AOI-2012.09.30-10Q
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 September 30, 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 November 1, 2012, 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 Six Months Ended September 30, 2012 and 2011
3
 
 
 
Condensed Consolidated Statements of Comprehensive Income (Loss)
 
 
Three and Six Months Ended September 30, 2012 and 2011
4
 
 
 
 
Condensed Consolidated Balance Sheets
 
 
September 30, 2012 and 2011 and March 31, 2012
5
 
 
 
Condensed Statements of Consolidated Stockholders’ Equity
 
 
Six Months Ended September 30, 2012 and 2011
6
 
 
 
 
Condensed Consolidated Statements of Cash Flows
 
 
Six Months Ended September 30, 2012 and 2011
7
 
 
 
Notes to Condensed Consolidated Financial Statements
8 – 23
 
 
 
 
Item 2.
Management's Discussion and Analysis
 
 
 
of Financial Condition and Results of Operations
24 – 30
 
 
 
 
 
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
30
 
 
 
 
 
Item 4.
Controls and Procedures
30 - 31
 
 
Part II.
Other Information
 
 
 
 
 
Item 1.
Legal Proceedings
31
 
 
 
 
 
Item 1A.
Risk Factors
31
 
 
 
 
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
32
 
 
 
 
 
Item 3.
Defaults Upon Senior Securities
32
 
 
 
 
 
Item 4.
32
 
 
 
 
 
Item 5.
Other Information
32
 
 
 
 
 
Item 6.
Exhibits
32
 
Signature
33
 
 
Index of Exhibits
34

- 2 -

Part I. Financial Information

Item 1. Financial Statements

Alliance One International, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three and Six Months Ended September 30, 2012 and 2011
(Unaudited)
 
 
 
 
 
 
 
 
 
 
Three Months Ended
September 30,
 
Six Months Ended
September 30,
(in thousands, except per share data)
 
2012
2011
 
2012
2011
 
 
 
 
 
 
 
Sales and other operating revenues
 
$
576,411

$
514,531

 
$
934,181

$
876,095

Cost of goods and services sold
 
489,448

443,281

 
805,655

748,597

Gross profit
 
86,963

71,250

 
128,526

127,498

Selling, general and administrative expenses
 
35,982

34,402

 
72,076

69,357

Other income (expense)
 
(1,157
)
891

 
(1,347
)
4,121

Restructuring and asset impairment charges
 
—

747

 
—

1,516

Operating income
 
49,824

36,992

 
55,103

60,746

Interest expense (includes debt amortization of $2,625 and $2,883 for the three months and $5,217 and $5,463 for the six months in 2012 and 2011, respectively)
 
29,776

27,027

 
56,891

52,803

Interest income
 
1,121

1,286

 
2,119

2,777

Income before income taxes and other items
 
21,169

11,251

 
331

10,720

Income tax expense
 
3,901

16,275

 
13,140

14,394

Equity in net income of investee companies
 
1,045

1,173

 
850

1,173

Net income (loss)
 
18,313

(3,851
)
 
(11,959
)
(2,501
)
Less: Net income (loss) attributable to noncontrolling interests
 
(55
)
(130
)
 
416

(101
)
Net income (loss) attributable to Alliance One International, Inc.
 
$
18,368

$
(3,721
)
 
$
(12,375
)
$
(2,400
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Earnings (loss) per share:
 
 
 
 
 
 
Basic
 
$
.21

$
(.04
)
 
$
(.14
)
$
(.03
)
Diluted
 
$
.18

$
(.04
)
 
$
(.14
)
$
(.03
)
 
 
 
 
 
 
 
Weighted average number of shares outstanding:
 
 
 
 
 
 
Basic
 
87,367

86,968

 
87,280

86,891

Diluted
 
110,545

86,968

 
87,280

86,891

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
See notes to condensed consolidated financial statements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

- 3 -


Alliance One International, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Three and Six Months Ended September 30, 2012 and 2011
(Unaudited)
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended
September 30,
 
Six Months Ended
September 30,
(in thousands)
2012
2011
 
2012
2011
 
 
 
