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, 2011
	[  ]	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 February 3, 2012, the registrant had 87,372,504 shares outstanding of Common Stock (no par value) excluding 7,853,121 shares owned by a wholly owned subsidiary.

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, 2011.

Taxes Collected from Customers

Certain subsidiaries are subject to value added taxes on local sales.  These amounts have been included in sales and were $4,864 and $6,868 for the three months ended December 31, 2011 and 2010, respectively and $13,478 and $25,538 for the nine months ended December 31, 2011 and 2010, respectively.

Other Deferred Charges

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

Property Exchange in Brazil

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

New Accounting Standards

Recently Adopted Accounting Pronouncements

On April 1, 2011 the Company adopted new accounting guidance on accounting for multiple-deliverable revenue arrangements.  The objective of this accounting guidance is to address the accounting for multiple-deliverable arrangements to enable vendors to account for products or services (deliverables) separately rather than as a combined unit.  The Company adopted this new accounting guidance with no material impact on its financial condition or results of operations.

         On April 1, 2011, the Company adopted new accounting guidance on fair value measurements and disclosures.  This guidance requires reporting entities to disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers.  It also requires reporting entities to present separately information about purchases, sales, issuances, and settlements in their Level 3 fair value reconciliations.  The Company adopted these new disclosure requirements with no material impact on its financial condition or results of operations.  See Note 17 “Fair Value Measurements” for further details.

Recent Accounting Pronouncements Not Yet Adopted

In May 2011, the FASB issued new accounting guidance on fair value measurements and disclosures.  The objective of this accounting guidance is to provide consistent common fair value measurement and disclosure requirements in U.S. GAAP and IFRS such as clarifying how existing fair value measurement requirements should be applied, changing particular principles and requirements for measuring fair value and fair value measurement disclosures.  This accounting guidance will be effective for the Company on January 1, 2012.  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 June 2011, the FASB issued new accounting guidance on comprehensive income that was amended in December 2011.  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.  This accounting guidance, as amended, will be effective for the Company on April 1, 2012.  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 September 2011, the 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 but early adoption is permitted.  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.

2.  INCOME TAXES

Accounting for Uncertainty in Income Taxes  

As of December 31, 2011, the Company’s unrecognized tax benefits totaled $8,790, 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, 2011, accrued interest and penalties totaled $8,574 and $1,365 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.

         Other than the expiration of an applicable statute of limitations pertaining to an international unrecognized tax benefit of $1,468, interest of $7,357, and penalties of $424, 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 related to recognized benefits that are material to its financial statements.  The Company believes it is more likely than not that it will prevail in these situations and accordingly have not recorded liabilities for these positions.  The Company expects the challenged positions to be settled at a time greater than twelve months from its balance sheet date.

         The Company and its subsidiaries file a U.S. federal consolidated income tax return as well as returns in several U.S. states and a number of foreign jurisdictions.  As of December 31, 2011, 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, 2011

The effective tax rate used for the nine months ended December 31, 2011 was 68.8% compared to an expense of 30.1% for the nine months ended December 31, 2010.  The effective tax rates for these periods are based on the current estimate of full year results including the effect of taxes related to specific events which are recorded in the interim period in which they occur.  The Company expects the tax rate for the year ended March 31, 2012 to be 32.3% after absorption of discrete items.

         For the nine months ended December 31, 2011, the Company recorded a specific event adjustment expense of $13,867, bringing the effective tax rate estimated for the nine months of 21.4% to 68.8%.  This specific 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.   For the nine months ended December 31, 2010, the Company recorded a specific event adjustment expense of $4,324, bringing the effective tax rate estimated for the nine months of 19.9% to 30.1%.  This specific event adjustment expense relates primarily to additional income tax, interest, and exchange losses related to liabilities for unrecognized tax benefits, reductions in foreign tax credit carryforwards and net exchange gains on income tax accounts.  The significant difference in the estimated effective tax rate for the nine months ended December 31, 2011 from the statutory rate is primarily due to net exchange losses on income tax accounts and foreign income tax rates lower than the U.S. rate.

