AOI-2012.12.31-10Q
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, 2012

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

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

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

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

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

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

Large accelerated filer  [ ]                                                                        Accelerated filer  [X]                                           

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

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

As of January 31, 2013, the registrant had 87,640,640 shares outstanding of Common Stock (no par value) excluding 7,853,121 shares owned by a wholly owned subsidiary.

- 1 -


 
Alliance One International, Inc. and Subsidiaries
 
 
Table of Contents
 
 
 
Page No.
Part I.
Financial Information
 
 
 
 
Item 1.
Financial Statements (Unaudited)
 
 
 
 
Condensed Consolidated Statements of Operations
 
 
Three and Nine Months Ended December 31, 2012 and 2011
3
 
 
 
Condensed Consolidated Statements of Comprehensive Income (Loss)
 
 
Three and Nine Months Ended December 31, 2012 and 2011
4
 
 
 
 
Condensed Consolidated Balance Sheets
 
 
December 31, 2012 and 2011 and March 31, 2012
5
 
 
 
Condensed Statements of Consolidated Stockholders’ Equity
 
 
Nine Months Ended December 31, 2012 and 2011
6
 
 
 
 
Condensed Consolidated Statements of Cash Flows
 
 
Nine Months Ended December 31, 2012 and 2011
7
 
 
 
Notes to Condensed Consolidated Financial Statements
8 – 24
 
 
 
 
Item 2.
Management's Discussion and Analysis
 
 
 
of Financial Condition and Results of Operations
25 – 31
 
 
 
 
 
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
31
 
 
 
 
 
Item 4.
Controls and Procedures
31 - 32
 
 
Part II.
Other Information
 
 
 
 
 
Item 1.
Legal Proceedings
32
 
 
 
 
 
Item 1A.
Risk Factors
32
 
 
 
 
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
33
 
 
 
 
 
Item 3.
Defaults Upon Senior Securities
33
 
 
 
 
 
Item 4.
33
 
 
 
 
 
Item 5.
Other Information
33
 
 
 
 
 
Item 6.
Exhibits
33
 
Signature
34
 
 
Index of Exhibits
35

- 2 -


Part I. Financial Information

Item 1. Financial Statements

Alliance One International, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three and Nine Months Ended December 31, 2012 and 2011
(Unaudited)
 
 
 
 
 
 
 
 
 
 
Three Months Ended
December 31,
 
Nine Months Ended
December 31,
(in thousands, except per share data)
 
2012
2011
 
2012
2011
 
 
 
 
 
 
 
Sales and other operating revenues
 
$
699,111

$
493,888

 
$
1,633,292

$
1,369,983

Cost of goods and services sold
 
615,982

428,092

 
1,421,637

1,176,689

Gross profit
 
83,129

65,796

 
211,655

193,294

Selling, general and administrative expenses
 
33,494

33,877

 
105,570

103,234

Other income (expense)
 
(297
)
12,052

 
(1,644
)
16,173

Restructuring and asset impairment charges
 
56

67

 
56

1,583

Operating income
 
49,282

43,904

 
104,385

104,650

Interest expense (includes debt amortization of $2,640 and $2,946 for the three months and $7,856 and $8,409 for the nine months in 2012 and 2011, respectively)
 
29,384

27,408

 
86,275

80,211

Interest income
 
3,120

1,999

 
5,239

4,776

Income before income taxes and other items
 
23,018

18,495

 
23,349

29,215

Income tax expense
 
2,152

5,714

 
15,292

20,108

Equity in net income (loss) of investee companies
 
406

(975
)
 
1,256

198

Net income
 
21,272

11,806

 
9,313

9,305

Less: Net income (loss) attributable to noncontrolling interests
 
(48
)
52

 
368

(49
)
Net income attributable to Alliance One International, Inc.
 
$
21,320

$
11,754

 
$
8,945

$
9,354

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Earnings per share:
 
 
 
 
 
 
Basic
 
$
.24

$
.13

 
$
.10

$
.11

Diluted
 
$
.20

$
.12

 
$
.10

$
.11

 
 
 
 
 
 
 
Weighted average number of shares outstanding:
 
 
 
 
 
 
Basic
 
87,465

87,146

 
87,342

86,976

Diluted
 
110,639

110,186

 
87,679

110,130

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
See notes to condensed consolidated financial statements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

- 3 -



Alliance One International, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three and Nine Months Ended December 31, 2012 and 2011
(Unaudited)
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended
December 31,
 
Nine Months Ended
December 31,
(in thousands)
2012
2011
 
2012
2011
 
 
 
 
 
 
Net income
$
21,272

$
11,806

 
$
9,313

$
9,305

 
 
 
 
 
 
Other comprehensive income (loss), net of tax:
 
 
 
 
 
Currency translation adjustment
(93
)
(1,667
)
 
(795
)
(2,794
)
Define benefit pension amounts reclassified to income, net of
     tax of $399 for the nine months ended December 31, 2011
(260
)

 
(781
)
931

Total other comprehensive income (loss), net of tax
(353
)
(1,667
)
 
(1,576
)
(1,863
)
Total comprehensive income
20,919

10,139

 
7,737

7,442

Comprehensive income (loss) attributable to noncontrolling interests
(48
)
52

 
368

(49
)
Comprehensive income attributable to Alliance One International, Inc.
$
20,967

$
10,087

 
$
7,369

$
7,491

 
 
 
 
 
See notes to condensed consolidated financial statements
 
 
 
 

- 4 -


Alliance One International, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS 
(Unaudited)
(in thousands)
December 31,
2012
 
December 31,
2011
 
March 31,
2012
ASSETS
 
 
 
 
 
Current assets
 
 
 
 
 
Cash and cash equivalents
$
195,331

 
$
150,647

 
$
119,743

Trade and other receivables, net
256,326

 
186,849

 
303,090

Accounts receivable, related parties
59,023

 
44,536

 
32,316

Inventories
908,121

 
1,063,295

 
839,902

Advances to tobacco suppliers
80,182

 
83,149

 
89,378

Recoverable income taxes
6,229

 
9,280

 
9,592

Current deferred taxes
19,365

 
13,358

 
23,855

Prepaid expenses
34,506

 
39,186

 
45,097

Other current assets
10,633

 
813

 
14,874

Total current assets
1,569,716

 
1,591,113

 
1,477,847

Other assets
 
 
 
 
 
Investments in unconsolidated affiliates
24,788

 
24,383

 
24,530

Goodwill and other intangible assets
32,307

 
37,081

 
35,865

Deferred income taxes
61,608

 
67,332

 
73,378

Other deferred charges
15,931

 
17,343

 
12,467

Other noncurrent assets
63,787

 
58,422

 
66,079

 
198,421

 
204,561

 
212,319

Property, plant and equipment, net
265,504

 
257,232

 
259,679

 
$
2,033,641

 
$
2,052,906

 
$
1,949,845

 
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
 
Current liabilities
 
 
 
 
 
Notes payable to banks
$
290,965

 
$
429,120

 
$
374,532

Accounts payable
61,248

 
64,441

 
120,148

Due to related parties
22,398

 
17,593

 
37,520

Advances from customers
52,481

 
113,009

 
14,876

Accrued expenses and other current liabilities
92,656

 
95,391

 
78,758

Income taxes
4,201

 
11,190

 
16,282

Long-term debt current
51,264

 
1,271

 
7,050

Total current liabilities
575,213

 
732,015

 
649,166

 
 
 
 
 
 
Long-term debt
986,628

 
873,332

 
821,453

Deferred income taxes
7,751

 
3,438

 
9,494

Liability for unrecognized tax benefits
8,859

 
15,229

 
18,183

Pension, postretirement and other long-term liabilities
113,882

 
103,192

 
121,128

 
1,117,120

 
995,191

 
970,258

Commitments and contingencies
 
 
 
