AOI-2013.12.31-10Q


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, 2013

[  ] 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, 2014, the registrant had 88,151,205 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, 2013 and 2012
3
 
 
 
Condensed Consolidated Statements of Comprehensive Income (Loss)
 
 
Three and Nine Months Ended December 31, 2013 and 2012
4
 
 
 
 
Condensed Consolidated Balance Sheets
 
 
December 31, 2013 and 2012 and March 31, 2013
5
 
 
 
Condensed Statements of Consolidated Stockholders’ Equity
 
 
Nine Months Ended December 31, 2013 and 2012
6
 
 
 
 
Condensed Consolidated Statements of Cash Flows
 
 
Nine Months Ended December 31, 2013 and 2012
7
 
 
 
Notes to Condensed Consolidated Financial Statements
8 – 25
 
 
 
 
Item 2.
Management's Discussion and Analysis
 
 
 
of Financial Condition and Results of Operations
26 – 39
 
 
 
 
 
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
39
 
 
 
 
 
Item 4.
Controls and Procedures
39
 
 
Part II.
Other Information
 
 
 
 
 
Item 1.
Legal Proceedings
40
 
 
 
 
 
Item 1A.
Risk Factors
40
 
 
 
 
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
40
 
 
 
 
 
Item 3.
Defaults Upon Senior Securities
40
 
 
 
 
 
Item 4.
40
 
 
 
 
 
Item 5.
Other Information
40
 
 
 
 
 
Item 6.
Exhibits
40
 
Signature
41
 
 
Index of Exhibits
42

- 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, 2013 and 2012
(Unaudited)
 
 
 
 
Three Months Ended
December 31,
Nine Months Ended
December 31,
(in thousands, except per share data)
 
2013
2012
2013
2012
 
 
 
 
 
 
Sales and other operating revenues
 
$
654,550

$
699,111

$
1,739,117

$
1,633,292

Cost of goods and services sold
 
570,709

615,982

1,542,812

1,421,637

Gross profit
 
83,841

83,129

196,305

211,655

Selling, general and administrative expenses
 
30,156

33,494

100,288

105,570

Other income (expense)
 
(1,627
)
(297
)
(882
)
(1,644
)
Restructuring and asset impairment charges
 
1,988

56

4,764

56

Operating income
 
50,070

49,282

90,371

104,385

Debt retirement expense
 
64

—

55,663

—

Interest expense (includes debt amortization of $2,609 and $2,640 for the three months and $7,811 and $7,856 for the nine months in 2013 and 2012, respectively)
 
29,052

29,384

89,579

86,275

Interest income
 
1,108

3,120

4,953

5,239

Income (loss) before income taxes and other items
 
22,062

23,018

(49,918
)
23,349

Income tax expense
 
9,423

2,152

20,582

15,292

Equity in net income of investee companies
 
378

406

698

1,256

Net income (loss)
 
13,017

21,272

(69,802
)
9,313

Less: Net income (loss) attributable to noncontrolling interests
 
(270
)
(48
)
(245
)
368

Net income (loss) attributable to Alliance One International, Inc.
 
$
13,287

$
21,320

$
(69,557
)
$
8,945

 
 
 
 
 
 
 
 
 
 
 
 
Income (loss) per share:
 
 
 
 
 
Basic
 
$
.15

$
.24

$
(.79
)
$
.10

Diluted
 
$
.14

$
.20

$
(.79
)
$
.10

 
 
 
 
 
 
Weighted average number of shares outstanding:
 
 
 
 
 
Basic
 
87,878

87,465

87,641

87,342

Diluted
 
98,939

110,639

87,641

87,679

 
 
 
 
 
 
 
 
 
See notes to condensed consolidated financial statements
 
 
 

- 3 -


Alliance One International, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Three and Nine Months Ended December 31, 2013 and 2012
(Unaudited)
 
 
 
 
 
 
 
 
 
 
Three Months Ended
December 31,
Nine Months Ended
December 31,
(in thousands)
 
2013
2012
2013
2012
 
 
 
 
 
 
Net income (loss)
 
$
13,017

$
21,272

$
(69,802
)
$
9,313

 
 
 
 
 
 
Other comprehensive income (loss), net of tax:
 
 
 
 
 
Currency translation adjustment
 
889

(93
)
3,499

(795
)
Defined benefit pension amounts reclassified to income
 
522

(260
)
1,566

(781
)
Total other comprehensive income (loss), net of tax
 
1,411

(353
)
5,065

(1,576
)
Total comprehensive income (loss)
 
14,428

20,919

(64,737
)
7,737

Comprehensive income (loss) attributable to noncontrolling interests
 
(270
)
(48
)
(245
)
368

Comprehensive income (loss) attributable to Alliance One International, Inc.
 
$
14,698

$
20,967

$
(64,492
)
$
7,369

 
 
See notes to condensed consolidated financial statements
 

- 4 -

Alliance One International, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS 
(Unaudited)
(in thousands)
December 31, 2013
 
December 31, 2012
 
March 31, 2013
ASSETS
 
 
 
 
 
Current assets
 
 
 
 
 
Cash and cash equivalents
$
303,658

 
$
195,331

 
$
92,026

Trade and other receivables, net
206,411

 
256,326

 
224,222

Accounts receivable, related parties
68,194

 
59,023

 
55,696

Inventories
770,435

 
908,121

 
903,947

Advances to tobacco suppliers
126,856

 
80,182

 
109,520

Recoverable income taxes
4,023

 
6,229

 
8,980

Current deferred taxes
24,245

 
19,365

 
16,776

Prepaid expenses
25,415

 
34,506

 
36,811

Other current assets
14,157

 
10,633

 
16,777

Total current assets
1,543,394

 
1,569,716

 
1,464,755

Other assets
 
 
 
 
 