 
 
 
Net income (loss)
$
18,313

$
(3,851
)
 
$
(11,959
)
$
(2,501
)
 
 
 
 
 
 
Other comprehensive income (loss), net of tax:
 
 
 
 
 
Currency translation adjustment
1,074

(1,808
)
 
(702
)
(1,127
)
Pension plans:
 
 
 
 
 
      Amounts reclassified to income, net of tax of $399 for the six
          months ended September 30, 2011
(521
)
—

 
(521
)
931

Total other comprehensive income (loss), net of tax
553

(1,808
)
 
(1,223
)
(196
)
Total comprehensive income (loss)
18,866

(5,659
)
 
(13,182
)
(2,697
)
Comprehensive income (loss) attributable to noncontrolling interests
(55
)
(130
)
 
416

(101
)
Comprehensive income (loss) attributable to Alliance One International, Inc.
$
18,921

$
(5,529
)
 
$
(13,598
)
$
(2,596
)
 
 
 
 
 
See notes to condensed consolidated financial statements
 
 
 
 

- 4 -

Alliance One International, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS 
(Unaudited)
(in thousands)
September 30,
2012
 
September 30,
2011
 
March 31,
2012
ASSETS
 
 
 
 
 
Current assets
 
 
 
 
 
Cash and cash equivalents
$
194,717

 
$
139,575

 
$
119,743

Trade and other receivables, net
270,632

 
241,262

 
303,090

Accounts receivable, related parties
111,878

 
50,523

 
32,316

Inventories
1,009,722

 
1,061,849

 
839,902

Advances to tobacco suppliers
104,840

 
76,297

 
89,378

Recoverable income taxes
7,361

 
15,928

 
9,592

Current deferred taxes
22,529

 
13,141

 
23,855

Prepaid expenses
37,819

 
40,071

 
45,097

Other current assets
7,419

 
919

 
14,874

Total current assets
1,766,917

 
1,639,565

 
1,477,847

Other assets
 
 
 
 
 
Investments in unconsolidated affiliates
24,207

 
26,838

 
24,530

Goodwill and other intangible assets
33,525

 
38,321

 
35,865

Deferred income taxes
60,952

 
71,597

 
73,378

Other deferred charges
18,145

 
18,986

 
12,467

Other noncurrent assets
62,324

 
57,436

 
66,079

 
199,153

 
213,178

 
212,319

Property, plant and equipment, net
265,100

 
239,513

 
259,679

 
$
2,231,170

 
$
2,092,256

 
$
1,949,845

 
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
 
Current liabilities
 
 
 
 
 
Notes payable to banks
$
491,207

 
$
499,890

 
$
374,532

Accounts payable
58,904

 
76,521

 
120,148

Due to related parties
64,757

 
31,295

 
37,520

Advances from customers
55,727

 
63,645

 
14,876

Accrued expenses and other current liabilities
84,493

 
87,516

 
78,758

Income taxes
11,750

 
18,765

 
16,282

Long-term debt current
51,268

 
1,188

 
7,050

Total current liabilities
818,106

 
778,820

 
649,166

 
 
 
 
 
 
Long-term debt
962,327

 
877,647

 
821,453

Deferred income taxes
8,268

 
3,439

 
9,494

Liability for unrecognized tax benefits
7,853

 
14,512

 
18,183

Pension, postretirement and other long-term liabilities
114,540

 
102,839

 
121,128

 
1,092,988

 
998,437

 
970,258

Commitments and contingencies
 
 
 
 
 
Stockholders’ equity
Sept. 30, 2012
 
Sept. 30, 2011
 
March 31,
2012
 
 
 
 
 
Common Stock—no par value:
 
 
 
 
 
 
 
 
 
 
Authorized shares
250,000

 
250,000

 
250,000

 
 
 
 
 
Issued shares
95,454

 
95,133

 
95,234

460,334

 
457,093

 
457,497

Retained deficit
(103,717
)
 
(123,193
)
 