 
 
Stockholders’ equity
December 31, 2012
 
December 31, 2011
 
March 31,
2012
 
 
 
 
 
Common Stock—no par value:
 
 
 
 
 
 
 
 
 
 
Authorized shares
250,000

 
250,000

 
250,000

 
 
 
 
 
Issued shares
95,494

 
95,221

 
95,234

460,647

 
457,655

 
457,497

Retained deficit
(82,397
)
 
(111,439
)
 
(91,342
)
Accumulated other comprehensive loss
(40,249
)
 
(23,666
)
 
(38,673
)
Total stockholders’ equity of Alliance One International, Inc.
338,001

 
322,550

 
327,482

Noncontrolling interests
3,307

 
3,150

 
2,939

Total equity
341,308

 
325,700

 
330,421

 
$
2,033,641

 
$
2,052,906

 
$
1,949,845

See notes to condensed consolidated financial statements

- 5 -



Alliance One International, Inc. and Subsidiaries
CONDENSED STATEMENTS OF CONSOLIDATED STOCKHOLDERS’ EQUITY
(Unaudited)
 
 
 
 
 
Attributable to Alliance One International, Inc.
 
 
 
 
 
 
 
 
 
 
 
 
Accumulated Other Comprehensive Loss
 
 
(in thousands)
Common
Stock
Retained
Deficit
Currency Translation Adjustment
Pensions, Net of Tax
Noncontrolling
Interests
Total
Equity
 
 
 
 
 
 
 
Balance, March 31, 2011
$
455,409

$
(120,793
)
$
(1,376
)
$
(20,427
)
$
3,199

$
316,012

Net income (loss)

9,354



(49
)
9,305

Restricted stock surrendered
(183
)




(183
)
Stock-based compensation
2,429






2,429

Other comprehensive loss, net of tax


(2,794
)
931


(1,863
)
 
 
 
 
 
 
 
Balance, December 31, 2011
$
457,655

$
(111,439
)
$
(4,170
)
$
(19,496
)
$
3,150

$
325,700

 
 
 
 
 
 
 
Balance, March 31, 2012
$
457,497

$
(91,342
)
$
(2,922
)
$
(35,751
)
$
2,939

$
330,421

Net income

8,945



368

9,313

Restricted stock surrendered
(160
)




(160
)
Stock-based compensation
3,310





3,310

Other comprehensive loss, net of tax


(795
)
(781
)

(1,576
)
 
 
 
 
 
 
 
Balance, December 31, 2012
$
460,647

$
(82,397
)
$
(3,717
)
$
(36,532
)
$
3,307

$
341,308

 
 
 
 
 
 
 
See notes to condensed consolidated financial statements

- 6 -


Alliance One International, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS 
Nine Months Ended December 31, 2012 and 2011
(Unaudited)
 
 
(in thousands)
 
December 31,
2012
 
December 31,
2011
 
 
 
 
 
Operating activities
 
 
 
 
   Net income
 
$
9,313

 
$
9,305

   Adjustments to reconcile net income to net cash used by operating activities:
 
 
 
 
      Depreciation and amortization
 
24,913

 
24,241

      Debt amortization/interest
 
11,173

 
11,080

     Restructuring charges
 
56

 
792

     Loss on foreign currency transactions
 
9,949

 
12,607

      Gain on sale of property, plant and equipment
 
(1,176
)
 
(2,504
)
      Gain on other sale of assets
 

 
(13,072
)
      Stock-based compensation
 
3,976

 
2,558

      Changes in operating assets and liabilities, net
 
(76,023
)
 
(100,274
)
      Other, net
 
326

 
1,537

   Net cash used by operating activities
 
(17,493
)
 
(53,730
)
 
 
 
 
 
Investing activities
 
 
 
 
   Purchases of property, plant and equipment
 
(28,460
)
 
(34,159
)
   Proceeds from sale of property, plant and equipment
 
1,402

 
2,617

   Restricted cash
 
3,974

 

   Other, net
 
(518
)
 
622

   Net cash used by investing activities
 
(23,602
)
 
(30,920
)
 
 
 
Financing activities
 
 
 
 
   Net proceeds from short-term borrowings
 
(82,383
)
 
208,525

   Proceeds from long-term borrowings
 
321,607

 
305,200

   Repayment of long-term borrowings
 
(115,046
)
 
(318,269
)
   Debt issuance cost
 
(5,867
)
 
(6,207
)
   Other, net
 
(66
)
 
(82
)
   Net cash provided by financing activities
 
118,245

 
189,167

 
 
 
 
 
Effect of exchange rate changes on cash
 
(1,562
)
 
2,624

 
 
 
Increase in cash and cash equivalents
 
75,588

 
107,141

Cash and cash equivalents at beginning of period
 
119,743

 
43,506

Cash and cash equivalents at end of period
 
$
195,331

 
$
150,647

 
Other information:
 
 
 
 
   Cash paid during the nine months:
 
 
 
 
         Interest
 
$
58,508

 
$
50,313

         Taxes
 
15,689

 
18,642

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
See notes to condensed consolidated financial statements

- 7 -


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

1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

Because of the seasonal nature of the Company’s business, the results of operations for any fiscal quarter will not necessarily be indicative of results to be expected for other quarters or a full fiscal year. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair statement of financial position, results of operation and cash flows at the dates and for the periods presented have been included. The unaudited information included in this Form 10-Q should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2012.
          Beginning April 1, 2012, the Company’s management began evaluating the performance of its Value Added Services business as a separate operating segment from the Company’s five geographic operating segments. Value Added Services is comprised of the Company's cut rolled expanded stem ("CRES"), cut rag, toasted burley and other specialty products and services. The economic characteristics of the Value Added Services segment are dissimilar from the other operating segments. Therefore, effective April 1, 2012, the Company’s reportable segments are Value Added Services, South America Region and Other Regions.

Taxes Collected from Customers
Certain subsidiaries are subject to value added taxes on local sales. These amounts have been included in sales and cost of sales and were $6,242 and $4,864 for the three months ended December 31, 2012 and 2011, respectively and $15,364 and $13,478 for the nine months ended December 31, 2012 and 2011, respectively.

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

Property Exchange in Brazil
During the quarter ended, December 31, 2011 the Company exchanged real property with a third party in Brazil. The transaction consisted of the Company exchanging real property located in Vera Cruz, Brazil and $9,403 of cash for real property located in Venancio Aires, Brazil. The Company accounted for the transaction as a nonmonetary exchange involving monetary consideration. In accordance with U.S. GAAP, the transaction was recorded and measured at fair value as the transaction had commercial substance, the fair values of the assets exchanged were determinable within reasonable limits, and the Company's real property was not held for sale in the ordinary course of business or for property to be sold in the same line of business to facilitate sales to customers other than the parties to the exchange. The cost of the real property received in the exchange was measured using the fair value of the assets given which equaled $26,250 including the cash. The Company's basis in its assets given was $13,178 and a gain of $13,072 was recorded in Other Income (Expense) in the Condensed Consolidated Statements of Operations.

New Accounting Standards

Recently Adopted Accounting Pronouncements
On April 1, 2012, the Company adopted new accounting guidance, as amended, on comprehensive income. The objective of this accounting guidance is to improve the comparability, consistency and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income. The guidance eliminates the option to present components of other comprehensive income as part of the statement of stockholders’ equity and requires them to be presented in the statement of comprehensive income instead. The Company adopted this new accounting guidance and is reporting other comprehensive income in a separate financial statement.