Investments in unconsolidated affiliates
24,861

 
24,788

 
25,169

Goodwill and intangible assets
35,369

 
32,307

 
31,471

Deferred income taxes
46,540

 
61,608

 
56,045

Other deferred charges
21,072

 
15,931

 
12,971

Other noncurrent assets
47,261

 
63,787

 
50,190

 
175,103

 
198,421

 
175,846

Property, plant and equipment, net
260,892

 
265,504

 
270,978

 
$
1,979,389

 
$
2,033,641

 
$
1,911,579

 
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
 
Current liabilities
 
 
 
 
 
Notes payable to banks
$
544,235

 
$
290,965

 
$
356,836

Accounts payable
73,888

 
61,248

 
135,260

Due to related parties
18,455

 
22,398

 
26,084

Advances from customers
69,014

 
52,481

 
16,817

Accrued expenses and other current liabilities
97,660

 
92,656

 
69,508

Income taxes
7,764

 
4,201

 
10,098

Long-term debt current
56,066

 
51,264

 
6,349

Total current liabilities
867,082

 
575,213

 
620,952

 
 
 
 
 
 
Long-term debt
721,846

 
986,628

 
830,870

Deferred income taxes
6,782

 
7,751

 
6,396

Liability for unrecognized tax benefits
8,622

 
8,859

 
8,617

Pension, postretirement and other long-term liabilities
95,531

 
113,882

 
102,713

 
832,781

 
1,117,120

 
948,596

Commitments and contingencies


 


 


Stockholders’ equity
December 31, 2013
 
December 31, 2012
 
March 31, 2013
 
 
 
 
 
Common Stock—no par value:
 
 
 
 
 
 
 
 
 
 
Authorized shares
250,000

 
250,000

 
250,000

 
 
 
 
 
Issued shares
96,004

 
95,454

 
95,494

463,146

 
460,647

 
460,914

Retained deficit
(136,886
)
 
(82,397
)
 
(67,329
)
Accumulated other comprehensive loss
(50,127
)
 
(40,249
)
 
(55,192
)
Total stockholders’ equity of Alliance One International, Inc.
276,133

 
338,001

 
338,393

Noncontrolling interests
3,393

 
3,307

 
3,638

Total equity
279,526

 
341,308

 
342,031

 
$
1,979,389

 
$
2,033,641

 
$
1,911,579

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, 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

 
 
 
 
 
 
 
Balance, March 31, 2013
$
460,914

$
(67,329
)
$
(5,724
)
$
(49,468
)
$
3,638

$
342,031

Net loss
—

(69,557
)
—

—

(245
)
(69,802
)
Restricted stock surrendered
(323
)
—

—

—

—

(323
)
Stock-based compensation
2,555

—

—

—

—

2,555

Other comprehensive loss, net of tax
—

—

3,499

1,566

—

5,065

 
 
 
 
 
 
 
Balance, December 31, 2013
$
463,146

$
(136,886
)
$
(2,225
)
$
(47,902
)
$
3,393

$
279,526

 
 
 
 
 
 
 
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, 2013 and 2012
(Unaudited)
 
 
(in thousands)
 
December 31, 2013
 
December 31, 2012
 
 
 
 
 
Operating activities
 
 
 
 
   Net income (loss)
 
$
(69,802
)
 
$
9,313

   Adjustments to reconcile net income (loss) to net cash provided (used) by operating
       activities:
 
 
 
 
      Depreciation and amortization
 
24,781

 
24,913

      Debt amortization/interest
 
9,748

 
11,173

     Debt retirement costs
 
55,663

 
—

     Loss on foreign currency transactions
 
13,267

 
9,949

      Restructuring and asset impairment charges
 
4,764

 
56

      Gain on sale of property, plant and equipment
 
(195
)
 
(1,176
)
      Stock-based compensation
 
2,492

 
3,976

      Changes in operating assets and liabilities, net
 
132,291

 
(76,023
)
      Other, net
 
1,775

 
326

   Net cash provided (used) by operating activities
 
174,784

 
(17,493
)
 
 
 
 
 
Investing activities
 
 
 
 
   Purchases of property, plant and equipment
 
(15,291
)
 
(28,460
)
   Proceeds from sale of property, plant and equipment
 
709

 
1,402

   Restricted cash
 
(183
)
 
3,974

   Surrender of life insurance policies
 
2,482

 
80

   Other, net
 
(819
)
 
(598
)
   Net cash used by investing activities
 
(13,102
)
 
(23,602
)
 
 
 
Financing activities
 
 
 
 
   Net proceeds (repayments) from short-term borrowings
 
182,083

 
(82,383
)
   Proceeds from long-term borrowings
 
885,300

 
321,607

   Repayment of long-term borrowings
 
(961,121
)
 
(115,046
)
   Debt issuance cost
 
(22,579
)
 
(5,867
)
   Debt retirement costs
 
(34,411
)
 
—

   Other, net
 
111

 
(66
)
   Net cash provided by financing activities
 
49,383

 
118,245

 
 
 
 
 
Effect of exchange rate changes on cash
 
567

 
(1,562
)
 
 
 
Increase in cash and cash equivalents
 
211,632

 
75,588

Cash and cash equivalents at beginning of period
 
92,026

 
119,743

Cash and cash equivalents at end of period
 
$
303,658

 
$
195,331

 
Other information:
 
 
 
 
   Cash paid during the nine months:
 
 
 
 
      Interest
 
$
56,805

 
$
58,508

      Taxes
 
13,901

 
15,689

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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. Included in Operating Income for the nine months ended December 31, 2013 is a pretax charge of approximately $11,000 primarily resulting from reducing the estimate for recoveries of advances to tobacco suppliers in Zambia. 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, 2013.

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 $4,848 and $6,242 for the three months ended December 31, 2013 and 2012, respectively and $15,810 and $15,364 for the nine months ended December 31, 2013 and 2012, 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, 2013, the Company adopted new accounting guidance, as amended, on disclosures about offsetting assets and liabilities. The guidance enhances disclosures of the effect or potential effect of netting arrangements on an entity's financial position and is applicable to derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending that are offset or subject to an enforceable master netting arrangement or similar agreement. The Company adopted this new accounting guidance with no material impact on its financial condition or results of operations.
          On April 1, 2013, the Company adopted new accounting guidance to improve the reporting of reclassifications out of accumulated other comprehensive income. Companies are required to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income when reclassified to net income in its entirety. If amounts are not reclassified to net income in its entirety in the same reporting period, cross-reference to other disclosures is required to provide additional detail about those amounts. The Company adopted this new accounting guidance with no material impact on its financial condition or results of operations.