(91,342
)
Accumulated other comprehensive loss
(39,896
)
 
(21,999
)
 
(38,673
)
Total stockholders’ equity of Alliance One International, Inc.
316,721

 
311,901

 
327,482

Noncontrolling interests
3,355

 
3,098

 
2,939

Total equity
320,076

 
314,999

 
330,421

 
$
2,231,170

 
$
2,092,256

 
$
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 Income
 
 
(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 loss
—

(2,400
)
—

—

(101
)
(2,501
)
Restricted stock surrendered
(98
)
—

—

—

—

(98
)
Stock-based compensation
1,782

—



—

—

1,782

Other comprehensive income, net of tax
—

—

(1,127
)
931

—

(196
)
 
 
 
 
 
 
 
Balance, September 30, 2011
$
457,093

$
(123,193
)
$
(2,503
)
$
(19,496
)
$
3,098

$
314,999

 
 
 
 
 
 
 
Balance, March 31, 2012
$
457,497

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

$
330,421

Net income (loss)
—

(12,375
)
—

—

416

(11,959
)
Restricted stock surrendered
(118
)
—

—

—

—

(118
)
Stock-based compensation
2,955

—

—

—

—

2,955

Other comprehensive income, net of tax
—

—

(702
)
(521
)
—

(1,223
)
 
 
 
 
 
 
 
Balance, September 30, 2012
$
460,334

$
(103,717
)
$
(3,624
)
$
(36,272
)
$
3,355

$
320,076

 
 
 
 
 
 
 
See notes to condensed consolidated financial statements

- 6 -

Alliance One International, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS 
Six Months Ended September 30, 2012 and 2011
(Unaudited)
 
 
(in thousands)
 
September 30,
2012
 
September 30,
2011
 
 
 
 
 
Operating activities
 
 
 
 
   Net loss
 
$
(11,959
)
 
$
(2,501
)
   Adjustments to reconcile net loss to net cash used by operating activities:
 
 
 
 
      Depreciation and amortization
 
16,589

 
16,068

      Debt amortization/interest
 
7,432

 
7,154

     Restructuring charges
 
—

 
792

     Loss on foreign currency transactions
 
9,034

 
14,021

      Gain on sale of property, plant and equipment
 
(713
)
 
(2,533
)
      Stock-based compensation
 
3,297

 
1,868

      Changes in operating assets and liabilities, net
 
(236,228
)
 
(183,015
)
      Other, net
 
1,632

 
(259
)
   Net cash used by operating activities
 
(210,916
)
 
(148,405
)
 
 
 
 
 
Investing activities
 
 
 
 
   Purchases of property, plant and equipment
 
(20,433
)
 
(18,181
)
   Proceeds from sale of property, plant and equipment
 
835

 
2,392

   Restricted cash
 
7,611

 
30

   Other, net
 
(888
)
 
221

   Net cash used by investing activities
 
(12,875
)
 
(15,538
)
 
 
 
Financing activities
 
 
 
 
   Net proceeds from short-term borrowings
 
121,526

 
272,103

   Proceeds from long-term borrowings
 
228,060

 
250,200

   Repayment of long-term borrowings
 
(44,821
)
 
(258,182
)
   Debt issuance cost
 
(5,759
)
 
(5,271
)
   Net cash provided by financing activities
 
299,006

 
258,850

 
 
 
 
 
Effect of exchange rate changes on cash
 
(241
)
 
1,162

 
 
 
Increase in cash and cash equivalents
 
74,974

 
96,069

Cash and cash equivalents at beginning of period
 
119,743

 
43,506

Cash and cash equivalents at end of period
 
$
194,717

 
$
139,575

 
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 $3,975 and $3,042 for the three months ended September 30, 2012 and 2011, respectively and $9,122 and $8,614 for the six months ended September 30, 2012 and 2011, respectively.

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

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.
          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.