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.  The Company also guarantees bank loans to certain tobacco cooperatives to assist with the financing of their suppliers’ crops.  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 or tobacco cooperative default.  If default occurs, the Company has recourse against the supplier or cooperative.  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, 2011		December 31, 2010		March 31, 2011
Amounts guaranteed (not to exceed)	$   140,826		$   102,324		$   119,114
Amounts outstanding under guarantee	96,798		100,040		102,550
Fair value of guarantees	4,342		4,866		4,575

         Of the guarantees outstanding at December 31, 2011 approximately 95% will 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.

         In Brazil, some 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, 2011 and 2010 and March 31, 2011, respectively, the Company had balances of $358, $301 and $27,750 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 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.  As of December 31, 2011, these initiatives are substantially complete.  The following table summarizes the restructuring and asset impairment charges recorded in the Company’s reporting segments during the three months and nine months ended December 31, 2011 and 2010:

          Non-current asset impairment charges are primarily for non-tobacco internally developed software intangible assets and real property in Macedonia.

         The following table summarizes the employee separation and other cash charges recorded in the Company’s South America and Other Regions segments during the three months and nine months ended December 31, 2011 and 2010:

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.

          The Company has no intangible assets with indefinite useful lives.  It does have other 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 nine months December 31, 2011 and 2010:

		Goodwill		Amortizable Intangibles
		Other Regions Segment		Customer Relationship Intangible		Production and Supply Contract Intangibles		Internally Developed Software Intangible		Total
Weighted average remaining useful     life in years as of March 31, 2011		-		14		5		3
March 31, 2010 balance:
Gross carrying amount		$ 2,794		$ 33,700		$   7,893		$ 14,459		$ 58,846
Accumulated amortization		-		(8,214)		(1,452)		(4,189)		(13,855)
Net March 31, 2010		2,794		25,486		6,441		10,270		44,991
Amortization expense		-		(421)		(47)		(696)		(1,164)
Net June 30, 2010		2,794		25,065		6,394		9,574		43,827
Additions		-		-		-		251		251
Amortization expense		-		(422)		(22)		(740)		(1,184)
Net September 30, 2010		2,794		24,643		6,372		9,085		42,894
Amortization expense		-		(421)		(233)		(730)		(1,384)
Net December 31, 2010		2,794		24,222		6,139		8,355		41,510
Additions		-		-		-		1,057		1,057
Amortization expense		-		(421)		(194)		(747)		(1,362)
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		-		-		-		153		153
Amortization expense		-		(421)		(227)		(745)		(1,393)
Net December 31, 2011		$ 2,794		$ 22,537		$   5,352		$   6,398		$ 37,081

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

*  Estimated amortization expense for the internally developed software is based on costs accumulated as of December 31, 2011.  These estimates will change as new costs are incurred and until the software is placed into service in all locations.

6.  VARIABLE INTEREST ENTITIES

Consolidated Variable Interest Entities

The Company held a variable interest in one joint venture in which the Company was the primary beneficiary because of its power to direct activities that most significantly impacted the economic performance of the entity.  The joint venture was an enterprise that served as a dedicated inventory supply source in Asia and the Company’s variable interest in this joint venture related to working capital advances and guarantees of the joint venture’s borrowings.  The Company terminated its relationship with this entity during the three months ended June 30, 2011 with no material impact on its financial condition or results of operations.

          As the primary beneficiary of this VIE, the entity’s material assets, liabilities and results of operations were previously included in the Company’s consolidated financial statements.  The following table summarizes the material carrying amounts of the entity’s assets, all of which were restricted, and liabilities included in the Company’s consolidated balance sheets.

Assets of Consolidated VIE		December 31, 2010		March 31, 2011
Inventory		$ 14,269		$ 5,195
Advances to suppliers		3,694		1,770
Liabilities of Consolidated VIE
Notes payable to banks		4,764		-

          Amounts presented in the table above as restricted assets relating to the consolidated VIE are adjusted for intercompany eliminations.