Recent Accounting Pronouncements Not Yet Adopted
In July 2013, the Financial Accounting Standards Board ("FASB") issued new accounting guidance on the financial presentation of an unrecognized tax benefit when a net operating loss (“NOL”) carryforward, a similar tax loss, or a tax credit carryforward exists. The primary objective of this accounting guidance is to reduce diversity in financial presentations resulting from a current lack of guidance on this topic. An unrecognized tax benefit should be presented as a reduction in a deferred tax asset for a NOL or tax credit carryforward whenever the NOL or tax credit carryforward would be available to reduce the additional taxable income or tax due if the tax position is disallowed. This accounting guidance is effective for the Company on April 1, 2014. The Company currently reports its applicable unrecognized tax benefits in accordance with this guidance and therefore, 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 December 31, 2013, the Company’s unrecognized tax benefits totaled $7,811, 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, 2013, accrued interest and penalties totaled $874 and $1,172 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 acknowledges circumstances can change due to unexpected developments in the law. In certain jurisdictions, tax authorities have challenged positions that the Company has taken that resulted in recognizing benefits that are material to its financial statements. The Company believes it is more likely than not that it will prevail in these situations and accordingly has not recorded liabilities for these positions. The Company expects the challenged positions to be settled at a time greater than twelve months from its balance sheet date.
         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, 2013, 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, 2013
The effective tax rate used for the nine months ended December 31, 2013 was (41.2)% compared to 65.5% for the nine months ended December 31, 2012. 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, 2014 to be (116.4)% after absorption of discrete items.
         For the nine months ended December 31, 2013, the Company recorded a discrete event adjustment expense of $9,876, bringing the effective tax rate estimated for the nine months of (21.4)% to (41.2)%. This discrete event adjustment expense relates primarily to net exchange losses on income tax accounts and net exchange gains related to liabilities for unrecognized tax benefits. 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. The significant difference in the estimated effective tax rate for the nine months ended December 31, 2013 from the U.S. federal statutory rate is primarily due to net exchange losses on income tax accounts, foreign income tax rates lower than the U.S. rate and certain losses for which no benefit is currently recorded.

3. GUARANTEES

The Company and certain of its foreign subsidiaries guarantee bank loans to suppliers to finance their crops. Under longer-term arrangements, the Company may also guarantee financing on suppliers’ construction of curing barns or other tobacco production assets. Guaranteed loans are generally repaid concurrent with the delivery of tobacco to the Company. The Company is obligated to repay any guaranteed loan should the supplier default. If default occurs, the Company has recourse against the supplier. The Company also guarantees bank loans of certain unconsolidated subsidiaries in Asia and Zimbabwe.
         The following table summarizes amounts guaranteed and the fair value of those guarantees:
 
December 31, 2013
 
December 31, 2012
 
March 31, 2013
Amounts guaranteed (not to exceed)
$
167,914

 
$
129,088

 
$
125,623

Amounts outstanding under guarantee
144,435

 
100,393

 
98,689

Fair value of guarantees
6,671

 
7,728

 
6,367


         Of the guarantees outstanding at December 31, 2013, all expire within one year. The fair value of guarantees is recorded in Accrued Expenses and Other Current Liabilities in the Condensed Consolidated Balance Sheets and included in crop costs except for Zimbabwe which is included in Accounts Receivable, Related Parties.




- 9 -
Alliance One International, Inc. and Subsidiaries

3. GUARANTEES (continued)
         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, 2013 and 2012 and March 31, 2013, respectively, the Company had balances of $188, $606 and $45,843 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

The Company previously implemented several strategic initiatives in response to shifts in supply and demand balances and changing business models of its customers. These initiatives were substantially complete at March 31, 2013. The Company continues to focus on improving factory efficiencies and other core components of its business. As part of this focus, the Company agreed to a joint processing venture in one of its foreign locations during the three months ended June 30, 2013. As a result, the Company recorded pretax charges of $2,745 in connection with the reduction in workforce including the effect on the Company's defined benefit pension plans of $1,261 during the nine months ended December 31, 2013. Asset impairment charges of $680 were recorded for certain processing equipment in connection with the new venture as of December 31, 2013. As the Company continues to respond to changes in its business, additional employee separation charges of $580 and asset impairment charges of $759 were incurred during the nine months ended December 31, 2013.
         The following table summarizes the restructuring charges recorded in the Company’s reporting segments during the three months and nine months ended December 31, 2013 and 2012, respectively:
 
Three Months Ended
December 31,
Nine Months Ended
December 31,
Restructuring and Asset Impairment Charges
2013
2012
2013
2012
Employee separation and other cash charges:
 
 
 
 
Beginning balance
$
1,048

$
1,176

$
668

$
1,960

Period charges:
 
 
 
 
Severance charges
852

56

2,064

56

Total period charges
852

56

2,064

56

Payments through December 31
(1,587
)
(322
)
(2,419
)
(1,106
)
Ending balance December 31
$
313

$
910

$
313

$
910

Asset impairment and other non-cash charges
$
1,136

$
—

$
2,700

$
—

Total restructuring and asset impairment charges for the period
$
1,988

$
56

$
4,764

$
56


 
Three Months Ended
December 31,
Nine Months Ended
December 31,
Employee Separation and Other Cash Charges
2013
2012
2013
2012
Beginning balance:
$
1,048