Recent Accounting Pronouncements Not Yet Adopted
In September 2011, the Financial Accounting Standards Board ("FASB") issued new accounting guidance on testing goodwill for impairment. The primary objective of this accounting guidance is to reduce complexity and costs by allowing an entity to make a qualitative evaluation about the likelihood of goodwill impairment to determine whether it should calculate the fair value of a reporting unit. If, after assessing qualitative factors, an entity determines that it is not more likely than not (a likelihood of more than 50 percent) that the fair value of a reporting unit is less than its carrying amount, then the two-step goodwill impairment test is unnecessary. This accounting guidance is effective for the Company in fiscal 2013 when it performs its annual goodwill testing on January 1, 2013. The Company does not expect the impact of this new accounting guidance to have a material impact on its financial condition or results of operations.


- 8 -


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

Recent Accounting Pronouncements Not Yet Adopted (continued)
          In December 2011, the FASB issued new accounting guidance on disclosures about offsetting assets and liabilities. The requirements for offsetting are different under U.S. GAAP and IFRS. Therefore, the objective of this accounting guidance is to facilitate comparison between financials statements prepared under U.S. GAAP and IFRS by enhancing disclosures of the effect or potential effect of netting arrangements on an entity’s financial position, including the effect or potential effect of rights of setoff associated with certain assets and liabilities. This accounting guidance will be effective for the Company on April 1, 2013. The Company does not expect the impact of this new accounting guidance to have a material impact on its financial condition or results of operations.

2. INCOME TAXES

Accounting for Uncertainty in Income Taxes
As of December 31, 2012, the Company’s unrecognized tax benefits totaled $6,723, all of which would impact the Company’s effective tax rate if recognized.
         The Company recognizes interest and penalties related to unrecognized tax benefits in income tax expense. As of December 31, 2012, accrued interest and penalties totaled $863 and $1,273 respectively.
         The Company expects to continue accruing interest expense related to the unrecognized tax benefits described above. Additionally, the Company may be subject to fluctuations in the unrecognized tax liability due to currency exchange rate movements.
         The Company does not foresee any reasonably possible changes in the unrecognized tax benefits in the next twelve months but must acknowledge 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 have not recorded liabilities for these positions. The Company expects the challenged positions to be settled at a time greater than twelve months from its balance sheet date.
         The Company and its subsidiaries file a U.S. federal consolidated income tax return as well as returns in several U.S. states and a number of foreign jurisdictions. As of December 31, 2012, the Company’s earliest open tax year for U.S. federal income tax purposes was its fiscal year ended March 31, 2009. Open tax years in state and foreign jurisdictions generally range from three to six years.

Provision for the Nine Months Ended December 31, 2012
The effective tax rate used for the nine months ended December 31, 2012 was 65.5% compared to 68.8% for the nine months ended December 31, 2011. The effective tax rates for these periods are based on the current estimate of full year results including the effect of taxes related to discrete events which are recorded in the interim period in which they occur. The Company expects the tax rate for the year ended March 31, 2013 to be 34.3% after absorption of discrete items.
         For the nine months ended December 31, 2012, the Company recorded a discrete event adjustment expense of $3,418, bringing the effective tax rate estimated for the nine months of 50.9% to 65.5%. This discrete event adjustment expense relates primarily to increases in net exchange losses on income tax accounts and an adjustment to the valuation allowance related to resolution of a prior period uncertain tax position; and, decreases due to the expiration of an assessment period local country administrative practice pertaining to an international unrecognized tax benefit, the release of a U.S. uncertain tax position effectively settled upon completion of a tax examination of a prior year and the release of foreign valuation allowances. For the nine months ended December 31, 2011, the Company recorded a discrete event adjustment expense of $13,867, bringing the effective tax rate estimated for the nine months of 21.4% to 68.8%. This discrete event adjustment expense relates primarily to net exchange losses on income tax accounts and additional income tax, interest and exchange gains related to liabilities for unrecognized tax benefits. The significant difference in the estimated effective tax rate for the nine months ended December 31, 2012 from the U.S. federal statutory rate is primarily due to net exchange losses on income tax accounts.

3. GUARANTEES

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

- 9 -

Alliance One International, Inc. and Subsidiaries

3. GUARANTEES (continued)

The following table summarizes amounts guaranteed and the fair value of those guarantees:
 
December 31, 2012
 
December 31, 2011
 
March 31, 2012
Amounts guaranteed (not to exceed)
$
129,088

 
$
140,826

 
$
127,132

Amounts outstanding under guarantee
100,393

 
96,798

 
105,403

Fair value of guarantees
7,728

 
4,342

 
5,265


         Of the guarantees outstanding at December 31, 2012, approximately 95% expire within one year and the remainder within five years. The fair value of guarantees is recorded in Accrued Expenses and Other Current Liabilities in the Condensed Consolidated Balance Sheets and included in crop costs except for Zimbabwe which is included in Accounts Receivable, Related Parties.
         In Brazil, certain suppliers obtain government subsidized rural credit financing from local banks that is guaranteed by the Company. The Company withholds amounts owed to suppliers related to the rural credit financing of the supplier upon delivery of tobacco to the Company. The Company remits payments to the local banks on behalf of the guaranteed suppliers. Terms of rural credit financing are such that repayment is due to local banks based on contractual due dates. As of December 31, 2012 and 2011 and March 31, 2012, respectively, the Company had balances of $606, $358 and $27,619 that were due to local banks on behalf of suppliers. These amounts are included in Accounts Payable in the Condensed Consolidated Balance Sheets.

4. RESTRUCTURING AND ASSET IMPAIRMENT CHARGES

In response to shifting supply and demand balances and the changing business models of the Company’s customers, the Company began implementing several strategic initiatives during the third quarter of fiscal 2011 and during fiscal 2012. At March 31, 2012, these initiatives were substantially complete. The following table summarizes the restructuring charges recorded in the Company’s reporting segments during the three months and nine months ended December 31, 2012 and 2011, respectively:
 
Three Months Ended
December 31,
 
Nine Months Ended
December 31,
Restructuring and Asset Impairment Charges
2012
2011
 
2012
2011
Employee separation and other cash charges:
 
 
 
 
 
Beginning balance
$
1,176

$
3,793

 
$
1,960

$
6,193

Period charges:
 
 
 
 
 
Severance charges
56

67

 
56

792

Other cash charges


 

31

Total period charges
56

67

 
56

823

Payments through December 31
(322
)
(433
)
 
(1,106
)
(3,589
)
Ending balance December 31
$
910

$
3,427

 
$
910

$
3,427

Non-current asset impairment charges


 

760

Total restructuring and asset impairment charges for the period
$
56

$
67

 
$
56

$
1,583


         Non-current asset impairment charges incurred in fiscal 2012 are primarily for non-tobacco internally developed software intangible assets and real property in Macedonia.
         April 1, 2012, the Company revised its reportable segments. See Note 1 "Basis of Presentation and Significant Accounting Policies" to the "Notes to Condensed Consolidated Financial Statements." The following table summarizes the employee separation and other cash charges recorded in the Company’s South America, Value Added Services and Other Regions segments during the three months and nine months ended December 31, 2012 and 2011, respectively:

- 10 -

Alliance One International, Inc. and Subsidiaries

4. RESTRUCTURING AND ASSET IMPAIRMENT CHARGES (continued)

 
Three Months Ended
December 31,
 
Nine Months Ended
December 31,
Employee Separation and Other Cash Charges
2012
2011
 
2012
2011
Beginning balance:
$
1,176

$
3,793

 
$
1,960

$
6,193

   South America
146

545

 
183

1,073

   Value added services


 


   Other regions
1,030

3,248

 
1,777

5,120

Period charges:
$
56

$
67

 
$
56

$
823

   South America
(22
)

 
(22
)
419

   Value added services


 


   Other regions
78

67

 
78

404

Payments through December 31:
$
(322
)
$
(433
)
 
$
(1,106
)
$
(3,589
)
   South America
(24
)
(6
)
 
(61
)
(953
)
   Value added services


 


   Other regions
(298
)
(427
)
 
(1,045
)
(2,636
)
Ending balance December 31:
$
910

$
3,427

 
$
910

$
3,427

   South America
100

538

 
100

538

   Value added services


 


   Other regions
810

2,889

 
810

2,889


5. GOODWILL AND INTANGIBLES

Goodwill represents costs in excess of fair values assigned to the underlying net assets of acquired businesses. Goodwill is not subject to amortization, but rather is tested for impairment annually or whenever events and circumstances indicate that an impairment may have occurred. The Company has chosen the first day of the last quarter of its fiscal year as the date to perform its annual goodwill impairment test.