- 8 -
Alliance One International, Inc. and Subsidiaries

2. INCOME TAXES

Accounting for Uncertainty in Income Taxes
As of September 30, 2012, the Company’s unrecognized tax benefits totaled $6,299, all of which would impact the Company’s effective tax rate if recognized.
         The Company recognizes interest and penalties related to unrecognized tax benefits in income tax expense. As of September 30, 2012, accrued interest and penalties totaled $665 and $889 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 September 30, 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 Six Months Ended September 30, 2012
The effective tax rate used for the six months ended September 30, 2012 was 3,969.8% compared to 1.343% for the six months ended September 30, 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 38.8% after absorption of discrete items.
         For the six months ended September 30, 2012, the Company recorded a discrete event adjustment expense of $913, bringing the effective tax rate estimated for the six months of 3,694.0% to 3,969.8%. 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 and the release of a U.S. uncertain tax position effectively settled upon completion of a tax examination of a prior year. For the six months ended September 30, 2011, the Company recorded a discrete event adjustment expense of $13,437, bringing the effective tax rate estimated for the six months of 8.9% to 134.3%. 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 six months ended September 30, 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.

The following table summarizes amounts guaranteed and the fair value of those guarantees:
 
September 30, 2012
 
September 30, 2011
 
March 31, 2012
Amounts guaranteed (not to exceed)
$
117,928

 
$
152,653

 
$
127,132

Amounts outstanding under guarantee
112,227

 
111,418

 
105,403

Fair value of guarantees
9,489

 
5,005

 
5,265


         Of the guarantees outstanding at September 30, 2012, approximately 94% 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 September 30, 2012 and 2011 and March 31, 2012, respectively, the Company had balances of $1,979, $3,447 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.

- 9 -
Alliance One International, Inc. and Subsidiaries

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 six months ended September 30, 2012 and 2011, respectively:
 
Three Months Ended
September 30,
 
Six Months Ended
September 30,
Restructuring and Asset Impairment Charges
2012
2011
 
2012
2011
Employee separation and other cash charges:
 
 
 
 
 
Beginning balance
$
1,405

$
5,220

 
$
1,960

$
6,193

Period charges:
 
 
 
 
 
Severance charges (recovery)
—

(13
)
 
—

725

Other cash charges
—

—

 
—

31

Total period charges
—

(13
)
 
—

756

Payments through September 30
(229
)
(1,414
)
 
(784
)
(3,156
)
Ending balance September 30
$
1,176

$
3,793

 
$
1,176

$
3,793

Non-current asset impairment charges
—

760

 
—

760

Total restructuring and asset impairment charges for the period
$
—

$
747

 
$
—

$
1,516


         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 six months ended September 30, 2012 and 2011, respectively:
 
Three Months Ended
September 30,
 
Six Months Ended
September 30,
Employee Separation and Other Cash Charges
2012
2011
 
2012
2011
Beginning balance:
$
1,405

$
5,220

 
$
1,960

$
6,193

   South America
165

993

 
183

1,073

   Value added services
—

—

 
—

—

   Other regions
1,240

4,227

 
1,777

5,120

Period charges:
$
—

$
(13
)
 
$
—

$
756

   South America
—

419

 
—

419

   Value added services
—

—

 
—

—

   Other regions
—

(432
)
 
—

337

Payments through September 30:
$
(229
)
$
(1,414
)
 
$
(784
)
$
(3,156
)
   South America
(19
)
(867
)
 
(37
)
(947
)
   Value added services
—

—

 
—

—

   Other regions
(210
)
(547
)
 
(747
)
(2,209
)
Ending balance September 30:
$
1,176

$
3,793

 
$
1,176

$
3,793

   South America
146

545

 
146

545

   Value added services
—

—

 
—

—

   Other regions
1,030

3,248

 
1,030

3,248


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 systematic 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.