$
1,176

$
668

$
1,960

   South America
—

146

—

183

   Value added services
—

—

—

—

   Other regions
1,048

1,030

668

1,777

Period charges:
$
852

$
56

$
2,064

$
56

   South America
—

(22
)
433

(22
)
   Value added services
—

—

—

—

   Other regions
852

78

1,631

78

Payments through December 31
$
(1,587
)
$
(322
)
$
(2,419
)
$
(1,106
)
   South America
—

(24
)
(433
)
(61
)
   Value added services
—

—

—

—

   Other regions
(1,587
)
(298
)
(1,986
)
(1,045
)
Ending balance December 31
$
313

$
910

$
313

$
910

   South America
—

100

—

100

   Value added services
—

—

—

—

   Other regions
313

810

313

810



- 10 -
Alliance One International, Inc. and Subsidiaries


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.
         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, 2013 and 2012:
 
 
 
 
Amortizable Intangibles
 
 
 
Goodwill (1)
 
Customer
Relationship
Intangible
 
Production
and Supply
Contract
Intangibles
 
Internally
Developed
Software
Intangible
 
Total
Weighted average remaining useful
    life in years as of December 31, 2013
 

 
11.25

 
2.25

 
0.25

 
 
March 31, 2012 balance:
 
 
 
 
 
 
 
 
 
 
Gross carrying amount
 
$
2,794

 
$
33,700

 
$
7,893

 
$
16,588

 
$
60,975

Accumulated amortization
 
—

 
(11,584
)
 
(3,043
)
 
(10,483
)
 
(25,110
)
Net March 31, 2012
 
2,794

 
22,116

 
4,850

 
6,105

 
35,865

Additions
 
—

 
—

 
—

 
269

 
269

Amortization expense
 
—

 
(843
)
 
(242
)
 
(1,524
)
 
(2,609
)
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

Additions
 
—

 
—

 
—

 
550

 
550

Amortization expense
 
—

 
(421
)
 
(180
)
 
(785
)
 
(1,386
)
Net March 31, 2013
 
2,794

 
20,431

 
4,236

 
4,010

 
31,471

Additions
 
—

 
—

 
—

 
563

 
563

Amortization expense
 
—

 
(843
)
 
(433
)
 
(1,510
)
 
(2,786
)
Net September 30, 2013
 
2,794

 
19,588

 
3,803

 
3,063

 
29,248

Additions
 
—

 
—

 
7,000

 
39

 
7,039

Amortization expense
 
—

 
(421
)
 
(332
)
 
(165
)
 
(918
)
Net December 31, 2013
 
$
2,794

 
$
19,167

 
$
10,471

 
$
2,937

 
$
35,369

(1) Goodwill of $1,592 relates to the Other Regions segment and $1,202 relates to the Value Added Services segment.

         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, 2014 through March 31, 2014
 
$
421

 
$
486

 
$
445

 
$
1,352

2015
 
1,685

 
1,173

 
849

 
3,707

2016
 
1,685

 
2,163

 
719

 
4,567

2017
 
1,685

 
1,405

 
544

 
3,634

2018
 
1,685

 
1,403

 
316

 
3,404

Subsequent years
 
12,006

 
3,841

 
64

 
15,911

 
 
$
19,167

 
$
10,471

 
$
2,937

 
$
32,575

*  Estimated amortization expense for the internally developed software is based on costs accumulated as of December 31, 2013. 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 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, 2013 and 2012, and March 31, 2013, the Company’s investment in these joint ventures was $23,841, $23,604, and $23,986, respectively and is classified as Investments in Unconsolidated Affiliates in the Condensed Consolidated Balance Sheets. The Company’s advances to these joint ventures were $915 and $734 at December 31, 2013 and 2012 and are classified as Accounts Receivable, Related Parties in the Condensed Consolidated Balance Sheets. There were no advances at March 31, 2013. The Company guaranteed an amount to a joint venture not to exceed $18,527, $19,320 and $19,363 at December 31, 2013 and 2012, and March 31, 2013, 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 approximately 90 countries. The sales, logistics and billing functions of the Company are primarily concentrated in service centers outside of the producing areas to facilitate access to its major customers. Within certain quality and grade constraints, tobacco is fungible and, subject to these constraints, customers may choose to fulfill their needs from any of the areas where the Company purchases tobacco.
          Selling, logistics, billing, and administrative overhead, including depreciation, which originates primarily from the Company’s corporate and sales offices, are allocated to the segments based upon segment operating income. 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, 2013 and 2012:       

 
Three Months Ended
December 31,
 
Nine Months Ended
December 31,
 
2013
 
2012
 
2013
 
2012
Sales and other operating revenues:
 
 
 
 
 
 
 
    South America
$
140,571

 
$
154,703

 
$
674,453

 
$
606,041

Value added services
32,600

 
28,877

 
93,537

 
96,077

    Other regions
481,379

 
515,531

 
971,127

 
931,174

    Total revenue
$
654,550

 
$
699,111

 
$
1,739,117

 
$
1,633,292

 
 
 
 
 
 
 
 
Operating income:
 
 
 
 
 
 
 
    South America
$
12,992

 
$
15,784

 
$
42,534

 
$
41,546

Value added services
3,818

 
3,681

 
9,347

 
11,811

    Other regions
33,260

 
29,817

 
38,490

 
51,028

Total operating income
50,070

 
49,282

 
90,371

 
104,385

 
 
 
 
 
 
 
 
    Debt retirement expense
64

 
—

 
55,663

 
—

    Interest expense
29,052

 
29,384

 
89,579

 
86,275

    Interest income
1,108

 
3,120

 
4,953

 
5,239

Income (loss) before income taxes and other items
$
22,062

 
$
23,018

 
$
(49,918
)
 
$
23,349


Analysis of Segment Assets
December 31, 2013
December 31, 2012
March 31, 2013

Segment assets:
 
 
 
 
South America
$
555,994

$
487,503

$
616,946

 
Value added services
207,302

185,452

197,959

 
Other regions
1,216,093

1,360,686

1,096,674

 
Total assets
$
1,979,389

$
2,033,641

$
1,911,579


- 12 -
Alliance One International, Inc. and Subsidiaries


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, 2013 and 2012. 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 6,885 at a weighted average exercise price of $6.04 per share at December 31, 2013 and 7,049 at a weighted average exercise price of $7.34 per share at December 31, 2012.
          In connection with the offering of the Company’s 5 ½% Convertible Senior Subordinated Notes due 2014, issued on July 2, 2009 and July 15, 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.
          The following table summarizes the computation of earnings per share for the three months and nine months ended December 31, 2013 and 2012, respectively.
 
