLES (continued)

The following summarizes the accounts receivable securitization information:

December 31, March 31,
2018 2017 2018
Receivables outstanding in facility $ 92,445  $ 125,581  $ 228,621 
Beneficial interest 24,659  26,272  48,715 
Servicing liability 26  55  81 
Cash proceeds:
Cash purchase price $ 416,526  $ 402,402  $ 694,517 
Deferred purchase price 171,565  183,610  263,670 
Service fees 435  359  473 
Total $ 588,526  $ 586,371  $ 958,660 

17. FAIR VALUE MEASUREMENTS

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

December 31, 2018 December 31, 2017 March 31, 2018
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  $ 1,029  $ —  $ 1,029  $ —  $ —  $ —  $ —  $ —  $ — 
Securitized beneficial interests  —  24,659  24,659  —  26,272  26,272  —  48,715  48,715 
Total assets  $ 1,029  $ 24,659  $ 25,688  $ —  $ 26,272  $ 26,272  $ —  $ 48,715  $ 48,715 
Liabilities 
Long-term debt  $ 742,047  $ 708  $ 742,755  $ 877,647  $ —  $ 877,647  $ 911,264  $ 895  $ 912,159 
Guarantees  —  2,890  2,890  —  2,913  2,913  —  5,864  5,864 
Total liabilities  $ 742,047  $ 3,598  $ 745,645  $ 877,647  $ 2,913  $ 880,560  $ 911,264  $ 6,759  $ 918,023 

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 of 15.0% to 70.0% and the Company’s historical loss rates of 2.4% to 10.0% as of December 31, 2018. The historical loss rate was weighted by the principal balance of the loans.
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 64 to 73 days and discount rates of 5.0% to 7.3% as of December 31, 2018. The discount rate was weighted by the outstanding interest. Payment speed was weighted by the average days outstanding.

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17. FAIR VALUE MEASUREMENTS (continued)

The following summarizes the reconciliation of changes in Level 3 instruments measured on a recurring basis:

Three Months Ended December 31, 2018 Nine Months Ended December 31, 2018
Securitized Beneficial Interests Guarantees Securitized Beneficial Interests Guarantees
Beginning balance $ 17,512  $ 1,861  $ 48,715  $ 5,864 
Issuances of sales of receivables/guarantees 71,047  1,585  161,943  2,988 
Settlements (62,432) (569) (183,450) (6,109)
(Losses) gains recognized in earnings (1,468) 13  (2,549) 147 
Ending balance $ 24,659  $ 2,890  $ 24,659  $ 2,890 

Three Months Ended December 31, 2017 Nine Months Ended December 31, 2017
Securitized Beneficial Interest Guarantees Securitized Beneficial Interest Guarantees
Beginning balance $ 23,668  $ 2,770  $ 38,206  $ 7,126 
Issuances of sales of receivables/guarantees 66,496  1,128  177,259  3,193 
Settlements (62,407) (993) (186,582) (6,946)
Losses recognized in earnings (1,485) (2,611) (460)
Ending balance $ 26,272  $ 2,913  $ 26,272  $ 2,913 

The change in unrealized losses for securitized beneficial interests as of December 31, 2018 and 2017, and March 31, 2018 were $643, $650, and $2,531, respectively.

18. RELATED PARTY TRANSACTIONS

The following summarizes sales and purchases with related parties:

Three Months Ended December 31, Nine Months Ended December 31,
2018 2017 2018 2017
Sales $ 475  $ 447  $ 14,238  $ 23,503 
Purchases 46,281  35,563  98,784  73,500 

During the three months ended December 31, 2018, the Company determined that purchases with related parties reported in its related party transactions footnote in the financial statements for the three and six months ended September 30, 2018, included in its Form 10-Q for the period then ended, were not properly stated, which resulted in an understatement of the related party purchases. This change did not impact the condensed consolidated balance sheets, condensed consolidated statements of operations or the condensed consolidated statements of cash flows for any period. The revised purchases with related parties for the three and six months ended September 30, 2018 were $21,042 and $52,503, respectively.  

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19. INVESTEE COMPANIES

The following summarizes the Company's equity method investments as of December 31, 2018:

Investee Name  Location  Primary Purpose  The Company's Ownership Percentage  Basis Difference 
Adams International Ltd. Thailand    purchase and process tobacco    49  % — 
Alliance One Industries India Private Ltd. India    purchase and process tobacco    49  % — 
China Brasil Tobacos Exportadora SA Brazil    purchase and process tobacco    49  % 7,475 
Criticality LLC U.S.    extraction of cannabidiol from industrial hemp    40  % 381 
Nicotine River, LLC U.S.    produce consumable e-liquids   40  % 2,150 
Oryantal Tutun Paketleme Turkey    process tobacco    50  % — 
Purilum, LLC U.S.    produce flavor formulations and consumable e-liquids   50  % — 
Siam Tobacco Export Company Thailand    purchase and process tobacco    49  % — 

20. RESTRUCTURING AND ASSET IMPAIRMENT CHARGES

The Company continues to focus on efficiency and cost improvements. During the nine months ended December 31, 2018, the Company continued to respond to changes in the business, with two cost-saving and restructuring initiatives. The first initiative involves the closing of one of its foreign processing facilities in order to process tobacco in the affected area under a third-party processing arrangement going forward. The second initiative involves the consolidation of the Company's U.S. green tobacco processing operations into its Wilson, North Carolina facility and the repurposing of its Farmville, North Carolina facility for storage and special projects. The following summarizes restructuring and impairment charges:

Three Months Ended December 31, Nine Months Ended December 31,
2018 2017 2018 2017
Employee separation charges $ 1,122  $ —  $ 2,499  $ — 
Asset impairment and other non-cash charges 545  —  891  — 
Restructuring and asset impairment charges $ 1,667  $ —  $ 3,390  $ — 

The following summarizes the liability for employee separation charges recorded in the Leaf - North America and Leaf - Other Regions segments: 

Three Months Ended December 31, Nine Months Ended December 31,
2018 2017 2018 2017
Leaf - North America Leaf - Other Regions Leaf - North America Leaf - Other Regions Leaf - North America Leaf - Other Regions Leaf - North America Leaf - Other Regions
Beginning balance $ 107  $ 889  $ —  $ —  $ —  $ 107  $ —  $ — 
Accruals 892  230  —  —  1,139  1,360  —  — 
Payments (73) (328) —  —  (213) (676) —  — 
Ending balance $ 926  $ 791  $ —  $ —  $ 926  $ 791  $ —  $ —