- 10 -
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 being amortized. The following table summarizes the changes in the Company’s goodwill and other intangibles for the three months and six months ended September 30, 2012 and 2011:

 
 

 
Amortizable Intangibles
 
 
 
Unamortizable
Goodwill
 
Customer
Relationship
Intangible
 
Production
and Supply
Contract
Intangibles
 
Internally
Developed
Software
Intangible
 
Total
Weighted average remaining useful life in years as of September 30, 2012
 

 
12.5

 
3.5

 
1.5

 
 
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

Additions
 
—

 
—

 
—

 
972

 
972

Amortization expense
 
—

 
(842
)
 
(729
)
 
(1,857
)
 
(3,428
)
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


         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
October 1, 2012 through March 31, 2013
 
$
842

 
$
1,009

 
$
1,690

 
$
3,541

2014
 
1,685

 
1,251

 
1,799

 
4,735

2015
 
1,685

 
1,173

 
583

 
3,441

2016
 
1,685

 
1,175

 
453

 
3,313

2017
 
1,685

 
—

 
299

 
1,984

Subsequent years
 
13,691

 
—

 
26

 
13,717

 
 
$
21,273

 
$
4,608

 
$
4,850

 
$
30,731

*  Estimated amortization expense for the internally developed software is based on costs accumulated as of September 30, 2012. These estimates will change as new costs are incurred and until the software is placed into service in all locations.

- 11 -
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 represent 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 September 30, 2012 and 2011, and March 31, 2012, the Company’s investment in these joint ventures was $23,023, $25,927, 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 $3,009, $9,317 and $9 at September 30, 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 $19,611, $17,661 and $19,712 at September 30, 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 has revised its reportable segments. Prior year segment data has been recast 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 six months ended September 30, 2012 and 2011:       

 
Three Months Ended
 
Six Months Ended
 
September 30,
 
September 30,
 
2012
 
2011
 
2012
 
2011
Sales and other operating revenues:
 
 
 
 
 
 
 
    South America
$
272,993

 
$
222,880

 
$
451,338

 
$
378,725

Value added services
33,568

 
39,588

 
67,200

 
75,699

    Other regions
269,850

 
252,063

 
415,643

 
421,671

    Total revenue
$
576,411

 
$
514,531

 
$
934,181

 
$
876,095

 
 
 
 
 
 
 
 
Operating income:
 
 
 
 
 
 
 
    South America
$
24,893

 
$
12,252

 
$
25,762

 
$
26,574

Value added services
6,482

 
6,304

 
8,130

 
10,689

    Other regions
18,449

 
18,436

 
21,211

 
23,483

Total operating income
49,824

 
36,992

 
55,103

 
60,746

 
 
 
 
 
 
 
 
    Interest expense
29,776

 
27,027

 
56,891

 
52,803

    Interest income
1,121

 
1,286

 
2,119

 
2,777

Income before income taxes and other items
$
21,169

 
$
11,251

 
$
331

 
$
10,720






- 12 -
Alliance One International, Inc. and Subsidiaries

7. SEGMENT INFORMATION (continued)

Analysis of Segment Assets
September 30, 2012
September 30, 2011
March 31, 2012

Segment assets:
 
 
 
 
South America
$
717,526

$
782,933

$
534,169

 
Value added services
158,591

93,607

117,288

 
Other regions
1,355,053

1,215,716

1,298,388

 
Total assets
$
2,231,170

$
2,092,256

$
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 September 30, 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 7,189 at a weighted average exercise price of $6.01 per share at September 30, 2012 and 4,229 at a weighted average exercise price of $7.02 per share at September 30, 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.






























- 13 -
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 six months ended September 30, 2012 and 2011, respectively.
 
Three Months Ended
 
Six Months Ended
 
 
September 30,
 
September 30,
 
(in thousands, except per share data)
2012

 
2011

 
2012
 
2011
 
BASIC EARNINGS (LOSS)
 
 
 
 
 
 
 
 
Net income (loss) attributable to Alliance One International, Inc.
$
18,368

 
$
(3,721
)
 
$
(12,375
)
 
$
(2,400
)
 
 
 
 
 
 
 
 
 
 
SHARES
 
 
 
 
 
 
 
 
   Weighted average number of shares outstanding
87,367

 
86,968

 
87,280

 
86,891

 
 
 
 
 
 
 
 
 
 
BASIC EARNINGS (LOSS) PER SHARE
$
.21

 
$
(.04
)
 