- 11 -

Alliance One International, Inc. and Subsidiaries

5. GOODWILL AND INTANGIBLES (continued)
         The Company has no intangible assets with indefinite useful lives. It does have intangible assets which are amortized. The following table summarizes the changes in the Company’s goodwill and other intangibles for the three months and nine months ended December 31, 2012 and 2011:
 
 

 
Amortizable Intangibles
 
 
 
Goodwill
 
Customer
Relationship
Intangible
 
Production
and Supply
Contract
Intangibles
 
Internally
Developed
Software
Intangible
 
Total
Weighted average remaining useful
    life in years as of December, 31, 2012
 

 
12.25

 
3.25

 
1.25

 
 
March 31, 2011 balance:
 
 
 
 
 
 
 
 
 
 
Gross carrying amount
 
$
2,794

 
$
33,700

 
$
7,893

 
$
15,767

 
$
60,154

Accumulated amortization
 

 
(9,899
)
 
(1,948
)
 
(7,102
)
 
(18,949
)
Net March 31, 2011
 
2,794

 
23,801

 
5,945

 
8,665

 
41,205

Additions
 

 

 

 
206

 
206

Amortization expense
 

 
(421
)
 
(244
)
 
(762
)
 
(1,427
)
Net June 30, 2011
 
2,794

 
23,380

 
5,701

 
8,109

 
39,984

Impairment/other
 

 

 

 
(357
)
 
(357
)
Amortization expense
 

 
(422
)
 
(122
)
 
(762
)
 
(1,306
)
Net September 30, 2011
 
2,794

 
22,958

 
5,579

 
6,990

 
38,321

      Impairment/other
 

 

 

 
153

 
153

      Amortization expense
 

 
(421
)
 
(227
)
 
(745
)
 
(1,393
)
Net December 31, 2011
 
2,794

 
22,537

 
5,352

 
6,398

 
37,081

Additions
 

 

 

 
819

 
819

Amortization expense
 

 
(421
)
 
(502
)
 
(1,112
)
 
(2,035
)
Net March 31, 2012
 
2,794

 
22,116

 
4,850

 
6,105

 
35,865

Additions
 

 

 

 
22

 
22

Amortization expense
 

 
(421
)
 
(115
)
 
(762
)
 
(1,298
)
Net June 30, 2012
 
2,794

 
21,695

 
4,735

 
5,365

 
34,589

Additions
 

 

 

 
247

 
247

Amortization expense
 

 
(422
)
 
(127
)
 
(762
)
 
(1,311
)
Net September 30, 2012
 
2,794

 
21,273

 
4,608

 
4,850

 
33,525

      Additions
 

 

 

 
157

 
157

      Amortization expense
 

 
(421
)
 
(192
)
 
(762
)
 
(1,375
)
Net December 31, 2012
 
$
2,794

 
$
20,852

 
$
4,416

 
$
4,245

 
$
32,307


         The following table summarizes the estimated intangible asset amortization expense for the next five years and beyond:

For Fiscal
Years Ended
 
Customer
Relationship
Intangible
 
Production
and Supply
Contract
Intangible
 
Internally
Developed
Software
Intangible
 
Total
January 1, 2013 through March 31, 2013
 
$
421

 
$
817

 
$
928

 
$
2,166

2014
 
1,685

 
1,251

 
1,830

 
4,766

2015
 
1,685

 
1,173

 
614

 
3,472

2016
 
1,685

 
1,175

 
484

 
3,344

2017
 
1,685

 

 
330

 
2,015

Subsequent years
 
13,691

 

 
59

 
13,750

 
 
$
20,852

 
$
4,416

 
$
4,245

 
$
29,513

*  Estimated amortization expense for the internally developed software is based on costs accumulated as of December 31, 2012. These estimates will change as new costs are incurred and until the software is placed into service in all locations.



- 12 -

Alliance One International, Inc. and Subsidiaries

6. VARIABLE INTEREST ENTITIES

The Company holds variable interests in four joint ventures that are accounted for under the equity method of accounting. These joint ventures procure inventory on behalf of the Company and the other joint venture partners. The variable interests relate to equity investments and advances made by the Company to the joint ventures. In addition, the Company also guarantees one of its joint venture’s borrowings which also represents a variable interest in that joint venture. The Company is not the primary beneficiary, as it does not have the power to direct the activities that most significantly impact the economic performance of the entities as a result of the entities’ management and board of directors structure. Therefore, these entities are not consolidated. At December 31, 2012 and 2011, and March 31, 2012, the Company’s investment in these joint ventures was $23,604, $23,471, and $23,346, respectively and is classified as Investments in Unconsolidated Affiliates in the Condensed Consolidated Balance Sheets. The Company’s advances to these joint ventures were $734, $56 and $9 at December 31, 2012 and 2011, and March 31, 2012, respectively and are classified as Accounts Receivable, Related Parties in the Condensed Consolidated Balance Sheets. The Company guaranteed an amount to a joint venture not to exceed $19,320, $16,115 and $19,712 at December 31, 2012 and 2011, and March 31, 2012, respectively. The investments, advances and guarantee in these joint ventures represent the Company’s maximum exposure to loss.

7. SEGMENT INFORMATION

The Company purchases, processes, sells and stores leaf tobacco. Tobacco is purchased in more than 35 countries and shipped to more than 90 countries. The sales, logistics and billing functions of the Company are primarily concentrated in service centers outside of the producing areas to facilitate access to its major customers. Within certain quality and grade constraints, tobacco is fungible and, subject to these constraints, customers may choose to fulfill their needs from any of the areas where the Company purchases tobacco.
          Beginning April 1, 2012, the Company revised its reportable segments. Prior year segment data has been retrospectively revised to conform with the current year segment presentation. See Note 1 “Basis of Presentation and Significant Accounting Policies” to the “Notes to Condensed Consolidated Financial Statements” for further information.
          Selling, logistics, billing, and administrative overhead, including depreciation, which originates primarily from the Company’s corporate and sales offices are allocated to the segments based upon segment operating income. The Company reviews performance data from the purchase of the product or the service provided through sale based on the source of the product or service and all intercompany transactions are allocated to the operating segment that either purchases or processes the tobacco.