Three Months Ended
December 31,
 
Nine Months Ended
December 31,
 
(in thousands, except per share data)
2013
 
2012
 
2013
 
2012
 
BASIC INCOME (LOSS)
 
 
 
 
 
 
 
 
Net income (loss) attributable to Alliance One International, Inc.
$
13,287

 
$
21,320

 
$
(69,557
)
 
$
8,945

 
 
 
 
 
 
 
 
 
 
SHARES
 
 
 
 
 
 
 
 
   Weighted average number of shares outstanding
87,878

 
87,465

 
87,641

 
87,342

 
 
 
 
 
 
 
 
 
 
BASIC INCOME (LOSS) PER SHARE
$
.15

 
$
.24

 
$
(.79
)
 
$
.10

 
 
 
 
 
 
 
 
 
 
DILUTED INCOME (LOSS)
 
 
 
 
 
 
 
 
   Net income (loss) attributable to Alliance One International, Inc.
$
13,287

 
$
21,320

 
$
(69,557
)
 
$
8,945

 
   Plus interest expense on 5 1/2% convertible notes,
   net of tax
492

 
1,028

 
—

*
—

*
   Net income attributable to Alliance One
         International, Inc. as adjusted
$
13,779

 
$
22,348

 
$
(69,557
)
 
$
8,945

 
 
 
 
 
 
 
 
 
 
SHARES
 
 
 
 
 
 
 
 
   Weighted average number of common shares
   outstanding
87,878

 
87,465

 
87,641

 
87,342

 
   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
122

 
302

 
—

*
337

 
              Assuming conversion of 5 1/2% convertible
              notes at the time of issuance
10,939

 
22,872

 
—

*
—

*
             Shares applicable to stock warrants
—

**
—

**
—

**
—

**
   Adjusted weighted average number of common
  shares outstanding
98,939

 
110,639

 
87,641

 
87,679

 
DILUTED INCOME (LOSS) PER SHARE
$
.14

 
$
.20

 
$
(.79
)
 
$
.10

 
 
 
 
 
 
 
 
 
 
* Assumed conversion of convertible notes at the beginning of the period has an antidilutive effect on earnings 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 nine months ending December 31, 2013.
** For the three months and nine months ended December 31, 2013 and 2012, 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 $780 and $679 for the three months ended December 31, 2013 and 2012, respectively and $2,492 and $3,976 for the nine months ended December 31, 2013 and 2012, respectively.

- 13 -
Alliance One International, Inc. and Subsidiaries


9. STOCK-BASED COMPENSATION (continued)
          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, 2013.
          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, 2013 and 2012, respectively, the Company made the following stock-based compensation awards:
 
Three Months Ended
December 31,
Nine Months Ended
December 31,
  (in thousands, except grant date fair value)
2013
2012
2013
2012
  Restricted Stock
 
 
 
 
            Number Granted
—

—

198

167

            Grant Date Fair Value
$
—

$
—

$
3.80

$
2.89

  Restricted Stock Units
 
 
 
 
           Number Granted
—

—

6.43

—

           Grant Date Fair Value
$
—

$
—

$
3.85

$
—

  Performance Based Stock Units
 
 
 
 
            Number Granted
—

—

6.43

—

            Grant Date Fair Value
$
—

$
—

$
3.85

$
—


          Under the terms of the Performance Based Stock Units, shares ultimately issued will be contingent upon specified business performance goals.

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 $5,624 and the total assessment including penalties and interest at December 31, 2013 is $14,724. The Company believes it has properly complied with Brazilian law and will contest any assessment through the judicial process. Should the Company lose in the judicial process, the loss of the intrastate trade tax credits would have a material impact on the financial statements of the Company.
          The Company also has local intrastate trade tax credits in the Brazilian State of Santa Catarina. This jurisdiction permits the sale or transfer of excess credits to third parties, however approval must be obtained from the tax authorities. The Company has an agreement with the state government regarding the amounts and timing of credits that can be sold. The tax credits have a carrying value of $11,738 at December 31, 2013, 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.

- 14 -
Alliance One International, Inc. and Subsidiaries


10. CONTINGENCIES AND OTHER INFORMATION (continued)

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

Other
Mindo, S.r.l., the purchaser in 2004 of the Company's Italian subsidiary Dimon Italia, S.r.l., asserted claims against a subsidiary of the Company arising out of that sale transaction in an action filed before the Court of Rome on April 12, 2007. The claim involved a guaranty letter issued by a consolidated subsidiary of the Company in connection with the sale transaction. On November 11, 2013, the court issued its judgment in favor of the Company’s subsidiary, rejecting the claims asserted by Mindo, S.r.l., and awarding the Company’s subsidiary legal costs of €48. The period for appeal of the court’s judgment is pending, and it is uncertain whether Mindo S.r.l. will pursue an appeal.
          The Company is aware of a complaint filed on January 3, 2014 in New Castle County, Delaware state court, captioned Biglia, et al. v. Alliance One International, Inc., et al., which names the Company as one of several defendants but which has not been served on the Company. Such complaint names as plaintiffs 67 individuals claiming to be tobacco farmers and their family members, all residing in Misiones Province, Argentina. The complaint seeks 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 complaint appears to be similar to five other complaints filed by other claimed residents of Misiones Province, Argentina against the Company and other defendants, from which the Company was dismissed without prejudice in 2012 and 2013.
          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.













- 15 -
Alliance One International, Inc. and Subsidiaries


11. DEBT ARRANGEMENTS

During the nine months ended December 31, 2013, the Company completed certain refinancing transactions, which are described below.