Nonconsolidated 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 December 31, 2011 and 2010, and March 31, 2011, the Company’s investment in these joint ventures was $23,471, $25,144, and $24,753, respectively and is classified as Investments in Unconsolidated Affiliates in the Condensed Consolidated Balance Sheets. The Company’s advances to these joint ventures were $56, $8,936 and $36 at December 31, 2011 and 2010, and March 31, 2011, 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 $16,115, $16,921 and $16,982 at December 31, 2011 and 2010, and March 31, 2011, 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 45 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.

          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 purchase through sale based on the source of the product and all intercompany transactions are allocated to the region 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, 2011 and 2010:

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, 2011 and 2010.  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 4,222 at a weighted average exercise price of $7.02 per share at December 31, 2011 and 1,222 at a weighted average exercise price of $7.02 per share at December 31, 2010.

          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.  As of December 31, 2011, the Company had purchased 2,380 shares of its common stock at a weighted average price paid per share of $3.78.  At December 31, 2011, the Company did not achieve the fixed charge coverage ratio under the indenture governing the Company’s 10% Senior Notes due 2016 necessary to access the restricted payments basket for the purchase of common stock.

          The following table summarizes the computation of earnings per share for the three months and nine months ended December 31, 2011 and 2010, respectively.

9.  COMPREHENSIVE INCOME

The components of comprehensive income were as follows:

10.  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 $690 and $644 for the three months ended December 31, 2011 and 2010, respectively, and $2,514 and $1,509 for the nine months ended December 31, 2011 and 2010, respectively.

          The Company’s shareholders amended the 2007 Incentive Plan (the “2007 Plan”) at its Annual Meeting of Shareholders on 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 three months and nine months ended December 31, 2011 and 2010, respectively, the Company made the following stock-based compensation awards:

          Under the terms of both the Performance Shares and Performance Based Restricted Stock Units, shares ultimately issued will be contingent upon specified business performance goals.  If minimum standards are not attained, compensation paid under these awards will be zero.  Alternatively, if the maximum performance levels described by the plan are attained, the awards may be 150% of the stated award.

11.  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 $7,024 and the total assessment including penalties and interest through December 31, 2011 is $16,668.  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 Brazil 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 $34,798, 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 $25,920 at December 31, 2011.  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.

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 respect of the investigation into practices in Italy, in October 2005 the EC announced that the Company and its Italian subsidiaries were assessed fines in the aggregate amount of €24,000 (US $28,800).  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 outcome of the 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. has asserted claims against a subsidiary of the Company arising out of the 2004 sale of the Company’s former Italian subsidiary, Dimon Italia, S.r.l., 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 $9,552) plus interest and costs.  A hearing for the disposition of this matter was held in December 2011 and the court’s ruling is pending.  No amounts have been reserved with respect to such claim.

          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 class action’s focus is a review of tobacco supplier contracts and business practices, specifically aiming to prohibit processors from notifying the national credit agency of producers in debt, prohibiting processors from deducting tobacco suppliers’ debt from payments for tobacco, and seeking the modification of other contractual terms historically used in the purchase of tobacco.  The case is currently before the 2nd civil court of São Lourenço do Sul.  The Company’s motion to dismiss the class action is currently pending.  The Company believes this claim to be without merit and is vigorously defending it. Ultimate exposure if an unfavorable outcome is received is not determinable.

            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.  The Company has no additional material AROs.

12.  DEBT ARRANGEMENTS

The Company’s liquidity requirements are affected by crop seasonality, foreign currency and interest rates, green tobacco prices, crop size and quality, as well as other factors. The Company monitors and adjusts funding sources that include cash from operations and various types of financings based on a number of industry, business, and financial market dynamics. Movement and changes between these various funding sources provides flexibility to help maximize various business opportunities, while minimizing associated costs where possible.  The Company’s sales patterns and timing of shipments are shifting from larger volumes shipping in the first part of the fiscal year to the second half of the fiscal year.  Factors such as later crop purchasing this year in a number of regions, transportation challenges in Africa, shifts in customer timing and mix, and the impact of Hurricane Irene in North Carolina have collectively created further timing shifts to its business this year.  As such, fourth quarter shipping is important to meeting full year expectations.  