The following table presents the summary segment information for the three months and nine months ended December 31, 2012 and 2011:       

 
Three Months Ended
 
Nine Months Ended
 
December 31,
 
December 31,
 
2012
 
2011
 
2012
 
2011
Sales and other operating revenues:
 
 
 
 
 
 
 
    South America
$
154,703

 
$
107,648

 
$
606,041

 
$
486,373

Value added services
28,877

 
39,652

 
96,077

 
115,351

    Other regions
515,531

 
346,588

 
931,174

 
768,259

    Total revenue
$
699,111

 
$
493,888

 
$
1,633,292

 
$
1,369,983

 
 
 
 
 
 
 
 
Operating income:
 
 
 
 
 
 
 
    South America
$
15,784

 
$
14,512

 
$
41,546

 
$
41,086

Value added services
3,681

 
5,001

 
11,811

 
15,690

    Other regions
29,817

 
24,391

 
51,028

 
47,874

Total operating income
49,282

 
43,904

 
104,385

 
104,650

 
 
 
 
 
 
 
 
    Interest expense
29,384

 
27,408

 
86,275

 
80,211

    Interest income
3,120

 
1,999

 
5,239

 
4,776

Income before income taxes and other items
$
23,018

 
$
18,495

 
$
23,349

 
$
29,215


- 13 -

Alliance One International, Inc. and Subsidiaries

7. SEGMENT INFORMATION (continued)
Analysis of Segment Assets
December 31, 2012
December 31, 2011
March 31, 2012

Segment assets:
 
 
 
 
South America
$
487,503

$
543,604

$
534,169

 
Value added services
185,452

123,094

117,288

 
Other regions
1,360,686

1,386,208

1,298,388

 
Total assets
$
2,033,641

$
2,052,906

$
1,949,845


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 7,853 at December 31, 2012 and 2011. This subsidiary waives its right to receive dividends and it does not have the right to vote.
          Certain potentially dilutive options were not included in the computation of earnings per diluted share because their exercise prices were greater than the average market price of the shares of common stock during the period and their effect would be antidilutive. These shares totaled 7,049 at a weighted average exercise price of $7.34 per share at December 31, 2012 and 4,222 at a weighted average exercise price of $7.02 per share at December 31, 2011.
          In connection with the offering of the Company’s 5 ½% Convertible Senior Subordinated Notes due 2014, issued on July 2, 2009 (the “Convertible Notes”), the Company entered into privately negotiated convertible note hedge transactions (the “convertible note hedge transactions”) equal to the number of shares that underlie the Company’s Convertible Notes. These convertible note hedge transactions are expected to reduce the potential dilution of the Company’s common stock upon conversion of the Convertible Notes in the event that the value per share of common stock exceeds the initial conversion price of $5.0280 per share. These shares were not included in the computation of earnings per diluted share because their inclusion would be antidilutive.
          On July 28, 2010, the Company’s board of directors authorized the purchase up to $40,000 of its common stock through June 30, 2012. The Company purchased 2,380 shares of its common stock at a weighted average price paid per share of $3.78.

- 14 -

Alliance One International, Inc. and Subsidiaries

8. EARNINGS PER SHARE (continued)
          The following table summarizes the computation of earnings per share for the three months and nine months ended December 31, 2012 and 2011, respectively.

 
Three Months Ended
 
Nine Months Ended
 
 
December 31,
 
December 31,
 
(in thousands, except per share data)
2012

 
2011

 
2012
 
2011
 
BASIC EARNINGS
 
 
 
 
 
 
 
 
Net income attributable to Alliance One International, Inc.
$
21,320

 
$
11,754

 
$
8,945

 
$
9,354

 
 
 
 
 
 
 
 
 
 
SHARES
 
 
 
 
 
 
 
 
   Weighted average number of shares outstanding
87,465

 
87,146

 
87,342

 
86,976

 
 
 
 
 
 
 
 
 
 
BASIC EARNINGS PER SHARE
$
.24

 
$
.13

 
$
.10

 
$
.11

 
 
 
 
 
 
 
 
 
 
DILUTED EARNINGS
 
 
 
 
 
 
 
 
   Net income attributable to Alliance One
   International, Inc.
$
21,320

 
$
11,754

 
$
8,945

 
$
9,354

 
   Plus interest expense on 5 1/2% convertible notes,
   net of tax
1,028

 
1,028



*
3,083


   Net income attributable to Alliance One
         International, Inc. as adjusted
$
22,348

 
$
12,782

 
$
8,945

 
$
12,437

 
 
 
 
 
 
 
 
 
 
SHARES
 
 
 
 
 
 
 
 
   Weighted average number of common shares
   outstanding
87,465

 
87,146

 
87,342

 
86,976

 
   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
302

 
168


337

 
282


              Assuming conversion of 5 1/2% convertible
              notes at the time of issuance
22,872

 
22,872



*
22,872


             Shares applicable to stock warrants

**

**

**

**
   Adjusted weighted average number of common
  shares outstanding
110,639

 
110,186

 
87,679

 
110,130

 
DILUTED EARNINGS PER SHARE
$
.20

 
$
.12

 
$
.10

 
$
.11

 
 
 
 
 
 
 
 
 
 
* Assumed conversion of convertible notes at the beginning of the period has an antidilutive effect on earnings per share.
** For the three months and nine months ended December 31, 2012 and 2011, the warrants were not assumed exercised because the exercise price was more than the average price for the periods presented.

9. STOCK-BASED COMPENSATION

The Company recorded stock-based compensation expense related to stock-based awards granted under its various employee and non-employee stock incentive plans of $679 and $690 for the three months ended December 31, 2012 and 2011, respectively and $3,976 and $2,514 for the nine months ended December 31, 2012 and 2011, respectively.
          The Company’s shareholders approved amendments to the 2007 Incentive Plan (the “2007 Plan”) at its Annual Meeting of Shareholders on August 11, 2011 and August 6, 2009. The 2007 Plan is an omnibus plan that provides the flexibility to grant a variety of equity awards including stock options, stock appreciation rights, stock awards, stock units, performance awards and incentive awards to officers, directors and employees of the Company.
          During the nine months ended December 31, 2012, 3,350 stock-based compensation awards for stock options were granted. No stock options were granted during the three months ended December 31, 2012. No stock options were granted during the three months and nine months ended December 31, 2011.

- 15 -

Alliance One International, Inc. and Subsidiaries

9. STOCK-BASED COMPENSATION (continued)
          Assumptions used to determine the fair value of options issued during the nine months ended December 31, 2012 include the following:
 
Nine Months Ended December 31, 2012
 
Grant Price
$
3.50

 
Exercise Price
$
6.00

 
Expected Term in Years
6 to 6.5 years

 
Expected Volatility
60.4% to 61.0%

 
Weighted Average Volatility
60.9
%
 
Annual Dividend Rate
0.00
%
 
Risk Free Rate
2.00
%
 
Weighted Average Fair Value
$
1.64

 

          During the three months and nine months ended December 31, 2012 and 2011, respectively, the Company made the following stock-based compensation awards for restricted stock:
 
Three Months Ended
December 31,
 
Nine Months Ended
December 31,
(in thousands, except grant date fair value)
2012
2011
 
2012
2011
Restricted Stock
 
 
 
 
 
           Number Granted


 
167

146

           Grant Date Fair Value
$

$

 
$
2.89

$
3.27



10. CONTINGENCIES AND OTHER INFORMATION

Non-Income Tax
The government in the Brazilian State of Parana (“Parana”) issued a tax assessment on October 26, 2007 with respect to local intrastate trade tax credits that result primarily from tobacco transferred between states within Brazil. The assessment for intrastate trade tax credits taken is $6,447 and the total assessment including penalties and interest at December 31, 2012 is $16,143. 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 Rio Grande do Sul and the State of Santa Catarina. 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 agreements with the state governments regarding the amounts and timing of credits that can be sold. The tax credits have a carrying value of $20,454, 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 2001, the Company’s subsidiary in Brazil won a claim related to certain excise taxes (“IPI credit bonus”) for the years 1983 through 1990. The Company used this IPI credit bonus to offset federal income and other taxes until January 2005 when it received a Judicial Order to suspend the IPI compensation. In addition, the Company received an assessment in 2006 for federal income taxes that were offset by the IPI credit bonus. The assessment is valued at $23,791 at December 31, 2012. The Company appealed the assessment and believes it has properly utilized the IPI credit bonus. No benefit for the utilization of the IPI credit bonus has been recognized as it has been recorded in Pension, Postretirement and Other Long-Term Liabilities. On September 9, 2011, the Court affirmed the Company’s position regarding the IPI credit bonus which is subject to appeal. The Company does not expect resolution in the near future, which would directly impact the outcome of the Company’s appeal of the tax assessment as well as its utilization of its remaining IPI credit bonus. No benefit for any potential future utilization of IPI credit bonus has been recognized.