Senior Secured Revolving Credit Facility

On August 1, 2013, the agreement governing the Company's senior secured revolving credit facility was amended and restated to provide for a senior secured revolving credit facility with a syndicate of banks of approximately $303,900 that will automatically reduce to approximately $210,300 on April 15, 2014 and will mature in April 15, 2017, subject to a springing maturity on April 15, 2014 if by that date the Company has not deposited in the Blocked Account (as defined below) sufficient amounts to fund the repayment at maturity of all then outstanding 5½% Convertible Senior Subordinated Notes due 2014 of the Company (the “Convertible Notes”). Borrowings under the amended and restated senior secured revolving credit facility initially bear interest at an annual rate of LIBOR plus 3.75% and base rate plus 2.75%, as applicable, though the interest rate under the amended and restated senior secured revolving credit facility is subject to increase or decrease according to the Company's consolidated interest coverage ratio.
          The agreement governing the amended and restated senior secured revolving credit facility requires the Company to deposit with the lenders, in a segregated account that the Company may not use other than for specified purposes (the “Blocked Account”), the net proceeds from the sale of $735,000 in aggregate principal amount of the Company's 9.875% Senior Secured Second Lien Notes due 2021 (the “Second Lien Notes”) that are not immediately applied to redeem all of the Company's outstanding 10% Senior Notes due 2016 (the “Senior Notes”). Amounts held in the Blocked Account may be used solely to purchase any and all Convertible Notes tendered in the Company's cash tender offer to purchase up to $60,000 in aggregate principal amount of the Convertible Notes commenced on July 17, 2013 (the “Convertible Notes Tender Offer”) and, subject to conditions, to retire any remaining Convertible Notes not purchased in the Convertible Notes Tender Offer, including repayment at maturity. All amounts deposited in the Blocked Account from the net proceeds of the sale of the Second Lien Notes were applied to the purchase of Convertible Notes in the Convertible Notes Tender Offer. Borrowings under the amended and restated senior secured revolving credit facility are secured by a first priority lien on specified property of the Company, including the capital stock of specified subsidiaries, all U.S. accounts receivable, certain U.S. inventory, intercompany notes evidencing loans or advances, certain U.S. fixed assets and the Blocked Account.

Financial covenants.  The following financial covenants and required financial ratios are included in the agreement governing the amended and restated senior secured revolving credit facility:

•
a minimum consolidated interest coverage ratio specified for each fiscal quarter of 2014 and 1.90 to 1.00 thereafter, which ratio is 1.85 to 1.00 for the fiscal quarter ending December 31, 2013;

•
a maximum consolidated leverage ratio specified for each fiscal quarter, which ratio is 6.95 to 1.00 for the fiscal quarter ending December 31, 2013;

•
a maximum consolidated total senior debt to working capital ratio of not more than 0.80 to 1.00 other than during periods in which the consolidated leverage ratio is less than 4.00 to 1.00 if the consolidated leverage ratio has been less than 4.00 to 1.00 for the prior two consecutive fiscal quarters; and

•
a maximum amount of the Company's annual capital expenditures of approximately $50,800 during the fiscal year ending March 31, 2014 and $40,000 during any fiscal year thereafter, in each case with a one-year carry-forward (not in excess of $40,000) for unused capital expenditures in any fiscal year below the maximum amount.

          Certain of these financial covenants are calculated on a rolling twelve-month basis and certain of these financial covenants and required financial ratios adjust over time in accordance with schedules in the agreement governing the amended and restated senior secured revolving credit facility.

Affirmative and restrictive covenants.  The agreement governing the amended and restated senior secured revolving credit facility contains affirmative and negative covenants (subject, in each case, to exceptions and qualifications), including covenants that limit the Company's ability to, among other things, incur additional indebtedness, incur certain guarantees, merge, consolidate or dispose of substantially all of its assets, grant liens on its assets, pay dividends, redeem stock or make other distributions or restricted payments, create certain dividend and payment restrictions on its subsidiaries, repurchase or redeem capital stock or prepay subordinated debt, make certain investments, agree to restrictions on the payment of dividends to it by its subsidiaries, sell or otherwise dispose of assets, including equity interests of its subsidiaries, enter into transactions with its affiliates, and enter into certain sale and leaseback transactions.

- 16 -
Alliance One International, Inc. and Subsidiaries


11. DEBT ARRANGEMENTS (continued)

Senior Secured Revolving Credit Facility (continued)

          At December 31, 2013, there were no borrowings under the amended and restated senior secured revolving credit facility. The Company continuously monitors its compliance with the covenants of its amended and restated senior secured revolving credit facility, its senior notes and its senior secured second lien notes. Significant changes in market conditions or other factors could adversely affect the Company's business and future debt covenant compliance thereunder. As a result, the Company may not be able to maintain compliance with the covenants over the next twelve months. If the Company were unable to maintain compliance with the covenants in the Amended and Restated Senior Secured Revolving Credit Facility agreement, as amended from time-to-time, the Company would seek modification to the existing agreement to further amend covenants and extend maturities. If the Company were unable to obtain modification, in a scenario where it is required, the Company could decide to pay off outstanding amounts and terminate the agreement. In such case, the liquidity provided by the agreement would not be available and the Company believes that it has sufficient liquidity from operations and other available funding sources to meet future requirements.
          As amended, the senior secured revolving 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, 2013, the Company did not satisfy this fixed charge coverage ratio. The Company may from time to time not satisfy this ratio.