$
(.14
)
 
$
(.03
)
 
 
 
 
 
 
 
 
 
 
DILUTED EARNINGS (LOSS)
 
 
 
 
 
 
 
 
   Net income (loss) attributable to Alliance One
   International, Inc.
$
18,368

 
$
(3,721
)
 
$
(12,375
)
 
$
(2,400
)
 
   Plus interest expense on 5 1/2% convertible notes,
   net of tax
1,016

 
—

*
—

*
—

*
   Net income (loss) attributable to Alliance One
         International, Inc. as adjusted
$
19,384

 
$
(3,721
)
 
$
(12,375
)
 
$
(2,400
)
 
 
 
 
 
 
 
 
 
 
SHARES
 
 
 
 
 
 
 
 
   Weighted average number of common shares
   outstanding
87,367

 
86,968

 
87,280

 
86,891

 
   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
306

 
—

*
—

*
—

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

 
—

*
—

*
—

*
             Shares applicable to stock warrants
—

**
—

**
—

**
—

**
   Adjusted weighted average number of common
  shares outstanding
110,545

 
86,968

 
87,280

 
86,891

 
DILUTED EARNINGS (LOSS) PER SHARE
$
.18

 
$
(.04
)
 
$
(.14
)
 
$
(.03
)
 
 
 
 
 
 
 
 
 
 
*Assumed conversion of convertible notes at the beginning of the period has an antidilutive effect on earnings (loss) per share. 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.
** For the three months and six months ended September 30, 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 $672 and $850 for the three months ended September 30, 2012 and 2011, respectively and $3,297 and $1,868 for the six months ended September 30, 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 six months ended September 30, 2012, 3,350 stock-based compensation awards for stock options were granted. No stock options were granted during the three months ended September 30, 2012. No stock options were granted during the three months and six months ended September 30, 2011.








- 14 -
Alliance One International, Inc. and Subsidiaries

9. STOCK-BASED COMPENSATION (continued)
          Assumptions used to determine the fair value of options issued during the six months ended September 30, 2012 include the following:
 
Six Months Ended
September 30, 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 six months ended September 30, 2012 and 2011, respectively, the Company made the following stock-based compensation awards for restricted stock:
 
Three Months Ended
September 30,
 
Six Months Ended
September 30,
(in thousands, except grant date fair value)
2012
2011
 
2012
2011
Restricted Stock
 
 
 
 
 
           Number Granted
167

146

 
167

146

           Grant Date Fair Value
$
2.89

$
3.27

 
$
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 $6,488 and the total assessment including penalties and interest at September 30, 2012 is $16,012. 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 $23,862, 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 $23,942 at September 30, 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.





- 15 -
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 has been set for 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.  Hearings have yet to be set in the pending 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.  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 these 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 $9,483) 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, commenced on June 27, 2012 and are continuing. The Company believes the remaining claims in the action to be without merit and is vigorously defending the action. Due to the broad scope of the pleading, the ultimate exposure if an unfavorable outcome is received is not estimable.
          The Company has been named as one of several defendants in Hupan, et al. v. Alliance One International, Inc., et al., and Chalanuk, et al. v. Alliance One International, Inc., et al., which are distinct but related lawsuits respectively filed in New Castle County, Delaware state court on February 14, 2012 and April 5, 2012. The lawsuits were brought by approximately 130 individuals claiming to be tobacco farmers and their family members, all residing in Misiones Province, Argentina. The complaints seek compensatory and punitive damages from the Company and 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. The Company has not yet filed answers or other responsive pleadings in these actions, as to which the time for filing has been extended. The Company is also aware of a complaint filed on October 25, 2012 in New Castle County, Delaware state court which names the Company as one of several defendants, but which has not been served on the Company.  The complaint names as plaintiffs approximately 100 additional individuals who are also alleged to be tobacco farmers and their family members residing in Misiones Province, Argentina, and alleges injuries and seeks remedies similar to the two other actions pending against the Company in Delaware state court. Based on its preliminary investigation, the Company believes the claims against it in each of these matters to be without merit and intends to vigorously defend against them. Because the Company has only recently been named in the lawsuits, the ultimate exposure if an unfavorable outcome is received is not estimable.
          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.