- 16 -

Alliance One International, Inc. and Subsidiaries

10. CONTINGENCIES AND OTHER INFORMATION (continued)

Other
In October 2001, the Directorate General for Competition (“DGCOMP”) of the European Commission (“EC”) began an administrative investigation into certain tobacco buying and selling practices alleged to have occurred within the leaf tobacco industry in some countries within the European Union, including Spain and Italy.  In respect of the investigation into practices in Spain, in 2004 the EC fined the Company and its Spanish subsidiaries €4,415 (US $5,641) in the aggregate.  In respect of the investigation into practices in Italy, in October 2005 the EC announced the assessment of fines against the Company and its Italian subsidiaries of €24,000 (US $28,800) in the aggregate.  With respect to both the Spanish and Italian investigations, the fines imposed on the Company and its predecessors and subsidiaries were part of fines assessed on several participants in the applicable industry.  The Company, along with its applicable subsidiaries, lodged several appeals against the EC decisions and these cases are currently at various stages of appeal before the European Court of Justice (the “ECJ”).  On July 19, 2012, the ECJ denied the Company's appeal in joined cases C-628/10 and C-14/11 relating to a €1,800 fine imposed by the EC on one of the Company's Spanish subsidiaries, and as to which the EC further imposed joint and several parent-company liability on the Company and such subsidiary's other shareholders (being a corporate predecessor of the Company, and a current subsidiary of the Company), which matter is now concluded.  In appeals relating to a different Spanish subsidiary involving the remainder of the above-referenced €4,415 in fines, a hearing before the ECJ in case C-679/11 P regarding joint and several parent-company liability was held on January 10, 2013, while the appeal in case C-668/11 P relating to the underlying liability of the relevant Spanish subsidiary is proceeding without a hearing.  On December 13, 2012, the ECJ denied the Company's appeals in cases C-593/11 P and C-654/11 P, which relate to the above-referenced €24,000 in fines assessed against the Company and its Italian subsidiaries, and those actions are now concluded. A hearing before the ECJ in case C-652/11 P relating to the appeal of one of the Company's Italian subsidiaries which had been individually fined €3,990 (for which the Company was held jointly liable and which amount is included in the €24,000 in fines assessed against the Company and its subsidiaries referenced above) was held on October 15, 2012.  The outcome of each of the remaining pending appeals is uncertain as to both timing and results.  The Company has fully recognized the impact of each of the fines set forth above and has paid all of such fines as part of the appeal process.
          Mindo, S.r.l., the purchaser in 2004 of the Company's Italian subsidiary Dimon Italia, S.r.l., has asserted claims against subsidiaries of the Company arising out of that sale transaction in an action filed before the Court of Rome on April 12, 2007. The claim, allegedly arising from a guaranty letter issued by a consolidated subsidiary of the Company in connection with the sale transaction, seeks the recovery of €7,377 (US $9,749) plus interest and costs. A hearing for the disposition of this matter was held in December 2011 and the court's ruling is pending. Due to the uncertain legal interpretation in a foreign jurisdiction and the complexity of the matter, the Company is not able to reasonably estimate the outcome.
          On June 6, 2008, the Company's Brazilian subsidiary and a number of other tobacco processors were notified of a class action initiated by the ALPAG - Associação Lourenciana de Pequenos Agricultrores ("Association of Small Farmers of São Lourenço”). The case is currently before the 2nd civil court of São Lourenço do Sul. On April 20, 2012, the Company's motion to dismiss the class action was granted in part and denied in part. Hearings with respect to the remaining claims, which relate to practices regarding the weighing and grading of tobacco, concluded on January 23, 2013. The outcome with respect to these remaining claims is uncertain as to both timing and result. Due to the broad scope of the pleading, the ultimate exposure if an unfavorable outcome is received is not estimable.
          The Company was named as one of several defendants in Hupan, et al. v. Alliance One International, Inc., et al., Chalanuk, et al. v. Alliance One International, Inc., et al., and Rodriquez Da Silva, et al., which are distinct but related lawsuits respectively filed in New Castle County, Delaware state court on February 14, 2012, April 5, 2012 and October 25, 2012. The lawsuits were brought by approximately 230 individuals claiming to be tobacco farmers and their family members, all residing in Misiones Province, Argentina. The complaints sought compensatory and punitive damages from the Company, and from other multinational defendants, under U.S. and Argentine law for alleged injuries, including birth defects, purportedly caused by exposure to agricultural chemicals in connection with the production and cultivation of tobacco. In December 2012, in each of these actions the Company was dismissed without prejudice and without any cost to the Company.
          In accordance with generally accepted accounting principles, the Company records all known asset retirement obligations (“ARO”) for which the liability can be reasonably estimated. Currently, it has identified an ARO associated with one of its facilities that requires it to restore the land to its initial condition upon vacating the facility. The Company has not recognized a liability under generally accepted accounting principles for this ARO because the fair value of restoring the land at this site cannot be reasonably estimated since the settlement date is unknown at this time. The settlement date is unknown because the land restoration is not required until title is returned to the government, and the Company has no current or future plans to return the title. The Company will recognize a liability in the period in which sufficient information is available to reasonably estimate its fair value.







- 17 -

Alliance One International, Inc. and Subsidiaries

11. DEBT ARRANGEMENTS

At December 31, 2012, borrowings under the senior secured credit facility were $180,000 and $6,000 aggregate principal of the Company's 8 1/2% senior notes due 2012 were repaid during the nine months ended December 31, 2012. The Company continuously monitors its compliance with the covenants of its senior secured credit facility and its senior notes. Significant changes in market conditions could adversely affect the Company's business. As a result, there can be no assurance that the Company will be able to maintain compliance with its financial covenants in the future.
          As amended, the senior secured credit facility restricts the Company from paying any dividends during the remaining term of the facility. In addition, the indenture governing the Company's senior notes contains similar restrictions and also prohibits the payment of dividends and other distributions if the Company fails to satisfy a ratio of consolidated EBITDA to fixed charges of at least 2.0 to 1.0. At December 31, 2012, the Company did not satisfy this fixed charge coverage ratio. The Company may from time to time not satisfy this ratio.
          During the three months ended December 31, 2012, the maximum capacity of the Company's long-term foreign seasonal borrowings increased from $125,000 to $145,000.

12. DERIVATIVE FINANCIAL INSTRUMENTS

Fair Value of Derivative Financial Instruments
The Company recognizes all derivative financial instruments, such as foreign exchange contracts at fair value. Changes in the fair value of derivative financial instruments are either recognized periodically in income or in shareholders’ equity as a component of other comprehensive income depending on whether the derivative financial instrument qualifies for hedge accounting, and if so, whether it qualifies as a fair value hedge or a cash flow hedge. The Company has elected not to offset fair value amounts recognized for derivative instruments with the same counterparty under a master netting agreement. See Note 16 “Fair Value Measurements” to the “Notes to Condensed Consolidated Financial Statements” for further information on fair value methodology.
           The following table summarizes the fair value of the Company’s derivatives by type at December 31, 2012 and 2011, and March 31, 2012.
 