Senior Secured Second Lien Notes
On August 1, 2013, the Company issued $735,000 in aggregate principal amount of the Second Lien Notes. The Second Lien Notes were sold at 98% of the face value, for gross proceeds of approximately $720,300. The Second Lien Notes bear interest at a rate of 9.875% per year, payable semi-annually in arrears in cash on January 15 and July 15 of each year, beginning January 15, 2014, to holders of record at the close of business on the preceding January 1 and July 1, respectively. The Second Lien Notes will mature on July 15, 2021. The Second Lien Notes are secured by a second priority lien on specified property of Alliance One International, Inc. for which the amended and restated senior secured revolving credit facility holds the first priority lien. The indenture governing the Second Lien Notes restricts (subject to exceptions and qualifications) the Company's ability and the ability of its restricted subsidiaries to, among other things, incur additional indebtedness or issue disqualified stock or preferred stock, pay dividends and make other restricted payments (including restricted investments), sell assets, create liens, consolidate, merge, sell or otherwise dispose of all or substantially all of its assets, enter into transactions with its affiliates, enter into certain sale and leaseback transactions, create certain dividend and payment restrictions on its restricted subsidiaries, and designate its subsidiaries as unrestricted subsidiaries.
          The indenture governing the Second Lien Notes requires the Company's existing and future material domestic subsidiaries to guarantee the Second Lien Notes. The Company has no material domestic subsidiaries, and the Second Lien Notes are not presently guaranteed by any subsidiary. If a change of control (as defined in the indenture governing the Second Lien Notes) occurs at any time, holders of the Second Lien Notes will have the right, at their option, to require the Company to repurchase all or a portion of the Second Lien Notes for cash at a price equal to 101% of the principal amount of Second Lien Notes being repurchased, plus accrued and unpaid interest and special interest, if any, to, but excluding, the date of repurchase. In connection with the issuance of the Second Lien Notes, the Company entered into a registration rights agreement that requires the Company to pay additional special interest on the Second Lien Notes, at increasing annual rates up to a maximum of 1.0% per year, if the Company fails to timely comply with its registration obligations thereunder.

Redemption of Existing Senior Notes
On August 2, 2013, the Company redeemed all $635,000 in aggregate principal amount of the Company's outstanding 10% Senior Notes due 2016 at a redemption price equal to 105% of the aggregate principal amount thereof, plus accrued and unpaid interest and other costs of which $31,808 was charged to debt retirement expense. As a result of the redemption of the Senior Notes, the Company accelerated $6,095 of deferred financing costs and $14,612 of amortization of original issue discount.

Partial Tender of Convertible Senior Subordinated Notes
On August 30, 2013, the Company purchased of $60,000 in aggregate principal amount of its existing $115,000 5 ½% Convertible Senior Subordinated Notes due 2014 pursuant to a cash tender offer at a purchase price equal to $1.03 per $1.00 principal amount plus accrued and unpaid interest and other costs of which $2,539 was charged to debt retirement expense. The Company funded the purchase with available cash and a portion of the net proceeds from the issuance of the $735,000 Second Lien Notes, which proceeds had been held in the Blocked Account. As a result of this purchase, the Company accelerated $412 of deferred financing costs. On December 20, 2013, the Company commenced a cash tender offer to purchase any or all of the remaining Convertible Notes. See Note 19 "Subsequent Event" to the "Notes to Condensed Consolidated Financial Statements" for further information.

- 17 -
Alliance One International, Inc. and Subsidiaries


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 17 “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, 2013 and 2012, and March 31, 2013.
 
 
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, 2013
 
Other Current Assets
 
$
1,388

 
Accrued Expenses and Other Current Liabilities
 
$
13

     Foreign currency contracts at December 31, 2012
 
Other Current Assets
 
$
—

 
Accrued Expenses and Other Current Liabilities
 
$
1,350

     Foreign currency contracts at March 31, 2013
 
Other Current Assets
 
$
3,145

 
Accrued Expenses and Other Current Liabilities
 
$
644


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, 2013 and 2012.

 
 
 
 
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,
 
 
 
 
2013
 
2012
2013
 
2012
 
 
 
 
 
 
 
 
 
 
Foreign currency contracts
 
Cost of goods and services sold
 
$
756

 
$
(627
)
$
(1,917
)
 
$
(13,876
)

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.









- 18 -
Alliance One International, Inc. and Subsidiaries


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.
         The Company experienced a special termination benefit and curtailment loss of $1,261 during the quarter ended June 30, 2013 in connection with restructuring in one of its foreign locations, which has been recorded in Restructuring and Asset Impairment Charges.

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,
 
2013
 
2012
2013
 
2012
     Service cost
$
530

 
$
512

$
1,608

 
$
1,535

     Interest expense
1,661

 
1,842

5,044

 
5,526

     Expected return on plan assets
(1,519
)
 
(1,570
)
(4,556
)
 
(4,710
)
     Amortization of prior service cost
49

 
55

151

 
165

     Actuarial loss
761

 
499

2,278

 
1,497

     Curtailment loss
—

 
—

77

 
—

     Special termination benefit
—

 
—

1,184

 
—

     Net periodic pension cost
$
1,482

 
$
1,338

$
5,786

 
$
4,013


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. For the nine months ended December 31, 2013, contributions of $11,218 were made to pension plans for fiscal 2014. Additional contributions to pension plans of approximately $1,977 are expected during the remainder of fiscal 2014. 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 December 31, 2013, contributions of $547 were made to the plans for fiscal 2014. Additional contributions of $339 to the plans are expected during the rest of fiscal 2014. The Company retains the right, subject to existing agreements, to modify or eliminate the postretirement medical benefits.














- 19 -
Alliance One International, Inc. and Subsidiaries


13. PENSION AND POSTRETIREMENT BENEFITS (continued)

Postretirement Health and Life Insurance Benefits (continued)

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,
 
2013
 
2012
2013
 
2012
     Service cost
$
17

 
$
16

$
50

 
$
47

     Interest expense
143

 
157

427

 
471

     Amortization of prior service cost
(410
)
 
(411
)
(1,230
)
 
(1,232
)
     Actuarial loss
122

 
117

368

 
351

     Net periodic pension (benefit)
$
(128
)
 
$
(121
)
$
(385
)
 
$
(363
)

14. INVENTORIES

The following table summarizes the Company’s costs in inventory:
 
December 31, 2013

December 31, 2012
March 31, 2013
Processed tobacco
$
561,936

$
668,846

$
549,738

Unprocessed tobacco
181,542

193,554

310,164

Other
26,957

45,721

44,045

 
$
770,435

$
908,121

$
903,947


15. OTHER COMPREHENSIVE INCOME (LOSS)

The following tables set forth the changes in each component of accumulated other comprehensive loss, net of tax, attributable to the Company:
 
Currency Translation Adjustment
Pensions, Net of Tax
Accumulated Other Comprehensive Loss
Balances, March 31, 2013
$
(5,724
)
$
(49,468
)
$
(55,192
)
Other comprehensive earnings before reclassifications
2,610

—

2,610

Amounts reclassified to net earnings, net of tax
—

1,044

1,044

Other comprehensive earnings, net of tax
2,610

1,044

3,654

Balances, September 30, 2013
(3,114
)
(48,424
)
(51,538
)
Other comprehensive earnings before reclassifications
889

—

889

Amounts reclassified to net earnings, net of tax
—

522

522

Other comprehensive earnings, net of tax
889

522

1,411

Balances, December 31, 2013
$
(2,225
)
$
(47,902
)
$
(50,127
)
 
 
 
 
Balances, March 31, 2012
$
(2,922
)
$
(35,751
)
$
(38,673
)
Other comprehensive losses before reclassifications
(702
)
—

(702
)
Amounts reclassified to net earnings, net of tax
—

(521
)
(521
)
Other comprehensive losses, net of tax
(702
)
(521
)
(1,223
)
Balances, September 30, 2012
(3,624
)
(36,272
)
(39,896
)
Other comprehensive earnings before reclassifications
(93
)
—

(93
)
Amounts reclassified to net earnings, net of tax
—

(260
)
(260
)
Other comprehensive earnings, net of tax
(93
)
(260
)
(353
)
Balances, December 31, 2012
$
(3,717
)
$
(36,532
)
$
(40,249
)



- 20 -
Alliance One International, Inc. and Subsidiaries


15. OTHER COMPREHENSIVE INCOME (LOSS) (continued)

The following table sets forth amounts by component, reclassified from accumulated other comprehensive loss to earnings for the three months and nine months ended December 31, 2013 and 2012:
 
Three Months Ended
December 31,
Nine Months Ended
December 31,
 
2013
2012
2013
2012
Pension and postretirement plans (*):
 
 
 
 
       Actuarial loss
$
883

$
(616
)
$
2,646

$
(1,848
)
       Amortization of prior service cost
(361
)
356

(1,080
)
1,067

 
$
522

$
(260
)
$
1,566

$
(781
)
 
 
 
 
 
Amounts reclassified from accumulated other comprehensive losses to net earnings
$
522

$
(260
)
$
1,566

$
(781
)
(*) Amounts are included in net periodic benefit costs for pension and postretirement plans. See Note 13 "Pension and
Postretirement Benefits" to the "Notes to Condensed Consolidated Financial Statements" for further information.

16. SALE OF RECEIVABLES

The Company sells trade receivables to unaffiliated financial institutions under three accounts receivable securitization programs. Under the first program, the Company continuously sells a designated pool 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.
          The agreements for the second and third securitization programs also allow the Company to receive a cash payment and a deferred purchase price receivable for sold receivables. These are uncommitted programs, whereby the Company offers receivables for sale to the respective 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 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. The investment limits under these agreements are $35,000 and $100,000, respectively.
          Under the 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. As servicer of these facilities, the Company may receive funds that are due to the unaffiliated financial institutions which are net settled on the next settlement date. Trade and Other Receivables, Net in the Condensed Consolidated Balance Sheets has been reduced by $31,531, $39,214 and $12,316 as a result of the net settlement as of December 31, 2013, December 31, 2012 and March 31, 2013, respectively. See Note 17 "Fair Value Measurements" to the "Notes to Condensed Consolidated Financial Statements" for further information.




- 21 -
Alliance One International, Inc. and Subsidiaries


16. SALE OF RECEIVABLES (continued)

          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,
 
2013
2012
 
2013
Receivables outstanding in facility
$
218,506

$
213,757

 
$
156,633

Beneficial interest
$
37,207

$
43,700

 
$
31,992

Servicing liability
$
115

$
26

 
$
166

   Cash proceeds for the nine months ended December 31:
 
 
 
 
   Cash purchase price
$
571,067

$
481,090

 


   Deferred purchase price
198,489

223,830

 


   Service fees
379

460

 


   Total
$
769,935

$
705,380

 



17. 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 the 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.

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 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 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 debt with maturities of one year or less for which book value is a reasonable approximation of the fair value of this debt. The fair value of 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, 2013
December 31, 2012
March 31, 2013

Carrying value
$
777,912

$
1,037,892

$
837,219

Estimated fair value
736,399

1,059,415

877,869





- 22 -
Alliance One International, Inc. and Subsidiaries


17. FAIR VALUE MEASUREMENTS (continued)

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, 2013 and 2012 and March 31, 2013 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, 2013 by $146 and $294, 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 the greater of historical loss rates or the differential rates with and without the guarantee. Should the loss rates change 10% or 20%, the fair value of the guarantee at December 31, 2013 would change by $335 or $667, 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, 2013 would change by $672 or $1,330, respectively.




















- 23 -
Alliance One International, Inc. and Subsidiaries


17. 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, 2013
 
December 31, 2012
 
March 31, 2013
 
 
Total Assets /
 
 
 
Total Assets /
 
 
 
Total Assets /
 
 
Liabilities
 
 
 
Liabilities
 
 
 
Liabilities
 
Level 2
Level 3
at Fair Value
 
Level 2
Level 3
at Fair Value
 
Level 2
Level 3
at Fair Value
Assets
 
 
 
 
 
 
 
 
 
 
 
Derivative financial instruments
$
1,388

$
—

$
1,388

 
$
—

$
—

$
—

 
$
3,145

$
—

$
3,145

Securitized beneficial interests
—

37,207

37,207

 
—

43,700

43,700

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