- 16 -
Alliance One International, Inc. and Subsidiaries

10. CONTINGENCIES AND OTHER INFORMATION (continued)

Other (continued)

The Company has no additional material AROs.

11. DEBT ARRANGEMENTS

At September 30, 2012, borrowings under the senior secured credit facility were $190,000 and $6,000 aggregate principal of the Company's 8 1/2% senior notes due 2012 were repaid during the six months ended September 30, 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 September 30, 2012, the Company did not satisfy this fixed charge coverage ratio. The Company may from time to time not satisfy this ratio.

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 September 30, 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 September 30, 2012
 
Other Current Assets
 
$
398

 
Accrued Expenses and Other Current Liabilities
 
$
747

     Foreign currency contracts at September 30, 2011
 
Other Current Assets
 
$
367

 
Accrued Expenses and Other Current Liabilities
 
$
655

     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.









- 17 -
Alliance One International, Inc. and Subsidiaries

12. DERIVATIVE FINANCIAL INSTRUMENTS (continued)

Earnings Effects of Derivatives (continued)
          The following table summarizes the earnings effects of derivatives in the Condensed Consolidated Statements of Operations for the three months and six months ended September 30, 2012 and 2011.

 
 
 
 
Gain (Loss) Recognized in Income
Derivatives Not Designated
as Hedging Instruments
 
Location of Gain (Loss)
Recognized in Income
 
Three Months Ended
September 30,
 
Six Months Ended
September 30,
 
 
 
 
2012
 
2011
 
2012
 
2011
 
 
 
 
 
 
 
 
 
 
 
Foreign currency contracts
 
Cost of goods and services sold
 
$
(295
)
 
$
(745
)
 
$
(13,250
)
 
$
6,025

Foreign currency contracts
 
Selling, general and administrative expenses
 
—

 
(82
)
 
—

 
(116
)
Total
 
 
 
$
(295
)
 
$
(827
)
 
$
(13,250
)
 
$
5,909


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
September 30,
Six Months Ended
September 30,
 
2012
 
2011
2012
 
2011
     Service cost
$
511

 
$
526

$
1,023

 
$
1,140

     Interest expense
1,842

 
2,049

3,684

 
4,189

     Expected return on plan assets
(1,571
)
 
(1,637
)
(3,140
)
 
(3,274
)
     Amortization of prior service cost
55

 
26

110

 
53

     Actuarial loss
500

 
287

998

 
593

     Curtailment gain recognized
—

 
—

—

 
(4,989
)
     Net periodic pension cost (benefit)
$
1,337

 
$
1,251

$
2,675

 
$
(2,288
)





- 18 -
Alliance One International, Inc. and Subsidiaries

13. PENSION AND POSTRETIREMENT BENEFITS (continued)

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 September 30, 2012, contributions of $5,878 were made to pension plans for fiscal 2013. Additional contributions to pension plans of approximately $4,348 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.

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 September 30, 2012, contributions of $390 were made to the plans for fiscal 2013. Additional contributions of $547 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
September 30,
Six Months Ended
September 30,
 
2012
 
2011
2012
 
2011
     Service cost
$
15

 
$
18

$
31

 
$
37

     Interest expense
157

 
167

314

 
333

     Amortization of prior service cost
(410
)
 
(411
)
(821
)
 
(822
)
     Actuarial loss
117

 
101

234

 
202

     Net periodic pension (benefit)
$
(121
)
 
$
(125
)
$
(242
)
 
$
(250
)

14. INVENTORIES

The following table summarizes the Company’s costs in inventory:
 
September 30, 2012
September 30, 2011
March 31, 2012
Processed tobacco
$
775,685

$
760,648

$
555,341

Unprocessed tobacco
187,965

263,061

240,811

Other
46,072

38,140

43,750

 
$
1,009,722

$
1,061,849

$
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 is 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.


- 19 -
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:
 
September 30,
 
March 31,
 
2012
2011
 
2012
Receivables outstanding in facility
$
133,392

$
143,201

 
$
182,856

Beneficial interest
$
20,989

$
28,426

 
$
25,864

Servicing liability
$
—

$
30

 
$
45

Cash proceeds for the six months ended September 30:
 
 
 
 
Cash purchase price
$
256,747

$
277,860

 
 
Deferred purchase price
118,628

99,432

 
 
Service fees
254

216

 
 
Total
$
375,629

$
377,508

 
 


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.


- 20 -
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.
 
September 30, 2012
September 30, 2011
March 31, 2012
Carrying value
$
1,013,595

$
878,735

$
828,503

Estimated fair value
1,035,702

767,865

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 September 30, 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 September 30, 2012 by $220 and $322, 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 September 30, 2012 would change by $463 or $926, 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 September 30, 2012 would change by $433 or $518, respectively.




- 21 -
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:

 
September 30, 2012
 
September 30, 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
$
398

$
—

$
398

 
$
367

$
—

$
367

 
$
312

$
—

$
312

Securitized beneficial interests
—

20,989

20,989

 
—

28,426

28,426

 
—

25,864

25,864

Total Assets
$
398

$
20,989

$
21,387

 
$
367

$
28,426

$
28,793

 
$
312

$
25,864

$
26,176

Liabilities
 
 
 
 
 
 
 
 
 
 
 
Guarantees
$
—

$
9,489

$
9,489

 
$
—

$
5,005

$
5,005

 
$
—

$
5,265

$
5,265

Derivative financial instruments
747

—

747

 
655

—

655

 
16

—

16

Total liabilities
$
747

$
9,489

$
10,236

 
$
655

$
5,005

$
5,660

 
$
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 September 30, 2012
 
Six Months Ended September 30, 2012
 
Securitized Beneficial Interests
Guarantees
 
Securitized Beneficial Interests
Guarantees
Beginning Balance
$
35,368

$
5,803

 
$
25,864

$
5,265

   Issuances of guarantees/sales of receivables
55,541

5,170

 
111,879

9,062

   Settlements
(67,888
)
(1,484
)
 
(114,168
)
(4,838
)
   Losses recognized in earnings
(2,032
)
—

 
(2,586
)
—

Ending Balance September 30, 2012
$
20,989

$
9,489

 
$
20,989

$
9,489


 
Three Months Ended September 30, 2011
 
Six Months Ended September 30, 2011
 
Securitized Beneficial Interest
Guarantees
 
Securitized Beneficial Interest
Guarantees
Beginning Balance
$
13,972

$
2,950

 
$
15,797

$
4,575

   Issuances of guarantees/sales of receivables
66,867

3,306

 
101,960

4,599

   Settlements
(50,799
)
(1,420
)
 
(87,073
)
(3,818
)
   Changes in anticipated loss rate
—

169

 
—

(351
)
   Losses recognized in earnings
(1,614
)
—

 
(2,258
)
—

Ending Balance September 30, 2011
$
28,426

$
5,005

 
$
28,426

$
5,005


The amount of unrealized losses relating to assets still held at the respective dates of September 30, 2012 and 2011 and March 31, 2012 were $1,052, $861 and $1,373 on securitized beneficial interests.
          Gains and losses included in earnings are reported in Other Income (Expense).


- 22 -
Alliance One International, Inc. and Subsidiaries

16. FAIR VALUE MEASUREMENTS (continued)

Information About Fair Value Measurements Using Significant Unobservable Inputs

The following table summarizes significant unobservable inputs and the valuation techniques thereof for the period ended September 30, 2012:

 
Fair Value at 9/30/2012
Valuation Technique
Unobservable Input
Range (Weighted Average)
Securitized Beneficial Interests
$
20,989

 
Discounted Cash Flow
Discount Rate
3.0%

 
 
 
Payment Speed
91 days

Tobacco Supplier Guarantees
$
4,630

 
Historical Loss