 
Fair Values of Derivative Instruments
 
 
Assets
 
Liabilities
Derivatives Not Designated as Hedging Instruments:
 
Balance Sheet Account
 
Fair
Value
 
Balance Sheet Account
 
Fair
Value
     Foreign currency contracts at December 31, 2012
 
Other Current Assets
 
$

 
Accrued Expenses and Other Current Liabilities
 
$
1,350

     Foreign currency contracts at December 31, 2011
 
Other Current Assets
 
$
51

 
Accrued Expenses and Other Current Liabilities
 
$
80

     Foreign currency contracts at March 31, 2012
 
Other Current Assets
 
$
312

 
Accrued Expenses and Other Current Liabilities
 
$
16


Earnings Effects of Derivatives
The Company periodically enters into forward or option currency contracts to protect against volatility associated with certain non-U.S. dollar denominated forecasted transactions. These contracts are for green tobacco purchases and processing costs as well as selling, general and administrative costs as the Company deems necessary. These contracts do not meet the requirements for hedge accounting treatment under generally accepted accounting principles, and as such, all changes in fair value are reported in income each period.
          The following table summarizes the earnings effects of derivatives in the Condensed Consolidated Statements of Operations for the three months and nine months ended December 31, 2012 and 2011.

 
 
 
 
Gain (Loss) Recognized in Income
Derivatives Not Designated
as Hedging Instruments
 
Location of Gain (Loss)
Recognized in Income
 
Three Months Ended
December 31,
 
Nine Months Ended
December 31,
 
 
 
 
2012
 
2011
 
2012
 
2011
 
 
 
 
 
 
 
 
 
 
 
Foreign currency contracts
 
Cost of goods and services sold
 
$
(627
)
 
$
235

 
$
(13,876
)
 
$
6,260

Foreign currency contracts
 
Selling, general and administrative expenses
 

 
22

 

 
(95
)
Total
 
 
 
$
(627
)
 
$
257

 
$
(13,876
)
 
$
6,165


- 18 -

Alliance One International, Inc. and Subsidiaries

12. DERIVATIVE FINANCIAL INSTRUMENTS (continued)

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

13. PENSION AND POSTRETIREMENT BENEFITS

The Company has multiple benefit plans at several locations. The Company has a defined benefit plan that provides retirement benefits for substantially all U.S. salaried personnel based on years of service rendered, age and compensation. The Company also maintains various other Excess Benefit and Supplemental Plans that provide additional benefits to (1) certain individuals whose compensation and the resulting benefits that would have actually been paid are limited by regulations imposed by the Internal Revenue Code and (2) certain individuals in key positions. The Company funds these plans in amounts consistent with the funding requirements of federal law and regulations.
         Additional non-U.S. defined benefit plans sponsored by certain subsidiaries cover certain full-time employees located in Germany, Turkey, and the United Kingdom. In the quarter ended June 30, 2011, Malawi enacted legislation that terminated the statutorily required defined benefit plan and replaced it with a defined contribution plan. This terminated defined benefit plan resulted in a curtailment gain of $4,989. The new statutorily required defined contribution plan has been integrated with the Company’s existing defined contribution plan which resulted in an additional liability of $4,172 at June 30, 2011.

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

 
Three Months Ended
December 31,
Nine Months Ended
December 31,
 
2012
 
2011
2012
 
2011
     Service cost
$
512

 
$
526

$
1,535

 
$
1,667

     Interest expense
1,842

 
2,048

5,526

 
6,238

     Expected return on plan assets
(1,570
)
 
(1,637
)
(4,710
)
 
(4,911
)
     Amortization of prior service cost
55

 
27

165

 
80

     Actuarial loss
499

 
287

1,497

 
879

     Curtailment gain recognized

 


 
(4,989
)
     Net periodic pension cost (benefit)
$
1,338

 
$
1,251

$
4,013

 
$
(1,036
)

Employer Contributions
The Company’s investment objectives are to generate consistent total investment return to pay anticipated plan benefits, while minimizing long-term costs. Financial objectives underlying this policy include maintaining plan contributions at a reasonable level relative to benefits provided and assuring that unfunded obligations do not grow to a level to adversely affect the Company’s financial health. As of December 31, 2012, contributions of $7,371 were made to pension plans for fiscal 2013. Additional contributions to pension plans of approximately $2,855 are expected during the remainder of fiscal 2013. However, this amount is subject to change, due primarily to asset performance significantly above or below the assumed long-term rate of return on pension assets and significant changes in interest rates.

- 19 -

Alliance One International, Inc. and Subsidiaries

13. PENSION AND POSTRETIREMENT BENEFITS (continued)

Postretirement Health and Life Insurance Benefits
The Company also provides certain health and life insurance benefits to retired employees, and their eligible dependents, who meet specified age and service requirements. As of December 31, 2012, contributions of $629 were made to the plans for fiscal 2013. Additional contributions of $308 to the plans are expected during the rest of fiscal 2013. The Company retains the right, subject to existing agreements, to modify or eliminate the postretirement medical benefits.

Components of Net Periodic Benefit Cost
Net periodic benefit cost for postretirement health and life insurance benefit plans consisted of the following:

 
Three Months Ended
December 31,
Nine Months Ended
December 31,
 
2012
 
2011
2012
 
2011
     Service cost
$
16

 
$
18

$
47

 
$
55

     Interest expense
157

 
167

471

 
500

     Amortization of prior service cost
(411
)
 
(411
)
(1,232
)
 
(1,233
)
     Actuarial loss
117

 
101

351

 
303

     Net periodic pension (benefit)
$
(121
)
 
$
(125
)
$
(363
)
 
$
(375
)

14. INVENTORIES

The following table summarizes the Company’s costs in inventory:
 
December 31, 2012
December 31, 2011
March 31, 2012
Processed tobacco
$
668,846

$
830,548

$
555,341

Unprocessed tobacco
193,554

196,355

240,811

Other
45,721

36,392

43,750

 
$
908,121

$
1,063,295

$
839,902



15. SALE OF RECEIVABLES

The Company sells trade receivables to unaffiliated financial institutions under two accounts receivable securitization programs. Under the first program, the Company continuously sells a designated pool of up to $250,000 trade receivables to a special purpose entity, which in turn sells 100% of the receivables to an unaffiliated financial institution. This program allows the Company to receive a cash payment and a deferred purchase price receivable for sold receivables. Following the sale and transfer of the receivables to the special purpose entity, the receivables are isolated from the Company and its affiliates, and upon the sale and transfer of the receivables from the special purpose entity to the unaffiliated financial institution effective control of the receivables is passed to the unaffiliated financial institution, which has all rights, including the right to pledge or sell the receivables. This program requires a minimum level of deferred purchase price to be retained by the Company in connection with the sales. The Company services, administers and collects the receivables on behalf of the special purpose entity and receives a servicing fee of .5% of serviced receivables per annum. As the Company estimates the fee it receives in return for its obligation to service these receivables at fair value, no servicing assets or liabilities are recognized. Servicing fees recognized were not material and are recorded as a reduction of Selling, General and Administrative Expenses within the Condensed Consolidated Statements of Operations.

- 20 -

Alliance One International, Inc. and Subsidiaries

15. SALE OF RECEIVABLES (continued)

          The agreement for the second securitization program also allows the Company to receive a cash payment and a deferred purchase price receivable for sold receivables. This is an uncommitted program, whereby the Company offers receivables for sale to the unaffiliated financial institution, which are then subject to acceptance by the unaffiliated financial institution. Following the sale and transfer of the receivables to the unaffiliated financial institution, the receivables are isolated from the Company and its affiliates, and effective control of the receivables is passed to the unaffiliated financial institution, which has all rights, including the right to pledge or sell the receivables. The investment limit with this financial institution is $35,000. The Company receives no servicing fee from the unaffiliated financial institution and as a result, has established a servicing liability based upon unobservable inputs, primarily discounted cash flow. This liability is recorded in Accrued Expenses and Other Current Liabilities in the Condensed Consolidated Balance Sheets.
          Under both programs, all of the receivables sold for cash are removed from the Condensed Consolidated Balance Sheets and the net cash proceeds received by the Company are included as cash provided by operating activities in the Condensed Consolidated Statements of Cash Flows. A portion of the purchase price for the receivables is paid by the unaffiliated financial institutions in cash and the balance is a deferred purchase price receivable, which is paid as payments on the receivables are collected from account debtors. The deferred purchase price receivable represents a continuing involvement and a beneficial interest in the transferred financial assets and is recognized at fair value as part of the sale transaction. The deferred purchase price receivables are included in Trade and Other Receivables, Net in the Condensed Consolidated Balance Sheets and are valued using unobservable inputs (i.e., level three inputs), primarily discounted cash flow. See Note 16 "Fair Value Measurements" to the "Notes to Condensed Consolidated Financial Statements" for further information.
          The difference between the carrying amount of the receivables sold under these programs and the sum of the cash and fair value of the other assets received at the time of transfer is recognized as a loss on sale of the related receivables and recorded in Other Income (Expense) in the Condensed Consolidated Statements of Operations.

          The following table summarizes the Company’s accounts receivable securitization information as of the dates shown:
 
December 31,
 
March 31,
 
2012
2011
 
2012
Receivables outstanding in facility
$
213,757

$
136,196

 
$
182,856

Beneficial interest
$
43,700

$
34,405

 
$
25,864

Servicing liability
$
26

$
28

 
$
45

Cash proceeds for the nine months ended December 31:
 
 
 
 
Cash purchase price
$
481,090

$
461,237

 
 
Deferred purchase price
223,830

217,522

 
 
Service fees
460

399

 
 
Total
$
705,380

$
679,158

 
 


16. FAIR VALUE MEASUREMENTS

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

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

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


- 21 -

Alliance One International, Inc. and Subsidiaries

16. FAIR VALUE MEASUREMENTS (continued)

Debt
The fair value of debt is measured for purpose of disclosure. Debt is shown at historical value in the Condensed Consolidated Balance Sheets. When possible, to measure the fair value of its long-term debt the Company uses quoted market prices of its own debt with approximately the same remaining maturities. When this is not possible, the fair value of long-term debt is calculated using discounted cash flow models with interest rates based upon market based expectations, the Company's credit risk and the contractual terms of the debt instrument. The Company also has portions of its long-term debt with maturities of one year or less. Due to the short-term nature of this debt, the Company believes book value is a reasonable approximation of this debt. The fair value of long-term debt is considered to fall within Level 2 of the fair value hierarchy as significant value drivers such as interest rates are readily observable. The carrying value and estimated fair value of the Company's Long-Term Debt are shown in the table below.
 
December 31, 2012
December 31, 2011
March 31, 2012
Carrying value
$
1,037,892

$
874,603

$
828,503

Estimated fair value
1,059,415

785,090

841,558


Derivative financial instruments
The Company's derivatives consist of foreign currency contracts. The fair value of the derivatives are determined using a discounted cash flow analysis on the expected future cash flows of each derivative. This analysis utilizes observable market data including forward yield curves and implied volatilities to determine the market's expectation of the future cash flows of the variable component. The fixed and variable components of the derivative are then discounted using calculated discount factors developed based on the LIBOR swap rate and are netted to arrive at a single valuation for the period. The Company also incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty's nonperformance risk in the fair value measurements. As of December 31, 2012 and 2011 and March 31, 2012 the inputs used to value the Company's derivatives fall within Level 2 of the fair value hierarchy. However, credit valuation adjustments associated with its derivatives could utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. Should the use of such credit valuation adjustment estimates result in a significant impact on the overall valuation, this would require reclassification to Level 3.

Securitized beneficial interests
The fair value of securitized beneficial interests is based upon a valuation model that calculates the present value of future expected cash flows using key assumptions for payment speeds and discount rates. The assumptions for payment speed are based on the Company's historical experience. The discount rates are based upon market trends and anticipated performance relative to the particular assets securitized which have been assumed to be commercial paper rate plus a margin or LIBOR plus a margin. Due to the use of the Company's own assumptions and the uniqueness of these transactions, securitized beneficial interests fall within Level 3 of the fair value hierarchy. Since the discount rate and the payment speed are components of the same equation, a change in either by 10% or 20% would change the value of the recorded beneficial interest at December 31, 2012 by $106 and $212, respectively.

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

          Tobacco supplier guarantees - The Company provides guarantees to third parties for indebtedness of certain tobacco suppliers to finance their crops. The fair value of these guarantees is determined using historical loss rates on both guaranteed and non-guaranteed tobacco supplier loans. Should the loss rates change 10% or 20%, the fair value of the guarantee at December 31, 2012 would change by $502 or $1,003, respectively.

          Deconsolidated subsidiary guarantees - The fair value of these guarantees is determined using a discounted cash flow model based on the differential between interest rates available with and without the guarantees. The fair value of these guarantees is most closely tied to the theoretical interest rate differential. Should interest rates used in the model change by 10% or 20%, the fair value of the guarantee, at December 31, 2012 would change by $271 or $542, respectively.

- 22 -

Alliance One International, Inc. and Subsidiaries

16. FAIR VALUE MEASUREMENTS (continued)

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

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

 
December 31, 2012
 
December 31, 2011
 
March 31, 2012
 
 
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
$

$

$

 
$
51

$

$
51

 
$
312

$

$
312

Securitized beneficial interests

43,700

43,700

 

34,405

34,405

 

25,864

25,864

Total Assets
$

$
43,700

$
43,700

 
$
51

$
34,405

$
34,456

 
$
312

$
25,864

$
26,176

Liabilities
 
 
 
 
 
 
 
 
 
 
 
Guarantees
$

$
7,728

$
7,728

 
$

$
4,342

$
4,342

 
$

$
5,265

$
5,265

Derivative financial instruments
1,350


1,350

 
80


80

 
16


16

Total liabilities
$
1,350

$
7,728

$
9,078

 
$
80

$
4,342

$
4,422

 
$
16

$
5,265

$
5,281


Reconciliation of Change in Recurring Level 3 Balances

The following tables present the changes in Level 3 instruments measured on a recurring basis.

 
Three Months Ended December 31, 2012
 
Nine Months Ended December 31, 2012
 
Securitized Beneficial Interests
Guarantees
 
Securitized Beneficial Interests
Guarantees
Beginning Balance
$
20,989

$
9,489

 
$
25,864

$
5,265

   Issuances of guarantees/sales of receivables
68,889

1,551

 
180,768

10,613

   Settlements
(44,550
)
(3,312
)
 
(158,718
)
(8,150
)
   Losses recognized in earnings
(1,628
)

 
(4,214
)

Ending Balance December 31, 2012
$
43,700

$
7,728

 
$
43,700

$
7,728


 
Three Months Ended December 31, 2011
 
Nine Months Ended December 31, 2011
 
Securitized Beneficial Interest
Guarantees
 
Securitized Beneficial Interest
Guarantees
Beginning Balance
$