          The Company continues monitoring turbulence in the capital markets as a result of the European debt crisis, and believes that it is well positioned with no major long-term debt maturities in the next twelve months, good availability to crop lines globally, and appropriate levels of cash on hand. As of December 31, 2011, available credit lines and cash were $775,816, comprised of $150,647 in cash and $625,169 of credit lines, of which $10,810 million was exclusively for letters of credit.

Senior Secured Credit Facility

Fourth Amendment.  On November 3, 2011, the Company closed the Fourth Amendment to the Credit Agreement that expires March 31, 2013.  The amendment permits the exclusion of specified levels of restructuring and impairment charges from the financial covenants impacted by the Company’s EBIT for fiscal quarters ending on or prior to March 31, 2012 and permits the exclusion of specified levels of costs and expenses associated with the commercialization, sale or dissolution of the Company’s Alert business from the financial covenants impacted by the Company’s EBIT for fiscal quarters ending on or prior to December 31, 2011.  The amendment also extends to April 30, 2012 the period in which the Company is permitted to form one or more subsidiaries for a specified business purpose to be funded by up to $1,000 in equity and $30,000 in subordinated note investments by the Company, provided the subsidiary or subsidiaries receive revolving credit financing of up to $200,000 from third parties and issue subordinated notes for an aggregate of up to $100,000.

          The senior secured credit facility under which the Company had borrowings of $85,000 at December 31, 2011 contains various financial covenants.  The Company did not meet the hurdle rate for the consolidated leverage ratio covenant on December 31, 2011; however, the Company was provided a waiver of this covenant for the period October 1, 2011 through December 31, 2011.  The Company believes that it will be able to maintain compliance with each of the financial covenants over the next year and, accordingly, has classified the $85,000 of borrowings as long-term debt at December 31, 2011.  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.

Senior Notes

At December 31, 2011, the Company did not achieve the ratio of consolidated EBITDA to fixed charges of at least 2.0 to 1.0 under the indenture governing the 10% Senior Notes due 2016 necessary to access the restricted payments basket for the purchase of common stock, payment of dividends and other actions under that basket.  The Company from time to time may not satisfy this ratio.

Foreign Seasonal Lines of Credit

The Company has typically financed its non-U.S. operations with uncommitted unsecured short-term seasonal lines of credit at the local level.  These operating lines are seasonal in nature, normally extending for a term of 180 to 270 days corresponding to the tobacco crop cycle in that location.  These facilities are typically uncommitted in that the lenders have the right to cease making loans and demand repayment of loans at any time.  These loans are typically renewed at the outset of each tobacco season.  As of December 31, 2011, the Company had approximately $429,120 drawn and outstanding on foreign seasonal lines with maximum capacity totaling $853,535 subject to limitations as provided for in the Credit Agreement.  Additionally against these lines there was $10,810 available in unused letter of credit capacity with $4,316 issued but unfunded.

The following table summarizes the debt financing as of December 31, 2011 and 2010, and March 31, 2011.

13.  DERIVATIVE FINANCIAL INSTRUMENTS

Fair Value of Derivative Financial Instruments

The Company recognizes all derivative financial instruments, such as interest rate swap contracts and 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.  Changes in fair values of derivatives accounted for as fair value hedges are recorded in income along with the portions of the changes in the fair values of the hedged items that relate to the hedged risk(s).  Changes in fair values of derivatives accounted for as cash flow hedges, to the extent they are effective as hedges, are recorded in other comprehensive income net of deferred taxes.  Changes in fair values of derivatives not qualifying as hedges are reported in income.  During the three months and nine months ended December 31, 2011 and 2010, there were no qualified cash flow or fair value hedges.  Estimates of fair value were determined in accordance with generally accepted accounting principles.  

           The following table summarizes the fair value of the Company’s derivatives by type at December 31, 2011 and 2010, and March 31, 2011.

Earnings Effects of Derivatives

Foreign Currency Contracts

The Company periodically enters into forward or option currency contracts to protect against volatility associated with certain non-U.S. dollar denominated forecasted transactions.  When these derivatives qualify for hedge accounting treatment, they are accounted for as cash flow hedges and are recorded in other comprehensive income, net of deferred taxes.

          The Company has entered into forward currency contracts to hedge cash outflows in foreign currencies around the world for green tobacco purchases and processing costs as well as selling, administrative and general 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.

          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, 2011 and 2010.

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.

14.  PENSION AND POSTRETIREMENT BENEFITS

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 will be 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:

Employer Contributions

The Company’s investment objectives are to generate consistent total investment return to pay anticipated plan benefits, while minimizing long-term costs.  Financial objectives underlying this policy include maintaining plan contributions at a reasonable level relative to benefits provided and assuring that unfunded obligations do not grow to a level to adversely affect the Company’s financial health.  As of December 31, 2011, contributions of $8,814 were made to pension plans for fiscal 2012.  Additional contributions to pension plans of approximately $3,886 are expected during the remainder of fiscal 2012.  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, 2011, contributions of $555 were made to the plans for fiscal 2012.  Additional contributions of $449 to the plans are expected during the rest of fiscal 2012.  The Company retains the right, subject to existing agreements, to modify or eliminate the postretirement medical benefits.

Components of Net Periodic Benefit Cost

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

	Three Months Ended December 31,				Nine Months Ended December 31,
	2011		2010		2011		2010
Service cost	$       18		$     20		$     55		$     60
Interest expense	167		166		500		499
Amortization of prior service cost	(411)		(410)		(1,233)		(1,232)
Actuarial loss	101		108		303		325
Net periodic pension cost (benefit)	$   (125)		$ (116)		$ (375)		$ (348)

15.  INVENTORIES

The following table summarizes the Company’s costs in inventory:

	December 31, 2011	December 31, 2010	March 31, 2011
Processed tobacco	$   830,548	$ 700,144	$   525,759
Unprocessed tobacco	196,355	79,765	230,831
Other	36,392	40,074	43,775
	$1,063,295	$ 819,983	$   800,365

16.  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 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 institutions 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 $125,000 and requires a minimum level of deferred purchase price to be retained by the Company in connection with the sales.  The Company continues to service, administer and collect 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 during the three months and nine months ended December 31, 2011 and 2010 were not material and are recorded as a reduction of Selling, Administrative and General Expenses within the Condensed Consolidated Statements of Operations.

          The agreement for the second securitization program was executed on September 28, 2011 between the Company and an unaffiliated financial institution.  This 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 Liabilities in the Condensed Consolidated Balance Sheets.

          Under both programs, all of the receivables sold to the unaffiliated financial institutions for cash are removed from the Condensed Consolidated Balance Sheet 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 accounts receivable in the Condensed Consolidated Balance Sheets and are valued using unobservable inputs (i.e., level three inputs), primarily discounted cash flow.

          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 in the Condensed Consolidated Statements of Operations.

         The following table summarizes the Company’s accounts receivable securitization information as of the dates shown:

17.  FAIR VALUE MEASUREMENTS

The financial assets and liabilities measured at fair value include derivative instruments, securitized beneficial interests and guarantees.  The non-financial assets and liabilities measured at fair value primarily include assessments of investments in subsidiaries, goodwill and other intangible assets and long-lived assets for potential impairment.  The carrying value and estimated fair value of the Company’s long-term debt are shown in the table below.

	December 31, 2011	December 31, 2010	March 31, 2011
Long-term debt
Carrying value	$ 874,603	$ 763,052	$ 885,155
Estimated fair value	785,090	796,213	905,330

          A three-level valuation hierarchy is used to determine fair value as follows:

·

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

          The amount of unrealized losses relating to assets still held December 31, 2011 and  2010, and  March 31, 2011 was $493, $366 and $288, respectively, all relating to securitized beneficial interests.  Gains and losses included in earnings are reported in Other Income in the Condensed Consolidated Statements of Operations.

Valuation methodologies

The fair value of derivative financial instruments is based on third-party market maker valuation models including amounts related to the Company’s own credit risk and counterparty credit risk.  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 based on the Company’s historical experience, market trends and anticipated performance relative to the particular assets securitized.  The fair value of guarantees is based upon the premium the Company would require to issue the same guarantee in a stand-alone arm’s-length transaction with an unrelated party based upon internally developed models. Internally developed models utilize historical loss data for similar guarantees to develop an estimate of future losses under the guarantees outstanding at the measurement date.

Fair Value of Nonfinancial Assets and Nonfinancial Liabilities

The Company measures certain nonfinancial assets and nonfinancial liabilities at fair value on a nonrecurring basis.  These assets and liabilities include assets acquired and liabilities assumed in an acquisition or in a nonmonetary exchange and property, plant and equipment and intangible assets that are written down to fair value when they are held for sale or determined to be impaired.  During the quarter ended December 31, 2011, the Company recorded property that was received in a nonmonetary exchange at fair value of $26,250.  The fair value was determined utilizing independent third party real estate appraisals.

18.  RELATED PARTY TRANSACTIONS

The Company’s operating subsidiaries engage in transactions with related parties in the normal course of business.  The following is a summary of balances and transactions with related parties of the Company:

	December 31, 2011	December 31, 2010	March 31, 2011
Balances:
Accounts receivable	$ 44,536	$ 71,167	$ 61,981
Accounts payable	17,593	13,581	38,937

	Three Months Ended December 31,			Nine Months Ended December 31,
	2011	2010		2011	2010
Transactions:
Purchases	$ 49,678	$ 47,432		$ 127,472	$ 96,197

          The Company’s operating subsidiaries have entered into transactions with affiliates of the Company for the purpose of procuring inventory.

          The Company’s balances due to and from related parties are primarily with its deconsolidated Zimbabwe subsidiary.  The remaining related party balances and transactions relate to the Company’s equity basis investments in companies located in Asia which purchase and process tobacco.  The balance due from the Zimbabwe subsidiary includes a $9,120 pledge to a bank, which has been recorded in Notes Payable to Banks.

Item 2.    Management’s Discussion and Analysis of
                Financial Condition and Results of Operations

EXECUTIVE OVERVIEW  

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

Financial Results

Sales and other operating revenue for the quarter were impacted by shipment timing as well as lower green costs for the current crop that have been passed on to our customers.  However, gross profit and gross profit as a percentage of revenues improved due to product mix, lower processing cost per kilo due to larger crops and factory efficiencies.  Operating income and pretax income also improved compared to last year mainly due to enhanced margins, the non-recurrence of a reserve for a customer receivable and the substantial completion of our restructuring initiative that began last year partially offset by decreased gains on sales of assets in Brazil.  Tax expense for the quarter decreased to $5.7 million compared to $8.5 million in the prior year resulting in $11.8 million of net income, a $13.8 million increase over the prior year quarter.

Liquidity

Our liquidity requirements are affected by crop seasonality, foreign currency and interest rates, green tobacco prices, crop size and quality, as well as other factors.  We monitor and adjust funding sources that include cash from operations and various types of financings based on a number of industry, business, and financial market dynamics.  Movement and changes between these various funding sources provides flexibility to help maximize various business opportunities, while minimizing associated costs where possible.  We continue monitoring turbulence in the capital markets as a result of the European debt crisis, and believe that we are well positioned with no major long-term debt maturities in the next twelve months, good availability to crop lines globally, and appropriate levels of cash on hand.  As of December 31, 2011, available credit lines and cash were $775.8 million, comprised of $150.6 million in cash and $625.2 million of credit lines, of which $10.8 million was exclusively for letters of credit.

Outlook

We will continue to modify our operations to meet changing market conditions.  Combined with reduced crop sizes in Brazil, Africa and other parts of the world we believe the shift back towards global supply and demand equilibrium for tobacco is beginning.  As stated in prior quarters, our sales patterns and timing of shipments are shifting from larger volumes shipping in the first part of our fiscal year to the second half of the fiscal year. Factors such as later crop purchasing this year in a number of regions, transportation challenges in Africa, shifts in customer timing and mix, and the impact of Hurricane Irene in North Carolina have collectively created further timing shifts to our business this year.  As such, fourth quarter shipping is important to meeting our full year expectations.  We believe our factory investments are reducing operating expenses and we will continue to deploy capital where our customers see value in grower sustainability and social responsibility.  Combined with improved shipping schedules we anticipate building on these positive trends as we move through the remainder of this year and into the next year.  

RESULTS OF OPERATIONS: