UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
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þ☑ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended June 30, 20172020
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¨☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 001-34249
FARMER BROS. CO.
(Exact Name of Registrant as Specified in Its Charter)
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| Delaware | | | 95-0725980 |
(State or other jurisdiction of Incorporation)incorporation or organization) | | | (I.R.S. Employer Identification No.) |
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| 1912 Farmer Brothers Drive, | Northlake, | Texas | 76262 |
| (Address of Principal Executive Offices; Zip Code) |
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888-998-2468 | | 888 | 998-2468 |
| (Registrant’s Telephone Number, Including Area Code) |
Securities registered pursuant to Section 12(b) of the Act:
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| Title of Each Class | Trading Symbol(s) | Name of Each Exchange on Which Registered |
| Common Stock, $1.00 par value | FARM | The NASDAQ Global Select Market |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES ¨ NO þ☐ No ☑
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES ¨ NO þ☐ No ☑
Indicate by check mark whether the registrant: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 þYes ☑ 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 þYes ☑ NO ¨☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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| Large accelerated filer | ¨☐ | | | Accelerated filer | | þ☑ |
| Non-accelerated filer | ¨☐ | (Do not check if a smaller reporting company) | | Smaller reporting company | | ¨☐ |
| | | | | Emerging growth company | | ¨☐ |
| If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the | | |
| Exchange Act. | ¨☐ | | | | | |
| Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. | | ☑ |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES ¨ ☐NO þ☑
The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the closing price at which the Farmer Bros. Co. common stock was sold on December 31, 20162019 was $347.1 million.$119.7 million.
As of September 27, 20171, 2020 the registrant had 16,846,00217,426,497 shares outstanding of its common stock, par value $1.00 per share, which is the registrant’s only class of common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Specified portions of the registrant’s definitive proxy statement to be filed with the U.S. Securities and Exchange Commission (“SEC”) pursuant to Regulation 14A in connection with the registrant’s 20172020 Annual Meeting of Stockholders (the “Proxy Statement”) are incorporated by reference into Part III of this report. Such Proxy Statement will be filed with the SEC not later than 120 days after the conclusion of the registrant’s fiscal year ended June 30, 20172020.
TABLE OF CONTENTS
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| PART I | | |
| ITEM 1. | Business | |
| ITEM 1A. | Risk Factors | |
| ITEM 1B. | Unresolved Staff Comments | |
| ITEM 2. | Properties | |
| ITEM 3. | Legal Proceedings | |
| ITEM 4. | Mine Safety Disclosures | |
| PART II | | |
| ITEM 5. | Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | |
| ITEM 6. | Selected Financial Data | |
| ITEM 7. | Management's Discussion and Analysis of Financial Condition and Results of Operations | |
| ITEM 7A. | Quantitative and Qualitative Disclosures About Market Risk | |
| ITEM 8. | Financial Statements and Supplementary Data | |
| ITEM 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | |
| ITEM 9A. | Controls and Procedures | |
| ITEM 9B. | Other Information | |
| PART III | | |
| ITEM 10. | Directors, Executive Officers and Corporate Governance | |
| ITEM 11. | Executive Compensation | |
| ITEM 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | |
| ITEM 13. | Certain Relationships and Related Transactions, and Director Independence | |
| ITEM 14. | Principal Accountant Fees and Services | |
| PART IV | | |
| ITEM 15. | Exhibits, and Financial Statement Schedules | |
| ITEM 16. | Form 10-K Summary | |
| SIGNATURES | |
| INDEX OF CONSOLIDATED FINANCIAL STATEMENTS | |
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report and other documents we file with the SEC contain forward-looking statements that are based on current expectations, estimates, forecasts and projections about us, our future performance, our financial condition, our products, our business strategy, our beliefs and our management’s assumptions. In addition, we, or others on our behalf, may make forward-looking statements in press releases or written statements, or in our communications and discussions with investors and analysts in the normal course of business through meetings, webcasts, phone calls and conference calls. These forward-looking statements can be identified by the use of words like “anticipates,” “estimates,” “projects,” “expects,” “plans,” “believes,” “intends,” “will,” “could,” “may,” “assumes” and other words of similar meaning. These statements are based on management’s beliefs, assumptions, estimates and observations of future events based on information available to our management at the time the statements are made and include any statements that do not relate to any historical or current fact. These statements are not guarantees of future performance and they involve certain risks, uncertainties and assumptions that are difficult to predict. Actual outcomes and results may differ materially from what is expressed, implied or forecast by our forward-looking statements due in part to the risks, uncertainties and assumptions set forth below in Part I, Item 1A, 1.A., Risk Factors of this report, as well as those discussed elsewhere in this report and other factors described from time to time in our filings with the SEC. Reference is made in particular toGiven these risks and uncertainties, you should not rely on forward-looking statements regardingas a prediction of actual results. Any or all of the success of our corporate relocation, the timing and success of our direct-store-delivery restructuring plan, our success in consummating acquisitions and integrating acquired businesses, the adequacy and availability of capital resources to fund our existing and planned business operations and our capital expenditure requirements, product sales, expenses, earnings per share (EPS), and liquidity and capital resources. We intend these forward-looking statements contained in this Annual Report on Form 10-K and any other public statement made by us, including by our management, may turn out to speak only atbe incorrect. We are including this cautionary note to make applicable and take advantage of the datesafe harbor provisions of this report and do not undertakethe Private Securities Litigation Reform Act of 1995 for forward-looking statements. We expressly disclaim any obligation to update or revise theseany forward-looking statements, whether as a result of new information, future events, changes in assumptions or otherwise, except as required under federal securities laws and the rules and regulations of the SEC.
PART I
Overview
Farmer Bros. Co., a Delaware corporation (including its consolidated subsidiaries unless the context otherwise requires, the “Company,” “we,” “us,” “our” or “Farmer Bros.”), is a national coffee roaster, wholesaler and distributor of coffee, tea and culinary products. We serve a wide variety of customers, from small independent restaurants and foodservice operators to large institutional buyers like restaurant, department and convenience store chains, hotels, casinos, healthcare facilities, and gourmet coffee houses, as well as grocery chains with private brand and consumer-branded coffee and tea products.products, and foodservice distributors. With a robust product line, including organic, Direct Trade, Direct Trade Verified Sustainable coffees or DTVSProject D.I.R.E.C.T.® and other sustainably-produced coffees, iced and hot teas, cappuccino, spices, and baking/biscuit mixes, among others, we offer a comprehensive approach to our customers by providing not only a breadth of high-quality products, but also value-addedvalue added services such as market insight, beverage planning, and equipment placement and service. We were founded in 1912, incorporated in California in 1923, and reincorporated in Delaware in 2004. Our principal office and product development lab is located in Northlake, Texas ("Northlake facility"). We operate in one business segment.
Corporate Relocation
In fiscal 2015 we began the process of relocating our corporate headquarters, product development lab, and manufacturing and distribution operations from Torrance, California to a new facility housing these operations in Northlake, Texas (the “New Facility”) (the “Corporate Relocation Plan”). In order to focus on our core product offerings, in the second quarter of fiscal 2016, we sold certain assets associated with our manufacture, processing and distribution of raw, processed and blended spices and certain other culinary products (collectively, the “Spice Assets”) to Harris Spice Company Inc. (“Harris”). In fiscal 2017, we completed the construction of, and exercised the purchase option to acquire, the New Facility, relocated our Torrance operations to the New Facility, and sold our facility in Torrance, California (the “Torrance Facility”). We commenced distribution activities at the New Facility during the second quarter of fiscal 2017 and initial production activities late in the third quarter of fiscal 2017. We completed the Corporate Relocation Plan in the fourth quarter of fiscal 2017. We began roasting coffee in the New Facility in the fourth quarter of fiscal 2017.
Recent Developments
Acquisitions
In fiscal 2017, we completed two acquisitions. On October 11, 2016, we acquired substantially all of the assets and certain specified liabilities of China Mist Brands, Inc. dba China Mist Tea Company (“China Mist”), a provider of flavored iced teas and iced green teas, and on February 7, 2017, we acquired substantially all of the assets and certain specified liabilities of West Coast Coffee Company, Inc. (“West Coast Coffee”), a coffee roaster and distributor with a focus on the convenience store, grocery and foodservice channels. The China Mist acquisition is expected to extend our tea product offerings and give us a greater presence in the high-growth premium tea industry, while the West Coast Coffee acquisition is expected to broaden our reach in the Northwestern United States.
On August 18, 2017, we entered into an agreement to acquire substantially all of the assets of Boyd Coffee Company (“Boyd’s”), a privately-held coffee roaster and distributor with a focus on restaurants, hotels and convenience stores on the West Coast of the United States, with a combination of cash and stock. Boyd’s business model is expected to be complementary to the Company across customer channels, product portfolios and distribution networks, including a high-touch service model of direct-store-delivery. The transaction is expected to close in the second quarter of fiscal 2018, subject to certain closing conditions.
DSD Restructuring Plan
As a result of an ongoing operational review of various initiatives within our direct-store-delivery or DSD selling organization, in the third quarter of fiscal 2017, we commenced a restructuring plan to reorganize our DSD operations in an effort to realign functions into a channel-based selling organization, streamline operations, acquire certain channel specific expertise, and improve selling effectiveness and financial results (the “DSD Restructuring Plan”).
Products
We are a national coffee roaster, wholesaler and distributor of coffee, tea and culinary products manufactured under supply agreements, under our owned brands, as well as under private labels on behalf of certain customers. Our product categories consist of the following:
a robust line of roast and ground coffee, including organic, Direct Trade, DTVS | |
| • | a robust line of roast and ground coffee, including organic, Direct Trade, Project D.I.R.E.C.T.® and other sustainably-produced offerings; |
frozen liquid coffee;
flavored and unflavored iced and hot teas; | |
| • | flavored and unflavored iced and hot teas, including organic and Rainforest Alliance Certified TM; |
culinary products including gelatinspremium spices, pancake and puddings, soup bases, dressings,biscuit mixes, gravy and sauce mixes, pancakesoup bases, dressings, syrups and biscuit mixes, jellies and preserves,sauces, and coffee-related products such as coffee filters, cups, sugar and creamers;
spices; and
other beverages including cappuccino, cocoa, granitas, and concentrated and ready-to-drink cold brew and iced coffee.
Our owned brand products are sold primarily into the foodservice channel. Our primary brands include Farmer Brothers™Brothers®, Artisan Collection by Farmer Brothers™, Superior®, Metropolitan™ and, China Mist® and Boyds®. Our Artisan coffee products include Direct Trade, Project D.I.R.E.C.T.®, Fair Trade Certified™, Rainforest Alliance Certified™, organic and proprietary blends. In addition, we sell whole bean and roast and ground flavored and unflavored coffee products under the Public Domain, Un Momento®, Collaborative Coffee™Coffee®, Cain's™, McGarvey® and McGarveyBoyds®brands and iced and hot teas under the China Mist® brand through foodservice distributors at retail. Our roast and ground coffee products are primarily sold in traditional packaging, including bags and fractional packages, as well as single-serve packaging. Our China Mist tea products are sold in traditional tea bags and sachets, as well as single-serve tea pods and capsules. For a description of the amount of net sales attributed to each of our product categories in fiscal 2017, 20162020, 2019 and 2015,2018, see Management's Discussion and Analysis of Financial ConditionsCondition and Results of Operations—Results of Operationsincluded in Part II, Item 7 of this report.
Business Strategy
Overview
We developare a coffee company dedicated to deliver the coffee people want, the way they want it. We build partnerships with customers who value service, quality, and sustainable sourcing and are passionate about delivering great tasting products delivered with concierge service with the goal of a positive impact on our customerscoffee, tea, and the planet. Through our sustainability, stewardship, environmental efforts, and leadership we are not only committedculinary experiences to serving the finest products available, considering the cost needs of the customer, but also insist on their sustainable cultivation, manufacture and distribution whenever possible.communities.
In order to achieve our mission, we have had to growhave grown existing capabilities and continue to develop new ones over the years.capabilities to deliver value to our customers. More recently, we have undertaken initiatives such as, but not limited to, the following:
developdeveloping new products in response to demographic and other trends to better compete in areas such as premium coffees and teas;
grow through acquisitions to broadenbuilding our geographic reache-commerce capabilities;
executing manufacturing and to increasenetwork optimization;
optimizing our presence in the high-growth premium tea industry;product assortment;
implementdeveloping our product innovation pipeline;
creating a channel-based selling strategy to better address the unique needs of each customer channel, more quickly respond tocommercial brewing equipment (CBE) competitive service advantage;
building an industry trends, and improve sales growth while maintaining the value-add provided by the DSD delivery and service model;leading sustainability platform;
rethink aspects of our Companycreating a culture to improve productivity and employee engagement and to attract and retain talent;
embrace sustainability acrosstalent within our operations, in the quality of our products, as well as, how we treat our coffee growers;diverse workplace; and
ensure our systems and processes provide the highest qualityhigh-quality products at a competitive cost, protection against cyber threats, and a safe environment for our employees and partners.
We differentiate ourselves in the marketplace throughby providing tailored product and equipment service solutions to help our product offerings and through our customer service model, with quality and sustainability as the underpinning,customers deliver a great experience for their consumers, which includes:
offering a wide variety of coffee, product offeringstea, and packaging options across numerous brands and three quality tiers-value, premium and specialty;
consumer-branded coffee and teaculinary products;
beverage equipment placementproviding consumer, channel, and service;market insights;
hassle-free inventoryideation to support customer menu and product procurement management;evaluation in line with consumer trends;
DSD service;delivering comprehensive commercial brewing equipment program support from installation to preventative maintenance to timely repair;
delivering the highest standards in food quality and safety with all of our production facilities being Safe Quality Food (“SQF”) certified;
helping our customers deliver their sustainability goals and objectives;
Customer–centric Direct-store-delivery ("DSD") capability with focus on providing location-level program execution and merchandising support;
product and menu insights; and
a robust approach to social, environmental and economic sustainability throughout our business.
Our services provided to DSD customers are conducted primarily in person through Route Sales Representatives, or RSRs, who develop personalbusiness relationships with chefs, restaurant owners and food buyers at their delivery locations. We also provide comprehensive coffee programs to our national account customers, including private brand development, green coffee procurement, hedging, category management, sustainable sourcing and supply chain management. Through China Mist Tea-Loving Care®, we offer our customers an iced tea service that includes a diverse offering of on-trend products, brewing equipment expertly calibrated for extracting optimal flavor from our tea blends, specialized distribution, training and incentives, professional service, quality assurance, and strategic marketing support.
We distribute our owned brands primarily through our DSD network, and, in some cases, through third-party distributors, while continuing to support and grow our private label and other national account business. We also sell coffee and tea products directly to consumers through our website and China Mist's website, respectively, and sell certain products such as Un Momento®, Collaborative Coffee™, Cain's™ and McGarvey® coffees and China Mist® teas at retail.
Strategic Initiatives
We are focused onIn fiscal 2020, the entire organization worked to evolve our purpose, vision, and values to underpin our strategy and support building a performance driven culture. That work identified the following strategies to reduce costs, streamline our supply chain, expandfive strategic initiatives (our "5 Es") that serve as the breadth of products and services we provide to our customers, broaden our geographic reach, increase our presence in high growth industries and product categories, and better position the Company to attract new customers:
Reduce Costs to Compete More Effectively
New Facility. In fiscal 2017, we completed construction of and relocation to our state-of-the-art facility in Northlake, Texas. We undertook this endeavor, in part, to pursue improved production efficiency to allow us to provide a more cost-competitive offering of high-quality products. We believe the ongoing improvements in production efficiency will allow us to operate at a lower cost, generally.
DSD Restructuring Plan. As a result of an ongoing operational review of various initiatives within our DSD selling organization, in the third quarter of fiscal 2017, we commenced the DSD Restructuring Plan to reorganize our DSD operations in an effort to realign functions into a channel-based selling organization, streamline operations, acquire certain channel specific expertise, and improve selling effectiveness and financial results. We began recognizing cost benefits associated with the restructuring in the fourth quarter of fiscal 2017 and we anticipate annualized savings from the restructuring plan beginning in the second quarter of fiscal 2018. We expect to complete the DSD Restructuring Plan by the end of the second quarter of fiscal 2018. We continue to analyze our DSD organization and evaluate other potential restructuring opportunities in lightpillars of our strategic priorities.
strategy:Third-Party Logistics. During the second half of fiscal 2016, we replaced our long-haul fleet operations with third-party logistics (“3PL“). In fiscal 2017, we experienced a reduction in our fuel consumption and empty
trailer miles, while improving our intermodal and trailer cube utilization as compared to the prior fiscal year.Aligning with our 3PL partner has allowed us to more efficiently manage routing thereby reducing diesel pollution in support of our sustainability efforts. Dynamic routing is expected to allow for further reduction of our carbon emissions in fiscal 2018.
Vendor Managed Inventory. During the second half of fiscal 2016, we entered into a third-party vendor managed inventory arrangement. The use of vendor managed inventory arrangements has begun to yield benefits in fiscal 2017 by enabling us to reconfigure our packaging methodology, eliminating duplication but resulting in the same strength packaging with less material, thereby reducing waste and contributing to our sustainability efforts.
Warehouse Management. In the first quarter of fiscal 2017, we entered into an agreement with a third party to provide warehouse management services for our New Facility. We expect the warehouse management services to facilitate cost savings by leveraging the third party's expertise in opening new facilities, implementing lean management practices, improving performance on certain key performance metrics, and standardizing best practices.
Optimize Sales, Pricing and Portfolio of Products
Pricing and Products. In fiscal 2016, we built capability to more strategically optimize our pricing strategy across product, channel, customer and geographic segments, which we continued in fiscal 2017. This process is designed to improve our average margins as well as retention rates. In addition, in fiscal 2017, we continued our prior work optimizing SKU count and identifying opportunities to consolidate suppliers to improve costs and supply chain efficiency.
Channel-Based Selling Organization. Changing from a geographic to a channel-based selling strategy as part of the DSD Restructuring Plan is expected to allow us to better serve our customers and improve sales growth while maintaining the value-add provided by the DSD delivery and service model. We believe this new, channel-based sales strategy will empower our sales organization to better address the unique needs of each customer channel thereby deepening our customer relationships, allow us to create a more comprehensive customer support structure, enhance our marketing efforts, and allow us to respond more quickly to industry trends.
Strategic Investment in Assets and Evaluation of Cost StructureEmpower Talent
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| • | Acquisitions. OneEmbrace our Purpose, Vision, and Values. In fiscal 2020, we evolved our purpose, vision, and values to support building a performance driven culture.
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| • | Develop our Talent. We have invested in a Learning Management System to enable training facilitation and tracking of training modules to support the development of our investment priorities is exploring acquisitions that we believe will enhanceteam members. |
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| • | Recognize and Reward Performance. We aligned our incentive plans to support our annual and long-term stockholder value and complement or enhance our product, equipment, service and/or distribution offerings to existing and new customer bases.strategy. For example,instance, in fiscal 2017,2020, we completedexecuted a front-line recognition program for those team members that delivered great results on company service metrics, which aligns with the China Mist acquisition to extendEnrich Customer Relationships pillar of our tea product offerings and give us a greater presence in the high-growth premium tea industry, and the West Coast Coffee acquisition to broaden our reach in the Northwestern United States. Additionally, on August 18, 2017, we entered into an agreement to acquire Boyd Coffee Company. The Boyd Coffee Company acquisition is expected to add to our product portfolio, improve our growth potential, broaden our distribution footprint with a deeper penetration on the West Coast of the United States, and increase our capacity utilization at our production facilities. The transaction is expected to close in the second quarter of fiscal 2018, subject to certain closing conditions. See Note 3, Acquisitions, and Note 26, Subsequent Events—Boyd’s Purchase Agreement, of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this report.5 Es strategy. |
Asset Utilization. We continue to look for ways to deploy our personnel, systems, assets and infrastructure to create or enhance stockholder value. Areas of focus have included corporate staffing and structure, methods of procurement, logistics, inventory management, supporting technology, and real estate assets.
Branch Consolidation and Property Sales. In an effort to streamline our branch operations, in the fourth quarter of fiscal 2016, we sold two Northern California branch properties, with a third Northern California property under contract for sale, and we acquired a new branch facility in Hayward, California. The third Northern California property was sold in fiscal 2017. We evaluate our branch operation structure on an ongoing basis to identify opportunities to streamline the supply chain and reduce costs.
Corporate Capabilities and Alignment to Create Stockholder Value
Investment in Human Resources. In February 2017, we hired David G. Robson as our Treasurer and Chief Financial Officer and Ellen D. Iobst as our Chief Operations Officer. We also promoted Scott Siers to our
executive management team as Senior Vice President and General Manager—Direct Ship. Each of these individuals brings a proven track record of strategic and operational leadership capabilities in finance and/or manufacturing operations at large consumer goods organizations.
Commitment to Employee Wellness. We are committed to creating a healthier and happier workforce which we believe contributes to our success. We have received certifications as a Fit-Friendly Worksite and a Blue Zone Workplace based on the activities and environment created in our workplace to support healthy living and promote wellness of our associates.
Employee Development. We have invested in a Learning Management System to enable training facilitation and tracking of training modules to support the development of employees at all levels and functions within the organization. We recently completed a Talent Planning Process of all exempt level employees across the organization. We calibrated the assessment of talent and created succession charts for all critical roles to ensure we have the right talent and capabilities to support the business today and in the future.
Performance Driven Culture
In fiscal 2017, we continued to emphasize greater alignment of employee individual goals with Company goals under our compensation plans in order to focus the entire organization on the effort to create value for our stockholders.
Drive High-Growth Product Categories and Address BroaderEnrich Customer NeedsRelationships
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| • | Introduction of Collaborative Coffee™Build on our Brewing Equipment Service Advantage. From installation, to preventative maintenance, and Redesign of Un Momento®Branded Retail Products. In an effort to address whattimely repair execution, our trained service technicians and equipment remanufacturing capabilities provide reliable, consistent service coverage across a wide geographic area which we believe is a competitive advantage. We continue to be unmet consumerinvest in systems and processes to enable a more efficient go-to-market with our equipment program.
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| • | Drive Customer Satisfaction. Providing our customers the product they want, when they want it, is key to customer satisfaction and retention. We have invested in systems and processes to improve fill rates, including SKU optimization and inventory replenishment tools. We have also reinvigorated our innovation pipeline so we can continually deliver on-trend products and equipment. |
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| • | Expand Customer Service Capabilities. In fiscal 2020, we have expanded our equipment service call center to support our DSD route business in order to enable quick resolution of issues and drive better visibility on customer inquiries. We believe this enables better customer response and improves customer retention. |
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| • | Develop Pre-Sell/Tel-Sell Capabilities. In order to better serve certain customer’s needs, and improve margin within the retail grocery environment,we expanded our Tel-Sell (Roastery Direct) program in fiscal 20162020. This program enables us to better service customers outside our DSD network who want to purchase our products. We pick, pack, and ship products to these customers via common carriers. We are also implementing a Pre-Sell DSD model in select markets. In this model, we launchedsell to our customers in advance of the Collaborative Coffee™ brand into the retail grocery channeldelivery, enabling more quality time with our customers, and completed a packaging redesign and product portfolio optimization of our Un Momento® retail branded product line. Collaborative Coffee™ offers coffee enthusiasts a super-premium, verified direct trade coffee at an approachable price. Un Momento® delivers Millennial Hispanic consumers appealing flavor variety and premium coffee at an exceptional value.more deliveries per day. |
Growth in Premium Tea Industry. In fiscal 2017, we increased our presence in the high-growth premium tea industry through the China Mist acquisition. In fiscal 2017, we introduced a new retail line of China Mist naturally flavored iced teas which are naturally gluten-free and blended with all-natural flavorings, and a new line of Artisan hot teas.
Product Development Lab. In fiscal 2017, we opened our product development lab at the New Facility where we are focused on developing innovative products in response to industry trends and customer needs. In fiscal 2017, we developed new products including Artisan Cold Brew Coffee and Artisan Direct Trade Coffee.
SQF Certification. We are committed to the highest standards in food quality and safety. We have obtained the Safety Quality Food (“SQF”) certification under the Global Food Safety Initiative in our Portland and Houston facilities and are in the process of obtaining the SQF certification for the New Facility.
Expand Sustainability Leadership
Sustainability. We believe that our collective efforts in measuring our social and environmental impact, creating programs for waste, water and energy reduction, promoting partnerships in our supply chain that aim at supply chain stability and food security, and focusing on employee engagement place us in a unique position to help retailers and foodservice operators create differentiated coffee and tea programs that can include sustainable supply chains, direct trade purchasing, training and technical assistance, recycling and composting networks, and packaging material reductions. During fiscal 2017, we submitted our third third-party verified Carbon Disclosure Project survey for Scope 1, 2 and 3 emissions (direct emissions, indirect emissions from consumption of purchased electricity, heat or steam and other indirect emissions). Further, we published sustainability reports based on the Global Reporting Initiative’s core compliance standard in fiscal 2017 and 2016 relating to our fiscal 2016 and 2015 operations, respectively. In addition, China Mist is a member of the Ethical Tea Partnership (the “ETP”), a non-profit organization that works to improve the sustainability of the tea sector, the lives of tea
workers and farmers, and the environment in which tea is produced. As a member of the ETP, China Mist sources all its tea from tea plantations that are certified, monitored, and regularly audited by the ETP.Enhance Processes & Systems
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| • | LEED®Upgrade our Route Handheld Technology. We are piloting a new handheld technology in select markets. We expect this technology to improve route productivity and enable improved customer fill rates.
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| • | Investment in Technology. We are implementing IT applications which we expect to enhance supply chain optimization and flexibility. |
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| • | Deploy B2B/E-Commerce Solution. We believe that this solution will enable a more robust roastery direct program, as well as coffee house and subscription sales. This will lead to improved customer analytics, and enable better product targeting. |
Execute Optimization
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| • | Improve Demand Planning. We are in process of developing new tools to provide visibility to customer demand. We are working closely with our key vendor partners to create a more robust demand and supply process and implementing a sales demand consensus model. |
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| • | Manufacturing and Distribution Network Optimization Plan. We are in process of developing and executing manufacturing network optimization, which includes opening a distribution center in the western part of the United States and consolidating third party frozen distribution services. Additionally, we continue to evaluate our branch footprint to determine the optimal structure to deliver products to our DSD customers more efficiently and effectively. These initiatives, among others, is expected to reduce our transportation and warehousing cost. |
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| • | SKU Optimization. In fiscal 2020, we continued optimizing our SKU portfolio. We have reduced the number of underperforming coffee and allied products, and have reduced components and packaging options. Since fiscal 2019, we have undertaken efforts to optimize our SKU count reducing our total SKU count by more than 26.0%. |
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| • | Implement Procurement Partnerships. We are working with our vendor partners to enhance our vendor managed inventory program. We have implemented quarterly business reviews with key vendor partners. |
Elevate Innovation
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| • | Expand Sustainability Program. We continue to enhance our sustainable product offerings and incorporate sustainability as we develop new products. We are developing marketing campaigns to better communicate our program portfolio as a differentiator for our customers, inclusive of our capability to restore and refurbish equipment. |
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| • | Evolve our Product Portfolio. We are actively developing product solutions that align with emerging consumer trends with premium coffee and tea products. We are partnering with our equipment suppliers on equipment innovation. We are developing our espresso based beverage program and actively optimizing our allied product offerings. |
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| • | Renovate Product Portfolio. As consumers shift in the demand for healthier food and beverage products, we look to future opportunities to reformulate our existing product lines with clean label offerings and provide more "Better for You" product offerings. |
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| • | Define and Implement our Digital Strategy. We are actively engaging and developing our digital strategy to respond to the digital capabilities that our customers expect as well as add efficiency to our sales and logistics functions. |
Expand Sustainability Leadership
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| • | Sustainability. We believe that our collective efforts in measuring our social and environmental impact, creating programs for waste, water and energy reduction, promoting partnerships in our supply chain that aim at supply chain stability and food security, and focusing on employee engagement place us in a unique position to help retailers and foodservice operators create differentiated coffee and tea programs that can include sustainable supply chains, direct trade purchasing, training and technical assistance, recycling and composting networks, and packaging material reductions. During fiscal 2020, we achieved the Carbon Disclosure Project's Climate leadership level for our efforts to reduce Scope 1, 2 and 3 emissions (direct emissions, indirect emissions from consumption of purchased electricity, heat or steam and other indirect emissions). Further, in fiscal 2020, we published our annual sustainability report based on the Global Reporting Initiative’s comprehensive compliance standard. In addition, China Mist is a member of the Ethical Tea Partnership (the “ETP”), a non-profit organization that works to improve the sustainability of the tea sector, the lives of tea workers and farmers, and the environment in which tea is produced. As a member of the ETP, China Mist sources all of its tea from tea plantations that are certified, monitored, and regularly audited by the ETP. |
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| • | Science-Based Carbon Reduction Targets. We believe combating climate change is critical to the future of our company, the coffee industry, coffee growers and the world. In fiscal 2020 we made progress towards our science based carbon reduction targets. With a new baseline established in fiscal 2018, we set more ambitious goals in line with efforts to limit global warming to 1.5°C. Setting approved targets places us among those responsible businesses that are making measurable contributions to incorporate sustainability within their business strategy. |
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| • | Zero Waste to Landfill. Achieving zero waste in our production and distribution facilities is a significant step in reaching our overall sustainability goals. In fiscal 2020 we maintained our goal of 90% waste diversion for our primary production and distribution facilities. To accomplish this goal, we implemented ambitious recycling and composting guidelines across these facilities. |
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| • | LEED® Certified Facilities. Our Portland production and distribution facility was one of the first in the Northwest to achieve LEED®LEED® Silver Certification. We anticipate that ourOur corporate offices at the New Facility willin Northlake, Texas has also beachieved LEED® certified. Silver Certification. |
Expansion of DTVS Program. In fiscal 2017, we completed our second third-party audit and verification of our DTVS program for sourcing green coffee. DTVS is an impact-based product or raw material sourcing framework that utilizes data-based sustainability metrics to influence an inclusive, collaborative approach to sustainability along the supply chain. To evaluate whether coffee is DTVS, we follow an outcome-based evaluation framework. The outcome of this evaluation weighs on | |
| • | Expansion ofProject D.I.R.E.C.T.® Program. In fiscal 2020, we continued to grow our direct trade sourcing model, Project D.I.R.E.C.T. ®. This model is an impact-based product or raw material sourcing framework that utilizes data-based sustainability metrics to influence an inclusive, collaborative approach to sustainability along the supply chain. To evaluate whether coffee is Project D.I.R.E.C.T.®, we follow an outcome-based evaluation framework. The result of this evaluation impacts where we invest our resources within our supply chain and has led to an increased level of transparency for us. Project D.I.R.E.C.T . ® represents a growing part of our coffee portfolio. |
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| • | Green Coffee Traceability. We are committed to the inclusion of more sustainably-sourced coffees in our supply chain. Regulatory and reputational risks can increase when customers, roasters and suppliers cannot see back into their supply chain. To address these concerns, as well as to deepen our commitment to the longevity of the coffee industry, we track traceability levels from all green coffee suppliers on a per-contract basis. During fiscal 2020, we continued to monitor purchases from coffee suppliers and ask for them to provide traceability information on a per contract basis. This helps us to bring transparency to our supply chain, rank our suppliers, and also to identify opportunities to select trusted providers, cooperatives, mills, exporters, etc., when offering sustainable coffees to our customers. |
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| • | Supplier Sustainability. We are committed to working with suppliers who share our social, environmental and economic sustainability goals. Regulatory and reputational risks can increase when suppliers are not held to the same strict standards to which we hold ourselves. To address this concern, we annually survey all green coffee suppliers along with our top suppliers of processed coffee and non-coffee products to assess their social, environmental, and economic sustainability practices and alignment with the United Nations Global Compact, a United Nations initiative to encourage businesses worldwide to adopt sustainable and socially responsible policies, documenting 96% compliance with United Nations Global Compact practices from all respondents. Existing suppliers and new suppliers must acknowledge and adhere to our Supplier Standards of Engagement. These Standards of Engagement set minimum standards for Suppliers that are designed to provide Farmer Bros. visibility into all |
aspects of its supply chain and has led to an increased levelmeets these objectives. These Standards of transparency for us. DTVS represents a growing partEngagement also serve as Supplier’s Certificate of our coffee portfolio.
Green Coffee Traceability. We are committed toCompliance, executed by the inclusion of more sustainably-sourced coffees in our supply chain. Regulatorysupplier, representing supplier's receipt and reputational risks can increase when customers, roasters and suppliers cannot see back into their supply chain. To address these concerns, as well as to deepen our commitment to the longevityacknowledgment of the coffee industry, in fiscal 2017 we began tracking traceability levels from all green coffee suppliers on a per contract basis.
Supplier Sustainability. We are committedStandards of Engagement and agreement to working with suppliers who share our social, environmental and economic sustainability goals. Regulatory and reputational risks can increase when suppliers are not held to the same strict standards to which we hold ourselves. To address this concern, in fiscal 2017, we surveyed all green coffee suppliers along with our top non-raw coffee suppliers to assess their social, environmental, and economic sustainability practices and alignmentcomply with the United Nations Global Compact, a United Nations initiative to encourage businesses worldwide to adopt sustainable and socially responsible policies.
same.Charitable Activities
We view charitable involvement as a part of our corporate responsibility and sustainability model: Social, Environmental, and Economic Development, or SEED. We endorse and support communities where our customers, employees, businesses, and suppliers are located, and who have enthusiastically supported us over the past 100 years. Our objective is to provide support toward a mission of supply chain stability with a focus on food security.
Recipient organizations include those with strong local and regional networks that ensure that families have access to nutritious food. Donations may take the form of corporate cash contributions, product donations, employee volunteerism, and workplace giving (with or without matching contributions).
Recipient organizations include Feeding America, Ronald McDonald House, and local food banks.
We support industry organizations such as World Coffee Research, which commits to grow, protect, and enhance supplies of quality coffee while improving the livelihoods of the families who produce it, and the Specialty Coffee Association (“SCA”) Sustainability Council and the Coalition for Coffee Communities, which are focused on sustainability in coffee growing regions.
Our employee-driven CAFÉ Crew organizes employee involvement at local charities and fund raisers, including running in the Chicago Marathon in support of Team Ronald McDonald House, riding in the Ride Against Hunger supported by Tarrant Area Food Bank, supporting delivery for Meals on Wheels, and hosting local food drives.drives and donation of Farmer Brothers products nearing the end of their shelf life to organizations related to Feeding America.
All of ourOur usable and near expiring products or products with damaged packaging that can be donated are donated to Feeding America affiliated food banks nationwide, in an effort to fully eliminatekeep all edible food waste from the landfill.going to landfills.
Industry and Market Leadership
We have made the following investments in an effort to ensure we are well-positioned within the industry to take advantage of category trends, industry insights, and general coffee, tea and teaallied product knowledge to grow our business:
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| • | Coffee Industry Leadership. Through our dedication to the craft of sourcing, blending and roasting coffee, and our participation and/or leadership positions with the SCA, National Coffee Association, Coalition for Coffee Communities, International Women's Coffee Alliance, International Foodservice Manufacturers Association, Pacific Coast Coffee Association, Roasters Guild and World Coffee Research, we work to help shape the future of the coffee industry. We believe that due to our commitment to the industry, large retail and foodservice operators are drawn to working with us. We were among the first coffee roasters in the nation to receive SCA certification of a state-of-the-art coffee lab, andwhich includes our product development lab at the Northlake facility. We also operate Public Domain®, a specialty coffeehouse in Portland, Oregon. |
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| • | Market Insight and Consumer Research. We plan to submithave developed a market insight capability internally that reinforces our business-to-business positioning as a thought leader in the coffee, tea and food service industries. We provide trend insights and product development labsupport that help our customers create winning products and integrated marketing strategies. Within this, we are focused on understanding key demographic groups and their attitudes and behaviors to better position the Company as a consumer brand at the New Facility for SCA certification.retail and e-commerce and expand these sales channels. |
Market Insight and Consumer Research. We have developed a market insight capability internally that reinforces our business-to-business positioning as a thought leader in the coffee and tea industries. We provide trend insights that help our customers create winning products and integrated marketing strategies. Within this, we are focused on understanding key demographic groups such as Millennials and Hispanics, and key channel trends.
Raw Materials and Supplies
Our primary raw material is green coffee, an exchange-traded agricultural commodity traded on the Commodities and Futures Exchange that is subject to price fluctuations. Over the past five years, the coffee “C” market near month price per pound ranged from approximately $1.02$0.88 to $2.22.$1.74. The coffee “C” market near month price as of June 30, 20172020 and 2016 was $1.262019, were $1.04 and $1.46$1.10 per pound, respectively. Our principal packaging materials include cartonboard, corrugated and plastic. We also use a significant amount of electricity, natural gas, and other energy sources to operate our production and distribution facilities.
We purchase green coffee beans from multiple coffee regions around the world. Coffee “C” market prices in fiscal 20172020 traded in a 60$0.48 cent range during the year, butand averaged near11% below the historical average for the past five years. There can be no assurance that green coffee prices will remain at these levels in the future. Some of the Arabica coffee beans we purchase do not trade directly on the commodity markets. Rather, we purchase these coffee beans on a negotiated basis from coffee brokers, exporters and growers, including Direct Trade DTVS and Fair Trade Certified™ sources and Rainforest Alliance Certified™ farms. Fair Trade Certified™ provides an assurance that farmer groups are receiving the Fair Trade minimum price and an additional premium for certified organic products through arrangements with cooperatives. Direct Trade and DTVS products provide similar assurance except that the arrangements are provided directly to farmersindividual coffee growers instead of through brokers in an effort to promote investment in bettercooperatives, providing these farmers with price premiums and morededicated technical assistance to improve farm conditions and increase both quality and productivity of sustainable farming practices as well as to ensure a fairer price.coffee crops at the individual farm level. Rainforest Alliance Certified™ coffee is grown using methods that help promote and preserve biodiversity, conserve scarce natural resources, and help farmers build sustainable lives. Our business model strives to reduce the impact of green coffee price fluctuations on our financial results and to protect and stabilize our margins, principally through customer arrangements and derivative instruments, as further explained in Note 86, Derivative Instruments, of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this report.Annual Report on Form 10‑K. Intellectual Property
We own a number of United States trademarks and service marks that have been registered with the United States Patent and Trademark Office. We also own other trademarks and service marks for which we have filed applications for U.S. registration. We have licenses to use certain trademarks outside of the United States and to certain product formulas, all subject to the terms of the agreements under which such licenses are granted. We believe our trademarks and service marks are integral to customer identification of our products. It is not possible to assess the impact of the loss of such identification. Depending on the jurisdiction, trademarks are generally valid as long as they are in use and/or their registrations are properly maintained and they have not been found to have become generic. Registrations of trademarks can also generally be renewed indefinitely as long as the trademarks are in use. In addition, we own numerous copyrights, registered and unregistered, registered domain names, and proprietary trade secrets, technology, know-how, processes and other proprietary rights that are not registered.
Seasonality
We experience some seasonal influences. The winter months arehistorically have generally thebeen our strongest sales months. However, our product line and geographic diversity provide some sales stability during the warmer months when coffee consumption ordinarily decreases. Additionally, we usually experience an increase in sales during the summer and early fall months from seasonal businesses located in vacation areas and from grocery retailers ramping up inventory for the winter selling season.
Because of the seasonality of our business, results for any quarter are not necessarily indicative of the results that may be achieved for the full fiscal year.
Distribution
We operate production facilities in Northlake, Texas; Houston, Texas; Portland, Oregon; and Hillsboro, Oregon; and Scottsdale, Arizona.Oregon. Distribution takes place out of the New Facility,Northlake facility, the Portland Hillsboro and ScottsdaleHillsboro facilities, as well as separate distribution centers in Northlake, Illinois; and Moonachie, New Jersey. We commenced distribution activities at the New Facility during the second quarter of fiscal 2017 and initial production activities late in the third quarter of fiscal 2017. We began roasting coffee in the New Facility in the fourth quarter of fiscal 2017.
Our products reach our customers primarily in twothe following ways: through our nationwide DSD network of 450186 delivery routes and 11497 branch warehouses as of June 30, 2017,2020, or direct-shipped via common carriers or third-party distributors. DSD sales are primarily made “off-truck” to our customers at their places of business by our RSRs who generally are responsible for soliciting, selling and collecting from and otherwise maintaining our customer accounts. Our DSD business includes office coffee services whereby we provide office coffee and tea products, including a variety of coffee brands and blends, brewing and beverage equipment, and foodservice supplies directly to offices.business. We operate a large fleet of trucks and other vehicles to distribute and deliver our products through our DSD network, and we rely on 3PL service providers for our long-haul distribution. We maintain inventory levels at each branch warehouse to promote minimal interruption in supply. We also sell coffee and tea products directly to consumers through our websitewebsites and China Mist's website, respectively.sell certain products at retail and through foodservice distributors.
During the second half of our fiscal year ended June 30, 2020, we introduced new product delivery concepts such as warehouse and pop-up sales, and accelerated our roastery direct and e-commerce initiatives. Some of these new concepts will continue to be a focus in the future as we execute our 5E strategy.
Customers
We serve a wide variety of customers, from small independent restaurants and foodservice operators to large institutional buyers like restaurant, department and convenience store chains, hotels, casinos, healthcare facilities, and gourmet coffee houses, as well as grocery chainsretail with private brand and consumer-branded coffee and tea products.products, foodservice distributors, and consumers through e-commerce. Although no single customer accounted for 10% or more of our net sales in any of the last three fiscal years, we have severala number of large national account customers, thecustomers. The loss of or reduction in sales to one or more of which would be likely to have a material adverse effect on our results of operations. During fiscal 2017,2020, our top five customers accounted for approximately 21%19.8% of our net sales and no one customer exceed 10% of our net sales.
Most of our customers rely on us for distribution; however, some of our customers use third-party distribution or conduct their own distribution. Some of our customers are “price” buyers, seeking the low-cost provider with littleless concern aboutfor service, while others find great value in the service programs we provide. We offer a full return policy to ensure satisfaction and extended terms for those customers who qualify. Historically, our product returns have not been significant.
Competition
The coffee industry is highly competitive, including with respect to price, product quality, service, convenience, technology and innovation, and competition could become increasingly more intense due to the relatively low barriers to entry. We face competition from many sources, including the institutional foodservice divisions of multi-national manufacturers of retail products many of which have greater financial and other resources than we do, such as The J.M. Smucker Company (Folgers Coffee), Dunkin' Brands Group, Inc., and The Kraft Heinz Company (Maxwell House Coffee) and Massimo Zanetti Beverage,, wholesale foodservice distributors such as Sysco Corporation and US Foods, regional and national coffee roasters such as S&D Coffee & Tea (Cott(WestRock Corporation), Massimo Zanetti Beverage USA, Trilliant Food and BoydNutrition LLC, Gaviña & Sons, Inc., Royal Cup, Inc., Ronnoco Coffee, LLC, and Community Coffee Company, L.L.C., specialty coffee suppliers such as Keurig Green Mountain, Inc., Rogers Family Company, Distant Lands Coffee, Mother Parkers Tea & Coffee Inc., Starbucks Corporation and Peet’s Coffee & Tea (JAB Holding Company), and retail brand beverage manufacturers.manufacturers such as Keurig Dr. Pepper Inc. As many of our customers are small foodservice operators, we also compete with cash and carry and club stores (physical and on-line) such as Costco, Sam’s Club and Restaurant Depot and on-line retailers such as Amazon. We also face competition from growth in the single-serve, ready-to-drink coffee beverage and cold-brewed coffee channels, as well as competition from other beverages, such as soft drinks (including highly caffeinated energy drinks), juices, bottled water, teas and other beverages.
We believe our state-of-the-art production facility, longevity, product quality and offerings, national distribution and equipment service network, industry and sustainability leadership, market insight, comprehensive approach to customer relationship management, and superior customer service are the major factors that differentiate us from our competitors. We compete well when these factors are valued by our customers, and we are less effective when only price matters. Our customer base is price sensitive, and we are often faced with price competition.
Working Capital
We finance our operations internally and through borrowings under our existing credit facility. For a description of our liquidity and capital resources, see Results of Operations and Liquidity, Capital Resources and Financial Conditionincluded in Part II, Item 7 of this report and Note 1917, Other Current Liabilities, of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this report.Annual Report on Form 10‑K. Our working capital needs are greater in the months leading up to our peak sales period during the winter months, which we typically finance with cash flows from operations. In anticipation of our peak sales period, we typically increase inventory in the first quarter of theour fiscal year. We use various techniques including demand forecasting and planning to determine appropriate inventory levels for seasonal demand.
Regulatory Environment
The conduct of our businesses, including, among other things, the production, storage, distribution, sale, labeling, quality and safety of our products, and occupational safety and health practices, are subject to various laws and regulations administered by federal, state and local governmental agencies in the United States. Our facilities are subject to various laws and regulations regarding the release of material into the environment and the protection of the environment in other ways. We are not a party to any material legal proceedings arising under these regulations except as described in Note 2322, Commitments and Contingencies, of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this report.Annual Report on Form 10‑K. Employees
On June 30, 2017,2020, we employed approximately 1,6101,210 employees, 442227 of whom are subject to collective bargaining agreements.agreements expiring on or before January 31, 2025.
Other
The nature of our business does not provide for maintenance of or reliance upon a sales backlog. None of our business is subject to renegotiation of profits or termination of contracts or subcontracts at the election of the government. We have no material revenues from foreign operations or long-lived assets located in foreign countries.
Available Information
Our Internet website address is http://www.farmerbros.com, (the website address is not intended to function as a hyperlink, and the information contained in our website is not intended to be part of this filing), where we make available, free of charge, through a link maintained on our website under the heading “Investor Relations—SEC Filings,” copies of our annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, including amendments thereto, as soon as reasonably practicable after filing such material electronically or otherwise furnishing it to the SEC. In addition, these reports and the other documents we file with the SEC are available at a website maintained by the SEC at http://www.sec.gov. Copies of our Corporate Governance Guidelines, the Charters of the Audit, Compensation, and Nominating and Corporate Governance Committees of the Board of Directors, and our Code of Conduct and Ethics can also be found on our website.
You should carefully consider each of the following factors, as well as the other information in this report, in evaluating our business and prospects. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently consider immaterial may also negatively affect our business operations. If any of the following risks actually occurs, our business, financial condition and results of operations could be harmed. In that case, the trading price of our common stock could decline.
Our DSD Restructuring PlanThe recent novel coronavirus (“COVID-19”) pandemic could materially adversely affect our financial condition and results of operations.
In late 2019, a novel strain of coronavirus (“COVID-19” or the “virus”) emerged in China and has spread worldwide and by March 2020 the World Health Organization declared it a pandemic. The measure to contain the spread of the virus is adversely affecting our business and those of our customers. The outbreak has resulted in federal, state and local government authorities implementing numerous restrictive measures to attempt to contain the virus, including travel bans and restrictions, quarantines, shelter-in-place orders, and shutdowns. These measures have impacted our workforce and operations, the operations of our customers, and those of our respective vendors and suppliers. There is considerable uncertainty regarding how such measures and potential future measures will affect our manufacturing, sales and distribution operations, and how similar limitations will affect our customers, vendors and suppliers. Restrictions or disruptions of transportation could limit our capacity to meet customer demand and have a material adverse effect on our financial condition and results of operations.
The COVID-19 pandemic has significantly increased economic uncertainty. The current pandemic, has resulted in economic slowdown and a global recession. This has caused us to modify our business practices (including practices related to employee travel, work locations, physical participation in meetings, events and conferences), and we may take further actions as may be unsuccessfulrequired by government authorities, or less successful thanthat we presently anticipate,determine are in the best interests of our employees, customers, vendors and suppliers. There is no certainty that such measures will be sufficient to mitigate the risks posed by the virus, and our ability to perform critical functions could be harmed.
The COVID-19 pandemic and the related restrictive measures and changes in recent consumer behavior have had an adverse impact on certain of our direct ship and DSD customers, particularly restaurants, hotels, casinos and coffeehouses. Many of these customers have been forced to close or curtail operations and are purchasing at reduced volumes if at all. We are unable to predict the rate at which these customers will resume operations and purchases as restrictive measures are lifted. Certain of these customers may be unable to resume operations or satisfy their outstanding obligations, which may adversely affectimpact our business,receivables. The ability of our customers to resume operations will largely depend on the behavior of end consumers and the ability of our customers to respond to those habits. Our success will depend on our ability to scale operations and production in line with purchases by our customers, acquire additional customers as operators resume operations, flexible delivery methods and manage accounts receivable. We have adjusted our operations to address current demand. Our success will depend on our ability and effectiveness in identifying and addressing our customers’ future needs in light of the COVID-19 pandemic. Although we have already experienced some negative effects of COVID-19, it is difficult to predict the full extent and timing of the impact that the COVID-19 pandemic will have on our customer base.
While most participants in our supply chain are considered an “essential businesses” and permitted to continue operations, the COVID-19 pandemic has created uncertainty within certain supply chains due to restrictions in movement and shortages of shipping containers, including potential delays in transportation and labor shortages for upcoming harvests in Central and South America. Globally, roasters and coffee importers have stocked up on green coffee and, those increased purchases, may increase green coffee prices in the near term.
Our success largely depends on the efforts and abilities of our team members. In response to the pandemic and resulting decrease in sales, we have eliminated and furloughed positions, implemented temporary reductions in base salary of exempt team members, and suspended 401(k) matching cash contributions. The Company’s executive leadership has taken a voluntary 15% reduction in base salary and Farmer Brothers’ Board of Directors forwent its cash compensation for the third quarter 2020. As operating results have stabilized, the Company returned 5% of the 15% reduction to employees effective September 1. As business conditions and financial condition.
On February 21, 2017,related performance improve, the Company expects to reinstate pre-COVID base compensation. At this time, we announcedare unable to predict the DSD Restructuring Plan in an effortduration of these actions at this time. If we are unable to realign functions into a channel-based selling organization, streamline operations, acquire certain channel specific expertise, and improve selling effectiveness and financial results. We cannot guarantee thatregain sales to bring back team members before others, we will be successful in implementing the DSD Restructuring Plan in a timely manner or at all, or that such efforts willmay lose talent to other employers, including competitors. If we are not interfere withable to effectively retain our talent, our ability to achieve certain strategic objectives may be adversely affected, which may impact our financial
condition and results of operations. Further, any unplanned turnover or failure to develop or implement an adequate succession plan for our senior management and other key employees, could deplete our institutional knowledge base, erode our competitive advantage, and negatively affect our business, objectives.financial condition and results of operations.
We continue to assess the impact of the COVID-19 pandemic and will continue to take appropriate actions to support the business and address the needs of its customers during and after the COVID-19 pandemic. The DSD Restructuring Plan costs mayCompany continues to leverage relief available through the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) and other government programs, including through industry associations, as well as any other efforts to support the food industry as a pillar of critical infrastructure.
The degree to which the COVID-19 pandemic impacts our results will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including, but not limited to, the duration and spread of the outbreak, its severity, the actions to contain the virus or treat its impact, and how quickly and to what extent normal economic and operating conditions can resume and our effectiveness on serving our customer base and acquiring new customers. With the uncertainty around the duration and breadth of the COVID-19 pandemic, the ultimate impact on our business, financial condition or operating results cannot be reasonably estimated at this time.
Competition in the coffee industry and beverage category could impact our profitability or harm our competitive position.
The coffee industry is highly competitive, including with respect to price, product quality, service, convenience, technology and innovation, and competition could become increasingly more intense due to the relatively low barriers to entry. We face competition from many sources, including the institutional foodservice divisions of multi-national manufacturers of retail products many of which have greater financial and other resources than anticipated which could cause uswe do, wholesale foodservice distributors, regional and national coffee roasters, specialty coffee suppliers, and retail brand beverage manufacturers. As many of our customers are small foodservice operators, we also compete with cash and carry and club stores and on-line retailers.
We consider our roasting and blending methods essential to incur indebtedness in amounts in excessthe flavor and richness of expectations. We mayour coffees and, therefore, essential to our brand. Because our roasting methods cannot be patented, we would be unable to realize the contemplated benefitsprevent competitors from copying these methods if such methods became known. In addition, competitors may be able to develop roasting or blending methods that are more advanced than our production methods, which may also harm our competitive position.
Increased competition in connection with the reduction in workforce andcoffee or other potential restructuring activities, whichbeverage channels may have an adverse impact on sales of our performance. Moreover, reductions in force can be difficult to manage, may cause concerns from current and potential customers, suppliers and other third parties with whomproducts. If we do business which may cause them to delaynot succeed in differentiating ourselves through, among other things, our product and service offerings, or curtail doing business with us, may increase the likelihood of key employees leaving the Company or may make it more difficult to recruit new employees, and may have an adverse impact onif we are not effective in setting proper pricing, then our business. If we fail to achieve our objectives of the DSD Restructuring Plan, further restructuringcompetitive position may be necessary. Management continues to analyze the Company’s DSD organization and evaluate other potential restructuring opportunities in light of the Company’s strategic priorities which could result in additional restructuring charges the amount of which could be material. If we are unable to realize the anticipated benefits from our restructuring activities, we could be cost disadvantaged in the marketplace,weakened and our competitivenesssales and our profitability could decrease.may be materially adversely affected.
Increases in the cost of green coffee could reduce our gross margin and profit.profit and may increase volatility in our results.
Our primary raw material is green coffee, an exchange-traded agricultural commodity traded on the Commodities and Futures Exchange that is subject to price fluctuations. Although coffee “C” market prices in fiscal 2017 averaged near the historical average for the past five years, there can be no assurance thatThe supply of green coffee, prices will remain at these levels in the future. The supply and price of green coffeesimilar to any agricultural commodity, may be impacted by, among other things, climate change, weather, natural disasters, real or perceived supply shortages, crop disease (such as coffee rust) and pests, general increase in farm inputs and costs of production, an increase in green coffee purchased and sold on a negotiated basis rather than directly on commodity markets in response to higher production costs relative to “C” market prices, political and economic conditions or uncertainty, labor actions, foreign currency fluctuations, armed conflict in coffee producing nations, acts of terrorism, pandemics, government actions and trade barriers, and the actions of producer organizations that have historically attempted to influence green coffee prices through agreements establishing export quotas or by restricting coffee supplies.
Speculative trading in coffee commodities can also influence coffee prices. Additionally, specialty green coffees tend to trade on a negotiated basis at a premium above the “C” market price which premium, depending on the supply and demand at the time of purchase, may be significant. IncreasesWe purchase over-the-counter coffee-related derivative instruments to enable us to lock in the “C”price of green coffee commodity purchases on our behalf or at the direction of our customers under commodity-based pricing arrangements. Although we account for certain coffee-related derivative instruments as accounting hedges, the portion of open hedging contracts that are not designated as accounting hedges are marked to period-end market price may also impact our ability to enter into green coffee purchase commitments at a fixedand unrealized gains or losses based on whether the period-end market price was higher or at a price to be fixed wherebylower than the price we locked-in are recognized in our financial results at which the base “C” marketend of each reporting period. Depending on contractual restrictions, we may be unable to pass these cost to our customers by increasing the price willof products. If we are unable to increase prices sufficiently to offset
increased input costs, or if our sales volume decreases significantly as a result of price increases, our results of operations and financial condition may be fixed has not yet been established. adversely affected.
There can be no assurance that our purchasing practices and hedging activities will mitigate future price risk. As a result, increases in the cost of green coffee could have an adverse impact on our profitability.
We face exposure to other commodity cost fluctuations, which could impact our margins and profitability.
In addition to green coffee, we are exposed to cost fluctuations in other commodities under supply arrangements, including raw materials, tea, spices, and packaging materials such as cartonboard, corrugated and plastic. We are also exposed to flucutations in the cost of fuel. We purchase certain ingredients, finished goods and packaging materials under cost-plus supply arrangements whereby our costs may increase based on an increase in the underlying commodity price or changes in production costs. The cost of these commodities depend on various factors beyond our control, including economic and political conditions, foreign currency fluctuations, and global weather patterns. The changes in the prices we pay may take place on a monthly, quarterly or annual basis depending on the product and supplier. Unlike green coffee, we do not purchase any derivative instruments to hedge cost fluctuations in these other commodities. As a result, to the extent we are unable to pass along such costs to our customers through price increases, our margins and profitability will decrease.
Our efforts to secure an adequate supply of quality coffees and other raw materials may be unsuccessful and impact our ability to supply our customers or expose us to commodity price risk.
Maintaining a steady supply of green coffee is essential to keeping inventory levels low while securing sufficient stock to meet customer needs. We rely upon our ongoing relationships with our key suppliers to support our operations. Some of the Arabica coffee beans we purchase do not trade directly on the commodity markets. Rather, we purchase these coffee beans on a negotiated basis from coffee brokers, exporters and growers. If any of these supply relationships deteriorate or we are unable to renegotiate contracts with suppliers (with similar or more favorable terms) or find alternative sources for supply, we may be unable to procure a sufficient quantity of high‑qualityhigh-quality coffee beans and other raw materials at prices acceptable to us or at all which could negatively affect our results of operations. Further, non-performance by
suppliers could expose us to credit and supply risk under coffee purchase commitments for delivery in the future. In addition, the political situation in many of the Arabica coffee growing regions, including Africa, Indonesia, and Central and South America, can be unstable, and such instability could affect our ability to purchase coffee from those regions. If green coffee beans from a region become unavailable or prohibitively expensive, we could be forced to use alternative coffee beans or discontinue certain blends, which could adversely impact our sales. A raw material shortage could result in disruptions in our ability to deliver products to our customers, a deterioration of our relationship with our customers, decreased revenues or could impair our ability to expand our business.
Changes in green coffee commodity prices may not be immediately reflected in our cost of goods sold and may increase volatility in our results.
We purchase over-the-counter coffee derivative instruments to enable us to lock in the price of green coffee commodity purchases on our behalfInterruption or at the directionincreased costs of our customers under commodity-based pricing arrangements. Although we account for certain coffee-related derivative instruments as accounting hedges, the portionsupply chain and sales network or labor force, including a disruption in operations at any of open hedging contracts that are not 100% effective as cash flow hedgesour production and those that are not designated as accounting hedges are markeddistribution facilities, could affect our ability to period-end market pricemanufacture or distribute products and unrealized gains or losses based on whether the period-end market price was higher or lower than the price we locked-in are recognized in our financial results at the end of each reporting period. If the period-end green coffee commodity prices decline below our locked in price for these derivative instruments, we will be required to recognize the resulting losses in our results of operations. Further, changes in commodity prices and the number of coffee-related derivative instruments held could have a significant impact on cash deposit requirements under our broker and counterparty agreements. Such transactions could cause volatility in our results because the recognition of losses and the offsetting gains may occur in different fiscal periods. Rapid, sharp decreases in the cost of green coffee could also force us to lower sales prices before realizing cost reductions in our green coffee inventory.
Our business and results of operations are highly dependent upon sales of roast and ground coffee products. Any decrease in the demand for coffee could materially adversely affect our business and financial results.sales.
SalesOur sales and distribution network requires a large investment to maintain and operate, and we rely on a limited number of roastproduction and ground coffee represented approximately 63%distribution facilities. We also operate a large fleet of trucks and other vehicles to distribute and deliver our products through our DSD network, and we rely on 3PL service providers for our long-haul distribution. Certain products are also distributed by third parties or direct shipped via common carrier. Many of these costs are beyond our control, and many are fixed rather than variable.
There are potential adverse effects of labor disputes with our own employees or by others who provide warehousing, transportation (lines, truck drivers, 3PL service providers) or cargo handling (longshoremen), 61%both domestic and 61%foreign, of our net salesraw materials or other products. We have union contracts relating to a significant portion of our workforce. Although we believe union relations have been amicable in the fiscal years ended June 30, 2017, 2016 and 2015, respectively. Demand for our productspast, there is affected by, among other things, consumer tastes and preferences, global economic conditions, demographic trends and competing products. Any decreaseno assurance that this will continue in demand for our roast and ground coffee products would cause our sales and profitability to decline.
Ifthe future or that we are unable to respond successfully to changing consumer preferences and trends related to our products, we maywill not be ablesubject to maintainfuture union organizing activity. The terms and conditions of existing, renegotiated or new collective bargaining agreements could also increase our revenues and profits.
Consumer preferences may change due to a variety of factors, including changes in consumer demographics, increasing awareness of the environmental and social effects of product production, social trends, negative publicity, economic downturncosts or other factors. Demand for our products depends onotherwise affect our ability to identify and offer products that appealfully implement future operational changes to these shifting preferences. If we failenhance our efficiency or to anticipate accurately and respond to trends and shifts in consumer preferences by adjusting the mix of existing product offerings and developing new products and categories, our business and results of operations could be negatively affected. We may not be successful in respondingadapt to changing consumer preferences,business needs or strategy.
In addition, we use a significant amount of electricity, gasoline, diesel and someoil, natural gas and other energy sources to operate our production and distribution facilities. An increase in the price, disruption of our competitorssupply or shortage of fuel and other energy sources that may be better ablecaused by increased demand or by events such as natural disasters, power outages, or the like, could lead to respond to these changes, eitherhigher electricity, transportation and other commodity costs, including the pass-through of whichsuch costs under our agreements with 3PL service providers and other suppliers, that could negatively affect our business and financial performance.
Price increases may not be sufficient to offset cost increases or may result in volume declines which could adversely impact our revenues and gross margin.profitability.
Customers generally pay for our products based either on an announced price scheduleA disruption in operations at any of these facilities or under commodity-based pricing arrangements whereby the changes in green coffee commodity andany other input costs are passed through to the customer. The pricing schedule is generally subject to adjustment, either on contractual terms or in accordance with periodic product price adjustments, which may result in a lagdisruption in our abilitysupply chain or increase in prices relating to correlate the changes inservice by our prices with fluctuations in the cost of raw materials and other inputs. Depending on contractual restrictions, we may be unable to pass some3PL service providers, common carriers or all of these cost increases to our customers by increasing the selling prices of our products. If we are not successful in increasing selling prices sufficiently to offset increased raw material and other input costs, including packaging, direct labor and other overhead,distributors, service technicians or if our sales volume decreases significantlyvendor-managed inventory arrangements, or otherwise, whether as a result of price increases,casualty, natural disaster, power loss, telecommunications failure, terrorism, labor shortages, shipping costs, trade restrictions, contractual disputes, weather, environmental incident, interruptions in port operations or highway arteries, increased downtime due to certain aging production infrastructure, pandemic, strikes, work stoppages, the financial or operational instability of key suppliers, distributors and transportation providers, or other causes, could significantly impair our ability to operate our business, adversely affect our relationship with our customers, and impact our financial condition or results of operations and financial condition may be adversely affected.
operations.
We rely on co-packers to provide our supply of tea, spice, culinary and culinaryother products. Any failure by co-packers to fulfill their obligations or any termination or renegotiation of our co-pack agreements could adversely affect our results of operations.
We have a number of supply agreements with co-packers that require them to provide us with specific finished goods, including tea, spice and culinary products. For some of our products we essentially rely upon a single co-packer as our sole-source for the product. The failure for any reason of any such sole-source or other co-packer to fulfill its obligations under the applicable agreements with us, including the failure by our co-packers to comply with food safety, environmental, or other laws and regulations, or the termination or renegotiation of any such co-pack agreement could result in disruptions to our supply of finished goods, cause damage to our reputation and brands, and have an adverse effect on our results of operations. Additionally, our co-packers are subject to risk, including labor disputes, union organizing activities, financial liquidity, inclement weather, natural disasters, pandemics, supply constraints, and general economic and political conditions that could limit their ability to timely provide us with acceptable products, which could disrupt our supply of finished goods, or require that we incur additional expense by providing financial accommodations to the co-packer or taking other steps to seek to minimize or avoid supply disruption, such as establishing a new co-pack arrangement with another provider. A new co-pack arrangement may not be available on terms as favorable to us as our existing co-pack arrangements, or at all.
CompetitionOur restructuring activities may be unsuccessful or less successful than we anticipate, which may adversely affect our business, operating results and financial condition.
We have implemented, and may in the coffee industryfuture implement, restructuring activities, such as the DSD Restructuring Plan and beverage categoryrecent optimization initiatives in an effort to achieve strategic objectives and improve financial results. We cannot guarantee that we will be successful in implementing these activities in a timely manner or at all, or that such efforts will advance our business strategy as expected or result in realizing the anticipated benefits. Costs associated with restructuring activities may be greater than anticipated which could cause us to incur indebtedness in amounts in excess of expectations. Execution of restructuring activities has required, and will continue to require a substantial amount of management time and operational resources, including implementation of administrative and operational changes necessary to achieve the anticipated benefits. These activities may have adverse effects on existing business relationships with suppliers and customers, and impact our profitability.
The coffee industry is highly competitive, including with respectemployee morale. Management continues to price, product quality, service, convenienceanalyze the Company’s sales organization and innovation, and competitionevaluate other potential restructuring opportunities in light of the Company’s strategic priorities which could become increasingly more intense due toresult in additional restructuring charges the relatively low barriers to entry. We face competition from many sources, including the institutional foodservice divisions of multi-national manufacturers of retail products manyamount of which have greater financial and other resources than we do, wholesale foodservice distributors, regional coffee roasters, specialty coffee suppliers, and retail brand beverage manufacturers. As many of our customers are small foodservice operators, we also compete with cash and carry and club stores and on-line retailers.could be material. If we do not succeed in differentiating ourselves through, among other things, our product and service offerings, then our competitive position may be weakened and our sales and profitability may be materially adversely affected. If, due to competitive pressures or contractual restrictions, we are required to reduce prices to attract market share or we are unable to increase pricesrealize the anticipated benefits from our restructuring activities, we could be cost disadvantaged in responsethe marketplace, and our competitiveness and our profitability could decrease.
Customer quality control problems or food safety issues may adversely affect our brands thereby negatively impacting our sales or leading to commoditypotential product recalls or product liability claims.
Selling products for human consumption involves inherent legal risks. Our success depends on our ability to provide customers with high-quality products and service. Although we take measures to ensure that we sell only fresh products, we have no control over our products once they are purchased by our customers. Clean water is critical to the preparation of coffee, tea and other cost increases,beverages. We have no ability to ensure that our customers use a clean water supply to prepare these beverages. Instances or reports of food safety issues involving our products, whether or not accurate, such as unclean water supply, food
or beverage-borne illnesses, tampering, contamination, mislabeling, or other food or beverage safety issues, including due to the failure of our third-party co-packers to maintain the quality of our products and to comply with our product specifications, could damage the value of our brands, negatively impact sales of our products, and potentially lead to product recalls, production interruptions, product liability claims, litigation or damages. A significant product liability claim against us, whether or not successful, or a widespread product recall may reduce our sales and harm our business.
Government regulations affecting the conduct of our business could increase our operating costs, reduce demand for our products or result in litigation.
The conduct of our business is subject to various laws and regulations including those relating to food safety, ingredients, manufacturing, processing, packaging, storage, marketing, advertising, labeling, quality and distribution of our products, import of raw materials, as well as environmental laws and those relating to privacy, worker health and workplace safety. These laws and regulations and interpretations thereof are subject to change as a result of political, economic or social events. In addition, our product advertising could make us the target of claims relating to false or deceptive advertising under U.S. federal and state laws, including the consumer protection statutes of some states. Any new laws and regulations or changes in government policy, existing laws and regulations or the interpretations thereof could require us to change certain of our operational processes and procedures, or implement new ones, and may increase our operating and compliance costs, which could adversely affect our results of operations. In addition, modifications to international trade policy, or the imposition of increased or new tariffs, quotas or trade barriers on key commodities, could adversely impact our business and results of operations. In some cases, increased regulatory scrutiny could interrupt distribution of our products or force changes in our production processes or procedures (or force us to implement new processes or procedures). In addition, compliance with any new or more stringent laws or regulations, or stricter interpretations of existing laws, including increased government regulations to limit carbon dioxide and other greenhouse gas emissions, could require us to reduce emissions and to incur compliance costs which could affect our profitability or impede the production or distribution of our products. If we fail to comply with applicable laws and regulations, we may be subject to civil remedies, including fines, injunctions, recalls or seizures, as well as potential criminal sanctions, which could have a material adverse effect on our results of operations and adversely affect our reputation and brand image. In addition, claims or liabilities of this sort may not be covered by insurance or by any rights of indemnity or contribution that we may have against others.
We could face significant withdrawal liability if we withdraw from participation in the multiemployer pension plans in which we participate.
We participate in two multiemployer defined benefit pension plans and one multiemployer defined contribution pension plan for certain union employees. We make periodic contributions to these plans to allow them to meet their pension benefit obligations to their participants. Our required contributions to these plans could increase due to a number of factors, including the funded status of the plans and the level of our ongoing participation in these plans. Our risk of such increased payments may be adversely affectedgreater if any of the participating employers in these underfunded plans withdraws from the plan due to insolvency and we are not able to increase sales volumescontribute an amount sufficient to offsetfund the margin declines. If our retail customers do not allocate adequate shelf space forunfunded liabilities associated with its participants in the beveragesplan. In the event we supply,withdraw from participation in one or more of these plans, we could experience a decline inbe required to make an additional lump-sum contribution to the plan. Our withdrawal liability for any multiemployer pension plan would depend on the extent of the plan’s funding of vested benefits. The amount of any potential withdrawal liability could be material to our product volumes. Increased competitionresults of operations and cash flows.
Litigation pending against us could expose us to significant liabilities and damage our reputation.
We are currently party to various legal and other proceedings, and additional claims may arise in the single-serve, ready-to-drink coffee beveragefuture. See Note 22, Commitments and cold-brewed coffee channels,Contingencies, of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10‑K. Regardless of the merit of particular claims, litigation may be expensive, time-consuming, operationally disruptive and distracting to management, and could negatively affect our brand name and image and subject us to statutory penalties and costs of enforcement. We can provide no assurances as well as competition fromto the outcome of any litigation or the resolution of any other beverages, such as soft drinks (including highly caffeinated energy drinks), juices, bottled water, teasclaims against us. An adverse outcome of any litigation or other claim could negatively affect our financial condition, results of operations and other beverages,liquidity.
We are self-insured and our reserves may alsonot be sufficient to cover future claims.
We are self-insured for many risks up to varying deductible amounts. The premiums associated with our insurance continue to increase. General liability, fire, workers’ compensation, directors' and officers' liability, life, employee medical, dental and vision, and automobile risks present a large potential liability. While we accrue for this liability based on historical claims experience, future claims may exceed claims we have an adverse impact on salesincurred in the past. Should a different number of claims occur compared to what was estimated or the cost of the claims increase beyond what was anticipated, reserves recorded may not be sufficient and the accruals may need to be adjusted accordingly in future periods. A successful claim against us that is not covered by insurance or is in excess of our coffee products.
We face exposure to other commodity cost fluctuations, whichreserves or available insurance limits could impact our margins and profitability.
In addition to green coffee, we are exposed to cost fluctuations in other commodities under supply arrangements, including raw materials, tea, spices, and packaging materials such as cartonboard, corrugated and plastic. We purchase certain ingredients, finished goods and packaging materials under cost-plus supply arrangements whereby our cost may increase based on an increase in the underlying commodity price or changes in production costs. The cost of these commodities depend on various factors beyond our control, including economic and political conditions, foreign currency fluctuations, and global weather patterns. The changes in the prices we pay may take place on a monthly, quarterly or annual basis depending on the product and supplier. Unlike green coffee, we do not purchase any derivative instruments to hedge cost fluctuations in these other commodities. As a result, to the extent we are unable to pass along such costs to our customers through price increases, our margins and profitability will decrease.
Increase in the cost, disruption of supply or shortage of energy or fuel couldnegatively affect our profitability.
We operate a large fleetbusiness, financial condition and results of trucks and other vehicles to distribute and deliver our products, and we rely on 3PL service providers for our long-haul distribution. Certain products are also distributed by third parties or direct shipped via common carrier. In addition, we use a significant amount of electricity, natural gas and other energy sources to operate our production and distribution facilities. An increase in the price, disruption of supply or shortage of fuel and other energy sources that may be caused by increasing demand or by events such as natural disasters, power outages, or the like, could lead to higher electricity, transportation and other commodity costs, including the pass-through of such costs under our agreements with 3PL service providers and other suppliers, that could negatively impact our profitability.
operations.
Loss of business from one or more of our large national account customers and efforts by these customers to improve their profitability could have a material adverse effect on our operations.
We have severala number of large national account customers, the loss of or reduction in sales to one or more of which is likely to have a material adverse effect on our results of operations. During fiscal 2017,2020, our top five customers accounted for approximately 21%19.8% of our net sales. We generally do not have long-term contracts with the majority of our customers. Accordingly, the majority of our customers can stop purchasing our products at any time without penalty and are free to purchase products from our competitors. There can be no assurance that our customers will continue to purchase our products in the same mix or quantities or on the same terms as they have in the past. In addition, because of the competitive environment facing many of our customers and industry consolidation which has produced large customers with increased buying power and negotiating strength, our customers have increasingly sought to improve their profitability through pricing concessions and more favorable trade terms. To the extent we provide pricing concessions or favorable trade terms, our margins would be reduced. If we are unable to continue to offer terms that are acceptable to our customers, they may reduce purchases of our products which would adversely affect our financial performance. Requirements that may be imposed on us by our customers, such as sustainability, inventory management or product specification requirements, may have an adverse effect on our results of operations. Additionally, our customers may face financial difficulties, bankruptcy or other business disruptions that may impact their operations and their purchases from us and may affect their ability to pay us for products which could adversely affect our sales and profitability.
We rely on information technology and are dependent on enterprise resource planning software in our operations. Any material failure, inadequacy, interruption or security failure of that technology could affect our ability to effectively operate our business.
Our ability to effectively manage our business, maintain financial accuracy and efficiency, comply with regulatory, financial reporting, legal and tax requirements, and coordinate the production, distribution and saleaccounts receivable represents a significant portion of our products depends significantly on the reliability, capacitycurrent assets and integrity of information technology systems on which we rely. We are also dependent on enterprise resource planning software for somea substantial portion of our information technology systems and support. The failure of these systemstrade accounts receivables relate principally to operate effectively and continuously, due to, among other things, natural disasters, terrorist attacks, software, equipment or telecommunications failures, issues with performance by third-party providers, processing errors, computer viruses, hackers, cyberattack or other security issues, supplier defects, power outages, inadequate or ineffective redundancy, or problems with transitioning to upgraded or replacement systems, could result in delays in processing replenishment orders from our branch warehouses, an inability to record input costs or product sales accurately or at all, an impaired understanding of our operations and results, an increase in operating expenses, reduced operational efficiency, lossa limited number of customers, or other business disruptions, all ofincreasing our exposure to bad debts and counter-party risk which could negatively affect our business and results of operations. Security, backup and disaster recovery measures may not be adequate or implemented properly to avoid such disruptions or failures. Failure to effectively allocate and manage our resources to support our information technology infrastructure could result in transaction errors, processing inefficiencies, the loss of customers, business disruptions, or the loss of sensitive or confidential data through security breach or otherwise. Significant capital investments could be required to remediate any potential problems or to otherwise protect against security breaches or to address problems caused by breaches.
If we are unable to securely maintain confidential information relating to our customers, suppliers, employees or our Company, we could be subject to negative publicity, costly government enforcement actions or private litigation, which could damage our business reputation and negatively affectpotentially have a material adverse effect on our results of operations.
The protectionA significant portion of our customer, supplier, employee,trade accounts receivable are from five customers. The concentration of our accounts receivable across a limited number of parties subjects us to individual counter-party and Company data is critical. Ifcredit risk as these parties may breach our agreement, claim that we experiencehave breached the agreement, become insolvent and/or declare bankruptcy, delaying or reducing our collection of receivables or rendering collection impossible altogether. Certain of the parties use third-party distributors or do business through a data security breachnetwork of any kind, weaffiliate entities which can make collection efforts more challenging and, at times, collections may experience a loss of critical data, suffer financial be economically unfeasible. Adverse changes in general economic conditions and/or reputational damage or penalties, or facecontraction in global credit markets could precipitate liquidity problems among our debtors. This could increase our exposure to negative publicity, government enforcement actions, private litigation or costly response measures. In addition,losses from bad debts and have a material adverse effect on our reputation within the business, community and with our customers and suppliers may be affected, which could result in our customers and suppliers ceasing to do business with us which could adversely affect our businessfinancial condition and results of operations. Our insurance policies do not cover losses caused by security breaches.
Interruption of our supply chain, including a disruption in operations at any of our production and distribution facilities, could affect our ability to manufacture or distribute products and could adversely affect our business and sales.
We rely on a limited number of production and distribution facilities. A disruption in operations at any of these facilities or any other disruption in our supply chain relating to green coffee supply, service by our 3PL service providers or common carriers, supply of raw materials and finished goods under co-pack or vendor-managed inventory arrangements, or otherwise, whether as a result of casualty, natural disaster, power loss, telecommunications failure, terrorism, labor shortages, contractual disputes, weather, environmental incident, pandemic, strikes, the financial or operational instability of key suppliers, distributors and transportation providers, or other causes, could significantly impair our ability to operate our business and adversely affect our relationship with our customers. In such event, we may also be forced to contract with alternative, and possibly more expensive, suppliers or service providers, which would adversely affect our profitability. Alternative facilities with sufficient capacity or capabilities may not be available, may cost substantially more or may take a significant time to start production, each of which could negatively impact our business and results of operations. Additionally, the majority of our green coffee comes through the Ports of Houston and Seattle. Any interruption to port operations, highway arteries, gas mains or electrical service in the areas where we operate or obtain products or inventory could restrict our ability to manufacture and distribute our products for sale and would adversely impact our business.
Our failure to accurately forecast demand for our products or quickly respond to forecast changes could have an adverse effect on our sales.
Based upon our forecasts of customer demand, we set target levels for the manufacture of our products and for the purchase of green coffee in advance of customer orders. If our forecasts exceed demand, we could experience excess inventory and manufacturing capacity and/or price decreases or we could be required to write-down expired or obsolete inventory, which could adversely impact our financial performance. Alternatively, if demand for our products increases more than we currently forecast and we are unable to satisfy increases in demand through our current manufacturing capacity or appropriate third-party providers, or we are unable to obtain sufficient raw materials inventories under vendor-managed inventory arrangements or otherwise, we may not be able to satisfy customer demand for our products which could have an adverse impact on our sales and reputation.
We depend on the expertise of key personnel.personnel and have experienced significant turnover in our senior management. The unexpected loss of one or more of these key employees or difficulty recruiting and retaining qualified personnel could have a material adverse effect on our operations and competitive position.
Our success largely depends on the efforts and abilities of our executive officers and other key personnel. There is limitedIn the past year, we have experienced significant turnover in our senior management depthranks. The lack of management continuity could adversely affect our ability to successfully manage our business and execute our strategy, as well as result in certain keyoperational and administrative inefficiencies and added costs, and may make recruiting for future management positions throughout the Company.more difficult. We must continue to recruit, retain, motivate and develop management and other employees sufficiently to maintain our current business and support our projected growth and strategic initiatives. This may require significant investments in training, coaching and other career development and retention activities. Activities related to identifying, recruiting, hiring and integrating qualified individuals require significant time and attention. We may also need to invest significant amounts of cash and equity to attract talented new employees, and we may never realize returns on these investments. Competition for talent is intense, and we might
not be able to identify and hire the personnel we need to continue to evolve and grow our business. If we are not able to effectively retain and grow our talent, our ability to achieve our strategic objectives will be adversely affected, which may impact our financial condition and results of operations. Further, any unplanned turnover or failure to develop or implement an adequate succession plan for our CEO, CFO, senior management and other key employees, could deplete our institutional knowledge base, erode our competitive advantage, and negatively affect our business, financial condition and results of operations. We do not maintain key person life insurance policies on any of our executive officers.
Investment in acquisitions could disrupt our ongoing business, not result in the anticipated benefits and present risks not originally contemplated.
We have invested and in the future may invest in acquisitions which may involve risks and uncertainties, including the risks involved with entering new product categories or geographic regions, contingent risks associated with the past operations of or other unanticipated problems arising in any acquired business, limited warranties and indemnities from the sellers of acquired businesses, the challenges of achieving strategic objectives and other benefits expected from acquisitions, failure to implement our business plan for the combined business, the diversion of our attention and resources from our operations and other initiatives, the potential impairment of acquired assets and liabilities, the performance of underlying
products, capabilities or technologies, inconsistencies in standards, controls, procedures, policies and compensation structures of the acquired businesses and our business, the potential loss of key personnel, customers and suppliers of the acquired businesses, and other unanticipated issues, expenses and liabilities. The success of any such acquisitions will depend, in part, on our ability to realize all or some of the anticipated benefits from integrating the acquired businesses with our existing businesses, and to achieve revenue and cost synergies. The integration process may be complex, time consuming, costly, and subject to uncertainties and contingencies many of which may be beyond our control and difficult to predict, including issues in integrating financial, manufacturing, logistics, information, communications and other systems. Additionally, any such acquisitions may result in potentially dilutive issuances of our equity securities, the incurrence of additional debt, restructuring charges and the recognition of significant charges for depreciation and amortization related to intangible assets.
There can be no assurance that any such acquisitions will be identified or that we will be able to consummate any such acquisitions on terms favorable to us or at all, or that we will be able to maintain the levels of revenue, earnings or operating efficiencies expected. Furthermore, there can be no assurance that the synergies from any such acquisitions will be achieved within the anticipated time frame or at all, or that such synergies will not be offset by costs incurred in consummating such acquisitions or in integrating the acquired businesses, increases in expenses, operating losses or adverse business results. In addition, actual results may differ from pro forma financial information of the combined companies due to changes in the fair value of assets acquired and liabilities assumed, changes in assumptions used to form estimates, differences in accounting policies between the companies, and completion of purchase accounting. If any such acquisitions are not successful, our business and results of operations could be adversely affected.
We may devote a significant amount of our management’s attention and resources to our ongoing review of strategic opportunities, and we may not be able to fully realize the potential benefit of any such opportunities that we pursue.
We may from time to time be engaged in evaluating strategic opportunities to complement our growth strategy, and we may engage in discussions that may result in one or more transactions. Although there would be uncertainty that any of these discussions would result in definitive agreements or the completion of any transaction, we may devote a significant amount of our management’s attention and resources to evaluating and pursuing a transaction or opportunity, which could negatively affect our operations. In addition, we may incur significant costs in connection with evaluating and pursuing strategic opportunities, regardless of whether any transaction is completed. We may not fully realize the potential benefits of any transactions that we may pursue.
Increased severe weather patterns may increase commodity costs, damage our facilities and disrupt our production capabilities and supply chain.
There is increasing concern that a gradual increase in global average temperatures due to increased concentration of carbon dioxide and other greenhouse gases in the atmosphere have caused and will continue to cause significant changes in weather patterns around the globe and an increase in the frequency and severity of extreme weather events. Major weather phenomena like El Niño and La Niña are dramatically affecting coffee growing countries. The wet and dry seasons are becoming unpredictable in timing and duration, causing improper development of the coffee cherries. A large portion of the global coffee supply comes from Brazil and so the climate and growing conditions in that country carry heightened importance. Decreased agricultural productivity in certain regions as a result of changing weather patterns may affect the quality, limit the availability or increase the cost of key agricultural commodities, such as green coffee and tea, which are important ingredients for our products. We have experienced storm-related damages and disruptions to our operations in the recent past related to both winter storms as well as heavy rainfall and flooding. Increased frequency or duration of extreme weather conditions could also damage our facilities, impair production capabilities, disrupt our supply chain or impact demand for our products. As a result, the effects of climate change could have a long-term adverse impact on our business and results of operations.
VolatilityInvestment in acquisitions could disrupt our ongoing business, not result in the equity markets or interest rate fluctuations could substantially increase our pension funding requirementsanticipated benefits and negatively impact our financial position.present risks not originally contemplated.
At June 30, 2017, the projected benefit obligation under our single employer defined benefit pension plans exceeded the fair value of plan assets. The difference between the projected benefit obligationWe have invested and the fair value of plan assets, or the funded status of the plans, significantly affects the net periodic benefit cost and ongoing funding requirements of those plans. Among other factors, changes in interest rates, mortality rates, early retirement rates, mix of plan asset investments,
investment returns and the market value of plan assets can affect the level of plan funding, cause volatility in the net periodic benefit cost, increase our future funding requirements and require payments to the Pension Benefit Guaranty Corporation. In addition, facility closings may trigger cash payments or previously unrecognized obligations under our defined benefit pension plans, and the cost of such liabilities may be significant or may compromise our ability to close facilities or otherwise conduct cost reduction initiatives on time and within budget. A significant increaseinvest in future funding requirements could have a negative impact on our financial condition and results of operations.
Our sales and distribution network is costly to maintain.
Our sales and distribution network requires a large investment to maintain and operate. Costs include the fluctuating cost of gasoline, diesel and oil, costs associated with managing, purchasing, leasing, maintaining and insuring a fleet of delivery vehicles, the cost of maintaining distribution centers and branch warehouses throughout the country, the cost of our long-haul distribution and 3PL service providers, and the cost of hiring, training and managing our sales force. Many of these costs are beyond our control, and many are fixed rather than variable. Some competitors use alternate methods of distribution that fix, control, reduce or eliminate many of the costs associated with our method of distribution.
We are self-insured and our reserves may not be sufficient to cover future claims.
We are self-insured for many risks up to significant deductible amounts. The premiums associated with our insurance continue to increase. General liability, fire, workers’ compensation, directors and officers liability, life, employee medical, dental and vision, and automobile risks present a large potential liability. While we accrue for this liability based on historical claims experience, future claims may exceed claims we have incurred in the past. Should a different number of claims occur compared to what was estimated or the cost of the claims increase beyond what was anticipated, reserves recorded may not be sufficient and the accruals may need to be adjusted accordingly in future periods.
Competitors may be able to duplicate our roasting and blending methods, which could harm our competitive position.
We consider our roasting and blending methods essential to the flavor and richness of our coffees and, therefore, essential to our brand. Because our roasting methods cannot be patented, we would be unable to prevent competitors from copying these methods if such methods became known. If our competitors copy our roasts or blends, the value of our brand may be diminished, and we may lose customers to our competitors. In addition, competitors may be able to develop roasting or blending methods that are more advanced than our production methods,acquisitions which may also harm our competitive position.
Failure to protect our intellectual property may adversely affect our competitive position.
We possess intellectual property that is important to our business. This intellectual property includes brand names, trademarks, trade names, service marks, copyrights, recipes, product formulas, business processesinvolve significant risks and other trade secrets. Ouruncertainties. The success depends,of any such acquisitions will depend, in part, on our ability to protectrealize all or some of the anticipated benefits from integrating the acquired businesses with our intellectual property. We cannot be certain that the steps we takeexisting businesses, and to protect our rights will be sufficient or that others will not infringe or misappropriate our rights. If we come into conflict with third parties over intellectual property rights itachieve revenue and cost synergies. Additionally, any such acquisitions may disrupt our business, divert management attention from business operations and consume significant resources. If we are found to infringe on the intellectual property rights of others, we could incur significant damages, be enjoined from continuing to manufacture, market or use the affected product, or be required to obtain a license to continue manufacturing or using the affected product. Changing products or processes to avoid infringing the rights of others may be costly or impracticable, and a license may be unavailable on reasonable terms, if at all.
Employee strikes and other labor-related disruptions may adversely affect our operations.
We have union contracts relating to a significant portionresult in potentially dilutive issuances of our workforce. Although we believe union relations have been amicable inequity securities, the past, there is no assurance that this will continue in the future or that we will not be subject to future union organizing activity. There are potential adverse effectsincurrence of labor disputes with our own employees or by others who provide warehousing, transportation (lines, truck drivers, 3PL service providers) or cargo handling (longshoremen), both domestic and foreign, of our raw materials or other products. Strikes or work stoppages or other business interruptions could occur if we are unable to renew collective bargaining agreements on satisfactory terms or enter into new agreements on satisfactory terms, which could impair manufacturing and distribution of our products or result in a loss of sales, which could adversely impact our business, financial condition or results of operations. The terms and conditions of existing,
renegotiated or new collective bargaining agreements could also increase our costs or otherwise affect our ability to fully implement future operational changes to enhance our efficiency or to adapt to changing business needs or strategy.
We could face significant withdrawal liability if we withdraw from participation in the multiemployer pension plans in which we participate.
We participate in two multiemployer defined benefit pension plans and one multiemployer defined contribution pension plan for certain union employees. We make periodic contributions to these plans to allow them to meet their pension benefit obligations to their participants. Our required contributions to these plans could increase due to a number of factors, including the funded status of the plans and the level of our ongoing participation in these plans. Our risk of such increased payments may be greater if any of the participating employers in these underfunded plans withdraws from the plan due to insolvency and is not able to contribute an amount sufficient to fund the unfunded liabilities associated with its participants in the plan. In the event we withdraw from participation in one or more of these plans, we could be required to make an additional lump-sum contribution to the plan. Our withdrawal liability for any multiemployer pension plan would depend on the extent of the plan’s funding of vested benefits. On July 13, 2017, we received correspondence from the Western Conference of Teamsters Pension Trust (the “WCT Pension Trust”) stating that we had liability for a share of the Western Conference of Teamsters Pension Plan (“WCTPP”) unfunded vested benefits based on the WCT Pension Trust’s claim that certain of our employment actions resulting from the Corporate Relocation Plan amounted to a partial withdrawal from the WCTPP. See Note 26, Subsequent Events---Western Conference of Teamsters Pension Trust, of the Notes to Consolidated Financial Statements included in Part I, Item 1 of this report. The amount of any potential withdrawal liability associated with the WCTPP or any other multiemployer pension plan in which we participate could be material to our results of operations and cash flows.Restrictive covenants in our credit facility may limit our ability to make investments or otherwise restrict our ability to pursue our business strategies.
Our credit facility contains various covenants that limit our ability to, among other things, make investments; incur additional indebtedness; create, incur, assume or permit any liens on our property; pay dividends under certain circumstances; and consolidate, merge, sell or otherwise dispose of all or substantially all of our assets. Our credit facility also contains financial covenants relating to the maintenance of a fixed charge coverage ratio in certain circumstances. Our ability to meet those covenants may be affected by events beyond our control, and there can be no assurance that we will meet those covenants. The breach of any of these covenants could result in a default under the credit facility.
Futuredebt, restructuring charges, impairment charges, could adversely affect our operating results.
At June 30, 2017, we had $18.6 million in long-lived intangible assets, including recipes, non-compete agreements, customer relationships, trade names, trademarks and a brand name, and goodwill of $11.0 million, associated with completed acquisitions. Acquisitions are based on certain target analysis and due diligence procedures designedcontingent liabilities, amortization expenses related to achieve a desired return or strategic objective. These procedures often involve certain assumptions and judgment in determining the acquisition price. After consummation of an acquisition, unforeseen issues could arise that adversely affect anticipated returns or that are otherwise not recoverable as an adjustment to the purchase price. Even after careful integration efforts, actual operating results may vary significantly from initial estimates. We perform an asset impairment analysis on an annual basis or whenever events occur that may indicate possible existence of impairment. Failure to achieve forecasted operating results, due to weakness in the economic environment or other factors, changes in market conditions, loss of or significant decline in sales to customers included in the intangible asset, changes in our imputed cost of capital, and declines in our market capitalization, among other things, could result in impairment of our intangible assets, and goodwill and adversely affect ourincreased operating results.
We rely on independent certification for a number of our coffee products. Loss of certification could harm our business.
A number of our Artisan coffee products are independently certified as “Rainforest Alliance,” “Organic” and “Fair Trade.” We must comply with the requirements of independent organizations and certification authorities in order to label our products as certified. The loss of any independent certifications could adversely affect our reputation and competitive position,expenses, which could harm our business.
Possible legislation or regulation intended to address concerns about climate change could adversely affect our results of operations cash flows and financial condition.
Governmental agencies are evaluating changes in laws to address concerns about the possible effects of greenhouse gas emissions on climate. Increased public awareness and concern over climate change may increase the likelihood of more proposals to reduce or mitigate the emission of greenhouse gases. Laws enacted that directly or indirectly affect our suppliers (through an increase in the cost of production or their ability to produce satisfactory products) or our business (through an impact on our inventory availability, cost of goods sold, operations or demand for the products we sell) could adversely affect our business, financial condition, results of operations and cash flows. Compliance with any new or more stringent laws or regulations, or stricter interpretations of existing laws, including increased government regulations to limit carbon dioxide and other greenhouse gas emissions as a result of concern over climate change, could require us to reduce emissions and to incur compliance costs which could affect our profitability or impede the production or distribution of our products, which could affect our results of operations, cash flows and financial condition. In addition, public expectations for reductions in greenhouse gas emissions could result in increased energy, transportation and raw material costs and may requireThere can be no assurance that any such acquisitions will be identified or that we will be able to consummate any such acquisitions on terms favorable to us to make additional investments in facilities and equipment.
Our operating results may have significant fluctuationsor at all, or that the synergies from period to period which could have a negative effect onany such acquisitions will be achieved. If any such acquisitions are not successful, our stock price.
Our operating results may fluctuate from period to period as a result of a number of factors, including fluctuations in the price and supply of green coffee, fluctuations in the selling prices of our products, the success of our hedging strategy, changes in financial estimates by analysts or our inability to meet those financial estimates, changes in conditions or trends in our industry, geographies, or customers, activism by any large stockholder or group of stockholders, speculation by the investment community regarding our business actual or anticipated growth rates relative to our competitors, terrorist acts, natural disasters, perceptions of the investment opportunity associated with our common stock relative to other investment alternatives, competition, changes in consumer preferences, seasonality, our ability to retain and attract customers, our ability to manage inventory and fulfillment operations and maintain gross margin, and period and year-end LIFO inventory adjustments. Fluctuations in our operating results due to these factors or for any other reason could cause our stock price to decline. In addition, the stock markets have experienced price and volume fluctuations that have affected and continue to affect the market price of equity securities issued by many companies. In the past, some companies that have had volatile market prices for their securities have been subject to class action or derivative lawsuits. The filing of a lawsuit against us, regardless of the outcome, could have a negative effect on our business, financial condition and results of operations as it could result in substantial legal costs and a diversion of management’s attention and resources. Accordingly, we believe that period-to-period comparisons of our operating results are not necessarily meaningful, and such comparisons should not be relied upon as indicators of future performance.adversely affected.
An increase in our debt leverage could adversely affect our liquidity and results of operations.
As of June 30, 20172020 and 2016,2019, we had outstanding borrowings under our credit facility of $27.6$122.0 million and $0.1$92.0 million, respectively, with no availability as of June 30, 2020, and excess availability of $27.9$55.7 million and $46.6 million, respectively.as of June 30, 2019, subject to covenant compliance. We may incur significant indebtedness in the future, including through additional borrowings under the credit facility exercise(if amended to provide additional capacity), through the issuance of the accordion feature under the credit facility to increase the revolving commitment by up to an additional $50.0 million,debt securities, or otherwise.
Our present indebtedness and any future borrowings could have adverse consequences, including:
requiring a substantial portion of our cash flow from operations to make payments on our indebtedness;
reducing the cash flow available or limiting our ability to borrow additional funds, to pay dividends, to fund capital expenditures and other corporate purposes and to pursue our business strategies;
limiting our flexibility in planning for, or reacting to, changes in our businesses and the industries in which we operate;
increasing our vulnerability to general adverse economic and industry conditions; and
placing us at a competitive disadvantage compared to our competitors that have less debt.
To the extent we become more leveraged, we face an increased likelihood that one or more of the risks described above would materialize.
As amended in July 2020 (See Liquidity Section for details), our credit facility also contains certain financial and operational covenants such as a minimum monthly cumulative EBITDA, a minimum fixed charge coverage ratio, and minimum liquidity and maximum capital expenditures. The breach of any of these covenants could result in a default under the credit facility. In addition, if we are unable to make payments as they come due or comply with the restrictions and covenants under the credit facility or any other agreements governing our indebtedness, there could be a default under
the terms of such agreements. In such event, or if we are otherwise in default under the credit facility or any such other agreements, the lenders could terminate their commitments to lend and/or accelerate the loans and declare all amounts borrowed due and payable. Furthermore, our lenders under the credit facility could foreclose on their security interests in our assets. If any of those events occur, our assets might not be sufficient to repay in full all of our outstanding indebtedness and we may be unable to find alternative financing on acceptable terms or at all. Failure to maintain existing or secure new financing could have a material adverse effect on our liquidity and financial position.
BorrowingsOur liquidity has been adversely affected as a result of our operating performance in recent periods and may be further materially adversely affected by constraints in the capital and credit markets and limitations under our financing arrangements.
We need sufficient sources of liquidity to fund our working capital requirements, service our outstanding indebtedness and finance business opportunities. Without sufficient liquidity, we could be forced to curtail our operations, or we may not be able to pursue business opportunities. The principal sources of our liquidity are funds generated from operating activities, available cash, our credit facility, bear interest atand proceeds from the sale of assets. In recent periods, significant acquisition costs, large capital investments along with the underperformance of our business has resulted in a variable rate exposing us to interest rate risk.decrease in funds from operating activities, which has weakened our liquidity position. Since March 2020, the impact of the COVID-19 pandemic and related federal, state, and local restrictive measures have had an adverse impact on certain of our customers, particularly restaurants, hotels, casinos and coffeehouses.
Our credit facility subjects us to interest rate risk. The rate at which we pay interest on outstanding amounts underShould our operating performance deteriorate further or the credit facility fluctuates with changes in interest rates and availability levels. As a result, we are exposed to changes in interest rates with respect to any amounts from time to time outstanding under our credit facility. If we are unable to adequately manage our debt structure in response to changesCOVID-19 pandemic persists or recurs in the market, our interest expense could increase, which would negatively affect our financial condition and results of operations.
We may need additional financing in the future, and we may be unable to obtain that financing.
Our cash requirements in the future may be greater than expected. Should we experience a deterioration in operating performance,near term, we will have less cash inflows from operations available to meet our financial obligations or to fund our other liquidity needs. In addition, if such deterioration were to lead to the closure of leased facilities, we would need to fund the costs of terminating those leases. If we are unable to generate sufficient cash flows from operations in the future to satisfy these financial obligations, we may be required to, among other things:
seek additional financing in the debt or equity markets;
refinance or restructure all or a portion of our indebtedness;
sell selected assets; and/or
reduce or delay planned capital or operating expenditures, strategic acquisitions or investments.
Such measures might not be sufficient to enable us to satisfy our financial obligations or to fund our other liquidity needs, and could impede the implementation of our business strategy, prevent us from entering into transactions that would otherwise benefit our business and/or have a material adverse effect on our financial condition and results of operations. In addition, any such financing, refinancing or sale of assets might not be available on economically favorable terms or at all. Our future operating performance and our ability to serviceobtain additional financing or refinance our indebtedness will be subject to future economic conditions and to financial, business and other factors, many of which are beyond our control.
Stockholders may experience future dilution as a result of future equity offerings.
In order to raise additional capital, we may in the future offer additional shares of our common stock or other securities convertible into or exchangeable for our common stock which would result in those newly issued shares being dilutive. In addition, investors purchasing shares or other securities in the future could have rights superior to existing stockholders, which could dilute the value of outstanding shares. The price per share at which we sell additional shares of our common stock, or securities convertible or exchangeable into common stock, in future transactions may be higher or lower than the price per share paid by existing stockholders for their shares.
Customer quality control problems may adversely affect our brands thereby negatively impacting our sales.
Our success depends on our ability to provide customers with high-quality products and service. Although we take measures to ensure that we sell only fresh products, we have no control over our products once they are purchased by our customers. Accordingly, customers may prepare our products inconsistent with our standards, or store our products for longer periods of time, potentially affecting product quality. Clean water is critical to the preparation of coffee, tea and other beverages. We have no ability to ensure that our customers use a clean water supply to prepare these beverages. If consumers do not perceive our products and service to be of high quality, then the value of our brands may be diminished and, consequently, our operating results and sales may be adversely affected.
Adverse public or medical opinions about caffeine may harm our business and reduce our sales.
Coffee contains caffeine and other active compounds, the health effects of some of which are not fully understood. A number of research studies conclude or suggest that excessive consumption of caffeine may lead to increased adverse health effects. An unfavorable report or other negative publicity or litigation on the health effects of caffeine or other compounds present in coffee could significantly reduce the demand for coffee which could harm our business and reduce our sales. In addition, we could be subject to litigation relating to the existence of such compounds in our coffee which could be costly and adversely affect our business.
Instances or reports linking us to food safety issues could harm our business and lead to potential product recalls or product liability claims.
Selling products for human consumption involves inherent legal risks. Instances or reports of food safety issues involving our products, whether or not accurate, such as unclean water supply, food or beverage-borne illnesses, tampering, contamination, mislabeling, or other food or beverage safety issues, including due to the failure of our third-party co-packers to maintain the quality of our products and to comply with our product specifications, could damage the value of our brands, negatively impact sales of our products, and potentially lead to product recalls, production interruptions, product liability claims, litigation or damages. A significant product liability claim against us, whether or not successful, or a widespread product recall may reduce our sales and harm our business.
Government regulations affecting the conduct of our business could increase our operating costs, reduce demand for our products or result in litigation.
The conduct of our business is subject to various laws and regulations including those relating to food safety, ingredients, manufacturing, processing, packaging, storage, marketing, advertising, labeling, quality and distribution of our products, as well as environmental laws and those relating to worker health and workplace safety. These laws and regulations and interpretations thereof are subject to change as a result of political, economic or social events. Such changes may include changes in: food and drug laws, including the Food Safety Modernization Act of 2011 which requires,depend upon, among other things, that food facilities conduct contamination hazard analyses, implement risk-based preventive controlsour financial condition at the time, and develop track-and-trace capabilities; laws relating to product labeling, advertisingthe liquidity of the overall capital markets and marketing practices; accounting standards and taxation requirements; competition laws; environmental laws; laws regarding ingredients used in our products; and increased regulatory scrutinythe state of and increased litigation involving, product claims and concerns regarding the effects on health of ingredients in, or attributeseconomy. Furthermore, any refinancing of our products.existing debt could be at higher interest rates and may require compliance with more onerous covenants, which could further restrict our business operations. In addition, if our product advertising could make uslenders experience difficulties that render them unable to fund future draws on the targetcredit facility, we may not be able to access all or a portion of claims relating to false or deceptive advertising under U.S. federal and state laws, including the consumer protection statutes of some states. Any new laws and regulations or changes in government policy, existing laws and regulations or the interpretations thereof could require us to change certain of our operational processes and procedures, or implement new ones, and may increase our operating and compliance costs,these funds, which could adversely affect our results of operations.ability to operate our business and pursue our business strategies. In some cases, increased regulatory scrutiny could interrupt distribution of our products or force changesaddition, covenants in our production processesdebt agreements could restrict or procedures (or force usdelay our ability to implement new processesrespond to business opportunities, or procedures). If we failin the event of a failure to comply with applicable laws and regulations, we may be subject to civil remedies, including fines, injunctions, recallssuch covenants, could result in an event of default, which if not cured or seizures, as well as potential criminal sanctions, whichwaived, could have a material adverse effect on us.
Our operating results may have significant fluctuations from period to period which could have a negative effect on the market price of our common stock.
Our operating results may fluctuate from period to period as a result of a number of factors, including variations in our operating performance or the performance of our competitors, changes in accounting principles, fluctuations in the price and supply of green coffee, fluctuations in the selling prices of our products, the success of our hedging strategy, research reports and changes in financial estimates by analysts about us, or competitors or our industry, our inability or the inability of our competitors to meet analysts’ projections or guidance, strategic decisions by us or our competitors, such as acquisitions, capital investments or changes in business strategy, the depth and liquidity of the market for our common stock, adverse outcomes of litigation, changes in or uncertainty about economic conditions, conditions or trends in our industry, geographies, or customers, activism by any large stockholder or group of stockholders, speculation by the investment community regarding our business, actual or anticipated growth rates relative to our competitors, terrorist acts, natural disasters, perceptions of the investment opportunity associated with our common stock relative to other investment alternatives, competition, changes in consumer preferences and market trends, seasonality, our ability to retain and attract customers, our ability to manage inventory and fulfillment operations and adversely affectmaintain gross margin, and other factors described elsewhere in this risk factors section. Fluctuations in our reputation and brand image.operating results due to these factors or for any other reason could cause the market price of our common stock to decline. In addition, claimsthe stock markets have experienced price and volume fluctuations that have affected and continue to affect the market price of equity securities issued by many companies. In the past, some companies that have had volatile market prices for their securities have been subject to class action or liabilitiesderivative lawsuits. The filing of this sort may not be covered by insurance or by any rights of indemnity or contribution that we may havea lawsuit against others.
Membersus, regardless of the U.S. Congress and the new presidential administration have announced plans to repeal and replace the Patient Protection and Affordable Care Act and the Health Care Education Reconciliation Act of 2010. It is currently unclear how a repeal or replacement of these programs might affect healthcare costs. Government regulations affecting taxes, healthcare costs, energy usage, immigration and other labor issues mayoutcome, could have a direct or indirectnegative effect on our business, or those of our customers or suppliers.
Significant additional labeling or warning requirements may increase our costs and adversely affect sales of the affected products.
Various jurisdictions may seek to adopt significant additional product labeling (such as requiring labeling of products that contain genetically modified organisms) or warning requirements or limitations on the availability of our products relating to the content or perceived adverse health consequences of certain of our products. If these types of requirements become applicable to one or more of our products, they may inhibit sales of such products. In addition, for example, we are subject to the California Safe Drinking Water and Toxic Enforcement Act of 1986 (commonly known as “Proposition 65”), a law which requires that a specific warning appear on any product sold in California that contains a substance listed by that State as having been found to cause cancer or birth defects. The Council for Education and Research on Toxics (“CERT”) has filed suit against a number of companies as defendants, including our subsidiary, Coffee Bean International, Inc., which sell coffee in California for allegedly failing to issue clear and reasonable warnings in accordance with Proposition 65 that the coffee they produce, distribute and sell contains acrylamide. Any action under Proposition 65 would likely seek statutory penalties and costs of enforcement, as well as a requirement to provide warnings and other notices to customers or remove acrylamide from finished products (which may be impossible). If we were required to add warning labels to any of our products or place warnings in certain locations where our products are sold, sales of those products could suffer not only in those locations but elsewhere. Any change in labeling requirements for our products also may lead to an increase in packaging costs or interruptions or delays in packaging deliveries.
Litigation pending against us could expose us to significant liabilities and damage our reputation.
We are currently party to various legal and other proceedings, and additional claims may arise in the future. See Note 23, Commitments and Contingencies, of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this report. Regardless of the merit of particular claims, litigation may be expensive, time-consuming, operationally disruptive and distracting to management, and could negatively affect our brand name and image and subject us to statutory penalties and costs of enforcement. We can provide no assurances as to the outcome of any litigation or the resolution of any other claims against us. An adverse outcome of any litigation or other claim could negatively affect our financial condition and results of operations, or liquidity.Compliance with regulations affecting publicly traded companies has resulted in increased costs and may continue toas it could result in increasedsubstantial legal costs, in the future.
As a publicly traded company, we are subject to laws, accounting and reporting requirements, tax rules and other regulations and requirements, including those imposed by the SEC and NASDAQ. Our efforts to comply with these requirements and regulations have resulted in, and are likely to continue to result in, increased expenses and a diversion of management’s attention and resources, and require us to make substantial management timepayments to satisfy judgments or to settle litigation. Accordingly, we believe that period-to-period comparisons of our operating results are not necessarily meaningful, and attention from revenue-generating activities to compliance activities. Because these laws and regulations are subject to varying interpretations, their application in practice may evolve over timesuch comparisons should not be relied upon as new guidance becomes available. This evolution may result in continuing uncertainty regarding compliance matters and additional costs necessitated by ongoing revisions to our disclosure and governance practices. Failure to comply with such regulations could have a material adverse effect on our business and stock price.indicators of future performance.
Concentration of ownership among our principal stockholders may dissuade potential investors from purchasing our stock, may prevent new investors from influencing significant corporate decisions, may result in activist actions and may result in a lower trading price for our common stock than if ownership of our common stock was less concentrated.
As of September 15, 2017, membersBased on statements and reports filed with the SEC pursuant to Sections 13(d) and 16(a) of the Farmer family or entities controlled by the Farmer family (including trusts)Securities Exchange Act of 1934, as amended (the “Exchange Act”), large stockholders beneficially owned approximately 27.9%own a significant portion of our outstanding common stock. As a result, these stockholders acting together, may be able to influence the outcome of stockholder votes, including votes concerning the election and removal of directors, activist campaigns, proxy contests, the amendment of our charter documents, and approval of significant corporate transactions. This level of concentrated ownership may have the effect of delaying or preventing a change in the management or voting control of the Company. If these stockholders engage in activist actions, responding to these actions can disrupt operations, be costly and time-consuming, and divert board and management attention, which could have an adverse effect on our results of operations and financial condition. In addition, this significant concentration of share ownership may adversely affect the trading price of our common stock if investors perceive disadvantages in owning stock in a company with such concentrated ownership.
Future sales Sales of sharescommon stock by existingsignificant stockholders could causehave a material adverse effect on the market price of our stock price to decline.
Allcommon stock. In addition, the transfer of ownership of a significant portion of our outstanding shares are eligible for sale inof common stock within a three-year period could adversely affect our ability to use our net operating loss (“NOL”) carryforwards to offset future taxable net income.
Our outstanding Series A Preferred Stock or future equity offerings could adversely affect the public market, subject in certain cases to limitations under Rule 144 of the Securities Act of 1933, as amended (the “Securities Act”). Also, shares subject to outstanding options and restricted stock under our long-term incentive plan are eligible for sale in the public market to the extent permitted by the provisions of various vesting agreements, our stock ownership guidelines, and Rule 144 under the Securities Act. If these shares are sold, or if it is perceived that they will be sold in the public market, the trading priceholders of our common stock in some circumstances.
As of June 30, 2020, we had 14,700 shares of Series A Convertible Participating Cumulative Perpetual Preferred Stock, par value $1.00 per share (“Series A Preferred Stock”), outstanding. The Series A Preferred Stock could decline.adversely affect the holders of our common stock in certain circumstances. On an as converted basis, holders of Series A Preferred Stock are entitled to vote together with the holders of our common stock and are entitled to share in the dividends on common stock, when declared. The Series A Preferred Stock pays a dividend, when, as and if declared by our Board of Directors, of 3.5% APR of the stated value per share payable in four quarterly installments in arrears, and has an initial stated value of $1,000 per share, adjustable up or down by the amount of undeclared and unpaid dividends or subsequent payment of accumulated dividends thereon, respectively, and a conversion premium of 22.5%. We may mandatorily convert all of the Series A Preferred Stock one year from the date of issue. The holder may convert 20%, 30% and 50% of the Series A Preferred Stock at the end of the first, second and third year, respectively, from the date of issue. In the future, we may offer additional equity, equity-linked or
debt securities, which may have rights, preferences or privileges senior to our common stock. As a result, our common stockholders may experience dilution. Any of the foregoing could have a material adverse effect on the holders of our common stock.
Anti-takeover provisions or stockholder dilution could make it more difficult for a third party to acquire us.
Our Board of Directors has the authority to issue up to 500,000 shares of preferred stock and to determine the price, rights, preferences, privileges and restrictions, including voting rights, of those shares without any further vote or action by stockholders. We currently have 479,000 authorized shares of preferred stock undesignated as to series, and we could cause shares currently designated as to series but not outstanding to become undesignated and available for issuance as a series of preferred stock to be designated in the future. The rights of the holders of our common stock may be subject to, and may be adversely affected by, the rights of the holders of any preferred stock that may be issued in the future. The issuance of preferred stock may have the effect of delaying, deterring or preventing a change in control of the Company without further action by stockholders and may adversely affect the voting and other rights of the holders of our common stock.
Further, certain provisions of our charter documents, including a classified board of directors which will phase out over the next two years, have provisions eliminating the ability of stockholders to take action by written consent, and provisions limiting the ability of stockholders to raise matters at a meeting of stockholders without giving advance notice, may have the effect of delaying or preventing changes in control or management of the Company, which could have an adverse effect on the market price of our common stock. In addition, our charter documents do not permit cumulative voting, which may make it more difficult for a third party to gain control of our Board of Directors. Further, we are subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law, which will prohibit us from engaging in a “business combination” with an “interested stockholder” for a period of three years after the date of the transaction in which the person became an interested stockholder, even if such combination is favored by a majority of stockholders, unless the business combination is approved in a prescribed manner. The application of Section 203 also could have the effect of delaying or preventing a change in control or management.
Volatility in the equity markets or interest rate fluctuations could substantially increase our pension funding requirements and negatively impact our financial position.
At June 30, 2020, the projected benefit obligation under our single employer defined benefit pension plans exceeded the fair value of plan assets. The difference between the projected benefit obligation and the fair value of plan assets, or the funded status of the plans, significantly affects the net periodic benefit cost and ongoing funding requirements of those plans. Among other factors, changes in interest rates, mortality rates, early retirement rates, mix of plan asset investments, investment returns and the market value of plan assets can affect the level of plan funding, cause volatility in the net periodic benefit cost, increase our future funding requirements and require payments to the Pension Benefit Guaranty Corporation. In addition, facility closings may trigger cash payments or previously unrecognized obligations under our defined benefit pension plans, and the cost of such liabilities may be significant or may compromise our ability to close facilities or otherwise conduct cost reduction initiatives on time and within budget. A significant increase in future funding requirements could have a negative impact on our financial condition and results of operations.
We rely on information technology and are dependent on software in our operations. Any material failure, inadequacy, interruption or security failure of that technology could affect our ability to effectively operate our business.
Our ability to effectively manage our business, maintain information accuracy and efficiency, comply with regulatory, financial reporting, legal and tax requirements, and coordinate the production, distribution and sale of our products depends significantly on the reliability, capacity and integrity of information technology systems, software and networks. We are also dependent on enterprise resource planning software for some of our information technology systems and support. The failure of these systems to operate effectively and continuously for any reason could result in delays in processing replenishment orders from our branch warehouses, an inability to record input costs or product sales accurately or at all, an impaired understanding of our operations and results, an increase in operating expenses, reduced operational efficiency, loss of customers or other business disruptions, all of which could negatively affect our business and results of operations. To date, we have not experienced a material breach of cyber security, however our computer systems have been, and will likely continue to be, subjected to unauthorized access or phishing attempts, computer viruses, malware, ransomware or other malicious codes. These threats are constantly evolving and this increases the difficulty of timely detection and successful defense. As a result, security, backup, disaster recovery, administrative and technical controls, and incident response measures may not be adequate or implemented
properly to prevent cyber-attacks or other security breaches to our systems. Failure to effectively allocate and manage our resources to build, sustain, protect and upgrade our information technology infrastructure could result in transaction errors, processing inefficiencies, the loss of customers, reputational damage, litigation, business disruptions, or the loss of sensitive or confidential data through security breach or otherwise. Significant capital investments could be required to remediate any potential problems or to otherwise protect against security breaches or to address problems caused by breaches. In addition, if our customers or suppliers experience a security breach or system failure, their businesses could be disrupted or negatively affected, which may result in a reduction in customer orders or disruption in our supply chain, which would adversely affect our results of operations.
Failure to prevent the unauthorized access, use, theft or destruction of personal, financial and other confidential information relating to our customers, suppliers, employees or our Company, could damage our business reputation, negatively affect our results of operations, and expose us to potential liability.
The protection of our customer, supplier, employee, and Company data and confidential information is critical. We are subject to new and changing privacy and information security laws and standards that may require significant investments in technology and new operational processes. The use of electronic payment methods and collection of other personal information exposes us to increased risk of privacy and/or security breaches. We rely on commercially available systems, software, tools, and monitoring to provide security for processing, transmitting, and storing personal information from individuals, including our customers, suppliers and employees, and our security measures may not effectively prohibit others from obtaining improper access to such information. We rely on third party, cloud based technologies which results in third party access and storage of Company data and confidential information. Employees or third parties with whom we do business or to whom we outsource certain information technology or administrative services may attempt to circumvent security measures in order to misappropriate such information, and may purposefully or inadvertently cause a breach involving such information. If we experience a data security breach of any kind or fail to respond appropriately to such incidents, we may experience a loss of or damage to critical data, suffer financial or reputational damage or penalties, or face exposure to negative publicity, government investigations and proceedings, private consumer or securities litigation, liability or costly response measures. In addition, our reputation within the business community and with our customers and suppliers may be affected, which could result in our customers and suppliers ceasing to do business with us which could adversely affect our business and results of operations. Our insurance policies do not cover losses caused by security breaches.
Our ability to use our NOL carryforwards to offset future taxable net income may be subject to certain limitations.
At June 30, 2020, we had approximately $150.6 million in federal and $115.0 million in state NOL carryforwards that will begin to expire in the years ending June 30, 2030 and June 30, 2021, respectively. If an ownership change as defined in Section 382 of the Internal Revenue Code (the "Code"), occurs with respect to our capital stock, our ability to use NOLs to offset taxable income would be subject to certain limitations. Generally, an ownership change occurs under Section 382 of the Code if certain persons or groups increase their aggregate ownership by more than 50 percentage points of our total capital stock over a rolling three-year period. If an ownership change occurs, our ability to use NOLs to reduce taxable net income is generally limited to an annual amount based on the fair market value of our stock immediately prior to the ownership change multiplied by the long-term tax-exempt interest rate. If an ownership change were to occur, use of our NOLs to reduce payments of federal taxable net income may be deferred to later years within the 20-year carryover period; however, if the carryover period for any loss year expires, the use of the remaining NOLs for the loss year will be prohibited. Future changes in our stock ownership, some of which may be outside of our control, could result in an ownership change under Section 382 of the Code.
There is also a risk that due to regulatory changes, such as suspensions on the use of NOLs, or other unforeseen reasons, our existing NOLs could expire, decrease in value or otherwise be unavailable to offset future income tax liabilities. As a result, we may be unable to realize a tax benefit from the use of our NOLs, even if we generate a sufficient level of taxable net income prior to the expiration of the NOL carry forward periods.
Future impairment charges could adversely affect our operating results.
At June 30, 2020, we had $20.7 million in long-lived intangible assets, including recipes, non-compete agreements, customer relationships, trade names, trademarks and a brand name, associated with completed acquisitions. Acquisitions are based on certain target analysis and due diligence procedures designed to achieve a desired return or strategic objective. These procedures often involve certain assumptions and judgment in determining the acquisition price. After consummation of an acquisition, unforeseen issues could arise that adversely affect anticipated returns or that are otherwise not recoverable as an
adjustment to the purchase price. Even after careful integration efforts, actual operating results may vary significantly from initial estimates. We perform an asset impairment analysis on an annual basis or whenever events occur that may indicate possible existence of impairment. Failure to achieve forecasted operating results, due to weakness in the economic environment or other factors, changes in market conditions, loss of or significant decline in sales to customers included in valuation of the intangible asset, changes in our imputed cost of capital, and declines in our market capitalization, among other things, could result in impairment of our intangible assets and goodwill and adversely affect our operating results. For the year ended June 30, 2020, we had full goodwill impairment and partial impairment of long-lived intangible assets.
|
| |
| Item 1.B. | Unresolved Staff Comments |
None.
Our current production and distribution facilities are as follows: |
| | | | | | | |
| Location | | Approximate Area (Square Feet) | | Purpose | | Status |
| Northlake, TX | | 538,000535,585 |
| | Corporate headquarters, manufacturing, distribution, warehouse, product development lab | | Owned |
| Houston, TX | | 330,877 |
| | Manufacturing and warehouse | | OwnedLeased |
| Portland, OR | | 114,000 |
| | Manufacturing and distribution | | Leased |
| Oklahoma City, OK | | 142,115 |
| | Equipment repair center | | Owned |
| Northlake, IL | | 89,837 |
| | Distribution and warehouse | | Leased |
Moonachie, NYNJ | | 41,404 |
| | Distribution and warehouse | | Leased |
| Hillsboro, OR | | 20,400 |
| | Manufacturing, distribution and warehouse | | Leased |
Scottsdale, AZ | | 17,400 |
| | Manufacturing, distribution and warehouse | | Leased |
As part of the China Mist transaction, we assumed the lease on China Mist’s existing 17,400 square foot production, distribution and warehouse facility in Scottsdale, Arizona which is terminable upon twelve months’ notice. As part of the West Coast Coffee transaction, we entered into a three-year lease on West Coast Coffee’s existing 20,400 square foot
production, distribution and warehouse facility in Hillsboro, Oregon, which expires January 31, 2020, and assumed leases on six branch warehouses consisting of an aggregate of 24,150 square feet in Oregon, California and Nevada, expiring on various dates through November 2020. Our owned facility in Oklahoma City, Oklahoma, consisting of approximately 142,100 square feet, served as a distribution facility through the third quarter of fiscal 2017, when distribution operations were transitioned to the New Facility, and continues to serve as a warehouse facility and service center.
As of June 30, 2017,2020, we stage our products in 11497 branch warehouses throughout the contiguous United States. These branch warehouses and our distribution centers, taken together, represent a vital part of our business, but no individual branch warehouse is material to the business as a whole. Our stand-alone branch warehouses vary in size from approximately 1,000 to 50,00034,000 square feet.
Approximately 55%62% of our facilities are leased with a variety of expiration dates within the range of 2021 through 2021.2028. The lease on the Portland facility was renewed in fiscal 2018 and expires in 2018 and has options2028, subject to an option to renew up to an additional 10 years.
We calculate our utilization for all of our coffee roasting facilities on an aggregate basis based on the number of product pounds manufactured during the actual number of production shifts worked during an average week, compared to the number of product pounds that could be manufactured based on the maximum number of production shifts that could be operated during the week (assuming three shifts per day, five days per week), in each case, based on our current product mix. Utilization rates for our coffee roasting facilities were approximately 93%66%, 90%71% and 66%75% during the fiscal years ended June 30, 2017, 20162020, 2019 and 2015,2018, respectively. The utilization rate in fiscal 2017 excludes the New Facility where we began roasting coffee in the fourth quarter of fiscal 2017. The utilization rate in fiscal 2016 excludes the Torrance Facility due to the transition of coffee processing and packaging to our Houston and Portland production facilities in the fourth quarter of fiscal 2015.
We believe that our existing facilities provide adequate capacity for our current operations.
.
For information regarding legal proceedings in which we are involved, see Note 2322, Commitments and Contingencies, of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this report. |
| |
| Item 4. | Mine Safety Disclosures |
Not applicable.
PART II
|
| |
| Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
Market Information
Our common stock trades on the NASDAQ Global Select Market under the symbol “FARM.” The following table sets forth the quarterly high and low sales prices of our common stock as reported by NASDAQ for each quarter during the last two fiscal years. |
| | | | | | | | | | | | | | | | |
| | | Year Ended June 30, 2017 | | Year Ended June 30, 2016 |
| | | High | | Low | | High | | Low |
| 1st Quarter | | $ | 36.96 |
| | $ | 29.16 |
| | $ | 28.16 |
| | $ | 20.90 |
|
| 2nd Quarter | | $ | 37.55 |
| | $ | 30.05 |
| | $ | 32.94 |
| | $ | 26.99 |
|
| 3rd Quarter | | $ | 37.15 |
| | $ | 31.25 |
| | $ | 31.63 |
| | $ | 24.04 |
|
| 4th Quarter | | $ | 37.35 |
| | $ | 29.30 |
| | $ | 32.50 |
| | $ | 26.69 |
|
On September 27, 2017, the last sale price reported on NASDAQ for our common stock was $30.30 per share.
Holders
As of September 27, 2017,1, 2020, there were approximately 2,200 holders of record. Determination of holders208 shareholders of record is based upon the number of record holders and individual participants in security position listings.common stock. This does not include persons whose common stock is in nominee or “street name” accounts through brokers.
Dividends
The Company’s Board of Directors has omitted the payment of a quarterly dividend since the third quarter of fiscal 2011. The amount, if any, of dividends to be paid in the future will depend upon the Company’s then available cash, anticipated cash needs, overall financial condition, credit agreement restrictions, future prospects for earnings and cash flows, as well as other relevant factors. For a description of the credit agreement restrictions on the payment of dividends, see Liquidity, Capital Resources and Financial Condition included in Part II, Item 7 of this report, and Note 16, Bank Loan, of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this report.Equity Compensation Plan Information
Performance Graph
The following graph depicts a comparison of the total cumulative stockholder return on our common stock for each of the last five fiscal years relative to the performance of the Russell 2000 Index, the Value Line Food Processing Index and a peer group index. Companies in the Russell 2000, Value Line Food Processing Index and peer group index are weighted by market capitalization. The graph assumes an initial investment of $100.00 at the beginningclose of the five year periodtrading on June 30, 2015 and that all dividends paid by companies included in these indices have been reinvested.
Because no published peer group is similar to the Company's portfolio of business, the Company created a peer group index that includes the following companies:companies that operate in the similar line of business: B&G Foods, Inc., Boulder Brands, Inc., Coffee Holding Co. Inc., Dunkin' Brands Group, Inc.,Lancaster Colony Corporation, National Beverage Corp., SpartanNash Company, InventureSeneca Foods Inc.Corp. and TreehouseTreeHouse Foods, Inc. The companies in the peer group index are in the same industry as Farmer Bros. Co. with product offerings that overlap with the Company's product offerings. Boulder Brands, Inc. is no longer a public company and has been excluded from the peer group index in fiscal 2017 and 2016.
The historical stock price performance of the Company’s common stock shown in the performance graph below is not necessarily indicative of future stock price performance. The Russell 2000 Index, the Value Line Food Processing Index and the peer group index are included for comparative purposes only. They do not necessarily reflect management's opinion that such indices are an appropriate measure for the relative performance of the stock involved, and they are not intended to forecast or be indicative of possible future performance of our common stock.
The material in this performance graph is not soliciting material, is not deemed filed with the SEC, and is not incorporated by reference in any filing of the Company under the Securities Act or the Exchange Act, whether made on, before or after the date of this filing and irrespective of any general incorporation language in such filing.
Comparison of Five-Year Cumulative Total Return Performance Table
Farmer Bros. Co., Russell 2000 Index, Value Line Food Processing Index and Peer Group Index
(Performance Results Through June 30, 2017)
| | | | | 2012 |
| | 2013 |
| | 2014 |
| | 2015 |
| | 2016 |
| | 2017 |
| | 2015 |
| | 2016 |
| | 2017 |
| | 2018 |
| | 2019 |
| | 2020 |
|
| Farmer Bros. Co. | | $ | 100.00 |
| | $ | 176.63 |
| | $ | 271.48 |
| | $ | 295.23 |
| | $ | 402.76 |
| | $ | 380.03 |
| | $ | 100.00 |
| | $ | 136.43 |
| | $ | 128.72 |
| | $ | 130.00 |
| | $ | 69.66 |
| | $ | 31.32 |
|
| Russell 2000 Index | | $ | 100.00 |
| | $ | 124.21 |
| | $ | 153.57 |
| | $ | 164.02 |
| | $ | 153.90 |
| | $ | 195.20 |
| | $ | 100.00 |
| | $ | 93.83 |
| | $ | 119.01 |
| | $ | 139.84 |
| | $ | 135.21 |
| | $ | 126.25 |
|
| Value Line Food Processing Index | | $ | 100.00 |
| | $ | 119.96 |
| | $ | 146.81 |
| | $ | 156.96 |
| | $ | 185.97 |
| | $ | 198.18 |
| | $ | 100.00 |
| | $ | 118.48 |
| | $ | 126.26 |
| | $ | 125.48 |
| | $ | 135.42 |
| | $ | 138.97 |
|
| Peer Group Index | | $ | 100.00 |
| | $ | 120.41 |
| | $ | 133.80 |
| | $ | 152.14 |
| | $ | 186.31 |
| | $ | 191.75 |
| | $ | 100.00 |
| | $ | 150.78 |
| | $ | 144.48 |
| | $ | 137.15 |
| | $ | 104.43 |
| | $ | 114.54 |
|
Source: Value Line Publishing, LLC
Issuer Purchases of Equity Securities
The table below presents purchases made by or on behalf of the Company or any “affiliated purchaser” (as defined in Rule 10b-18(a)(3) under the Exchange Act) of shares of our Class A Common Stock during each of the indicated periods.
|
| | | | | | | | | | | | | |
| Period | | Total Number of Shares of Our Class A Common Stock Purchased | | Average Price Paid Per Share of Our Class A Common Stock | | Total Number of Shares of Our Class A Common Stock Purchased as Part of Publicly Announced Plans or Programs | | Maximum Number of Shares of Our Class A Common Stock That May Yet Be Purchased Under the Plan or Program |
| April 1 to April 30, 2020 | | — |
| | $ | — |
| | — |
| | — |
|
| May 1 to May 31, 2020 | | — |
| | $ | — |
| | — |
| | — |
|
| June 1 to June 30, 2020 | | — |
| | $ | — |
| | — |
| | — |
|
|
| |
| Item 6. | Selected Financial Data |
|
| | | | | | | | | | | | | | | | | | | |
| | Year Ended June 30, |
| (In thousands, except per share data) | 2017(1) | | 2016 | | 2015 | | 2014 | | 2013 |
| Consolidated Statement of Operations Data: | | | | | | | | | |
| Net sales | $ | 541,500 |
| | $ | 544,382 |
| | $ | 545,882 |
| | $ | 528,380 |
| | $ | 513,869 |
|
| Cost of goods sold | $ | 327,765 |
| | $ | 335,907 |
| | $ | 348,846 |
| | $ | 332,466 |
| | $ | 328,693 |
|
| Restructuring and other transition expenses(2) | $ | 11,016 |
| | $ | 16,533 |
| | $ | 10,432 |
| | $ | — |
| | $ | — |
|
| Net gain from sale of Torrance Facility (3) | $ | (37,449 | ) | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Net gains from sale of Spice Assets(4) | $ | (919 | ) | | $ | (5,603 | ) | | $ | — |
| | $ | — |
| | $ | — |
|
| Net (gains) losses from sales of other assets | $ | (1,210 | ) | | $ | (2,802 | ) | | $ | 394 |
| | $ | (3,814 | ) | | $ | (4,467 | ) |
| Impairment losses on intangible assets | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 92 |
|
| Income from operations | $ | 42,166 |
| | $ | 8,179 |
| | $ | 3,284 |
| | $ | 8,916 |
| | $ | 372 |
|
| Income from operations per common share—diluted | $ | 2.51 |
| | $ | 0.49 |
| | $ | 0.20 |
| | $ | 0.56 |
| | $ | 0.02 |
|
| Income tax expense (benefit)(5) | $ | 15,954 |
| | $ | (79,997 | ) | | $ | 402 |
| | $ | 705 |
| | $ | (825 | ) |
| Net income (loss)(6) | $ | 24,400 |
| | $ | 89,918 |
| | $ | 652 |
| | $ | 12,132 |
| | $ | (8,462 | ) |
| Net income (loss) per common share—basic | $ | 1.46 |
| | $ | 5.45 |
| | $ | 0.04 |
| | $ | 0.76 |
| | $ | (0.54 | ) |
| Net income (loss) per common share—diluted | $ | 1.45 |
| | $ | 5.41 |
| | $ | 0.04 |
| | $ | 0.76 |
| | $ | (0.54 | ) |
| Cash dividends declared per common share | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| | June 30, |
| (In thousands) | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| Consolidated Balance Sheet Data: | | | | | | | | | |
| Total current assets(7) | $ | 117,164 |
| | $ | 153,365 |
| | $ | 135,685 |
| | $ | 157,460 |
| | $ | 139,749 |
|
| Property, plant and equipment, net(8) | $ | 176,066 |
| | $ | 118,416 |
| | $ | 90,201 |
| | $ | 95,641 |
| | $ | 92,159 |
|
| Goodwill(9) | $ | 10,996 |
| | $ | 272 |
| | $ | 272 |
| | $ | — |
| | $ | — |
|
| Intangible assets, net(9) | $ | 18,618 |
| | $ | 6,219 |
| | $ | 6,419 |
| | $ | 5,628 |
| | $ | 6,277 |
|
| Deferred income taxes | $ | 63,055 |
| | $ | 80,786 |
| | $ | 751 |
| | $ | 414 |
| | $ | 467 |
|
| Total assets | $ | 392,736 |
| | $ | 368,991 |
| | $ | 240,943 |
| | $ | 266,177 |
| | $ | 244,136 |
|
| Short-term borrowings under revolving credit facility(10) | $ | 27,621 |
| | $ | 109 |
| | $ | 78 |
| | $ | 78 |
| | $ | 9,654 |
|
| Capital lease obligations(11) | $ | 1,195 |
| | $ | 2,359 |
| | $ | 5,848 |
| | $ | 9,703 |
| | $ | 12,168 |
|
| Long-term borrowings under revolving credit facility | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 10,000 |
|
| Earn-out payable(12) | $ | 1,100 |
| | $ | 100 |
| | $ | 200 |
| | $ | — |
| | $ | — |
|
| Long-term derivative liabilities | $ | 380 |
| | $ | — |
| | $ | 25 |
| | $ | — |
| | $ | 1,129 |
|
| Total liabilities | $ | 177,601 |
| | $ | 186,397 |
| | $ | 150,932 |
| | $ | 151,313 |
| | $ | 162,298 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | For the Years Ended June 30, |
| (In thousands, except per share data) | 2020 | | 2019 | | 2018(1) | | 2017(1) | | 2016(1) |
| Consolidated Statement of Operations Data: | | | | | | | | | |
| Net sales | $ | 501,320 |
| | $ | 595,942 |
| | $ | 606,544 |
| | $ | 541,500 |
| | $ | 544,382 |
|
| Cost of goods sold | $ | 363,198 |
| | $ | 416,840 |
| | $ | 399,155 |
| | $ | 354,649 |
| | $ | 373,165 |
|
| Restructuring and other transition expenses | $ | — |
| | $ | 4,733 |
| | $ | 662 |
| | $ | 11,016 |
| | $ | 16,533 |
|
| Net gain from sale of Torrance Facility | $ | — |
| | $ | — |
| | $ | — |
| | $ | (37,449 | ) | | $ | — |
|
| Net (gains) losses from sales of assets | $ | (25,237 | ) | | $ | 465 |
| | $ | (966 | ) | | $ | (2,129 | ) | | $ | (8,405 | ) |
| Impairment losses on intangible assets | $ | 42,030 |
| | $ | — |
| | $ | 3,820 |
| | $ | — |
| | $ | — |
|
| (Loss) income from operations | $ | (43,002 | ) | | $ | (14,702 | ) | | $ | 1,053 |
| | $ | 38,934 |
| | $ | (1,736 | ) |
| Postretirement benefits curtailment gains and pension settlement (charge) | $ | 5,760 |
| | $ | (10,948 | ) | | $ | — |
| | $ | — |
| | $ | — |
|
| Income tax (benefit) expense(2) | $ | (195 | ) | | $ | 40,111 |
| | $ | 17,312 |
| | $ | 14,815 |
| | $ | (72,239 | ) |
| Net (loss) income available to common stockholders | $ | (37,641 | ) | | $ | (74,130 | ) | | $ | (18,669 | ) | | $ | 22,551 |
| | $ | 71,791 |
|
| Net (loss) income available to common stockholders per common share—basic | $ | (2.19 | ) | | $ | (4.36 | ) | | $ | (1.11 | ) | | $ | 1.35 |
| | $ | 4.35 |
|
| Net (loss) income available to common stockholders per common share—diluted | $ | (2.19 | ) | | $ | (4.36 | ) | | $ | (1.11 | ) | | $ | 1.34 |
| | $ | 4.32 |
|
| | | | | | | | | | |
| | As of June 30, |
| (In thousands) | 2020 | | 2019 | | 2018(1) | | 2017(1) | | 2016(1) |
| Consolidated Balance Sheet Data: | | | | | | | | | |
| Total current assets | $ | 176,713 |
| | $ | 159,908 |
| | $ | 173,514 |
| | $ | 140,703 |
| | $ | 177,366 |
|
| Property, plant and equipment, net | $ | 165,633 |
| | $ | 189,458 |
| | $ | 186,589 |
| | $ | 176,066 |
| | $ | 118,416 |
|
| Goodwill | $ | — |
| | $ | 36,224 |
| | $ | 36,224 |
| | $ | 10,996 |
| | $ | 272 |
|
| Intangible assets, net | $ | 20,662 |
| | $ | 28,878 |
| | $ | 31,515 |
| | $ | 18,618 |
| | $ | 6,219 |
|
| Operating lease assets | $ | 21,117 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Deferred income taxes | $ | — |
| | $ | — |
| | $ | 39,308 |
| | $ | 53,933 |
| | $ | 71,508 |
|
| Total assets | $ | 392,699 |
| | $ | 424,610 |
| | $ | 475,531 |
| | $ | 407,153 |
| | $ | 383,714 |
|
| Short-term borrowings under revolving credit facility | $ | — |
| | $ | — |
| | $ | 89,787 |
| | $ | 27,621 |
| | $ | 109 |
|
| Long-term borrowings under revolving credit facility | $ | 122,000 |
| | $ | 92,000 |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Operating lease liabilities | $ | 21,483 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Finance lease obligations | $ | 9 |
| | $ | 32 |
| | $ | 248 |
| | $ | 1,195 |
| | $ | 2,359 |
|
| Earnout payable | $ | — |
| | $ | 400 |
| | $ | 600 |
| | $ | 1,100 |
| | $ | 100 |
|
| Long-term derivative liabilities | $ | 2,859 |
| | $ | 1,612 |
| | $ | 386 |
| | $ | 380 |
| | $ | — |
|
| Total liabilities | $ | 280,786 |
| | $ | 267,116 |
| | $ | 246,476 |
| | $ | 177,601 |
| | $ | 186,397 |
|
(1) The resultsPrior year periods have been retrospectively adjusted to reflect the impact of operationscertain changes in accounting principles to previously issued financial statements.
(2) Includes valuation allowance of businesses acquired are included$64.4 million and $52.0 million in the Company's consolidated financial statements from their dates of acquisition.fiscal years ended June 30, 2020 and 2019, respectively. See Note 3, Acquisitions19, Income Taxes, of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this report. On August 18, 2017, we entered into an agreement to acquire substantially all of the assets of Boyd’s with a combination of cash and stock. See Note 26, Subsequent Events—Boyd’s Purchase Agreement, of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this report.Annual Report on Form 10‑K.
Note 4, Restructuring Plans, of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this report.(3) See Note 6, Sales of Assets—Sale of Torrance Facility, of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this report.
(4) See Note 6, Sales of Assets—Sale of Spice Assets, of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this report.(5) Includes non-cash income tax benefit of $80.3 million in fiscal 2016 from the release of valuation allowance on deferred tax assets. See Note 21, Income Taxes, of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this report.(6) Includes: the beneficial effect of liquidation of LIFO inventory quantities of $3.4 million, $4.2 million, $4.9 million, $0, and $1.1 million in fiscal 2017, 2016, 2015, 2014 and 2013, respectively.
(8) See Note 5, New Facility, and Note 13, Property, Plant and Equipment, of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this report.(9) See Note 3, Acquisitions, and Note 14, Goodwill and Intangible Assets, of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this report.(11) Excludes imputed interest.
(12) See Note 20, Other Long-Term Liabilities, of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this report.
|
| |
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
The following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of many factors. The results of operations for the fiscal years ended June 30, 2017, 20162020, 2019 and 20152018 are not necessarily indicative of the results that may be expected for any future period. The following discussion should be read in combination with the consolidated financial statements and the notes thereto included in Part II, Item 8 of this report and with the Risk Factors described in Part I, Item 1A of this report. OverviewOur Business
We are a national coffee roaster, wholesaler and distributor of coffee, tea and culinary products manufactured under supply agreements, under our owned brands, as well as under private labels on behalf of certain customers. We were founded in 1912, incorporated in California in 1923, and reincorporated in Delaware in 2004. Our principal office is located in Northlake, Texas. We operate in one business segment.
We serve a wide variety of customers, from small independent restaurants and foodservice operators to large institutional buyers like restaurants, department and convenience store chains, hotels, casinos, healthcare facilities, and gourmet coffee houses, as well as grocery chains with private brand and consumer-branded coffee and tea products.products, and foodservice distributors. We are a coffee company dedicated to deliver the coffee people want, the way they want it. We are focused on being a growing and profitable forward-thinking industry leader, championing coffee culture through understanding, leading, building and winning in the business of coffee. Through our sustainability, stewardship, environmental efforts, and leadership we are not only committed to serving the finest products available, considering the cost needs of the customer, but also insist on their sustainable cultivation, manufacture and distribution whenever possible.
Our product categories consist of a robust line of roast and ground coffee, including organic, Direct Trade, DTVSProject D.I.R.E.C.T.® and other sustainably-produced offerings; frozen liquid coffee; flavored and unflavored iced and hot teas; culinary products including gelatins and puddings, soup bases, dressings, gravy and sauce mixes, pancake and biscuit mixes, jellies and preserves, and coffee-related products such as coffee filters, sugar and creamers; spices; and other beverages including cappuccino, cocoa, granitas, and concentrated and ready-to-drink cold brew and iced coffee. We offer a comprehensive approach to our customers by providing not only a breadth of high-quality products, but also value-addedvalue added services such as market insight, beverage planning, and equipment placement and service.
We operate production facilities in Northlake facility, Texas; Houston, Texas; Portland, Oregon; and Hillsboro, Oregon; and Scottsdale, Arizona.Oregon. Distribution takes place out of the New Facility,Northlake facility, the Portland Hillsboro and ScottsdaleHillsboro facilities, as well as separate distribution centers in Northlake, Illinois; and Moonachie, New Jersey. We commenced distribution activities at the New Facility during the second quarter of fiscal 2017 and initial production activities late in the third quarter of fiscal 2017. We began roasting coffee in the New Facility in the fourth quarter of fiscal 2017.
Our products reach our customers primarily in twothe following ways: through our nationwide DSD network of 450186 delivery routes and 11497 branch warehouses as of June 30, 2017,2020, or direct-shipped via common carriers or third-party distributors. DSD sales are primarily made “off-truck” to our customers at their places of business. We operate a large fleet of trucks and other vehicles to distribute and deliver our products through our DSD network, and we rely on 3PL service providers for our long-haul distribution.
Corporate Relocation
In an effort
Impact of the COVID-19 Pandemic on Our Business
The COVID-19 pandemic has significantly impacted our financial position, results of operations, cash flows and liquidity as the spread of the pandemic and resulting governmental actions have decreased the demand for our products, most notably throughout our DSD network, which has had a material impact on our revenues during the second half of our fiscal year ended June 30, 2020; and we expect the COVID-19 pandemic will continue to makehave a material impact on our revenues in future periods, especially the Company more competitivefirst half of our fiscal year ending June 30, 2021. Our DSD customers consist of small independent restaurants, foodservice operators, large institutional buyers, and better positionedconvenience store chains, hotels, casinos, healthcare facilities, and foodservice distributors. Some customers have either limited operations, or have closed their operations in compliance with the restrictive measures enacted by federal, states and local governments restrictions on social distancing. Thus, our DSD sales channel weekly revenue from these customers at the height of the pandemic in April 2020, declined by 65% to capitalize on growth opportunities,70% from the pre COVID-19 pandemic weeks. We have proactively responded with new concepts such as, warehouse and pop-up sales, and accelerated our roastery direct and e-commerce initiatives; these efforts have helped to mitigate the impact of the decline in fiscal 2015 we began the processDSD revenue. As of relocating our corporate headquarters, product development lab, and manufacturing and distribution operations from Torrance, CaliforniaJune 30, 2020, due to the New Facility. Approximately 350 positions were impacted as a resultabove management initiatives, lifting of some of the Torrance Facility closure.government restrictions, and reopening of some of our customers' businesses, our revenues have recovered to some extent but are still down by approximately 45% from the pre COVID-19 pandemic weeks.
The significant milestones associated withOur Direct Ship sales channel has also been negatively impacted by the COVID-19 pandemic. However, our Corporate Relocation Plan areretail business and products sold by key grocery stores under their private labels, as follows: |
| | |
Event | | Date |
Announced Corporate Relocation Plan | | Q3 fiscal 2015 |
Transitioned coffee processing and packaging from Torrance production facility
and consolidated them with Houston and Portland production facilities
| | Q4 fiscal 2015 |
Moved Houston distribution operations to Oklahoma City distribution center | | Q4 fiscal 2015 |
Entered into lease agreement and development management agreement for New Facility | | Q1 fiscal 2016 |
Commenced construction of New Facility | | Q1 fiscal 2016 |
Transitioned primary administrative offices from Torrance to temporary leased offices in Fort Worth, Texas | | Q1-Q2 fiscal 2016 |
Sold Spice Assets to Harris | | Q2 fiscal 2016 |
Principal design work completed on New Facility | | Q3 fiscal 2016 |
Completed transition services to Harris and ceased spice processing and packaging at Torrance Facility | | Q4 fiscal 2016 |
Entered into purchase and sale agreement to sell Torrance Facility | | Q4 fiscal 2016 |
Exercised purchase option on New Facility | | Q4 fiscal 2016 |
Closed sale of Torrance Facility | | Q1 fiscal 2017 |
Closed purchase option for New Facility | | Q1 fiscal 2017 |
Entered into amended building contract with The Haskell Company | | Q1 fiscal 2017 |
Exited from Torrance Facility | | Q2 fiscal 2017 |
Commenced distribution from New Facility | | Q2 fiscal 2017 |
Substantial completion of construction and relocation to New Facility | | Q3 fiscal 2017 |
Transitioned Oklahoma City distribution operations to New Facility | | Q3 fiscal 2017 |
Coffee roasting commenced in New Facility | | Q4 fiscal 2017 |
Completed Corporate Relocation Plan | | Q4 fiscal 2017 |
In response to the pandemic's impact on our business, we instituted several initiatives in March 2020 to reduce operating expenses and capital expenditures to help mitigate the significant negative impact of our DSD revenue decline. Specifically, we have, among other things;
reduced headcount and furloughed a significant percentage of employees;
eliminated fiscal third quarter 2020 cash compensation for our Board of Directors;
temporarily decreased executive leadership, corporate team member’s and all exempt employees (except route sales representatives) base salaries by instituting a 15% reduction;
reduced discretionary spending, including a moratorium on all travel;
reduced fiscal year ending 2020 management incentive bonus program;
reduced plant production costs in two of our plants;
suspended 401k cash matching for all eligible employees;
reduced capital expenditures while also closely managing inventory and other spending;
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| • | implemented cost controls throughout our coffee brewing equipment (“CBE”) program service network; |
instituted cost savings to reduce our general and administrative expenses; and
reduced our DSD supply chain network costs by reducing freight and fleet, and consolidating routes.
The above initiatives have already resulted in significant monthly costs savings, improved our cost structure, and helped to mitigate the impact of the COVID-19 pandemic on our operating results.
In addition to the above initiatives to reduce operating expenses and capital expenditures, we also amended our existing senior secured revolving credit facility. The credit facility amendments, as described in the Liquidity section, provide us with increased flexibility to proactively manage our liquidity and working capital, while maintaining compliance with our debt financial conditioncovenants, and liquidity.preserving financial liquidity to mitigate the impact of the uncertain business environment resulting from the COVID-19 pandemic, while continuing to execute on key strategic initiatives. The magnitude of the COVID-19 pandemic, including the extent of the uncertain economic conditions resulting in weaker demand for our products, our financial position, results of operations and liquidity, which could be material, cannot be reasonably estimated at this time due to the rapid development and fluidity of the situation. It will be determined by the duration of the pandemic, its geographic spread, business disruptions and the overall impact on the global economy. Accordingly, we expect our results of operations will be adversely affected for our fiscal year ending June 30, 2021. While we anticipate that most of our revenue will continue to recover slowly as local and national governments ease social distancing restrictions, there can be no assurance that we will be successful in returning to the pre COVID-19 pandemic levels of revenue or profitability.
Summary Overview of Fiscal Year Ended June 30, 2020 Results
In fiscal year ended June 30, 2020, both our DSD and direct ship sales channels experienced sales declines compared to the prior year periods.
The DSD sales channel was negatively impacted by the COVID-19 pandemic, and to a lesser extent, the sale of our office coffee customers in July 2019 and net customer attrition. The impact of the COVID-19 pandemic on DSD revenues was during the second half of our fiscal year ended June 30, 2020. At the height of the pandemic in April 2020, DSD sales declined 65% to 70% from the pre–COVID pandemic sales run rates as the customer base had either limited operations, or had closed their doors in compliance with the federal, states and local governments restrictions on social distancing. The largest DSD revenue declines were from restaurants, hotels and casino channels, while demand from healthcare and C-stores channels were impacted less. Due to the above management initiatives, the lifting of some of the government restrictions, and reopening of some of our customers' businesses, DSD sales have recovered to some extent but are still down by about 45% from the pre COVID-19 pandemic weeks. Our direct ship channel sales were also impacted by lower coffee volumes due to the COVID-19 pandemic, and changes in coffee prices for our cost plus customers, offset by slightly favorable customer mix shift.
During fiscal year ended June 30, 2020, we experienced lower gross margin compared to the prior year periods primarily due to lower volumes and the impact of COVID-19 in the second half of the fiscal year. Gross margins decreased by 2.5% to 27.6% from 30.1% compared to the same prior period in fiscal 2019 mostly due to unfavorable customer mix since our DSD channel has higher margins, and higher reserves for slow moving inventories. The gross margin decline was partially offset by lower freight cost, lower warehouse cost, lower CBE cost and improved production variances resulting from the various cost initiatives implemented.
Operating expenses decreased by $12.7 million over the prior year period primarily driven by a $25.7 million increase in net gains from sales of assets, a $17.9 million decrease in selling expenses and a $6.4 million decrease in general and administrative expenses, partially offset by impairment of goodwill and intangible assets of $42.0 million. The impairment was primarily associated with the results of our annual goodwill and intangible impairment test as of January 31, 2020, adjusted further by the impact of the COVID-19 pandemic that had a negative impact on the fair value of our goodwill and intangible assets. Operating expenses benefited from cost savings actions taken due to COVID-19 pandemic, as well as other savings achieved earlier in the fiscal year due to headcount reductions, and other efficiencies realized from DSD route optimization.
During the fiscal year ended June 30, 2020, we completed the sales of certain assets associated with our office coffee customers, our Houston Texas manufacturing facility and nine branch properties for an aggregate sales price of $44.3 million. Net cash proceeds from these assets sales were $39.1 million. We recognized a net gain on these asset sales of $29.0 million during the fiscal year ended June 30, 2020. The proceeds from the sales provided us with increased liquidity and flexibility.
Our capital expenditures for the fiscal year ended June 30, 2020 were $17.6 million as compared to $34.8 million in the fiscal year ended June 30, 2019, representing lower maintenance capital spend of $11.8 million, a 49.5% reduction compared to the prior year period. These spending reductions were driven by several key initiatives put in place, including a focus on refurbished CBE equipment to drive cost savings, and reductions across some capital categories due to additional cost controls put in place during the COVID-19 pandemic.
As of June 30, 2020, the outstanding debt on our revolver was $122.0 million, an increase of $30.0 million since June 30, 2019. However, our cash increased by $53.0 million to $60.0 million as of June 30, 2020, compared to $7.0 million as of June 30, 2019. These improvements in our liquidity provide additional financial and operational flexibility during the COVID–19 pandemic.
Certain prior period amounts in the table below have been reclassified to conform to the current year presentation due to the adoption of new accounting standards.
Financial Data Highlights (in thousands, except per share data and percentages)
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | For The Years Ended June 30, | | 2020 vs 2019 | | 2019 vs 2018 |
| | 2020 | | 2019 | | 2018 | | Favorable (Unfavorable) | | Favorable (Unfavorable) |
| | | | | | | | Change | | % Change | | Change | | % Change |
| Income Statement Data: | | | | | | | | | | | | | |
| Net sales | $ | 501,320 |
| | $ | 595,942 |
| | $ | 606,544 |
| | $ | (94,622 | ) | | (15.9 | )% | | $ | (10,602 | ) | | (1.7 | )% |
| Gross margin | 27.6 | % | | 30.1 | % | | 34.2 | % | | (2.5 | )% | | NM |
| | (4.1 | )% | | NM |
|
| Operating expenses as a % of sales | 36.1 | % | | 32.5 | % | | 34.0 | % | | 3.6 | % | | NM |
| | (1.5 | )% | | NM |
|
| (Loss) income from operations | $ | (43,002 | ) | | $ | (14,702 | ) | | $ | 1,053 |
| | $ | (28,300 | ) | | 192.5 | % | | $ | (15,755 | ) | | NM |
|
| Net loss | $ | (37,087 | ) | | $ | (73,595 | ) | | $ | (18,280 | ) | | $ | 36,508 |
| | 49.6 | % | | $ | (55,315 | ) | | NM |
|
| Net loss available to common stockholders per common share—basic | $ | (2.19 | ) | | $ | (4.36 | ) | | $ | (1.11 | ) | | $ | 2.17 |
| | NM |
| | $ | (3.25 | ) | | NM |
|
| Net loss available to common stockholders per common share—diluted | $ | (2.19 | ) | | $ | (4.36 | ) | | $ | (1.11 | ) | | $ | 2.17 |
| | NM |
| | $ | (3.25 | ) | | NM |
|
| | | | | | | | | | | | | | |
| Operating Data: | | | | | | | | | | | | | |
| Coffee pounds | 100,700 |
| | 108,098 |
| | 107,429 |
| | (7,398 | ) | | (6.8 | )% | | 669 |
| | 0.6 | % |
| EBITDA(1) | $ | (1,796 | ) | | $ | 3,617 |
| | $ | 32,673 |
| | $ | (5,413 | ) | | (149.7 | )% | | (29,056 | ) | | (88.9 | )% |
| EBITDA Margin(1) | (0.4 | )% | | 0.6 | % | | 5.4 | % | | (1.0 | )% | | NM |
| | (4.8 | )% | | NM |
|
| Adjusted EBITDA(1) | $ | 18,742 |
| | $ | 31,882 |
| | $ | 47,562 |
| | $ | (13,140 | ) | | (41.2 | )% | | $ | (15,680 | ) | | (33.0 | )% |
| Adjusted EBITDA Margin(1) | 3.7 | % | | 5.3 | % | | 7.8 | % | | (1.6 | )% | | NM |
| | (2.5 | )% | | NM |
|
| | | | | | | | | | | | | | |
| Percentage of Total Net Sales By Product Category | | | | | | | | | | | | | |
| Coffee (Roasted) | 64.9 | % | | 63.5 | % | | 62.6 | % | | 1.4 | % | | 2.2 | % | | 0.9 | % | | 1.4 | % |
| Coffee (Frozen Liquid) | 5.7 | % | | 5.8 | % | | 5.7 | % | | (0.1 | )% | | (1.7 | )% | | 0.1 | % | | 1.8 | % |
| Tea (Iced & Hot) | 5.1 | % | | 5.6 | % | | 5.4 | % | | (0.5 | )% | | (8.9 | )% | | 0.2 | % | | 3.7 | % |
| Culinary | 10.0 | % | | 10.8 | % | | 10.6 | % | | (0.8 | )% | | (7.4 | )% | | 0.2 | % | | 1.9 | % |
| Spice | 4.3 | % | | 4.0 | % | | 4.2 | % | | 0.3 | % | | 7.5 | % | | (0.2 | )% | | (4.8 | )% |
| Other beverages(2) | 9.0 | % | | 9.8 | % | | 11.0 | % | | (0.8 | )% | | (8.2 | )% | | (1.2 | )% | | (10.9 | )% |
| Other revenues(3) | 0.5 | % | | — | % | | — | % | | | | | | | | |
| Net sales by product category | 99.5 | % | | 99.5 | % | | 99.5 | % | | (0.5 | )% | | (16.5 | )% | | — | % | | (6.9 | )% |
| Fuel Surcharge | 0.5 | % | | 0.5 | % | | 0.5 | % | | — | % | | — | % | | — | % | | — | % |
| Total | 100.0 | % | | 100.0 | % | | 100.0 | % | | (0.5 | )% | | (16.5 | )% | | — | % | | — | % |
| | | | | | | | | | | | | | |
| Other data: | | | | | | | | | | | | | |
| Capital expenditures related to maintenance | $ | 11,845 |
| | $ | 21,088 |
| | $ | 21,782 |
| | $ | (9,243 | ) | | (43.8 | )% | | $ | (694 | ) | | (3.2 | )% |
| Total capital expenditures | $ | 17,560 |
| | $ | 34,759 |
| | $ | 37,020 |
| | $ | (17,199 | ) | | (49.5 | )% | | $ | (2,261 | ) | | (6.1 | )% |
| Depreciation and amortization expense | $ | 29,896 |
| | $ | 31,065 |
| | $ | 30,464 |
| | $ | (1,169 | ) | | (3.8 | )% | | $ | 601 |
| | 2.0 | % |
| | | | | | | |
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________________
NM - Not Meaningful
(1) EBITDA, EBITDA Margin, Adjusted EBITDA and Adjusted EBITDA Margin are non-GAAP financial measures. See “Non-GAAP Financial Measures” below for a reconciliation of these non-GAAP measures to their corresponding GAAP measures. (2) Includes all beverages other than roasted coffee, frozen liquid coffee, and iced and hot tea, including cappuccino, cocoa, granitas, and concentrated and ready-to-drink cold brew and iced coffee.
(3) Represents revenues for certain transition services related to the sale of our office coffee assets.
Recent Developments
Acquisitions
In fiscal 2017, we completed two acquisitions. On October 11, 2016, we acquired substantially all of the assets and certain specified liabilities of China Mist, a provider of flavored iced teas and iced green teas, and on February 7, 2017, we acquired substantially all of the assets and certain specified liabilities of West Coast Coffee, a coffee roaster and distributor with a focus on the convenience store, grocery and foodservice channels. The China Mist acquisition is expected to extend our tea product offerings and give us a greater presence in the high-growth premium tea industry, while the West Coast Coffee acquisition is expected to broaden our reach in the Northwestern United States. See Liquidity, Capital Resources and Financial Condition—Liquidity—Acquisitions below, and Note 3, Acquisitions, of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this report.On August 18, 2017, we entered into an agreement to acquire substantially all of the assets of Boyd’s, a privately-held coffee roaster and distributor with a focus on restaurants, hotels and convenience stores on the West Coast of the United States, with a combination of cash and stock. Boyd’s business model is expected to be complementary to the Company across customer channels, product portfolios and distribution networks, including a high-touch service model of direct-store-delivery. The Boyd’s acquisition is expected to add to our product portfolio, improve our growth potential, broaden our distribution footprint with a deeper penetration on the West Coast of the United States, and increase our capacity utilization at our production facilities. The transaction is expected to close in the second quarter of fiscal 2018, subject to certain
closing conditions. See Note 26, Subsequent Events—Boyd’s Purchase Agreement, of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this report.DSD Restructuring Plan
As a result of an ongoing operational review of various initiatives within our DSD selling organization, in the third quarter of fiscal 2017, we commenced the DSD Restructuring Plan to reorganize our DSD operations in an effort to realign functions into a channel-based selling organization, streamline operations, acquire certain channel specific expertise, and improve selling effectiveness and financial results. See Liquidity, Capital Resources and Financial Condition—Liquidity—DSD Restructuring Plan, below, and Note 4, Restructuring Plans—DSD Restructuring Plan, of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this report.Important Factors Affecting Our Results of OperationsBusiness
We have identified factors that affect our industry and business which we expect to alsowill play an important role in our future growth and profitability. Some of these factors include:
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| • | Investment in State-of-the-Art Facility and Capacity Expansion. We are focused on leveraging our investment in the Northlake, Texas, facility to produce the highest quality coffee in response to the market shift to premium and specialty coffee, support volume rebalancing across our manufacturing network and create sustainable long-term growth. However, until we complete the transition of most manufacturing to our Northlake facility, we will continue to experience higher manufacturing costs driven by downtime and inefficiencies associated with certain aging production infrastructure. |
| |
| • | Supply Chain Efficiencies and Competition. In order to compete effectively and capitalize on growth opportunities, we must retain and continue to grow our customer base, evaluate and undertake initiatives to reduce costs and streamline our supply chain. We continue to look for ways to deploy our personnel, systems, assets and infrastructure to create or enhance stockholder value. Areas of focus include distribution network optimization, opening a western U.S. distribution facility, methods of procurement, logistics, inventory management, supporting technology, and real estate assets. |
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| • | Demographic and Channel Trends.Our success is dependent upon our ability to develop new products in response to demographic and other trends to better compete in areas such as premium coffee and tea, including expansion of our product portfolio by investing resources in what we believe to be key growth categories including the launch ofand different formats. We continue to focus on accelerating our Metropolitan™ single cup coffee, expanded seasonal coffeeroastery direct and specialty beverages,e-commerce initiatives via a new shelf-stable coffee products, new hot teas, the introduction of Collaborative Coffee™ branded products into the retail grocery channel, and the packaging redesign and product portfolio optimization of our Un Momento® retail branded product line.digital platform. |
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| • | Fluctuations in Green Coffee Prices. Our primary raw material is green coffee, an exchange-traded agricultural commodity traded on the Commodities and Futures Exchange that is subject to price fluctuations. Over the past five years, coffee “C” market near month price per pound ranged from approximately $1.02$0.88 to $2.22.$1.74. The coffee “C” market near month price as of June 30, 20172020 and 20162019 was $1.26$1.04 and $1.46$1.10 per pound, respectively. The price and availability of green coffee directly impacts our results of operations. For additional details, see Risk Factors in Part I, Item 1A of this report. |
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| • | Coffee Brewing Equipment and Service. We offer our customers a comprehensive equipment program and 24/7 nationwide equipment service which we believe differentiates us in the marketplace. We offer a full spectrum of equipment needs, which includes brewing equipment installation, water filtration systems, equipment training, and maintenance services to ensure we are able to meet our customer’s demands. |
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| • | Hedging Strategy. We are exposed to market risk of losses due to changes in coffee commodity prices. Our business model strives to reduce the impact of green coffee price fluctuations on our financial results and to protect and stabilize our margins, principally through customer arrangements and derivative instruments, as further explained in Note 76, Derivative Instruments, of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this report.Annual Report on Form 10‑K. |
Sustainability. With an increasing focus on sustainability across the coffee and foodservice industry, and particularly from the customers we serve, it is important for us to embrace sustainability across our operations, in the quality of our products, as well as, how we treat our coffee growers. We believe that our collective efforts in measuring our social and environmental impact, creating programs for waste, water and energy reduction, promoting partnerships in our supply chain that aim at supply chain stability and food security, and focusing on employee engagement place us in a unique position to help retailers and foodservice operators create differentiated coffee programs that can include sustainable supply chains, direct trade purchasing, training and technical assistance, recycling and composting networks, and packaging material reductions.
Supply Chain Efficiencies and Competition. In order to compete effectively and capitalize on growth opportunities, we must continue to evaluate and undertake initiatives to reduce costs and streamline our supply chain. We undertook the Corporate Relocation Plan, in part, to pursue improved production efficiency to allow us to provide a more cost-competitive offering of high-quality products. We continue to look for ways to deploy our personnel, systems, assets and infrastructure to create or enhance stockholder value. Areas of focus have included corporate staffing and structure, methods of procurement, logistics, inventory management, supporting technology, and real estate assets.
Market Opportunities. We have invested and in the future may invest in acquisitions that we believe will enhance long-term stockholder value and complement or enhance our product, equipment, service and/or distribution offerings to existing and new customer bases. For example, in fiscal 2017, we completed the China
Mist acquisition to extend our tea product offerings and give us a greater presence in the high-growth premium tea industry, and the West Coast Coffee acquisition to broaden our reach in the Northwestern United States. Additionally, on August 18, 2017, we entered into an agreement to acquire Boyd’s. The Boyd’s acquisition is expected to add to our product portfolio, improve our growth potential, broaden our distribution footprint with a deeper penetration on the West Coast of the United States, and increase our capacity utilization at our production facilities. The transaction is expected to close in the second quarter of fiscal 2018, subject to certain closing conditions. Additionally, in the first quarter of fiscal 2015, we acquired substantially all of the assets of Rae' Launo Corporation (“RLC”) relating to its DSD and in-room distribution business in the Southeastern United States. For additional information on these acquisitions, see Note 3, Acquisitions, of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this report.Capacity Utilization. We calculate our utilization for all of our coffee roasting facilities on an aggregate basis based on the number of product pounds manufactured during the actual number of production shifts worked during an average week, compared to the number of product pounds that could be manufactured based on the maximum number of production shifts that could be operated during the week (assuming three shifts per day, five days per week), in each case, based on our current product mix. Utilization rates for our coffee roasting facilities were approximately 93%, 90% and 66% during the fiscal years ended June 30, 2017, 2016 and 2015, respectively. The utilization rate in fiscal 2017 excludes the New Facility where we began roasting coffee in the fourth quarter of fiscal 2017. The utilization rate in fiscal 2016 excludes the Torrance Facility due to the transition of coffee processing and packaging to our Houston and Portland production facilities in the fourth quarter of fiscal 2015.
Results of Operations
Fiscal Years Ended June 30, 2017 and 2016
Financial Highlights
Volume of green coffee pounds processed and sold increased 5.3% in fiscal 2017 as compared to fiscal 2016.
Gross profit increased 2.5% to $213.7 million in fiscal 2017 from $208.5 million in fiscal 2016.
Gross margin increased to 39.5% in fiscal 2017 from 38.3% in fiscal 2016.
Income from operations increased 415.5% to $42.2 million in fiscal 2017 from $8.2 million in fiscal 2016. Income from operations included a $37.4 million net gain from the sale of the Torrance Facility in fiscal 2017 and net gains of $5.6 million from the sale of Spice Assets in fiscal 2016.
Net income was $24.4 million, or $1.45 per common share—diluted, in fiscal 2017, primarily due to $37.4 million in net gain from the sale of the Torrance Facility and non-cash income tax expense of $16.0 million, compared to net income of $89.9 million, or $5.41 per common share—diluted, in fiscal 2016, primarily due to non-cash income tax benefit of $80.3 million from the release of valuation allowance on deferred tax assets.
EBITDA increased 110.5% to $65.5 million and EBITDA Margin was 12.1% in fiscal 2017, as compared to EBITDA of $31.1 million and EBITDA Margin of 5.7% in fiscal 2016.*
Adjusted EBITDA increased 11.1% to $46.0 million and Adjusted EBITDA Margin was 8.5% in fiscal 2017, as compared to Adjusted EBITDA of $41.4 million and Adjusted EBITDA Margin of 7.6% in fiscal 2016.*
(* EBITDA, EBITDA Margin, Adjusted EBITDA and Adjusted EBITDA Margin are non-GAAP financial measures. See Non-GAAP Financial Measures in Part II, Item 7 of this report for a reconciliation of these non-GAAP measures to their corresponding GAAP measures.)
Fiscal 2017 Strategic Initiatives
In fiscal 2017, we undertook initiatives to reduce costs, streamline our supply chain, improve the breadth of products and services we provide to our customers, and better position the Company to attract new customers. These initiatives included the following:
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| • | Corporate Relocation Plan. We completedSustainability. With an increasing focus on sustainability across the Corporate Relocation Plan that was initiatedcoffee and foodservice industry, and particularly from the customers we serve, it is important for us to embrace sustainability across our operations, in the third quarterquality of fiscal 2015 by executingour products, as well as, how we treat our coffee growers. We believe that our collective efforts in measuring our social and environmental impact, creating programs for waste, water and energy reduction, promoting partnerships in our supply chain that aim at supply chain stability and food security, and focusing on the milestones described above under Corporate Relocation. We commenced distribution activities at the New Facility during the second quarter of fiscal 2017employee engagement place us in a unique position to help retailers and initial production activities late in the third quarter of fiscal 2017. We began roastingfoodservice operators create differentiated coffee in the New Facility in the fourth quarter of fiscal 2017. The roasting facility in the New Facility has increased our capacity to support existing and future customerstea programs that can include sustainable supply chains, direct trade purchasing, training and accommodate volume growth. We are in the process of obtaining SQF certification under the Global Food Safety Initiative for the New Facility.technical assistance, recycling and composting networks, and packaging material reductions. |
Results of China MistOperations
The following table sets forth information regarding our consolidated results of operations for the years ended June 30, 2020, 2019 and West Coast Coffee. In fiscal 2017, we completed the China Mist acquisition to extend our tea product offerings and give us a greater presence2018. Certain prior period amounts in the high-growth premium tea industry, and the West Coast Coffee acquisitiontable below have been reclassified to broaden our reach in the Northwestern United States.
DSD Restructuring Plan. In the third quarter of fiscal 2017, we commenced the DSD Restructuring Plan. The strategic decision to undertake the DSD Restructuring Plan resulted from an ongoing operational review of various initiatives within the DSD selling organization. We began recognizing cost benefits associated with the restructuring in the fourth quarter of fiscal 2017 and we anticipate annualized savings from the restructuring plan beginning in the second quarter of fiscal 2018. We expect to complete the DSD Restructuring Plan by the end of the second quarter of fiscal 2018.
Third-Party Logistics. During the second half of fiscal 2016, we replaced our long-haul fleet operations with 3PL. In fiscal 2017, we experienced a reduction in our fuel consumption and empty trailer miles, while improving our intermodal and trailer cube utilization as comparedconform to the prior fiscal year.Aligning with our 3PL partner has allowed uscurrent year presentation due to more efficiently manage routing thereby reducing diesel pollutionthe adoption of new accounting standards (in thousands, except percentages)::
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| | For the Years Ended June 30, | | 2020 vs 2019 | | 2019 vs 2018 |
| | 2020 | | 2019 | | 2018 | | Favorable (Unfavorable) | | Favorable (Unfavorable) |
| | | | | | | | Change | | % Change | | Change | | % Change |
| Net sales | $ | 501,320 |
| | $ | 595,942 |
| | $ | 606,544 |
| | $ | (94,622 | ) | | (15.9 | )% | | $ | (10,602 | ) | | (1.7 | )% |
| Cost of goods sold | 363,198 |
| | 416,840 |
| | 399,155 |
| | 53,642 |
| | 12.9 | % | | (17,685 | ) | | (4.4 | )% |
| Gross profit | 138,122 |
| | 179,102 |
| | 207,389 |
| | (40,980 | ) | | (22.9 | )% | | (28,287 | ) | | (13.6 | )% |
| Selling expenses | 121,762 |
| | 139,647 |
| | 153,391 |
| | 17,885 |
| | 12.8 | % | | 13,744 |
| | 9.0 | % |
| General and administrative expenses | 42,569 |
| | 48,959 |
| | 49,429 |
| | 6,390 |
| | 13.1 | % | | 470 |
| | 1.0 | % |
| Restructuring and other transition expenses | — |
| | 4,733 |
| | 662 |
| | 4,733 |
| | 100.0 | % | | (4,071 | ) | | NM |
|
| Net (gains) losses from sales of assets | (25,237 | ) | | 465 |
| | (966 | ) | | 25,702 |
| | NM |
| | (1,431 | ) | | 148.1 | % |
| Impairment of goodwill and intangible assets | 42,030 |
| | — |
| | 3,820 |
| | (42,030 | ) | | NM |
| | 3,820 |
| | 100.0 | % |
| Operating expenses | 181,124 |
| | 193,804 |
| | 206,336 |
| | 12,680 |
| | 6.5 | % | | 12,532 |
| | 6.1 | % |
| (Loss) income from operations | (43,002 | ) | | (14,702 | ) | | 1,053 |
| | (28,300 | ) | | 192.5 | % | | (15,755 | ) | | NM |
|
| Other (expense) income: | | | | | | | | | | | | | |
| Dividend income | — |
| | — |
| | 12 |
| | — |
| | — | % | | (12 | ) | | (100.0 | )% |
| Interest income | — |
| | — |
| | 2 |
| | — |
| | — | % | | (2 | ) | | (100.0 | )% |
| Interest expense | (10,483 | ) | | (12,000 | ) | | (9,757 | ) | | 1,517 |
| | (12.6 | )% | | (2,243 | ) | | 23.0 | % |
| Postretirement benefits curtailment gains and pension settlement (charge) | 5,760 |
| | (10,948 | ) | | — |
| | 16,708 |
| | NM |
| | (10,948 | ) | | NM |
|
| Other, net | 10,443 |
| | 4,166 |
| | 7,722 |
| | 6,277 |
| | 150.7 | % | | (3,556 | ) | | (46.1 | )% |
| Total other income (expense) | 5,720 |
| | (18,782 | ) | | (2,021 | ) | | 24,502 |
| | (130.5 | )% | | (16,761 | ) | | NM |
|
| Loss before taxes | (37,282 | ) | | (33,484 | ) | | (968 | ) | | (3,798 | ) | | 11.3 | % | | (32,516 | ) | | NM |
|
| Income tax (benefit) expense | (195 | ) | | 40,111 |
| | 17,312 |
| | (40,306 | ) | | (100.5 | )% | | 22,799 |
| | 131.7 | % |
| Net loss | $ | (37,087 | ) | | $ | (73,595 | ) | | $ | (18,280 | ) | | $ | 36,508 |
| | (49.6 | )% | | $ | (55,315 | ) | | 302.6 | % |
| Less: Cumulative preferred dividends, undeclared and unpaid | 554 |
| | 535 |
| | 389 |
| | 19 |
| | 3.6 | % | | 146 |
| | 37.5 | % |
| Net loss available to common stockholders | $ | (37,641 | ) | | $ | (74,130 | ) | | $ | (18,669 | ) | | $ | 36,489 |
| | (49.2 | )% | | $ | (55,461 | ) | | 297.1 | % |
_____________
NM - Not Meaningful
The following table presents changes in support of our sustainability efforts. Dynamic routing is expected to allowunits sold, unit price and net sales by product category for further reduction of our carbon emissions in fiscal 2018.the years ended June 30, 2020, 2019 and 2018 (in thousands, except unit price and percentages):
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Years Ended June 30, | | 2020 vs 2019 | | 2019 vs 2018 |
| | 2020 | | 2019 | | 2018 | | Favorable (Unfavorable) | | Favorable (Unfavorable) |
| | | | | | | | Change | | % Change | | Change | | % Change |
| Units sold | | | | | | | | | | | | | |
| Coffee (Roasted) | 80,560 |
| | 86,478 |
| | 85,943 |
| | (5,918 | ) | | (6.84 | )% | | 535 |
| | 0.62 | % |
| Coffee (Frozen Liquid) | 310 |
| | 427 |
| | 407 |
| | (117 | ) | | (27.40 | )% | | 20 |
| | 4.91 | % |
| Tea (Iced & Hot) | 2,381 |
| | 2,755 |
| | 2,706 |
| | (374 | ) | | (13.58 | )% | | 49 |
| | 1.81 | % |
| Culinary | 6,237 |
| | 7,932 |
| | 9,227 |
| | (1,695 | ) | | (21.37 | )% | | (1,295 | ) | | (14.03 | )% |
| Spice | 589 |
| | 792 |
| | 933 |
| | (203 | ) | | (25.63 | )% | | (141 | ) | | (15.11 | )% |
| Other beverages(1) | 3,566 |
| | 4,631 |
| | 5,932 |
| | (1,065 | ) | | (23.00 | )% | | (1,301 | ) | | (21.93 | )% |
| Total | 93,643 |
| | 103,015 |
| | 105,148 |
| | (9,372 | ) | | (9.10 | )% | | (2,133 | ) | | (2.03 | )% |
| | | | | | | | | | | | | | |
| Unit Price | | | | | | | | | | | | | |
| Coffee (Roasted) | $ | 4.06 |
| | $ | 4.38 |
| | $ | 4.42 |
| | $ | (0.32 | ) | | (7.31 | )% | | $ | (0.04 | ) | | (0.90 | )% |
| Coffee (Frozen Liquid) | $ | 92.32 |
| | $ | 80.89 |
| | $ | 85.49 |
| | $ | 11.43 |
| | 14.13 | % | | $ | (4.60 | ) | | (5.38 | )% |
| Tea (Iced & Hot) | $ | 10.65 |
| | $ | 12.02 |
| | $ | 12.00 |
| | $ | (1.37 | ) | | (11.40 | )% | | $ | 0.02 |
| | .17 | % |
| Culinary | $ | 8.16 |
| | $ | 8.08 |
| | $ | 6.98 |
| | $ | 0.08 |
| | .99 | % | | $ | 1.10 |
| | 15.76 | % |
| Spice | $ | 36.46 |
| | $ | 30.43 |
| | $ | 26.96 |
| | $ | 6.03 |
| | 19.82 | % | | $ | 3.47 |
| | 12.87 | % |
| Other beverages(1) | $ | 12.72 |
| | $ | 12.60 |
| | $ | 11.24 |
| | $ | 0.12 |
| | .95 | % | | $ | 1.36 |
| | 12.10 | % |
| Average unit price | $ | 5.35 |
| | $ | 5.79 |
| | $ | 5.77 |
| | $ | (0.44 | ) | | (7.60 | )% | | $ | 0.02 |
| | 0.35 | % |
| | | | | | | | | | | | | | |
| Total Net Sales By Product Category | | | | | | | | | | | | | |
| Coffee (Roasted) | $ | 327,283 |
| | $ | 378,583 |
| | $ | 379,951 |
| | $ | (51,300 | ) | | (13.55 | )% | | $ | (1,368 | ) | | (0.36 | )% |
| Coffee (Frozen Liquid) | 28,619 |
| | 34,541 |
| | 34,794 |
| | (5,922 | ) | | (17.14 | )% | | (253 | ) | | (.73 | )% |
| Tea (Iced & Hot) | 25,369 |
| | 33,109 |
| | 32,477 |
| | (7,740 | ) | | (23.38 | )% | | 632 |
| | 1.95 | % |
| Culinary | 50,917 |
| | 64,100 |
| | 64,432 |
| | (13,183 | ) | | (20.57 | )% | | (332 | ) | | (.52 | )% |
| Spice | 21,473 |
| | 24,101 |
| | 25,150 |
| | (2,628 | ) | | (10.90 | )% | | (1,049 | ) | | (4.17 | )% |
| Other beverages(1) | 45,342 |
| | 58,367 |
| | 66,699 |
| | (13,025 | ) | | (22.32 | )% | | (8,332 | ) | | (12.49 | )% |
| Net sales by product category | $ | 499,003 |
| | $ | 592,801 |
|
| $ | 603,503 |
|
| $ | (93,798 | ) | | (15.82 | )% | | $ | (10,702 | ) | | (1.77 | )% |
| Fuel Surcharge | 2,317 |
| | 3,141 |
| | 3,041 |
| | (824 | ) | | (26.23 | )% | | 100 |
| | 3.29 | % |
| Total | $ | 501,320 |
| | $ | 595,942 |
| | $ | 606,544 |
| | $ | (94,622 | ) | | (15.88 | )% | | $ | (10,602 | ) | | (1.75 | )% |
Vendor Managed Inventory. During the second half of fiscal 2016, we entered into a third-party vendor managed inventory arrangement. The use of vendor managed inventory arrangements has begun to yield benefits in fiscal 2017 by enabling us to reconfigure our packaging methodology, eliminating duplication but resulting in the same strength packaging with less material, thereby reducing waste(1) Includes all beverages other than roasted coffee, frozen liquid coffee, and contributing to our sustainability efforts.
iced and hot tea, including cappuccino, cocoa, granitas, and concentrated and ready-to-drink cold brew and iced coffee.
Warehouse Management. In the first quarter of fiscal 2017, we entered into an agreement with a third party to provide warehouse management services for our New Facility. We expect the warehouse management services to facilitate cost savings by leveraging the third party's expertise in opening new facilities, implementing lean management practices, improving performance on certain key performance metrics,
Fiscal Years Ended June 30, 2020 and standardizing best practices.
Product Development and Expansion. In fiscal 2017, we opened our product development lab at the New Facility where we are focused on developing innovative products in response to industry trends and customer needs. In fiscal 2017, we introduced a new retail line of China Mist naturally flavored iced teas, a new line of Artisan hot teas, an Artisan Cold Brew Coffee and an Artisan Direct Trade Coffee.
2019Net Sales
Net sales in fiscal 20172020 decreased $(2.9)$94.6 million, or (0.5)%15.9%, to $541.5$501.3 million from $544.4$595.9 million in fiscal 2016. A $6.8 million increase2019. The decline in net sales from roast and ground coffee, a $4.2 million increase in net sales from tea products primarily from the addition of China Mist net sales from the date of its acquisition and a $1.6 million increase in net sales from culinary products were offset by a $(10.9) million decrease in net sales of spice products resulting from the sale of our institutional spice assets, a $(3.1) million decrease in net sales of coffee (frozen liquid) products, primarily from the loss of a large casino customer, and a $(1.0) million decrease in net sales of other beverages. Net sales in fiscal 2017 included $(3.2) million in price decreases to customers utilizing commodity-based pricing arrangements, where the changes in the
green coffee commodity costs are passed on to the customer, as compared to $(9.7) million in price decreases to customers utilizing such arrangements in fiscal 2016. In each of fiscal 2017 and 2016, a lower percentage of our roast and ground coffee volume was based on a price schedule and a higher percentage was sold to customers under commodity-based pricing arrangements as compared to fiscal 2015.
The change in net sales in fiscal 2017 compared to fiscal 2016 was due to the following: |
| | | |
| (In millions) | Year Ended June 30, 2017 vs. 2016 |
| Effect of change in unit sales | $ | (7.4 | ) |
| Effect of pricing and product mix changes | 4.5 |
|
| Total decrease in net sales | $ | (2.9 | ) |
Unit sales decreased (1.3)% in fiscal 2017 as compared to fiscal 2016, but average unit price increased by 0.9% resulting in a decrease in net sales of (0.5)%. The decrease in unit sales was primarily due to a (81.3)% decreasedecline in unit sales of spice products which accounted for approximately 5% of our total net sales, due to the sale of our institutional spice assets, partially offset by a 5.3% increase in unit sales of roastrevenues and ground coffee products, which accounted for approximately 63% of our total net sales. Average unit price decreased primarily due to the lower average unit price of roast and ground coffee products primarily driven by the pass-through of lower green coffee commodity hedged costs to our customers. In fiscal 2017, we processed and sold approximately 95.5 million pounds of green coffee as compared to approximately 90.7 million poundsvolume of green coffee processed and sold in fiscal 2016. There were no new product category introductions in fiscal 2017 or 2016 which had a material impact on our net sales.
The following table presents net sales aggregated by product category for the respective periods indicated: |
| | | | | | | | | | | | | | |
| | | Year Ended June 30, |
| | | 2017 | | 2016 |
| (In thousands) | | $ | | % of total | | $ | | % of total |
| Net Sales by Product Category: | | | | | | | | |
| Coffee (Roast & Ground) | | $ | 339,358 |
| | 63 | % | | $ | 332,533 |
| | 61 | % |
| Coffee (Frozen Liquid) | | 32,827 |
| | 6 | % | | 35,933 |
| | 7 | % |
| Tea (Iced & Hot) | | 29,256 |
| | 5 | % | | 25,096 |
| | 4 | % |
| Culinary | | 55,592 |
| | 10 | % | | 54,036 |
| | 10 | % |
| Spice(1) | | 24,895 |
| | 5 | % | | 35,789 |
| | 6 | % |
| Other beverages(2) | | 56,653 |
| | 10 | % | | 57,690 |
| | 11 | % |
| Net sales by product category | | 538,581 |
| | 99 | % | | 541,077 |
| | 99 | % |
| Fuel surcharge | | 2,919 |
| | 1 | % | | 3,305 |
| | 1 | % |
| Net sales | | $ | 541,500 |
| | 100 | % | | $ | 544,382 |
| | 100 | % |
____________
(1) Spice product net sales in fiscal 2016 included $3.2 million in sale of inventory to Harris at cost upon conclusion of the transition services provided by the Company in connection with the sale of Spice Assets.
(2) Includes all beverages other than coffee and tea.
Cost of Goods Sold
Cost of goods sold in fiscal 2017 decreased $(8.1) million, or (2.4)%, to $327.8 million, or 60.5% of net sales, from $335.9 million, or 61.7% of net sales, in fiscal 2016. The decrease in cost of goods sold as a percentage of net sales in fiscal 2017 was primarily due to lower conversion costs from supply chain improvements and lower hedged cost of green coffee as compared to the same period in the prior fiscal year, partially offset by startup costs associated with the production operations in the New Facility and higher depreciation expense for the New Facility. The average Arabica “C” market price of green coffee increased 16.3% in fiscal 2017.
Inventories were higher at the end of fiscal 2017 due to the commencement of the New Facility's manufacturing operations and incremental inventory from China Mist and West Coast Coffee as compared to lower levels of inventory at
the Torrance Facility at the end of fiscal 2016 due to its anticipated closing. Notwithstanding this increase in total inventories at the end of fiscal 2017 compared to fiscal 2016 levels, inventories of manufactured spice products decreased at the end of fiscal 2017 compared to fiscal 2016 levels, primarily due to the liquidation of spice inventories in connection with the sale of the Spice Assets. As a result, we recorded $3.4 million in beneficial effect of the liquidation of LIFO inventory quantities in cost of goods sold in fiscal 2017, which increased income before taxes in fiscal 2017 by $3.4 million. In fiscal 2016, a beneficial effect of liquidation of LIFO inventory quantities in the amount of $4.2 million was recorded.
Gross Profit
Gross profit in fiscal 2017 increased $5.2 million, or 2.5%, to $213.7 million from $208.5 million in fiscal 2016 and gross margin increased to 39.5% in fiscal 2017 from 38.3% in fiscal 2016. This increase in gross profit was primarily due to lower conversion costs and lower hedged cost of green coffee partially offset by the decrease in net sales, startup costs associated with the production operations in the New Facility and higher depreciation expense for the New Facility. Gross profit in fiscal 2017 and 2016 included $3.4 million and $4.2 million, respectively, in beneficial effect of the liquidation of LIFO inventory quantities.
Operating Expenses
In fiscal 2017, operating expenses decreased $(28.7) million, or (14.3)%, to $171.6 million, or 31.7% of net sales from $200.3 million, or 36.8%, of net sales in fiscal 2016, primarily due to the recognition of $37.4 million in net gain from the sale of the Torrance Facility and lower restructuring and other transition expenses associated with the Corporate Relocation Plan, partially offset by lower net gains from the sale of Spice Assets and other assets, the addition of restructuring and other transition expenses associated with the DSD Restructuring Plan and an increase in selling expenses and general and administrative expenses.
Restructuring and other transition expenses decreased $(5.5) million in fiscal 2017, as compared to fiscal 2016 because most of the planned expenses related to our Corporate Relocation Plan had already been recognized in prior periods. Restructuring and other transition expenses in fiscal 2017 included $2.4 million in costs associated with the DSD Restructuring Plan.
In fiscal 2017, selling expenses and general and administrative expenses increased $7.0 million and $1.0 million, respectively. The increase in selling expenses in fiscal 2017 as compared to fiscal 2016 was primarily due to operations-related consulting expenses, sales training expenses and the addition of China Mist and West Coast Coffee, partially offset by lower workers' compensation expense, savings from utilizing 3PL for our long-haul distribution and the absence of expenses related to the institutional spice assets.
The increase in general and administrative expenses in fiscal 2017 was primarily due to non-recurring 2016 proxy contest expenses, acquisition-related expenses and higher depreciation expense, partially offset by lower workers' compensation expense, lower accruals for incentive compensation to eligible employees and lower retiree and employee medical expenses. In fiscal 2017, we incurred $5.2 million, or $0.31 per share, in expenses successfully defending against the 2016 proxy contest including non-recurring legal fees, financial advisory fees, proxy solicitor fees, mailing and printing costs of proxy solicitation materials and other costs and $1.7 million in acquisition-related expenses, including, legal fees and consulting costs. General and administrative expenses in fiscal 2017 also included $0.5 million in expenses related to the special stockholders' meeting held in June 2017.
The increase in selling expenses and general and administrative expenses was fully offset by the $37.4 million in net gain from the sale of the Torrance Facility, $(5.5) million decrease in restructuring and other transition expenses, $1.2 million in net gains from sales of other assets, primarily our Northern California branch property, and $0.9 million in earnout from the sale of Spice Assets, as compared to $5.6 million in net gains from the sale of Spice Assets and $2.8 million in net gains from sales of other assets, primarily real estate and equipment, in fiscal 2016.
Income from Operations
Income from operations in fiscal 2017 was $42.2 million as compared to $8.2 million in fiscal 2016 primarily due to net gains from the sales of the Torrance Facility and other real estate, lower restructuring and other transition expenses associated with the Corporate Relocation Plan and higher gross profit, partially offset by higher selling expenses, higher general and administrative expenses and lower net gains from the sale of Spice Assets.
Total Other (Expense) Income
Total other expense in fiscal 2017 was $(1.8) million as compared to total other income of $1.7 million in fiscal 2016. Total other expense in fiscal 2017 was primarily due to higher interest expense of $(2.2) million and higher net losses on derivative instruments and investments $(1.5) million, as compared to interest expense of $(0.4) million and net gains on derivative instruments and investments of $0.3 million in fiscal 2016. The net losses on derivative instruments and investments in fiscal 2017 and fiscal 2016, were primarily due to mark-to-market net gains and net losses on coffee-related derivative instruments not designated as accounting hedges. In fiscal 2017 and 2016, we recognized $(0.5) million and $(0.6) million in net losses on coffee-related derivative instruments designated as cash flow hedges due to ineffectiveness.
Interest expense in fiscal 2017 was $2.2 million as compared to $0.4 million in fiscal 2016. The higher interest expense in fiscal 2017 was primarily due to higher loan balance and non-recurring and non-cash interest expense related to the sale-leaseback of the Torrance Facility in the amount of $(0.7) million. We expect interest expense to increase in fiscal 2018 as compared to fiscal 2017 due to higher loan balance and additional borrowing under our credit facility for the anticipated acquisition of substantially all of the assets of Boyd Coffee Company, which transaction is expected to close in the second quarter of fiscal 2018.
Income Taxes
In fiscal 2017, we recorded income tax expense of $16.0 million compared to a tax benefit of $(80.0) million in fiscal 2016. In fiscal 2017, total deferred tax assets decreased by $6.2 million primarily due to a reduction in accrued liabilities and gains related to our defined benefit pension plans which were recorded in OCI. Total deferred tax liabilities decreased by $11.5 million primarily due to the deferral of gain from the sale of our Torrance Facility. In fiscal 2016, we released $80.3 million of the valuation allowance on deferred tax assets, resulting in unreserved deferred tax assets of $90.2 million at June 30, 2016 and a non-cash reduction in income tax expense, or a tax benefit of $80.0 million in fiscal 2016. In fiscal 2016, total deferred tax assets were largely unchanged because deferred tax assets related to our defined benefit pension plans and retiree medical plan increased due to losses recorded in OCI, and net operating loss related to deferred tax assets declined as losses were used to offset current income.
We cannot conclude that certain state net operating loss carryforwards and tax credit carryovers will be utilized before expiration. Accordingly, we will maintain a valuation allowance of $1.6 million to offset these deferred tax assets. We will continue to monitor all available evidence, both positive and negative, in determining whether it is more likely than not that we will realize our remaining deferred tax assets.
The Internal Revenue Service completed its examination of our tax years ended June 30, 2013 and 2014 and accepted the returns as filed for those years.
Net Income
As a result of the foregoing factors, net income was $24.4 million, or $1.45 per common share—diluted in fiscal 2017, as compared to $89.9 million, or $5.41 per common share—diluted, in fiscal 2016.
Fiscal Years Ended June 30, 2016 and 2015
Financial Highlights
Gross profit increased 5.8% to $208.5 million in fiscal 2016 from $197.0 million in fiscal 2015.
Gross margin increased to 38.3% in fiscal 2016 from 36.1% in fiscal 2015.
Income from operations increased 149.1% to $8.2 million in fiscal 2016 from $3.3 million in fiscal 2015.
Net income was $89.9 million, or $5.41 per diluted common share, in fiscal 2016, primarily due to non-cash income tax benefit of $80.3 million from the release of valuation allowance on deferred tax assets, compared to $0.7 million, or $0.04 per diluted common share, in fiscal 2015.
Fiscal 2016 Strategic Initiatives
In fiscal 2016, we undertook initiatives to reduce costs, streamline our supply chain, improve the breadth of products and services we provide to our customers, and better position the Company to attract new customers. These initiatives included the following:
| |
• | Corporate Relocation Plan. We continued to execute on the Corporate Relocation Plan that we initiated in the third quarter of fiscal 2015 by executing on the milestones described above under Corporate Relocation. |
Third-Party Logistics. During the second half of fiscal 2016, we replaced our long-haul fleet operations with 3PL. We expect that this transportation arrangement will reduce our fuel consumption and empty trailer miles, while improving our intermodal and trailer cube utilization.
Vendor Managed Inventory. During the second half of fiscal 2016, we entered into a vendor managed inventory arrangement with a third party. We anticipate that the use of vendor managed inventory arrangements will result in a reduction in raw material, finished goods and logistics costs, while improving packaging innovation and fulfillment.
DSD Reorganization. In fiscal 2016, we continued our efforts to improve efficiencies in our sales and product offerings. During the second half of fiscal 2016, we began to realignthrough our DSD organizationnetwork mostly impacted by undertaking initiatives intended to streamline communication and decision making, enhance branch organizational structure, and improve customer focus, including toward a comprehensive training program for all DSD team members to strengthen customer engagement. In fiscal 2016, we executed a regional test of our first advertising and lead generation campaign designed to improve our new customer acquisition rate within our DSD network.
Branch Consolidation and Property Sales. In an effort to streamline our branch operations, in the fourth quarter of fiscal 2016 we sold two Northern California branch properties, with a third Northern California property under contract for sale, and we acquired a new branch facility in Hayward, California.
| |
• | Introduction of Collaborative Coffee™ and Redesign of Un Momento® Branded Retail Products. In an effort to address what we believe to be unmet consumer needs and improve margin within the retail grocery environment, in fiscal 2016, we launched Collaborative Coffee™, a new brand of ethically sourced, whole bean direct trade coffees into the retail grocery channel. In addition, we completed a packaging redesign and product portfolio optimization of our Un Momento® retail branded product line.
|
Net Sales
Net sales in fiscal 2016 decreased $1.5 million, or 0.3%, to $544.4 million from $545.9 million in fiscal 2015 primarily due toCOVID-19 pandemic, a decrease in net sales from tea and culinary products, unfavorable customer mix within our direct ship sales, and the impact of changes in coffee and tea products, partially offsetprices for our cost plus customers. At the height of COVID-19 pandemic in April 2020, DSD sales declined 65% to 70% from the pre–COVID weekly average run rates, but improved to approximately a 45% decline from pre-COVID-19 levels by an increase inJune 30, 2020. Also, our DSD net sales were impacted by the sale of spice productsour office coffee business in July 2019, and other beverages. Netnet customer attrition. Our direct ship net sales in the fiscal 2016year ended June 30, 2020 included $9.7$9.5 million in price decreases to customers utilizing commodity-based pricing arrangements, where the changes in the green coffee commodity costs are passed on to the customer, as compared to $9.7$6.9 million in price increasesdecreases to customers utilizing such arrangements in the fiscal 2015.ended June 30, 2019.
The changefollowing table presents the effect of changes in netunit sales, in fiscal 2016unit pricing and product mix for the year ended June 30, 2020 compared to the same period in the prior fiscal 2015 was due to the following:year (in millions):
| | | (In millions) | Year Ended June 30, 2016 vs. 2015 | |
| | | For Year Ended June 30, 2020 vs. 2019 | | % of Total Mix Change |
| Effect of change in unit sales | $ | 14.4 |
| $ | (50.1 | ) | | (53.0 | )% |
| Effect of pricing and product mix changes | (15.9 | ) | (44.5 | ) | | (47.0 | )% |
| Total decrease in net sales | $ | (1.5 | ) | $ | (94.6 | ) | | (100.0 | )% |
Unit sales increased 3.6%decreased 9.1% and average unit price declined by 7.6% in fiscal 2016the year ended June 30, 2020 as compared to fiscal 2015, but average unit price decreased by 3.8%the same prior year period, resulting in a decrease in net sales of 0.3%15.9%. The increase inAverage unit sales was primarilyprice decreased during the year ended June 30, 2020 due to a 3.4% increase in unit saleshigher mix of roast and ground coffee products, which accounted for approximately 61% of our total net sales, while the decrease in average unit price was primarily due to theproduct sold via direct ship versus DSD network, as direct ship has a lower average unit price of roast and ground coffee products primarily driven by the pass-through of lower green coffee commodity purchase costs to our customers. In fiscal 2016, we processed and sold approximately 90.7 million pounds of green coffee as compared to 87.7 million pounds of green coffee processed and sold in fiscal 2015.price. There were no new product category introductions in fiscal 2016the year ended June 30, 2020 or 20152019, which had a material impact on our net sales.
The following table presents net sales aggregated by product category for the respective periods indicated: |
| | | | | | | | | | | | | | |
| | | Year Ended June 30, |
| | | 2016 | | 2015 |
| (In thousands) | | $ | | % of total | | $ | | % of total |
| Net Sales by Product Category: | | | | | | | | |
| Coffee (Roast & Ground) | | $ | 332,533 |
| | 61 | % | | $ | 336,129 |
| | 60 | % |
| Coffee (Frozen Liquid) | | 35,933 |
| | 7 | % | | 37,428 |
| | 7 | % |
| Tea (Iced & Hot) | | 25,096 |
| | 4 | % | | 27,172 |
| | 5 | % |
| Culinary | | 54,036 |
| | 10 | % | | 54,208 |
| | 11 | % |
| Spice(1) | | 35,789 |
| | 6 | % | | 32,336 |
| | 6 | % |
| Other beverages(2) | | 57,690 |
| | 11 | % | | 54,933 |
| | 10 | % |
| Net sales by product category | | 541,077 |
| | 99 | % | | 542,206 |
| | 99 | % |
| Fuel surcharge | | 3,305 |
| | 1 | % | | 3,676 |
| | 1 | % |
| Net sales | | $ | 544,382 |
| | 100 | % | | $ | 545,882 |
| | 100 | % |
____________
(1) Spice product net sales included $3.2 million in sale of inventory to Harris at cost in fiscal 2016 upon conclusion of the transition services provided by the Company in connection with the sale of Spice Assets.
(2) Includes all beverages other than coffee and tea.
Cost of Goods Sold
Cost of goods sold in fiscal 2016 decreased $12.9 million, or 3.7%, to $335.9 million, or 61.7% of net sales, from $348.8 million, or 63.9% of net sales, in fiscal 2015. The decrease in cost of goods sold as a percentage of net sales in fiscal 2016 was primarily due to lower coffee commodity costs compared to the same period in the prior fiscal year, supply chain efficiencies realized primarily through the consolidation of our former Torrance coffee production volumes into our Houston manufacturing facility, and other supply chain improvements. The average Arabica “C” market price of green coffee decreased 24.8% in fiscal 2016. Inventories decreased at the end of fiscal 2016 compared to fiscal 2015 primarily due to production consolidation and the sale of processed and unprocessed inventories to Harris at cost upon conclusion of the transition services provided by the Company in connection with the sale of Spice Assets. As a result, a beneficial effect of liquidation of LIFO inventory quantities in the amount of $4.2 million was recorded in cost of goods sold in fiscal 2016 reducing cost of goods sold by the same amount. In fiscal 2015 $4.9 million in beneficial effect of liquidation of LIFO inventory quantities was recorded.
Gross Profit
Gross profit in fiscal 2016 increased $11.42020 decreased $41.0 million, or 5.8%22.9%, to $208.5$138.1 million from $197.0$179.1 million in the prior fiscal year and gross2019. Gross margin increaseddecreased to 38.3%27.6% in fiscal 20162020 from 36.1%30.1% in the prior fiscal year.2019. The increasedecrease in gross profit was primarily driven by lower net sales of $94.6 million partially offset by lower costs of goods sold. Gross margin during the fiscal year June 30, 2020 was negatively impacted by the COVID-19 pandemic on DSD customers, unfavorable customer mix and higher reserves for slow moving inventories, partially offset by lower freight costs, lower CBE costs, improved production variances and the impact of changes in coffee prices during the fiscal year June 30, 2020. In the our fiscal year ending June 30, 2021, we expect continued decline in our margin due to lower coffee commodity costs compared tocustomer mix, and the same period in the prior fiscal year, supply chain efficiencies realized primarily through the consolidation of our former Torrance coffee production volumes into our Houston manufacturing facility and other supply chain improvements. Gross profit in fiscal 2016 and 2015 included the beneficial effectcontinued impact of the liquidation of LIFO inventory quantities in the amount of $4.2 million and $4.9 million, respectively.COVID-19 pandemic on DSD customers.
Operating Expenses
In fiscal 2016,2020, operating expenses increased $6.5decreased $12.7 million, or 3.4%6.5%, to $200.3$181.1 million, or 36.8%36.1% of net sales from $193.8 million, or 35.5%32.5%, of net sales in fiscal 2015,2019, primarily due to higher general and administrative expenses and restructuring and other transition expenses associated with the Corporate Relocation Plan as compared to the prior fiscal year. General and administrative expenses and restructuring and other transition expenses increased $10.8a $25.7 million and $6.1 million, respectively, in fiscal 2016, as compared to the prior fiscal year, partially offset by a $1.6 million decrease in selling expenses. The increase in general and administrative expenses in fiscal 2016 as compared to fiscal 2015 was primarily due to higher accruals for incentive compensation to eligible employees as compared to a reduction in accrual for incentive compensation to eligible employees in the prior fiscal year, an increase in employee and retiree medical costs, workers' compensation expense and the write-off of a long-term loan receivable that was deemed uncollectible. The increase in general and administrative expenses was partially offset by $5.6 million in net gains from sale of Spice Assets and $2.8 million in net gains from sales of assets, primarily real estate, as compared to $(0.4)a $17.9 million in net losses from sales of assets, primarily vehicles, in fiscal 2015. The decrease in selling expenses, a $6.4 million decrease in fiscal 2016 as compared to fiscal 2015 was primarily due to lower depreciationgeneral and amortization expenseadministrative expenses and lower vehicle, fuel and freight expenses, partially offset by higher accruals for incentive compensation for eligible employees as compared to a reduction in accrual for incentive compensation to eligible employees in the prior fiscal year.
Income from Operations
Income from operations in fiscal 2016 was $8.2 million as compared to $3.3absence of $4.7 million in fiscal 2015 primarily due to higher gross profit, net gains from the sale of Spice Assets and certain real estate assets and lower selling expenses, partially offset by higher restructuring and other transition expenses, partially offset by impairments of goodwill and intangible assets of $42.0 million.
Net gains from sales of assets in the fiscal year ended June 30, 2020 were primarily associated with the Corporate Relocation Plansales of the Houston Property, the office coffee assets and nine branch properties of $7.3 million, $7.2 million and $14.5 million, respectively.
See Note 5, Sales of Assets, of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10‑K for details.
The decreases in selling expenses was primarily due to headcount reductions, lower DSD sales commissions and travel expenses, the conclusion of Boyd Coffee integration at the beginning of October 2018 and other efficiencies realized from DSD route optimization. The decrease in general and administrative expenses.expenses was associated primarily with reductions in third party costs, lower headcount and the absence of Boyd Coffee integration costs, partially offset by severance costs, employee incentive and benefit costs and proxy contest expenses incurred during the fiscal year ended June 30, 2020.
Impairment of goodwill and intangible assets of $42.0 million in the fiscal year ended June 30, 2020, was primarily associated with our annual impairment test as of January 31, 2020, adjusted further by the impact of the COVID-19 pandemic that had a negative impact on the fair value of the assets. See Note 12, Goodwill and Intangible Assets, of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10‑K for details. Total Other Income (Expense)
Total other income (expense) in the fiscal year ended June 30, 2020 was $5.7 million of income compared to $18.8 million of expense in fiscal 2016year ended June 30, 2019. The change in total other income (expense) in the fiscal year ended June 30, 2020 was $1.7primarily a result of:
postretirement medical curtailment gains in the current year period;
pension settlement charge in prior year period;
higher employee postretirement benefit gains due to the plan curtailment;
lower interest expense; and
lower net losses on coffee-related derivative instruments in the fiscal year ended June 30, 2020.
In March 2020, we announced the termination of our postretirement medical benefit plan effective January 1, 2021. The announcement triggered a re-measurement, and resulted in curtailment gains of $5.8 million in the fiscal year ended June 30, 2020. The pension settlement charge incurred in the fiscal year ended June 30, 2019 of $10.9 million was due to the termination of the Farmer Bros. Co. Pension Plan for Salaried Employees effective December 1, 2018.
Interest expense in the fiscal year ended June 30, 2020 decreased $1.5 million to $10.5 million from $12.0 million in the prior year period. The decrease in interest expense in the fiscal year ended June 30, 2020 was principally due to lower pension interest expense and lower average outstanding borrowings on our revolving credit facility during the first half of fiscal 2020, partially offset by $0.4 million of realized loss from the partial unwinding of our interest rate swap notional amount from $80.0 million to $65.0 million.
Other, net in the fiscal year ended June 30, 2020 increased by $6.3 million to $10.4 million compared to total other expense of $(2.2)in $4.2 million in the prior year period. The increase in Other, net in the fiscal 2015,year ended June 30, 2020 was primarily due to nethigher amortized gains on derivative instruments and investments of $0.3 million in fiscal 2016 compared to net losses on derivative instruments and investments of $(3.3) million in fiscal 2015. The net gains and net losses on derivative instruments and investments in fiscal 2016 and fiscal 2015, respectively, were primarilyour postretirement medical benefit plan due to the curtailment announced in March 2020, partially offset by lower mark-to-market net gains and net losses on coffee-related derivative instruments not designated as accounting hedges. Net gains on such coffee-related derivative instruments in
Income Taxes
In the fiscal 2016 were $0.3 million compared to net losses of $(3.0) million in fiscal 2015. In fiscal 2016 and 2015, we recognized $(0.6) million and $(0.3) million in net losses on coffee-related derivative instruments designated as cash flow hedges due to ineffectiveness.
Income Taxes
In fiscal 2016, we released $80.3 million of the valuation allowance on deferred tax assets, resulting in unreserved deferred tax assets of $90.2 million atyear ended June 30, 2016 and a non-cash reduction in2020 we recorded income tax expense, or a tax benefit of $80.0$0.2 million in fiscal 2016 as compared to income tax expense of $(0.4)$40.1 million in fiscal 2015. In fiscal 2016, total deferredended June 30, 2019. The tax assets were largely unchanged. Deferred tax assets related to our defined benefit pension plans and retiree medical plan increased due to losses recorded in OCI, and net operating loss related to deferred tax assets declined as losses were used to offset current income. In fiscal 2015, deferred tax assets increasedis primarily due to lossesthe previously recorded in Other comprehensive income (loss) (“OCI”) related to coffee-related derivative instruments, our defined benefit pension plans and retiree medical plan.
Since 2009, a full valuation allowance
has been maintainedand change in our estimated deferred tax liability during the fiscal year ended June 30, 2020 as compared to
offsetthe prior year period. In the fiscal year ended June 30, 2019, we recorded a valuation allowance of $52.0 million to reduce our deferred tax assets.
See Note 19, Income Taxes, of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10‑K.
Fiscal Years Ended June 30, 2019 and 2018
Net Sales
Net sales in fiscal 2019 decreased $10.6 million, or 1.7%, to $595.9 million from $606.5 million in fiscal 2018. The decline in net sales was primarily due to a decrease in net sales from other beverages and spice products, a decline in revenues and volume of green coffee processed and sold through our DSD network, and the impact of lower coffee prices for our cost plus customers. The decrease in net sales was partially offset by an increase in sales from the addition of the Boyd Business which is fully reflected in the year ended June 30, 2019, compared to only nine months of Boyd Business operations in the year ended June 30, 2018. The impact of price decreases to customers utilizing commodity-based pricing arrangements was $6.9 million during the year ended June 30, 2019 as compared to $3.0 million in price decreases to customers utilizing such arrangements in the year ended June 30, 2018.
The following table presents the effect of changes in unit sales, unit pricing and product mix for the year ended June 30, 2019 compared to the same period in the prior fiscal year (in millions):
|
| | | | | | |
| | For Year Ended June 30, 2019 vs. 2018 | | % of Total Mix Change |
| Effect of change in unit sales | $ | (12.4 | ) | | (117.0 | )% |
| Effect of pricing and product mix changes | 1.8 |
| | 17.0 | % |
| Total decrease in net sales | $ | (10.6 | ) | | (100.0 | )% |
Unit sales decreased 2.0% and average unit price was essentially flat in the year ended June 30, 2019 as compared to the same prior year period, resulting in a decrease in net sales of 1.7%. In the fourth quarterlatter part of the fiscal 2016, after analyzingyear ended June 30, 2019, we experienced higher mix of product being sold via direct ship versus DSD which will negatively impact future overall average unit price as direct ship has a lower average unit price. There were no new product category introductions in the available positiveyear ended June 30, 2019 or 2018 which had a material impact on our net sales.
Gross Profit
Gross profit in fiscal 2019 decreased $28.3 million, or 13.6%, to $179.1 million from $207.4 million in fiscal 2018. Gross margin decreased to 30.1% in fiscal 2019 from 34.2% in fiscal 2018. The decrease in gross profit was primarily driven by lower net sales of $10.6 million and higher cost of goods sold. Cost of goods sold in the year ended June 30, 2019 increased $17.7 million, or 4.4%, to $416.8 million, or 69.9% of net sales, from $399.2 million, or 65.8% of net sales, in fiscal 2018. Margin was negatively impacted by higher coffee brewing equipment and labor costs associated with increased installation activity during the period, higher production costs associated with the production operations in the Northlake facility, including higher depreciation expense for the Northlake, Texas facility, higher manufacturing costs driven by downtime associated with certain aging production infrastructure and higher write-down of slow moving inventories. The negative evidence, we concluded that it is more likely than not that we will utilizemargin impact was partially offset by lower green coffee prices as the average Arabica “C” market price of green coffee decreased 13.2% in fiscal 2019 as compared to the prior year period.
Operating Expenses
In fiscal 2019, operating expenses decreased $12.5 million, or 6.1%, to $193.8 million, or 32.5% of net sales from $206.3 million, or 34.0%, of net sales in fiscal 2018, primarily due to a portion$13.7 million decrease in selling expenses, the absence of our tax loss carryforwards. In this analysis, we considered$3.8 million in impairment losses on intangible assets reported in the following itemsprior year period and a $0.5 million decrease in general and administrative expenses, partially offset by a $4.1 million increase in restructuring and other transition expenses and a $1.3 million increase in net losses from sales of positive evidence: twelve quartersother assets.
The decreases in selling expenses and general and administrative expenses in fiscal 2019 was primarily due to synergies achieved from the integration of our cumulative gain positionthe Boyd Business and our forecasted future earnings; completionconclusion of parts of our restructuring plan which significantly reduced costs;the transition services and sale of our Torrance Facility which is expected to result in a significant gainco-manufacturing agreements with Boyd Coffee in the first quarterhalf of fiscal 2017. We also considered2019. In the following itemsfiscal year ended June 30, 2019, we paid Boyd Coffee a total of negative evidence: large pension related OCI$3.7 million for services under these agreements, as compared to $25.4 million paid for such services in the fiscal year ended June 30, 2018.
Net losses that we recordedfrom sales of assets in the fiscal year ended June 30, 2019 included net losses of $1.1 million from sales of other assets, primarily associated with the Boyd Coffee plant decommissioning offset by $0.6 million in earnout from the sale of spice assets, as compared to $0.8 million in earnout from the sale of spice assets and net gains of $0.2 million from sales of other assets in the prior twelve quartersyear period.
Restructuring and potential expirationother transition expenses increased $4.1 million in fiscal 2019, as compared to fiscal 2018. This increase includes $3.4 million, including interest, assessed by the Western Conference of certain state unused net operating loss carryforwards and credits.
We cannot conclude that certain state net operating loss carryforwards and tax credit carryovers will be utilized before expiration. Accordingly, we will maintainTeamsters Pension Trust (the “WC Pension Trust”) in the fiscal year ended June 30, 2019, representing the Company’s share of the Western Conference of Teamsters Pension Plan (“WCTPP”) unfunded benefits due to the Company’s partial withdrawal from the WCTPP as a valuation allowanceresult of $1.6 million to offset these deferred tax assets. We will
continue to monitor all available evidence, both positive and negative, in determining whether it is more likely than not thatemployment actions taken by the Company will realize its remaining deferred tax assets.in 2016 in connection with the Corporate Relocation Plan. In addition, in the fiscal year ended June 30, 2019, we incurred $1.8 million in restructuring and other transition expenses, primarily employee-related costs, associated with the DSD Restructuring Plan, as compared to $1.0 million in restructuring and other transition expenses associated with the DSD Restructuring Plan in the fiscal year ended June 30, 2018.
Net
Total Other (Expense) Income
Total other expense in the fiscal year ended June 30, 2019 was $18.8 million compared to $2.0 million fiscal year ended June 30, 2018. The change in total other expense in the fiscal year ended June 30, 2019 was primarily a result of a pension settlement charge in the amount of $10.9 million, higher interest expense and higher net losses on coffee-related derivative instruments.
The non-cash pension settlement charge incurred in the fiscal year ended June 30, 2019 was due to the termination of the Farmer Bros. Co. Pension Plan for Salaried Employees effective December 1, 2018. As a result of the foregoing factors,pension plan termination, we expect to realize lower Pension Benefit Guaranty Corporation expenses in the future of approximately $0.3 million to $0.4 million per year.
Interest expense in the fiscal year ended June 30, 2019 increased $2.2 million to $12.0 million from $9.8 million in the prior year period. The increase in interest expense in the fiscal year ended June 30, 2019 was principally due to higher outstanding borrowings on our revolving credit facility, including borrowings for operations and borrowings related to the Boyd Business acquisition.
Other, net income was $89.9in the fiscal year ended June 30, 2019 decreased by $3.6 million or $5.41 per diluted common share, in fiscal 2016 asto $4.2 million compared to $0.7in $7.7 million or $0.04 per diluted common share, in the prior year period. The decrease in Other, net in the fiscal 2015.year ended June 30, 2019 was primarily due to increased mark-to-market losses on coffee-related derivative instruments not designated as accounting hedges.
Income Taxes
In the fiscal years ended June 30, 2019 and 2018, we recorded income tax expense of $40.1 million and $17.3 million, respectively. The $22.8 million increase in tax expense in the fiscal years ended June 30, 2019 is primarily due to a valuation allowance of $52.0 million recorded to reduce our deferred tax assets. See Note 19, Income Taxes, of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10‑K.
Non-GAAP Financial Measures
In addition to net (loss) income determined in accordance with U.S. generally accepted accounting principles (“GAAP”), we use the following non-GAAP financial measures in assessing our operating performance:
“Non-GAAP net income” EBITDA” is defined as net (loss) income excluding the impact of:
restructuring and other transition expenses;
net gains and losses from sales of assets;
non-cash income tax expense (benefit), including the release of valuation allowance on deferred tax assets;
non-recurring 2016 proxy contest-related expenses;
non-cash interest expense accrued on the Torrance Facility sale-leaseback financing obligation;
acquisition and integration costs;
and including the impact of:
income taxes on non-GAAP adjustments.
“Non-GAAP net income per diluted common share” is defined as Non-GAAP net income divided by the weighted-average number of common shares outstanding, inclusive of the dilutive effect of common equivalent shares outstanding during the period.
“EBITDA” is defined as net income excluding the impact of:
income taxes;
interest expense; and
depreciation and amortization expense.
“EBITDA Margin” is defined as EBITDA expressed as a percentage of net sales.
“Adjusted EBITDA” is defined as net (loss) income excluding the impact of:
income taxes;
interest expense;
(loss) income from short-term investments;
depreciation and amortization expense;
ESOP and share-based compensation expense;
non-cash impairment losses;
non-cash pension withdrawal expense;
other similar non-cash expenses;
restructuring and other transition expenses;
severance costs;
proxy contest-related expenses;
non-recurring costs associated with the COVID-19 pandemic;
net gains and losses from sales of assets;
non-recurring 2016 proxy contest-related expenses;non-cash pension settlements and postretirement benefits curtailment; and
acquisition, integration and integrationstrategic costs.
“Adjusted EBITDA Margin” is defined as Adjusted EBITDA expressed as a percentage of net sales.
Restructuring and other transition expenses are expenses that are directly attributable to (i) the Corporate Relocation Plan, consisting primarily of employee retention and separation benefits, pension withdrawal expense, facility-related costs and other related costs such as travel, legal, consulting and other professional services; and (ii) beginning in the third quarter of fiscal 2017, the DSD Restructuring Plan, consisting primarily of severance, prorated bonuses for bonus eligible employees, contractual termination payments and outplacement services, and other related costs, including legal, recruiting, consulting, other professional services, and travel.
In the first quarterFor purposes of fiscal 2017, we modified the calculation of Non-GAAP net incomecalculating EBITDA and Non-GAAP net income per diluted common share (i) to exclude non-recurring expenses for legalEBITDA Margin and other professional services incurred in connection with the 2016 proxy contest that were in excess of the level of expenses normally incurred for an annual meeting of stockholders (“2016 proxy contest-related expenses“) and non-cash interest expense accrued on the Torrance Facility sale-leaseback financing obligation which has been included in the computation of the gain on sale upon conclusion of the leaseback arrangement, and (ii) to include income tax expense (benefit) on the non-GAAP adjustments based on the Company’s marginal tax rate of 39.0%. There was no similar adjustment for non-cash income tax expense in the comparable period of the prior fiscal year due to the valuation allowance recorded against the Company’s deferred tax assets. We also modified Adjusted EBITDA and Adjusted EBITDA Margin, to exclude 2016 proxy contest-related expenses. These modifications to our non-GAAP financial measures were madewe have excluded the impact of interest expense resulting from the adoption of ASU 2017-07, non-cash pretax pension and postretirement benefits resulting from the amendment and termination of the Farmer Bros. pension and postretirement benefits plans and severance because such expensesthese items are not reflective of our ongoing operating results and adjusting for them will help investors with comparability of our results. The historical presentation of the
We believe these non-GAAP financial measures was not affected byprovide a useful measure of the Company’s operating results, a meaningful comparison with historical results and with the results of other companies, and insight into the Company’s ongoing operating performance. Further, management utilizes these modifications.measures, in addition to GAAP measures, when evaluating and comparing the Company’s operating performance against internal financial forecasts and budgets.
Beginning in the third quarter of fiscal 2017 and for all periods presented, we include EBITDA in our non-GAAP financial measures. We believe that EBITDA facilitates operating performance comparisons from period to period by isolating the effects of certain items that vary from period to period without any correlation to core operating performance or that vary widely among similar companies. These potential differences may be caused by variations in capital structures (affecting interest expense), tax positions (such as the impact on periods or companies of changes in effective tax rates or net operating losses) and the age
and book depreciation of facilities and equipment (affecting relative depreciation expense). We also present EBITDA and EBITDA Margin because (i) we believe that these measures are frequently used by securities analysts, investors and other interested parties to evaluate companies in our industry, (ii) we believe that investors will find these measures useful in assessing our ability to service or incur indebtedness, and (iii) we use these measures internally as benchmarks to compare our performance to that of our competitors.
Beginning in the third quarter of fiscal 2017, we modified the calculation of Adjusted EBITDA and Adjusted EBITDA Margin to exclude income from our short-term investments because we believe excluding income generated from our investment portfolio is a measure more reflective of our operating results. The historical presentation of Adjusted EBITDA and Adjusted EBITDA Margin was recast to be comparable to the current period presentation.
Beginning in the fourth quarter of fiscal 2017, we modified the calculation of Non-GAAP net income, Non-GAAP net income per diluted common share, Adjusted EBITDA and Adjusted EBITDA Margin to exclude acquisition and integration costs. Acquisition and integration costs include legal expenses, consulting expenses and internal costs associated with acquisitions and integration of those acquisitions. In the fourth quarter of fiscal 2017 acquisition and integration costs were significant and, we believe, excluding them will help investors to better understand our operating results and more accurately compare them across periods. We have not adjusted the historical presentation of Non-GAAP net income, Non-GAAP net income per diluted common share, Adjusted EBITDA and Adjusted EBITDA Margin because acquisition and integration costs in prior periods were not material to the Company’s results of operations.
We believe these non-GAAP financial measures provide a useful measure of the Company’s operating results, a meaningful comparison with historical results and with the results of other companies, and insight into the Company's ongoing operating performance. Further, management utilizes these measures, in addition to GAAP measures, when evaluating and comparing the Company's operating performance against internal financial forecasts and budgets.
Non-GAAP net income, Non-GAAP net income per diluted common share, EBITDA, EBITDA Margin, Adjusted EBITDA and Adjusted EBITDA Margin, as defined by us, may not be comparable to similarly titled measures reported by other companies. We do not intend for non-GAAP financial measures to be considered in isolation or as a substitute for other measures prepared in accordance with GAAP.
Set forth below is a reconciliation of reported net (loss) income to EBITDA (unaudited):
|
| | | | | | | | | | | | |
| | | For the Year Ended June 30, |
| (In thousands) | | 2020 | | 2019 | | 2018 |
| Net loss, as reported | | $ | (37,087 | ) | | $ | (73,595 | ) | | $ | (18,280 | ) |
| Income tax (benefit) expense | | (195 | ) | | 40,111 |
| | 17,312 |
|
| Interest expense(1) | | 5,590 |
| | 6,036 |
| | 3,177 |
|
| Depreciation and amortization expense | | 29,896 |
| | 31,065 |
| | 30,464 |
|
| EBITDA | | $ | (1,796 | ) | | $ | 3,617 |
| | $ | 32,673 |
|
| EBITDA Margin | | (0.4 | )% | | 0.6 | % | | 5.4 | % |
| |
| (1) | Excludes interest expense related to pension plans and postretirement benefits. |
Set forth below is a reconciliation of reported net income to Non-GAAP net income and reported net income per common share-diluted to Non-GAAP net income per diluted common share (unaudited):
|
| | | | | | | | | | | | |
| | | Year Ended June 30, |
| (In thousands) | | 2017 | | 2016 | | 2015 |
| Net income, as reported | | $ | 24,400 |
| | $ | 89,918 |
| | $ | 652 |
|
| Restructuring and other transition expenses | | 11,016 |
| | 16,533 |
| | 10,432 |
|
| Net gain from sale of Torrance Facility | | (37,449 | ) | | — |
| | — |
|
| Net gains from sale of Spice Assets | | (919 | ) | | (5,603 | ) | | — |
|
| Net (gains) losses from sales of other assets | | (1,210 | ) | | (2,802 | ) | | 394 |
|
| Non-recurring 2016 proxy contest-related expenses | | 5,186 |
| | — |
| | — |
|
| Non-cash income tax benefit, including release of valuation allowance on deferred tax assets | | — |
| | (80,439 | ) | | — |
|
| Interest expense on sale-leaseback financing obligation | | 681 |
| | — |
| | — |
|
| Acquisition and integration costs(1) | | 1,734 |
| | — |
| | — |
|
| Income tax expense on non-GAAP adjustments | | 8,175 |
| | — |
| | — |
|
| Non-GAAP net income(1) | | $ | 11,614 |
| | $ | 17,607 |
| | $ | 11,478 |
|
| | | | | | | |
| Net income per common share—diluted, as reported | | $ | 1.45 |
| | $ | 5.41 |
| | $ | 0.04 |
|
| Impact of restructuring and other transition expenses | | $ | 0.66 |
| | $ | 1.00 |
| | $ | 0.64 |
|
| Impact of net gain from sale of Torrance Facility | | $ | (2.23 | ) | | $ | — |
| | $ | — |
|
| Impact of net gains from sale of Spice Assets | | $ | (0.05 | ) | | $ | (0.34 | ) | | $ | — |
|
| Impact of net gains from sales of other assets | | $ | (0.07 | ) | | $ | (0.17 | ) | | $ | 0.03 |
|
| Impact of non-recurring 2016 proxy contest-related expenses | | $ | 0.31 |
| | $ | — |
| | $ | — |
|
| Impact of non-cash income tax benefit, including release of valuation allowance on deferred tax assets | | $ | — |
| | $ | (4.84 | ) | | $ | — |
|
| Impact of interest expense on sale-leaseback financing obligation | | $ | 0.04 |
| | $ | — |
| | $ | — |
|
| Impact of acquisition and integration costs(1) | | $ | 0.10 |
| | $ | — |
| | $ | — |
|
| Impact of income tax expense on non-GAAP adjustments | | $ | 0.49 |
| | $ | — |
| | $ | — |
|
| Non-GAAP net income per diluted common share(1) | | $ | 0.70 |
| | $ | 1.06 |
| | $ | 0.71 |
|
________
| |
(1) | Acquisition and integration costs related to Boyd Coffee transaction only and include $244 and $1,490 incurred in the third and fourth quarters of fiscal 2017, respectively. In the interim disclosures, while the Boyd Coffee Company transaction remained confidential, the expenses incurred in the third quarter were included in operating expenses and described as consulting expenses. Acquisition and integration costs incurred in prior periods were not material to the Company’s results of operations. |
Set forth below is a reconciliation of reported net income to EBITDA (unaudited):
|
| | | | | | | | | | | | |
| | | Year Ended June 30, |
| (In thousands) | | 2017 | | 2016 | | 2015 |
| Net income, as reported | | $ | 24,400 |
| | $ | 89,918 |
| | $ | 652 |
|
| Income tax expense (benefit) | | 15,954 |
| | (79,997 | ) | | 402 |
|
| Interest expense | | 2,185 |
| | 425 |
| | 769 |
|
| Depreciation and amortization expense | | 22,970 |
| | 20,774 |
| | 24,179 |
|
| EBITDA | | $ | 65,509 |
| | $ | 31,120 |
| | $ | 26,002 |
|
| EBITDA Margin | | 12.1 | % | | 5.7 | % | | 4.8 | % |
Set forth below is a reconciliation of reported net(loss) income to Adjusted EBITDA (unaudited):
|
| | | | | | | | | | | | |
| | | Year Ended June 30, |
| (In thousands) | | 2017 | | 2016 | | 2015 |
| Net income, as reported | | $ | 24,400 |
| | $ | 89,918 |
| | $ | 652 |
|
| Income tax expense (benefit) | | 15,954 |
| | (79,997 | ) | | 402 |
|
| Interest expense | | 2,185 |
| | 425 |
| | 769 |
|
| Income from short-term investments | | (1,853 | ) | | (2,204 | ) | | (1,251 | ) |
| Depreciation and amortization expense | | 22,970 |
| | 20,774 |
| | 24,179 |
|
| ESOP and share-based compensation expense | | 3,959 |
| | 4,342 |
| | 5,691 |
|
| Restructuring and other transition expenses | | 11,016 |
| | 16,533 |
| | 10,432 |
|
| Net gain from sale of Torrance Facility | | (37,449 | ) | | — |
| | — |
|
| Net gains from sale of Spice Assets | | (919 | ) | | (5,603 | ) | | — |
|
| Net (gains) losses from sales of other assets | | (1,210 | ) | | (2,802 | ) | | 394 |
|
| Non-recurring proxy contest-related expenses | | 5,186 |
| | — |
| | — |
|
| Acquisition and integration costs(1) | | 1,734 |
| | — |
| | — |
|
| Adjusted EBITDA(1) | | $ | 45,973 |
| | $ | 41,386 |
| | $ | 41,268 |
|
| Adjusted EBITDA Margin(1) | | 8.5 | % | | 7.6 | % | | 7.6 | % |
|
| | | | | | | | | | | | | |
| | | Year Ended June 30, |
| (In thousands) | | 2020 | | 2019 | | 2018 |
| Net loss, as reported | | $ | (37,087 | ) | | $ | (73,595 | ) | | $ | (18,280 | ) |
| Income tax (benefit) expense | | (195 | ) | | 40,111 |
| | 17,312 |
|
| Interest expense(1) | | 5,590 |
| | 6,036 |
| | 3,177 |
|
| Income from short-term investments | | — |
| | — |
| | (19 | ) |
| Depreciation and amortization expense | | 29,896 |
| | 31,065 |
| | 30,464 |
|
| ESOP and share-based compensation expense | | 4,329 |
| | 3,723 |
| | 3,822 |
|
| Restructuring and other transition expenses(2) | | — |
| | 4,733 |
| | 662 |
|
| Strategic initiatives | 341,000 |
| 523 |
| | — |
| | — |
|
| Net (gains) losses from sales of assets | | (25,237 | ) | | 465 |
| | (966 | ) |
| Impairment of goodwill and intangible assets | | 42,030 |
| | — |
| | 3,820 |
|
| Non-recurring costs associated with the COVID-19 pandemic | | 362 |
| | — |
| | — |
|
| Postretirement benefits gains curtailment and pension settlement charge | | (5,760 | ) | | 10,948 |
| | — |
|
| Proxy contest-related expenses | | 463 |
| | — |
| | — |
|
| Acquisition and integration costs | | — |
| | 6,123 |
| | 7,570 |
|
| Severance | 2,273,000 |
| 3,828 |
| | 2,273 |
| | — |
|
| Adjusted EBITDA(3) | | $ | 18,742 |
| | $ | 31,882 |
| | $ | 47,562 |
|
| Adjusted EBITDA Margin | | 3.7 | % | | 5.3 | % | | 7.8 | % |
________
| |
| (1) | Acquisition and integration costsExcludes interest expense related to Boyd Coffee transaction onlypension plans and include $244 and $1,490 incurred inpostretirement benefits. |
| |
| (2) | Fiscal year ended June 30, 2019, includes $3.4 million, including interest, assessed by the third and fourth quartersWC Pension Trust representing the Company’s share of fiscal 2017, respectively. In the interim disclosures, while the Boyd Coffee Company transaction remained confidential, the expenses incurred in the third quarter were included in operating expenses and described as consulting expenses. Acquisition and integration costs incurred in prior periods were not materialWCTPP unfunded benefits due to the Company’s resultspartial withdrawal from the WCTPP as a result of operations.employment actions taken by the Company in 2016 in connection with the Corporate Relocation Plan, net of payments of $0.8 million. |
| |
| (3) | Adjusted EBITDA for fiscal 2020 includes $7.2 million of higher amortized gains resulting from the curtailment of the postretirement medical plan in March 2020. These higher gains will continue until the plan sunset on January 1, 2021. See Note 13, Employee Benefit Plans, of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10‑K. |
Liquidity, Capital Resources and Financial Condition
|
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | June 30, 2020 | | June 30, 2019 |
| (In thousands) | | Debt Origination Date | | Maturity | | Original Borrowing Amount | | Carrying Value | | Weighted Average Interest Rate | | Carrying Value | | Weighted Average Interest Rate |
| Credit Facility | | Revolver | | 11/6/2023 | | N/A | | $ | 122,000 |
| | 4.91 | % | | $ | 92,000 |
| | 3.98 | % |
Revolving Credit Facility
We maintain aIn March 2020, pursuant to Amendment No. 2 to Amended and Restated Credit Agreement (the “Second Amendment”) we amended our existing senior secured revolving credit facility (the “Revolving(such facility as amended to date, including pursuant to the Second Amendment and the Third Amendments (as defined below), the “Amended Revolving Facility”) with JPMorgan Chase Bank, N.A. and SunTrust Bank (collectively,certain financial institutions. The Second Amendment, amongst other things (described in more detail in Note 14, Debt Obligations, of the “Lenders”), withNotes to Consolidated Financial Statements included in this Annual Report on Form 10‑K) decreased the size of the revolving commitmentscredit facility to $125.0 million from $150.0 million but retained most of $75.0 million as of June 30, 2017 and aits previous terms including the sublimit on letters of credit and swingline loans of $30.0 million and $15.0 million respectively.each. The Amended Revolving Facility includes an accordion feature whereby we may increasehas no scheduled payback required on the Revolving Commitment by upprincipal prior to an additional $50.0 million,
subject to certain conditions. Advances are based on our eligible accounts receivable, eligible inventory, and the value of certain real property and trademarks, less required reserves. As of June 30, 2017, the commitment fee ranges from 0.25% to 0.375% per annum based on average revolver usage. Outstanding obligations are collateralized by all of our assets, excluding certain real property not included in the borrowing base, machinery and equipment (other than inventory), and our preferred stock portfolio. Borrowings under the Revolving Facility bear interest based on average historical excess availability levels with a range of PRIME - 0.25% to PRIME + 0.50% or Adjusted LIBO Rate + 1.25% to Adjusted LIBO Rate + 2.00%. We are subject to a variety of affirmative and negative covenants of types customary in an asset-based lending facility, including financial covenants relating to the maintenance of a fixed charge coverage ratio in certain circumstances, and the right of the Lenders to establish reserve requirements, which may reduce the amount of credit otherwise available to us. We are allowed to pay dividends, provided, among other things, certain excess availability requirements are met, and no event of default exists or has occurred and is continuing as of the date of any such payment and after giving effect thereto.
On August 25, 2017, we amended the Revolving Facility (the “Amended Credit Agreement”) to, among other things: increase the aggregate commitments thereunder to $125.0 million; increase the advance rate on eligible accounts receivable and the amount of eligible real property which can be included in the borrowing base; increase the margin of 0.375% per annum up to an amount equal to the value of eligible real property in the borrowing base; reduce the commitment fee to a flat fee of 0.25% per annum irrespective of average revolver usage, and extend the maturity date of the Revolving Facility fromon November 6, 2023.
Effective March 2, 202027, 2019, we entered into an interest rate swap to August 25, 2022.manage our interest rate risk on our floating-rate indebtedness. See Note 266 , Subsequent Events—Amendment to Revolving Facility, Derivative Instruments, of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this report.Annual Report on Form 10‑K, for details. At June 30, 2017,2020, we were eligible to borrow up to a total of $55.6 million under the Revolving Facility and had outstanding borrowings of $27.6$122.0 million and utilized $0.1$2.3 million of the letters of credit sublimit and had excess availability under the Amended Revolving Facility. The amount available to borrow is subject to compliance with the applicable financial covenants set out under the Amended Revolving Facility (described in more detail below).
On July 23, 2020 (the "Effective Date"), pursuant to Amendment No. 3 to Amended and Restated Credit Agreement (the “Third Amendment”), we amended our existing senior secured revolving credit facility with certain financial institutions.
The Third Amendment, among other things:
| |
| (1) | retained the revolving commitments under the Credit Agreement of $125.0 million and the sublimit on letters of credit and swingline loans of $15.0 million each; |
| |
| (2) | added a $5.0 million quarterly commitment reduction beginning September 30, 2021; |
| |
| (3) | adjusted from cash flow-based to an asset-based lending structure with borrowing a base of 85% of eligible accounts receivable plus 50% of eligible inventory with certain permitted maximum over advance amounts; |
| |
| (4) | removed all previous financial covenants of net leverage ratio, interest coverage ratio and minimum EBITDA; |
| |
| (5) | added a covenant relief period (commencing on the effective date of the Third Amendment and ending upon delivery of a compliance certificate on or after fiscal month ending September 30, 2021), during which the Company must comply with the following: |
(i) a minimum cumulative EBITDA covenant, tested on a monthly basis until the last day of $27.9 million. At June 30, 2017,2021;
(ii) a standalone minimum monthly EBITDA covenant tested on the weighted average interest ratelast day of July 2021 and August 2021; and
(iii) a restriction on capital expenditures such that the amount of capital expenditures shall not exceed $25.0 million in the aggregate.
| |
| (6) | added a covenant requiring us to maintain a minimum liquidity covenant, tested on a weekly basis; |
| |
| (7) | added an anti-cash hoarding provision; |
| |
| (8) | added a minimum fixed charge coverage ratio of 1.05:1.00 commencing with fiscal quarter ending September 30, 2021, and tested on a quarterly basis thereafter; |
| |
| (9) | modified the applicable margin for base rate loans to range from PRIME + 3.50% to PRIME + 4.50% per annum and the applicable margin for Eurodollar loans to range from Adjusted LIBO Rate + 4.50% to Adjusted LIBO Rate + 5.50% per annum and fixed the commitment fee at 0.50%; |
| |
| (10) | provided for the revolving commitments to be reduced upon the occurrence of certain asset dispositions and incurrence of non-permitted indebtedness and imposed additional restrictions on the Company’s ability to utilize certain other negative covenant baskets; and |
| |
| (11) | added a requirement to provide mortgages and related mortgage instruments with respect to certain specified real property owned by the Company. |
The Third Amendment provides us with increased flexibility to proactively manage our outstanding borrowings under the Revolving Facility was 3.02%. At June 30, 2017, we were inliquidity and working capital, while maintaining compliance with allour debt financial covenants, and preserving financial liquidity to mitigate the impact of the restrictive covenants underuncertain business environment resulting from the Revolving Facility.
At August 31, 2017, we had estimated outstanding borrowings of $27.5 million, utilized $1.1 million of the letters of credit sublimit,COVID-19 pandemic and had excess availability under the Revolving Facility of $72.4 million pursuantcontinue to the Amended Credit Agreement. See Note 26, Subsequent Events—Amendment to Revolving Facility, of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this report. At August 31, 2017, the weighted average interest rateexecute on our outstanding borrowings under the Revolving Facility was 3.36%.key strategic initiatives.Liquidity
We generally finance our operations through cash flows from operations and borrowings under our Amended Revolving Facilityfacility described above. AtAlso, in fiscal year ended June 30, 2017,2020, the proceeds from the sale of assets helped financed our operations. In fiscal 2018, we had $6.2 millionfiled a shelf registration statement with the SEC which allows us to issue unspecified amounts of common stock, preferred stock, depository shares, warrants for the purchase of shares of common stock or preferred stock, purchase contracts for the purchase of equity securities, currencies or commodities, and units consisting of any combination of any of the foregoing securities, in cashone or more series, from time to time and cash equivalentsin one or more offerings up to a total dollar amount of $250.0 million. In light of our financial position, operating performance and $0.4 million in short-term investments.current economic conditions, including the state of the global capital markets, there can be no assurance as to whether or when we will be able to raise capital by issuing securities pursuant to our effective shelf registration statement or otherwise. We believe our Amended Revolving Facility, as amended, to the extent available, with its $50.0 million accordion feature, in addition to our cash flows from operations, and other liquid assets,collectively, will be sufficient to fund our working capital and capital expenditure requirements for the next 12 to 18 months.
ChangesAt June 30, 2020, we had $60.0 million in cash and cash equivalents and none of the cash in our coffee-related derivative margin accounts was restricted. As a result of the foregoing Third Amendment described above, we were in compliance with all of the covenants under the Amended Revolving Facility, and no event of default has occurred or existed through the Third Amendment effective date.
Impact of COVID-19 on Our Liquidity
The COVID-19 pandemic and related restrictive measures such as travel bans, quarantines, shelter-in-place orders, and shutdowns as well as changes in recent consumer behavior, have had an adverse impact on certain of our DSD customers, particularly restaurants, hotels, casinos and coffeehouses. Many of these customers have been forced to close or curtail operations, and are purchasing at reduced volumes, if at all. We are unable to predict the rate at which these customers will resume operations and purchases as the restrictive measures are lifted. As a result, sales from our DSD customers have declined from pre COVID-19 average sales. As of June 30, 2020, due to lifting of some the government restrictions, and reopening of some of our customers' businesses, our revenues have recovered to some extent but are still down by about 45% from the pre COVID-19 pandemic weeks, which is a significant improvement from the decline of approximately 65% to 70% at the end of March 2020.
Due to these factors, the degree to which the COVID-19 pandemic impacts our results will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including, but not limited to, the duration and spread of the pandemic, its severity, the actions to contain the pandemic or treat its impact, and how quickly and to what extent normal economic and operating conditions can resume, as well as our effectiveness on serving our customer base and acquiring new customers. Therefore, with the uncertainty around the duration and breadth of the COVID-19 pandemic, the ultimate impact on our business, financial condition or operating results cannot be reasonably estimated.
We have modified our business practices due to the impact of COVID-19 pandemic on our operating results. To navigate through this period of uncertainty, we have reduced discretionary expenses, aggressively reduced capital expenditures, closely and proactively managed our inventory purchases, while prioritizing investments in e-commerce initiatives and serving current Direct Ship customers’ needs. Additionally, we also continue to focused on the rebalancing of volume across our manufacturing network, bringing additional production into our Northlake, Texas facility to generate additional savings. Among others things, we have already taken the following actions:
amended our existing senior secured revolving credit facility, as described above;
reduced headcount and furloughed a significant percentage of employees;
eliminated fiscal third quarter 2020 cash compensation for our Board of Directors;
temporarily decreased executive leadership, corporate team members’ and all exempt employees’ (except route sales representatives) base salaries by 15%;
reduced discretionary spending, including a moratorium on all travel;
reduced fiscal year ending 2020 management incentive bonus program;
reduced plant production costs in two of our plants;
suspended 401(k) cash matching for all eligible employees;
reduced capital expenditures while also closely managing inventory and other spending;
implemented cost controls throughout our coffee brewing equipment (“CBE”) program service network;
instituted cost savings to reduce our selling, general and administrative expenses; and
reduced our DSD supply chain network costs by reducing freight, and fleet, and consolidating routes.
These actions have improved our cost structure and helped in mitigating the impact of the COVID-19 pandemic on our operating results and liquidity; however we cannot make assurances that these actions will continue to be successful.
Cash Flows
We generateThe significant captions and amounts from our condensed consolidated statements of cash from operating activities primarily from cash collections related to the sale of our products. Net cash provided by operating activities was $42.1 million in fiscal 2017 compared to $27.6 million in fiscal 2016 and $26.9 million in fiscal 2015. The higher level of net cashflows are summarized below:
|
| | | | | | | | | | | |
| | For the Years Ended June 30, |
| | 2020 | | 2019 | | 2018 |
| Condensed Consolidated Statements of cash flows data (in thousands) | | | | | |
| Net cash provided by operating activities | $ | 1,455 |
| | $ | 35,450 |
| | $ | 8,855 |
|
| Net cash used in investing activities | 21,917 |
| | (32,361 | ) | | (74,640 | ) |
| Net cash provided by financing activities | 29,658 |
| | 1,456 |
| | 61,982 |
|
| Net increase (decrease) in cash and cash equivalents | $ | 53,030 |
| | $ | 4,545 |
| | $ | (3,803 | ) |
Operating Activities
Cash provided by operating activities in fiscal 20172020 decreased $34.0 million as compared to fiscal 2019 primarily attributable to a higher use of cash for working capital during the current fiscal period. Working capital during the fiscal year ended June 30, 2020 was impacted by, among other items, declines in revenues and related net income and a reduction in outstanding accounts payable balances driven by significant reductions in past due balances. This was partially offset by lower inventory and trade accounts receivable balances resulting from lower revenues.
Cash provided by operating activities in fiscal 2019 increased $26.6 million as compared to fiscal 2018 primarily due to, the increase in deferred tax liabilities from non-cash income tax expense recorded in fiscal 2017among other items, improved collections on many large national accounts and distributors, improved vendor terms, and reduced cash inflows from the sale of substantially all of our preferred stock portfolio, net of purchases to fund expenditures associated with our New Facility in Northlake, Texas. Decreases in derivative assets, increases in derivative liabilities, and increases in accounts payable balances also contributed to the cash inflows in fiscal 2017. Cash inflows from operating activitiesinventory levels. These were partially offset by cash outflows from increasesa decline in inventories, reduction in other long-term liabilities, paymentsrevenues and higher manufacturing and supply chain costs, higher labor and service costs associated with increased installations of accrued payroll expensescoffee brewing equipment, and reduction in postretirement benefit liability. Inventories were higher at the end of fiscal 2017 due to the commencement of the New Facility's manufacturing operations and incremental inventory from China Mist and West Coast Coffee as compared to lower levels of inventory at the Torrance Facility at the end of fiscal 2016 due to its anticipated closing.
In fiscal 2016, the higher level of net cash provided by operating activities compared to fiscal 2015 was primarily due to higher net income and a higher level of cash inflows from operating activities. The increase in net income was
primarily due to non-cash income tax benefit resulting from the release of valuation allowance on deferred tax assets. The higher level of cash inflows from operating activities was primarily due to higher proceeds from sales of short-term investments, accruals for incentive compensation payments to eligible employees and a decrease in inventory balances, partially offset by higher cash outflows from increases in derivative assets and accounts receivable balances, purchases of short-term investments and payments for restructuring and other transition expenses. Inventories decreased at
Investing Activities
Net cash provided by investing activities during the end of fiscal 2016year ended June 30, 2020 was $21.9 million as compared to net cash used of $32.4 million during the fiscal 2015year ended June 30, 2019. The $54.3 million increase in cash provided from investment activities was principally due to the sales of assets during the current period resulting in net cash proceeds of $39.1 million. In addition, cash used for purchases of property, plant and equipment decreased $17.2 million primarily due to production consolidation,lower maintenance capital expenditures, and the sale of processed and unprocessed inventories to Harris at cost upon conclusion of the transition services provided by the Company in connection with the sale of Spice Assets. At June 30, 2016, we had a net gain position in our margin accounts for coffee-related derivative instruments resultinglower coffee brewing equipment purchases in the releasecurrent year period as we focused on refurbished CBE equipment to drive cost savings. Investment capital also declined due to lower purchases of restriction ofmachinery and equipment for the use of $1.0 million of cash in these accounts, which contributed to higher cash inflows in fiscal 2016.
In fiscal 2015, the lower level of net cash provided by operating activities asNorthlake, Texas plant compared to the prior fiscal year was due to lower net income and a higher level of cash outflows from operating activities. Cash outflows were primarily from payments of accounts payable balances including the payment of expenses associated with the Corporate Relocation Plan, payroll expenses including accrued bonuses and restriction of cash held in margin accounts for coffee-related derivative instruments. Cash outflows were partially offset by cash inflows from a decrease in inventory balances. Inventory balances decreased in fiscal 2015 compared to the prior fiscal year primarily due to the consolidation of coffee production from the Torrance production facility with the Houston and Portland production facilities pursuant to our Corporate Relocation Plan. At June 30, 2015, we had a net loss position in our margin accounts for coffee-related derivative instruments resulting in restriction of the use of $1.0 million of cash in these accounts, which contributed to lower cash inflows in fiscal 2015.period.
Net cash used in investing activities was $106.7during the fiscal year ended June 30, 2019 decreased $42.3 million in fiscal 2017 as compared to $39.5fiscal year ended June 30, 2018. Investment activities were elevated in the prior year period principally due to the acquisition of the Boyd Business for $39.6 million in cash. For the fiscal 2016 and $20.1 million in fiscal 2015. In fiscal 2017, net cash used in investing activities included $25.9 million for the acquisitions of China Mist and West Coast Coffee, $45.2 million foryear ended June 30, 2019 we had purchases of property, plant and equipment including $25.9of $34.8 million, for the New Facility and $39.8which included $13.7 million for purchases of construction-in-progress assets in connection with the construction of the New Facility as the deemed owner under the lease arrangement, partially offset by proceeds from the sale of property, plant and equipment of $4.1 million, primarily real estate. In fiscal 2016, net cash used in investing activities included $31.1 million for purchases of property, plant and equipment including $4.4 million in machinery and equipment forrelating to the New FacilityNorthlake, Texas facility, and $19.4$21.1 million in maintenance capital expenditures. Maintenance capital expenditures included higher coffee brewing equipment purchases compared to the prior year period due to an increased level of construction-in-progress assets in connection with the construction of the New Facility as the deemed owner under the lease arrangement, partially offset by $10.9 million in proceeds from sales of assets, primarily spice assets and real estate. Ininstallations for new customers during fiscal 2015, net cash used in investing activities included $1.2 million in payments in connection with the RLC Acquisition and $19.2 million for purchases of property, plant and equipment, partially offset by proceeds from sales of assets, primarily vehicles, of $0.3 million.2019.
Financing Activities
Net cash provided by financing activities in fiscal 2017 was $49.8year ended June 30, 2020 increased $28.2 million as compared to $17.8fiscal year ended June 30, 2019. Net cash provided by financing activities in the current year included $30.0 million in fiscal 2016 and net cash used in financing activities of $3.6borrowings under our Revolving Facility compared to $2.2 million in net borrowings in the fiscal 2015. year ended June 30, 2019. The $30.0 million in net borrowings in the fiscal year ended June 30, 2020, was the result of increased borrowings as a proactive measure to increase our cash position and preserve financial flexibility due to the COVID-19 pandemic business uncertainty.
Net cash provided by financing activities in fiscal 2017 included proceeds from sale-leaseback financing of $42.5year ended June 30, 2019 decreased $60.5 million net borrowings of $27.5 million, $16.3 million in proceeds from lease financing in connection with the construction of the New Facility as the deemed owner under the lease arrangement and $0.7 million in proceeds from stock option exercises, partially offset by repayments of sale-leaseback financing of $35.8 million, $1.4 million usedcompared to pay capital lease obligations and $38,000 in tax withholding payments related to net share settlement of equity awards.
fiscal year ended June 30, 2018. Net cash provided by financing activities in fiscal 2016year ended June 30, 2019 included $19.4$2.2 million
in proceeds from lease financing in connection with the construction of the New Facility as the deemed owner under the lease arrangement and $1.7 million in proceeds from stock option exercises, partially offset by $3.1 million usednet borrowings compared to pay capital lease obligations, $0.2 million in tax withholding payments related to net share settlement of equity awards and net repayments on our credit facility of $31,000. Net cash used in financing activities in fiscal 2015 included $3.9 million used to pay capital lease obligations, $0.6$62.2 million in net repayments on our credit facility, $0.6 million in deferred financing costs for the Revolving Facility and $0.1 million in tax withholding payments related to net share settlement of equity awards, partially offset by $1.5 million in proceeds from stock option exercises.
Sale of Spice Assets
In order to focus on our core product offerings, in the second quarter of fiscal 2016, we completed the sale of certain assets associated with our manufacture, processing and distribution of raw, processed and blended spices and certain other culinary products to Harris. See Note 6, Sales of Assets—Sale of Spice Assets, of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this report.Sale of Torrance Facility
On July 15, 2016, we completed the sale of the Torrance Facility consisting of approximately 665,000 square feet of buildings located on approximately 20.33 acres of land, for an aggregate cash sale price of $43.0 million, which sale price was subject to customary adjustments for closing costs and documentary transfer taxes. Cash proceeds from the sale of the Torrance Facility were $42.5 million. Following the closing of the sale, we leased back the Torrance Facility on a triple net basis through October 31, 2016 at zero base rent, and exercised two one-month extensions at a base rent of $100,000 per month. We vacated the Torrance Facility in December 2016 and concluded the leaseback transaction. Accordingly,borrowings in the fiscal year ended June 30, 2017, we recognized a net gain from the sale of the Torrance Facility in the amount of $37.4 million, including non-cash interest expense of $0.7 million and non-cash rent expense of $1.4 million, representing the rent for the zero base rent period previously recorded in “Other current liabilities” and removed the amounts recorded in “Assets Held for Sale” and the “Sale-leaseback financing obligation” on our consolidated balance sheet. See Note 6, Sale of Assets—Sale of Torrance Facility, and Note 7, Assets Held for Sale, of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this report.Acquisitions
On October 11, 2016, we acquired substantially all of the assets and certain specified liabilities of China Mist for aggregate purchase consideration of $12.2 million consisting of $11.2 million in cash paid at closing, including estimated working capital adjustments of $0.4 million, post-closing final working capital adjustments of $0.6 million and up to $0.5 million in contingent consideration to be paid as earnout if certain sales levels are achieved in in the calendar years of 2017 or 2018. On February 7, 2017, we acquired substantially all of the assets and certain specified liabilities of West Coast Coffee for aggregate purchase consideration of $15.7 million, which included $14.7 million in cash paid at closing including working capital adjustments of $1.2 million and up to $1.0 million in contingent consideration to be paid as earnout if certain sales levels are achieved in the twenty-four months following the closing. We funded the purchase price for these acquisitions with proceeds under our Revolving Facility and cash flows from operations. See Note 3, Acquisitions, of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this report.DSD Restructuring Plan
On February 21, 2017, we announced the DSD Restructuring Plan. We estimate that we will recognize approximately $3.7 million to $4.9 million of pre-tax restructuring charges by the end of the second quarter of fiscal 2018 consisting of approximately $1.9 million to $2.7 million in employee-related costs, including severance, prorated bonuses for bonus eligible employees, contractual termination payments and outplacement services, and $1.8 million to $2.2 million in other related costs, including legal, recruiting, consulting, other professional services, and travel. Expenses related to the DSD Restructuring Plan in theIn fiscal year ended June 30, 2017 consisted of $1.1 million in employee-related costs and $1.3 million in other related costs. As of June 30, 2017, we had paid a total of $1.72018, $39.6 million of these costs and had a balance of $0.7 million in DSD Restructuring Plan-related liabilities on our consolidated balance sheet. We may also incur other charges not currently contemplated duethe net borrowings was used to events that may occur as a result of, or associated with,fund the DSD Restructuring Plan. We expect to complete the DSD Restructuring Plan by the endpurchase of the second quarter of fiscal 2018. See Note 4, Restructuring Plans—DSD Restructuring Plan, of the Notes to Consolidated Financial Statements included in Part I, Item 1 of this report.Boyd Business.Corporate Relocation Plan
We estimated that we would incur approximately $31 million in cash costs in connection with the Corporate Relocation Plan consisting of $18 million in employee retention and separation benefits, $5 million in facility-related costs and $8 million in other related costs. Since the adoption of the Corporate Relocation Plan through June 30, 2017, we have
recognized a total of $31.5 million in aggregate cash costs including $17.1 million in employee retention and separation benefits, $7.0 million in facility-related costs related to the temporary office space, costs associated with the move of the Company's headquarters, relocation of our Torrance operations and certain distribution operations and $7.4 million in other related costs recorded in “Restructuring and other transition expenses” in our consolidated statements of operations. We completed the Corporate Relocation Plan in the fourth quarter of fiscal 2017 and have $0.3 million in accrued costs remaining to be paid in fiscal 2018. We also recognized from inception through June 30, 2017 non-cash depreciation expense of $2.3 million associated with the Torrance production facility resulting from the consolidation of coffee production operations with the Houston and Portland production facilities and $1.4 million in non-cash rent expense recognized in the sale-leaseback of the Torrance Facility. On July 13, 2017, we received correspondence from the WCT Pension Trust stating that we had liability for a share of the WCTPP unfunded vested benefits based on the WCT Pension Trust’s claim that certain of our employment actions resulting from the Corporate Relocation Plan amounted to a partial withdrawal from the WCTPP. See Note 4, Restructuring Plans—Corporate Relocation Plan, and Note 26, Subsequent Events-Western Conference of Teamsters Pension Trust, of the Notes to Consolidated Financial Statements included in Part I, Item 1 of this report.Purchase Option Exercise
On September 15, 2016, we closed the purchase option and acquired the land and the partially constructed New Facility located thereon for an aggregate purchase price of $42.5 million, consisting of the purchase option price of $42.0 million based on actual construction costs incurred for the partially constructed New Facility as of the Purchase Option Closing Date, plus the option exercise fee, plus amounts paid in respect of real estate commissions, title insurance, and recording fees. The Purchase Price was paid in cash from proceeds received from the sale of the Torrance Facility. Upon closing of the purchase option, we recorded the aggregate purchase price of the New Facility in “Property, plant and equipment, net” on our consolidated balance sheet. The asset related to the New Facility lease obligation included in “Property, plant and equipment, net,“ the offsetting liability for the lease obligation included in “Other long-term liabilities“ and the rent expense related to the land were reversed. See Note 5, New Facility—Lease Agreement and Purchase Option Exercise, of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this report.Amended Building Contract
On September 17, 2016, we and The Haskell Company (“Builder”) entered into a Change Order, which, among other things, amended the building contract previously entered into between us and Builder to provide a guaranteed maximum price and the basis for the price and the scope of Builder’s services in connection with the construction of the New Facility (the “Amended Building Contract“). Pursuant to the Amended Building Contract, we will pay Builder up to $21.9 million for Builder’s services in connection with the pre-construction and construction services, including specialized industrial design and construction work in connection with Builder’s construction of certain production equipment that will be installed in portions of the New Facility. In April 2017, we entered into a change order to change the scope of work which added $0.6 million to the Amended Building Contract. Builder's work has been completed as of June 30, 2017. See Note 5, New Facility—Amended Building Contract, and Note 23, Contractual Obligations, Commitments and Contingencies of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this report.New Facility Costs
We estimated that the total construction costs including the cost of the land for the New Facility would be approximately $60 million. As of June 30, 2017, we have incurred an aggregate of $60.8 million and have outstanding contractual obligations of $1.6 million. In addition to the costs to complete the construction of the New Facility, we estimated that we would incur approximately $35 million to $39 million for machinery and equipment, furniture and fixtures, and related expenditures of which we have incurred an aggregate of $33.2 million as of June 30, 2017, including $20.3 million under the Amended Building Contract, and have outstanding contractual obligations of $2.8 million as of June 30, 2017. See Note 5, New Facility, and Note 23,Commitments and Contingencies, of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this report. The majority of the capital expenditures associated with machinery and equipment, furniture and fixtures and related expenditures for the New Facility were incurred in the first three quarters of fiscal 2017. We commenced distribution activities at the New Facility during the second quarter of fiscal 2017 and initial production activities late in the third quarter of fiscal 2017. We began roasting coffee in the New Facility in the fourth quarter of fiscal 2017.
The following table summarizes the expenditures incurred for the New Facility as of June 30, 2017 as compared to the final budget:
|
| | | | | | | | | | | | | | | | | | | | |
| | | Expenditures Incurred | | Budget |
| (In thousands) | | Fiscal Year Ended June 30, 2017 | | Through Fiscal Year Ended June 30, 2016 | | Total | | Lower bound | | Upper bound |
| Building and facilities, including land | | $ | 32,660 |
| | $ | 28,110 |
| | $ | 60,770 |
| | $ | 55,000 |
| | $ | 60,000 |
|
| Machinery and equipment; furniture and fixtures | | 28,798 |
| | 4,443 |
| | $ | 33,241 |
| | 35,000 |
| | 39,000 |
|
| Total | | $ | 61,458 |
| | $ | 32,553 |
| | $ | 94,011 |
| | $ | 90,000 |
| | $ | 99,000 |
|
Capital Expenditures
For the fiscal years ended June 30, 2017, 2016 and 2015, our capital expenditures paid were as follows:
|
| | | | | | | | | | | | |
| | | June 30, |
| (In thousands) | | 2017 | | 2016 | | 2015 |
| Coffee brewing equipment | | $ | 10,758 |
| | $ | 8,375 |
| | $ | 10,709 |
|
| Building and facilities | | 345 |
| | 3,354 |
| | 1,460 |
|
| Vehicles, machinery and equipment | | 7,445 |
| | 10,254 |
| | 6,079 |
|
| Software, office furniture and equipment | | 698 |
| | 3,165 |
| | 946 |
|
| Land | | — |
| | 1,458 |
| | — |
|
| Capital expenditures, excluding New Facility | | $ | 19,246 |
| | $ | 26,606 |
| | $ | 19,194 |
|
| New Facility: | | | | | | |
| Building and facilities, including land(1) | | $ | 39,754 |
| | $ | 19,426 |
| | $ | — |
|
| Machinery and equipment | | 20,089 |
| | 4,443 |
| | 22 |
|
| Software, office furniture and equipment | | 5,860 |
| | — |
| | — |
|
| Capital expenditures, New Facility | | $ | 65,703 |
| | $ | 23,869 |
| | $ | 22 |
|
| Total capital expenditures(1) | | $ | 84,949 |
| | $ | 50,475 |
| | $ | 19,216 |
|
________
(1) Includes $19.4 million in purchase of construction-in-progress assets for New Facility in fiscal 2016.
In fiscal 2018, we anticipate paying between $4.5 million to $5.5 million in capital expenditures for machinery and equipment, furniture and fixtures and related expenditures budgeted for the New Facility, and approximately $20 million to $22 million in expenditures to replace normal wear and tear of coffee brewing equipment, vehicles, machinery and equipment and mobile sales solution hardware.
Depreciation and amortization expense was $23.0 million, $20.8 million and $24.2 million in fiscal 2017, 2016 and 2015, respectively. We anticipate our depreciation and amortization expense will be approximately $8.0 million to $8.5 million per quarter in fiscal 2018 based on our existing fixed asset commitments and the useful lives of our intangible assets.
Working Capital
At June 30, 2017 and 2016, our working capital was composed of the following:
|
| | | | | | | | |
| | | June 30, |
| (In thousands) | | 2017 | | 2016 |
| Current assets | | $ | 117,164 |
| | $ | 153,365 |
|
| Current liabilities | | 97,267 |
| | 56,837 |
|
| Working capital | | $ | 19,897 |
| | $ | 96,528 |
|
Contractual Obligations
The following table contains information regarding total contractual obligations as of June 30, 2017, including capital leases:2020:
| | | | | Payment due by period | | Payment due by period |
| (In thousands) | | Total | | Less Than One Year | | 1-3 Years | | 3-5 Years | | More Than 5 Years | | Total | | Less Than One Year | | 1-3 Years | | 3-5 Years | | More Than 5 Years |
| Contractual obligations: | | | | | | | | | | | | | | | | | | | | |
Operating lease obligations | | $ | 12,009 |
| | $ | 4,907 |
| | $ | 6,147 |
| | $ | 955 |
| | $ | — |
| | $ | 21,482 |
| | $ | 5,854 |
| | $ | 8,348 |
| | $ | 6,157 |
| | $ | 1,123 |
|
| New Facility construction and equipment contracts(1) | | 4,439 |
| | 4,439 |
| | — |
| | — |
| | — |
| |
| Capital lease obligations(2) | | 1,235 |
| | 994 |
| | 237 |
| | 4 |
| | — |
| |
| Pension plan obligations(3) | | 92,677 |
| | 14,097 |
| | 16,390 |
| | 17,320 |
| | 44,870 |
| |
Postretirement benefits other than pension plans(4) | | 15,801 |
| | 5,880 |
| | 1,960 |
| | 2,131 |
| | 5,830 |
| |
| Finance lease obligations(1) | | | 9 |
| | 9 |
| | — |
| | — |
| | — |
|
| Pension plan obligations(2) | | | 72,790 |
| | 7,260 |
| | 14,170 |
| | 14,700 |
| | 36,660 |
|
Postretirement benefits other than pension plans(2) | | | 5,166 |
| | 750 |
| | 915 |
| | 963 |
| | 2,538 |
|
| Revolving credit facility | | 27,621 |
| | 27,621 |
| | — |
| | — |
| | — |
| | 122,000 |
| | — |
| | — |
| | 122,000 |
| | — |
|
| Purchase commitments(5) | | 76,359 |
| | 76,359 |
| | — |
| | — |
| | — |
| |
| Purchase commitments(3) | | | 65,702 |
| | 65,702 |
| | — |
| | — |
| | — |
|
| Derivative liabilities—noncurrent | | | 2,859 |
| | — |
| | 2,859 |
| | — |
| | — |
|
| Cumulative Preferred dividends, undeclared and unpaid-non-current | | | 1,478 |
| | — |
| | 1,478 |
| | — |
| | — |
|
| Total contractual obligations | | $ | 230,141 |
| | $ | 134,297 |
| | $ | 24,734 |
| | $ | 20,410 |
| | $ | 50,700 |
| | $ | 291,486 |
| | $ | 79,575 |
| | $ | 27,770 |
| | $ | 143,820 |
| | $ | 40,321 |
|
______________
(1) Includes $1.6 million in outstanding contractual obligations for the construction of the New Facility and $2.8 million in outstanding contractual obligations for the purchase of machinery and equipment for the New Facility, including $2.2 million under the Amended Building Contract. See Note 57, New Facility,Leases, of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this report.Annual Report on Form 10‑K. (2) Includes imputed interest of $40,000.
(3) Includes $86.5 million in estimated future benefit payments on single employer pension plan obligations, $4.0 million in estimated payments in fiscal 2018 towards settlement of withdrawal liability associated with the Company's withdrawal from the Local 807 Labor Management Pension Plan and $2.2 million in estimated fiscal 2018 contributions to multiemployer pension plans. See Note 1513, Employee Benefit Plans, of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this report.Annual Report on Form 10‑K. | |
(4) | Includes $10.8 million in estimated future benefit payments on single employer postretirement plan obligations and $5.0 million in estimated 2018 contributions to multiemployer plans other than pension plans. See Note 15, Employee Benefit Plans, of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this report. |
(5)(3) Purchase commitments include commitments under coffee purchase contracts for which all delivery terms have been finalized but the related coffee has not been received as of June 30, 2017.2020. Amounts shown in the table above: (a) include all coffee purchase contracts that the Company considers to be from normal purchases; and (b) do not include amounts related to derivative instruments that are recorded at fair value on the Company’s consolidated balance sheets. See Note 22, Commitments and Contingencies, of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10‑K.
As of
Capital Expenditures
For the fiscal years ended June 30, 2020, 2019 and 2018, our capital expenditures paid were as follows:
|
| | | | | | | | | | | | |
| | | June 30, |
| (In thousands) | | 2020 | | 2019 | | 2018 |
| Maintenance: | | | | | | |
| Coffee brewing equipment | | $ | 6,479 |
| | $ | 14,925 |
| | $ | 12,067 |
|
| Building and facilities | | 154 |
| | 106 |
| | 542 |
|
| Vehicles, machinery and equipment | | 1,772 |
| | 2,787 |
| | 5,513 |
|
| Software, office furniture and equipment | | 3,440 |
| | 3,270 |
| | 3,660 |
|
| Capital expenditures, maintenance | | $ | 11,845 |
| | $ | 21,088 |
| | $ | 21,782 |
|
| | | | | | | |
| Expansion Project: | | | | | | |
| Machinery and equipment | | $ | 5,417 |
| | $ | 13,671 |
| | $ | 10,746 |
|
| IT equipment | | $ | 298 |
| | $ | — |
| | $ | — |
|
| Capital expenditures, Expansion Project | | $ | 5,715 |
| | $ | 13,671 |
| | $ | 10,746 |
|
| | | | | | | |
| New Facility Costs: | | | | | | |
| Building and facilities, including land | | $ | — |
| | $ | — |
| | $ | 1,577 |
|
| Machinery and equipment | | — |
| | — |
| | 2,489 |
|
| Software, office furniture and equipment | | — |
| | — |
| | 426 |
|
| Capital expenditures, New Facility | | $ | — |
| | $ | — |
| | $ | 4,492 |
|
| Total capital expenditures | | $ | 17,560 |
| | $ | 34,759 |
| | $ | 37,020 |
|
In fiscal 2021, we anticipate maintenance capital expenditures will be between $10.0 million to $13.0 million. We expect to finance these expenditures through cash flows from operations and borrowings under our Revolving Facility.
Depreciation and amortization expense was $29.9 million, $31.1 million and $30.5 million in fiscal 2020, 2019 and 2018, respectively. We anticipate our depreciation and amortization expense will be approximately $6.5 million to $7.0 million per quarter in fiscal 2021 based on our existing fixed assets and the useful lives of our intangible assets.
Acquisitions
On October 2, 2017, we had committed toacquired substantially all of the assets and certain specified liabilities of Boyd Coffee. At closing, for consideration of the purchase, green coffee inventory totaling $66.7 million under fixed-price contracts, $3.5we paid Boyd Coffee $38.9 million in equipment for the Newcash from borrowings under our Revolving Facility and $6.1 million in other purchases under non-cancelable purchase orders.
Certainissued to Boyd Coffee 14,700 shares of our business acquisitions involve the payment of contingent consideration. Certain of these payments are based on achievement of certain sales levels during the earn-out period and, consequently, we cannot currently determine the total payments. However, we have developed an estimate of the maximum potential contingent consideration for each of our acquisitionsSeries A Preferred Stock, with an outstanding earn-out obligation. The estimated maximuma fair value of future contingent$11.8 million as of the closing date. Additionally, we held back $3.2 million in cash and 6,300 shares of Series A Preferred Stock, with a fair value of $4.8 million as of the closing date, for the satisfaction of any post-closing net working capital adjustment and to secure Boyd Coffee’s (and the other seller parties’) indemnification obligations under the purchase agreement.
In addition to the $3.2 million cash holdback, as part of the consideration thatfor the purchase, at closing we could be requiredheld back $1.1 million in cash to pay, associated with our business acquisitionson behalf of Boyd Coffee, any assessment of withdrawal liability made against Boyd Coffee following the closing date in respect of Boyd Coffee’s multiemployer pension plan, which amount is $1.2 million recorded in “Other current liabilities” and “Otherother long-term liabilities”liabilities on our consolidated balance sheet at June 30, 2017 (see 2018. On January 8, 2019, Boyd Coffee notified the Company of the assessment of $0.5 million in withdrawal liability against Boyd Coffee, which the Company timely paid from the Multiemployer Plan Holdback during the three months ended March 31, 2019. The Company has applied the remaining amount of the Multiemployer Plan Holdback of $0.5 million towards satisfaction of the Seller’s post-closing net working capital deficiency under the Asset Purchase Agreement as of March 31, 2019.
The fair value of consideration transferred reflected the Company’s best estimate of the post-closing net working capital adjustment of $8.1 million due to the Company at June 30, 2018 when the purchase price allocation was finalized. In January
2019, the post-closing net working capital adjustment was determined by an Independent Expert to be $6.3 million due to the Company.
As of March 31, 2019 and updated as of June 30, 2020 , we have satisfied the $6.3 million amount by applying the remaining amount of the Multiemployer Plan Holdback of $0.5 million, retaining all of the Holdback Cash Amount of $3.2 million and canceling 5,386 shares of Holdback Stock with a fair value of $2.6 million based on the stated value and deemed conversion price as defined in the asset purchase agreement. We have retained the remaining 914 shares of the Holdback Stock pending satisfaction of certain indemnification claims against the Seller following which the remaining Holdback Stock, if any, will be released to the Seller.
See Note 193, Other Current Liabilities and Note 20Acquisitions, Other Long-Term Liabilities, of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this report. Subjectreport for further details of the acquisitions.
Recent Accounting Pronouncements
Refer to achievement of certain milestones, the contingent consideration is estimated to be paid before the end of calendar 2019. Since it is not possible to estimate when, or even if, the acquired companies will reach their performance milestones or the amount of contingent consideration payable based on future sales, the maximum contingent consideration has not been included in the table above.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
Critical Accounting Policies and Estimates
Management’s discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with GAAP. Our significant accounting policies are discussed in Note 2, Summary of Significant Accounting Policies,of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this report. The preparationreport for a summary of recently adopted and recently issued accounting standards and their related effects or anticipated effects on our consolidated results of operations and financial condition.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
Critical Accounting Policies and Estimates
We prepare our consolidated financial statements in accordance with GAAP. In applying many of these financial statements requires usaccounting principles, we need to make assumptions, estimates or judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluatein our estimates, including those related to inventory valuation, including LIFO reserves, valuation of goodwill and intangible assets, deferred tax assets, liabilities relating to retirement benefits, liabilities resulting from self-insurance, tax liabilities and litigation.consolidated financial statements. We base our estimates judgments and assumptionsjudgments on historical experience and other relevant factorsassumptions that are believed to be reasonable based on information available to us at the time these estimates are made.
While we believe thatare reasonable under the historical experiencecircumstances. These assumptions, estimates or judgments, however, are both subjective and other factors considered provide a meaningful basis for the accounting policies applied in the preparation of the consolidated financial statements,subject to change, and actual results may differ from theseour assumptions and estimates. If actual amounts are ultimately different from our estimates, the revisions are included in our results of operations for the period in which could require us to make adjustments to these estimates in future periods.
the actual amounts become known. We believe
that the
estimates, judgments and assumptions involved in the accounting policies described below require the most subjective judgment and have the greatest potential impact on our financial statements, so we consider these to be our critical accounting policies. Our senior management has reviewed the development and selection of thesefollowing critical accounting policies
andcould potentially produce materially different results if we were to change the underlying assumptions, estimates
and their related disclosureor judgments. See Note 2, Summary of Significant Accounting Policies,of the Notes to Consolidated Financial Statements included in this report, with the Audit CommitteeAnnual Report on Form 10‑K for a summary of our Board of Directors.significant accounting estimates. Exposure to Commodity Price Fluctuations and Derivative Instruments
We are exposed to commodity price risk arising from changes in the market price of green coffee. In general, increases in the price of green coffee could cause our cost of goods sold to increase and, if not offset by product price increases, could negatively affect our financial condition and results of operations. As a result, our business model strives to reduce the impact of green coffee price fluctuations on our financial results and to protect and stabilize our margins, principally through customer arrangements and derivative instruments.
Customers generally pay for our products based either on an announced price schedule or under commodity-based pricing arrangements whereby the changes in green coffee commodity and other input costs are passed through to the customer. The pricing schedule is generally subject to adjustment, either on contractual terms or in accordance with periodic product price adjustments, typically monthly, resulting in, at the least, a 30-day lag in our ability to correlate the changes in our prices with fluctuations in the cost of raw materials and other inputs.
In addition to our customer arrangements, we utilize derivative instruments to reduce further the impact of changing green coffee commodity prices. We purchase over-the-counter coffee derivative instruments to enable us to lock in the price of green coffee commodity purchases. These derivative instruments may be entered into at the direction of the customer under commodity-based pricing arrangements to effectively lock in the purchase price of green coffee under such customer
arrangements, in certain cases up to 18 months or longer in the future. Notwithstanding this customer direction, pursuant to Accounting Standards Codification (“ASC“) 815, “Derivatives and Hedging,” we are considered the owner of these derivative instruments and, therefore, we are required to account for them as such. In the event the customer fails to purchase the products associated with the underlying derivative instruments for which the price has been locked-in on behalf of the customer, we expect that such derivative instruments will be assigned to, and assumed by, the customer in accordance with contractual terms or, in the absence of such terms, in accordance with standard industry custom and practice. In the event the customer fails to assume such derivative instruments, we will remain obligated on the derivative instruments at settlement. We generally settle derivative instruments to coincide with the receipt of the purchased green coffee or apply the derivative instruments to purchase orders effectively fixing the cost of in-bound green coffee purchases. As of June 30, 20172020 and 2016,2019, we had 35.244.8 million and 34.048.2 million pounds of green coffee covered under coffee-related derivative instruments, respectively. We do not purchase any derivative instruments to hedge cost fluctuations of any commodities other than green coffee.
The fair value of derivative instruments is based upon broker quotes. We account for certain coffee-related derivative instruments as accounting hedges in order to minimize the volatility created in our quarterly results from utilizing these derivative contracts and to improve comparability between reporting periods. The effective portion of the change in fair value of the derivative is reported in accumulated other comprehensive income (loss) (“AOCI”) on our consolidated balance sheet and subsequently reclassified into cost of goods sold in the period or periods when the hedged transaction affects earnings. At June 30, 2017,2020, approximately 94%81% of our outstanding coffee-related derivative instruments, representing 33.036.4 million pounds of forecasted green coffee purchases, were designated as cash flow hedges. At June 30, 2016,2019, approximately 96%87% of our outstanding coffee-related derivative instruments, representing 32.642.1 million pounds of forecasted green coffee purchases, were designated as cash flow hedges. The portion of open hedging contracts that are not 100% effective as cash flow hedges and those that are not designated as accounting hedges are marked to period-end market price and unrealized gains or losses based on whether the period-end market price was higher or lower than the price we locked-in are recognized in our financial results.
Our risk management practices reduce but do not eliminate our exposure to changing green coffee prices. While
Additionally, we have limitedinterest swap rate derivative instruments on our exposure to unfavorable green coffee price changes, we have also limited our ability to benefit from favorable price changes. Further, our counterparty may require that we post cash collateral ifdebt facility. Therefore, movement in the fair value of our derivative liabilities exceedunderlying yield curves could negatively impact the amount of credit granted by such counterparty, thereby reducing our liquidity. At June 30, 2017interest expense, future earnings and 2016, because we had a net gain position in our coffee-related derivative margin accounts, none of the cash in these accounts was restricted. Changes in commodity prices and the number of coffee-related derivative instruments held could have a significant impact on cash deposit requirements under our broker and counterparty agreements.flows.
Inventories
Inventories are valued at the lower of cost or market. We account for coffee,net realizable value. Coffee, tea and culinary products, on the last in, first out (“LIFO”) basis, and coffee brewing equipment parts are accounted for on the first in, first out (“FIFO”)FIFO basis. We regularly evaluate these inventories to determine the provision for obsolete and slow-moving inventory. Inventory reserves are based on inventory obsolescence trends, historical experience and application of specific identification. At the end of each quarter, we record the expected effect of the liquidation of LIFO inventory quantities, if any, and record the actual impact at fiscal year-end. An actual valuation of inventory under the LIFO method is made only at the end of each fiscal year based on the inventory levels and costs at that time. If inventory quantities decline at the end of the fiscal year compared to the beginning of the fiscal year, the reduction results in the liquidation of LIFO inventory quantities carried at the cost prevailing in prior years. This LIFO inventory liquidation may result in a decrease or increase in cost of goods sold depending on whether the cost prevailing in prior years was lower or higher, respectively, than the current year cost. As these estimates are subject to many forces beyond management's control, interim results are subject to the final fiscal year-end LIFO inventory valuation.
Impairment of Goodwill and Indefinite-lived Intangible Assets
We account for our goodwill and indefinite-lived intangible assets in accordance with Accounting Standards Codification (“ASC”) 350, “Intangibles-Goodwill and Other” (“ASC 350”). Goodwill and other indefinite-lived intangible assets are not amortized but instead are reviewed for impairment annually, or more frequently if an event occurs or circumstances change which indicate that an asset might be impaired. We perform a qualitative assessment of goodwill and indefinite-lived intangible assets on our consolidated balance sheets, to determine if there is a more likely than not
indication that our goodwill and indefinite-lived intangible assets are impaired as of June 30.January 31, during our fiscal third quarter. If the indicators of impairment are present, we perform a quantitative test to determine the impairment of these assets as of the measurement date.
Testing for impairment of goodwill We may also elect to bypass the qualitative assessment and proceed directly to a quantitative analysis depending on the facts and circumstances. If, after assessing qualitative and quantitative factors, we believe that it is a two-step process. The first step requires us to comparemore likely than not that the fair value of our reporting units to the carrying value of the reporting units, including goodwill. If the fair value of a reporting unit is less than its carrying value, we will record the amount of goodwill and indefinite-lived intangible assets impairment as the excess of the carrying amount over the fair value. Indefinite-lived intangible assets consist of certain acquired trademarks, trade names and brand name.
In performing a quantitative analysis, recoverability of goodwill for each reporting unit is potentially impairedmeasured using an income approach based on discounted cash flow model incorporating discount rates commensurate with the risks involved. The income approach is supported by a reconciliation of our calculated fair value for the Company to the company’s market capitalization. Use of a discounted cash flow model is common practice in assessing impairment in the absence of available transactional market evidence to determine the fair value. The key assumptions used in the discounted cash flow valuation model include discount rates, growth rates, tax rates, cash flow projections and we then complete stepterminal value rates. Discount rates, growth rates and cash flow projections are the most sensitive and susceptible to change as they require significant management judgment. We may engage third-party valuation consultants to assist with this process. The valuation consultants assess fair value by equally weighting a combination of two market approaches (market multiple analysis and comparable transaction analysis) and the discounted cash flow approach. Discount rates are determined by using a weighted average cost of capital ("WACC"). The WACC considers market and industry data as well as company-specific risk factors for each reporting unit in determining the appropriate discount rate to measurebe used. The discount rate utilized for each reporting unit is indicative of the return an investor would expect to receive for investing in such a business. We consider industry and company-specific historical and projected data, to develop growth rates and cash flow projections for each reporting unit. Terminal value rate determination follows common methodology of capturing the present value of perpetual cash flow estimates beyond the last projected period assuming a constant WACC and low long-term growth rates. If the calculated fair value is less than the current carrying amount, an impairment loss if any. The second step requiresis recorded in the calculation ofamount by which the implied fair value of goodwill, which is the residual fair value remaining after deducting the fair value of all tangible and intangible net assets ofcarrying amount exceeds the reporting unit from theunit's fair value of the reporting unit. If the implied fair value of goodwill is less thanvalue. An impairment loss cannot exceed the carrying amount of goodwill an impairment loss is recognized equalassigned to the difference.
Indefinite-liveda reporting unit but may indicate certain long-lived and amortizable intangible assets are tested forassociated with the reporting unit may require additional impairment by comparing their fair valuestesting.
We test indefinite-lived intangible assets quantitatively utilizing the relief from royalty method under the income approach to their carrying values. An impairment charge is recorded ifdetermine the estimated fair value for each indefinite-lived intangible asset. The relief from royalty method estimates our theoretical royalty savings from ownership of suchthe intangible asset. Key assumptions used in this model include discount rates, royalty rates, growth rates, tax rates, sales projections and terminal value rates. Discount rates, royalty rates, growth rates and sales projections are the assumptions most sensitive and susceptible to change as they require significant management judgment. Discount rates used are similar to the rates estimated by the WACC considering any differences in company-specific risk factors. Royalty rates are established by management and are periodically substantiated by third-party valuation consultants. We consider industry and company-specific historical and projected data, to develop growth rates and sales projections associated with each indefinite-lived intangible asset. Terminal value rate determination follows common methodology of capturing the present value of perpetual sales projections beyond the last projected period assuming a constant WACC and low long-term growth rates.
Valuation methodologies utilized to evaluate goodwill and indefinite-lived intangible assets has decreasedfor impairment were consistent with prior periods. We periodically engage third-party valuation consultants to assist us with this process. Specific assumptions discussed above are updated at the date of each test to consider current industry and company-specific risk factors from the perspective of a market participant. The current business environment is subject to evolving market conditions and requires significant management judgment to interpret the potential impact to our assumptions. To the extent that changes in the current business environment result in adjusted management projections, impairment losses may occur in future periods.
Our annual impairment tests completed as of January 31, during our fiscal third quarter, and adjusted for the negative impact of COVID-19, indicated the fair values of our goodwill and certain indefinite-lived intangible assets were substantially below their carrying value.values. As a result, we recorded $36.2 million and $5.8 million, respectively, of impairments to goodwill and indefinite-lived intangibles during the year ended June 30, 2020. With this adjustment, our Goodwill assets are now fully impaired as of June 30, 2020. See Note 12, Goodwill and Intangible Assets, of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10‑K for further details. Other Intangible Assets
Other intangible assets consist of finite-lived intangible assets including acquired recipes, non-compete agreements, customer relationships, a trade names, trademarksname/brand name and a brand name.certain trademarks. These assets are amortized over their estimated useful lives and are tested for impairment by grouping them with other assets at the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities. The estimated future cash flows are based upon, among other things, assumptions about expected future operating performance and may differ from actual cash flows. If the sum of the projected undiscounted cash flows (excluding interest) is less than the carrying value of the assets, the assets will be written down to the estimated fair value in the period in which the determination is made. We review the recoverability of our long-lived assets whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable.
Self-Insurance
We use a combination of insurance and self-insurance mechanisms to provide for the potential liability of certain risks including workers’ compensation, health care benefits, general liability, product liability, property insurance and director and officers’ liability insurance. Liabilities associated with risks retained by us are not discounted and are estimated by considering historical claims experience, demographics, exposure and severity factors and other actuarial assumptions.
Our self-insurance for workers’ compensation liability includes estimated outstanding losses of unpaid claims and allocated loss adjustment expenses (“ALAE”), case reserves, the development of known claims and incurred but not reported claims. ALAE are the direct expenses for settling specific claims. The amounts reflect per occurrence and annual aggregate limits maintained by the Company. The estimated liability analysis does not include estimating a provision for unallocated loss adjustment expenses. We believe that the amount recorded at June 30, 20172020 is adequate to cover all known workers' compensation claims at June 30, 2017.2020. If the actual costs of such claims and related expenses exceed the amount estimated, additional reserves may be required which could have a material negative effect on our operating results.
The estimated liability related to our self-insured group medical insurance is recorded on an incurred but not reported basis, within deductible limits, based on actual claims and the average lag time between the date insurance claims are filed and the date those claims are paid. The cost of general liability, product liability and commercial auto liability is accrued based on estimates of the aggregate liability claims incurred using certain actuarial assumptions and historical claims experience.
Employee Benefit Plans
We provide benefit plansaccount for most full-time employees, including 401(k), health and other welfare benefit plans and, in certain circumstances, pension benefits. Generally the plans provide benefits based on years of service and/or a combination of years of service and earnings. In addition, we contribute to two multiemployerour defined benefit pension plans one multiemployer defined contribution pension plan and ten multiemployer defined contribution plans other than pension plans that provide medical, vision, dental and disability benefits for active, union-represented employees subject to collective bargaining agreements. In addition, we sponsor a postretirement defined benefit plan that covers qualified non-union retirees and certain qualified union retirees and provides retiree medical coverage and, depending on the age of the retiree, dental and vision coverage. We also provide a postretirement death benefit to certain of our employees and retirees.
We are required to recognize thein accordance with ASC No. 715-20, “Compensation—Defined Benefit Plans—General” (“ASC 715-20”). The funded status of a benefit plan in our consolidated balance sheet. We are also required to recognize in OCI certain gains and losses that arise duringis the period but are deferred under pension accounting rules.
Single Employer Pension Plans
We have a defined benefit pension plan, the Farmer Bros. Co. Pension Plan for Salaried Employees (the “Farmer Bros. Plan”), for our employees hired prior to January 1, 2010 who are not covered under a collective bargaining agreement. We amended the Farmer Bros. Plan, freezing the benefit for all participants effective June 30, 2011. After the plan freeze, participants do not accrue any benefits under the Farmer Bros. Plan, and new hires are not eligible to participate in the Farmer Bros. Plan. As all plan participants became inactive following this pension curtailment, net (gain) loss is now amortized based on the remaining life expectancy of these participants instead of the remaining service period of these participants.
We also have two defined benefit pension plans for certain hourly employees covered under collective bargaining agreements (the “Brewmatic Plan” and the “Hourly Employees’ Plan”). Effective October 1, 2016, the Company froze benefit accruals and participation in the Hourly Employees' Plan. After the plan freeze, participants do not accrue any benefits under the plan, and new hires are not eligible to participate in the plan. After the freeze the participants in the plan are eligible to receive the Company's matching contributions to their 401(k).
We obtain actuarial valuations for our single employer defined benefit pension plans. In fiscal 2017 we discounted the pension obligations using a 3.55% discount rate and 7.75% expected long-term rate of return on plan assets. The performance of the stock market and other investments as well as the overall health of the economy can have a material effect on pension investment returns and these assumptions. A change in these assumptions could affect our operating results.
At June 30, 2017, the projected benefit obligation under our single employer defined benefit pension plans was $154.7 million anddifference between the fair value of plan assets was $103.4 million.and the benefit obligation. The difference betweenadjustment to accumulated other comprehensive Income (loss) represents the net unrecognized actuarial gains or losses and unrecognized prior service costs. Future actuarial gains or losses that are not recognized as net periodic benefits cost in the same periods will be recognized as a component of other comprehensive income.
We maintain several defined benefit plans that cover certain employees. We record the expenses associated with these plans based on calculations which include various actuarial assumptions such as discount rates and expected long-term rates of return on plan assets. Material changes in pension costs may occur in the future due to changes in these assumptions. Future
annual amounts could be impacted by changes in the discount rate, changes in the expected long-term rate of return, changes in the level of contributions to the plans and other factors.
We utilize a yield curve analysis to determine the discount rates for our defined benefit plans’ obligations. The yield curve considers pricing and yield information for high quality bonds with maturities matched to estimated payouts of future pension benefits. The expected return on plan assets is based on our expectation of the long-term rates of return on each asset class based on the current asset mix of the funds, considering the historical returns earned on the type of assets in the funds. We review our actuarial assumptions on an annual basis and make modifications to the assumptions based on current rates and trends when appropriate. The effects of the modifications to the actuarial assumptions which impact the projected benefit obligation and the fair value of plan assets is recognized asare amortized over future periods.
In connection with certain collective bargaining agreements to which we are a decrease in OCI and an increase in pension liability and deferred tax assets. The difference between plan obligations and assets, or the funded status of the plans, significantly affects the net periodic benefit cost and ongoing funding requirements of those plans. Among other factors, changes in interest rates, mortality rates, early retirement rates, mix of plan asset investments, investment returns and the market value of plan assets can affect the level of plan funding, cause volatility in the net periodic benefit cost, increase our future funding requirements and require premium payments to the Pension Benefit Guaranty Corporation. For the fiscal year ended June 30, 2017,party, we made $2.4 million in contributions to our single employer defined benefit pension plans and recorded pension expense of $1.3 million. We expect to make approximately $3.1 million in contributions to our single employer defined benefit pension plans in fiscal 2018 and accrue pension expense of approximately $1.6 million per year beginning in fiscal 2018. These pension contributions are expected to increase for several years and we may be required to make larger contributions in the future.
The following chart quantifies the effect on the projected benefit obligation and the net periodic benefit cost of a change in the discount rate assumption and the impact on the net periodic benefit cost of a change in the assumed rate of return on plan assets under our single employer defined benefit pension plans for fiscal 2018:
|
| | | | | | | | | | | | |
| ($ in thousands) | | | | | | |
| Farmer Bros. Plan Discount Rate | | 3.3% | | Actual 3.80% | | 4.3% |
| Net periodic benefit cost | | $ | 5,638 |
| | $ | 1,515 |
| | $ | 4,495 |
|
| Projected benefit obligation | | $ | 155,829 |
| | $ | 146,291 |
| | $ | 137,686 |
|
| | | | | | | |
| Farmer Bros. Plan Rate of Return | | 6.3% | | Actual 6.75% | | 7.3% |
| Net periodic benefit cost | | $ | 1,991 |
| | $ | 1,515 |
| | $ | 1,040 |
|
| | | | | | | |
| Brewmatic Plan Discount Rate | | 3.3% | | Actual 3.80% | | 4.3% |
| Net periodic benefit cost | | $ | 36 |
| | $ | 68 |
| | $ | 46 |
|
| Projected benefit obligation | | $ | 4,320 |
| | $ | 4,080 |
| | $ | 3,863 |
|
| | | | | | | |
| Brewmatic Plan Rate of Return | | 6.3% | | Actual 6.75% | | 7.3% |
| Net periodic benefit cost | | $ | 83 |
| | $ | 68 |
| | $ | 53 |
|
| | | | | | | |
| Hourly Employees’ Plan Discount Rate | | 3.3% | | Actual 3.80% | | 4.3% |
| Net periodic benefit cost | | $ | 37 |
| | $ | (4 | ) | | $ | (3 | ) |
| Projected benefit obligation | | $ | 4,704 |
| | $ | 4,329 |
| | $ | 3,996 |
|
| | | | | | | |
| Hourly Employees' Plan Rate of Return | | 6.3% | | Actual 6.75% | | 7.3% |
| Net periodic benefit cost | | $ | 11 |
| | $ | (4 | ) | | $ | (20 | ) |
Multiemployer Pension Plans
We participate in two multiemployer defined benefit pension plans that are union sponsored and collectively bargained for the benefitbehalf of certain union employees subject to collective bargaining agreements. We makemultiemployer pension plans. The future contributions toand liabilities associated with these plans generally based on the numbercould be material to our results of hours worked by the participants in accordance with the provisions of negotiated labor contracts.operations, financial position and cash flows.
The risks of participating in multiemployer pension plans are different from single-employer plans in that: (i) assets contributed to a multiemployer plan by one employer may be used to provide benefits to employees of other participating employers; (ii) if a participating employer stops contributing to the plan, the unfunded obligationsSee Note 13, Employee Benefit Plans, of the plan may be borne by the remaining participating employers; and (iii) if we stop participatingNotes to Consolidated Financial Statements included in the multiemployer plan, we may be required to pay the plan an amount basedthis Annual Report on the underfunded status of the plan, referred to as a withdrawal liability.Postretirement Benefits
We sponsor a postretirement defined benefit plan that covers qualified non-union retirees and certain qualified union retirees. The plan provides medical, dental and vision coverageForm 10‑K for retirees under age 65 and medical coverage only for retirees age 65 and above. Under this postretirement plan, our contributions toward premiums for retiree medical, dental and vision coverage for participants and dependents are scaled based on length of service, with greater Company contributions for retirees with greater length of service, subject to a maximum monthly Company contribution. Our retiree medical, dental and vision plan is unfunded, and its liability was calculated using an assumed discount rate of 4.1% at June 30, 2017. We project an initial medical trend rate of 8.6% in fiscal 2018, ultimately reducing to 4.5% in 10 years.
We also provide a postretirement death benefit to certainfurther discussions of our employees and retirees, subject, in the case of current employees, to continued employment with the Company until retirement, and certain other conditions related to the manner of employment termination and manner of death. We record the actuarially determined liability for the present value of the postretirement death benefit using a discount rate of 4.1%. We have purchased life insurance policies to fund the
postretirement death benefit wherein we own the policy but the postretirement death benefit is paid to the employee's or retiree's beneficiary. We record an asset for the fair value of the life insurance policies which equates to the cash surrender value of the policies.various pension plans.
Share-based Compensation
We measure all share-based compensation cost at the grant date, based on the fair values of the awards that are ultimately expected to vest, and recognize that cost on a straight line basis in our consolidated statements of operations over the requisite service period. Fair value of restricted stock and performance-based restricted stock units is the closing price of the Company's common stock on the date of grant. We estimate the fair value of stock option awards on the date of grant using the Black-Scholes valuation model which requires that we make certain assumptions regarding: (i) the expected volatility in the market price of our common stock; (ii) dividend yield; (iii) risk-free interest rate; and (iv) the period of time employees are expected to hold the award prior to exercise (referred to as the expected term).
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. Because our stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimates, in management’s opinion, the existing models may not necessarily provide a reliable single measure of the fair value of our stock options. Although the fair value of stock options is determined using an option valuation model, that value may not be indicative of the fair value observed in a willing buyer/willing seller market transaction.
In addition, weWe estimate the expected impact of forfeited awards and recognize share-based compensation cost only for those awards ultimately expected to vest. If actual forfeiture rates differ materially from our estimates, share-based compensation expense could differ significantly from the amounts we have recorded in the current period. We will periodically review actual forfeiture experience and revise our estimates, as necessary. We will recognize as compensation cost the cumulative effect of the change in estimated forfeiture rates on current and prior periods in earnings of the period of revision. As a result, if we revise our assumptions and estimates, our share-based compensation expense could change materially in the future. In each of fiscal 20172020 and 2016,2019, we used an estimated annual forfeiture rate of 4.8%10.0% and 13.0%, respectively to calculate share-based compensation expense based on actual forfeiture experience.
We haveOur outstanding share-based awards include performance-based non-qualified stock options (“PNQs”) and performance-based restricted stock units (“PBRSUs”) that have performance-based vesting conditions in addition to time-based vesting. Awards with performance-based vesting conditions require the achievement of certain financial and other performance criteria as a condition to the vesting. We recognize the estimated fair value of performance-based awards, net of estimated forfeitures, as share-based compensation expense over the performance period based upon our determination of whether it is probable that the performance targets will be achieved. At each reporting period, we reassess the probability of achieving the performance criteria and the performance period required to meet those targets. Determining whether the performance criteria will be achieved involves judgment, and the estimate of share-based compensation expense may be revised periodically based on changes in the probability of achieving the performance criteria. Revisions are reflected in the period in which the estimate is changed. If performance goals are not met, no share-based compensation expense is recognized for the cancelled shares,PNQs or PBRSUs, and, to the extent share-based compensation expense was previously recognized for those cancelled shares,PNQs or PBRSUs, such share-based compensation expense is reversed. If performance goals are exceeded and the payout is more than 100% of the target shares in the case of PBRSUs, additional compensation expense is recorded in the period when that determination is certified by the Compensation Committee of the Board of Directors.
Income Taxes
Deferred income taxes are determined based on the temporary differences between the financial reporting and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Estimating our tax liabilities involves judgments related to uncertainties in the application of complex tax regulations. We make certain estimates and judgments to determine tax expense for financial statement purposes as we evaluate the effect of tax credits, tax benefits and deductions, some of which result from differences in the timing of recognition of revenue or expense for tax and financial statement purposes. Changes to these estimates may result in significant changes to our tax provision in future periods. Each fiscal quarter we re-evaluate our tax provision and reconsider our estimates and assumptions related to specific tax assets and liabilities, making adjustments as circumstances change.
|
| |
| Item 7A. | Quantitative and Qualitative Disclosures About Market Risk |
Interest Rate Risk
We arehistorically have been exposed to market value risk arising from changes in interest rates on our securities portfolio. Our portfolio of preferred securities has sometimes included investments in derivative instruments that provide a natural economic hedge of interest rate risk. We review the interest rate sensitivity of these securities and may enter into “short positions” in futures contracts on U.S. Treasury securities or hold put options on such futures contractsfor which we entered, from time to reduce the impact of certain interest rate changes. Specifically, we attempt to manage the risk arising from changes in the general level of interest rates. We do not transact in futures contracts or put options for speculative purposes. The number and type oftime, futures and options contracts, or invested in derivative instruments, to manage our interest rate risk. Effective March 27, 2019, as amended, we entered into depends on, among other items, the specifican interest rate swap transaction utilizing a notional amount of $65.0 million, with an effective date of April 11, 2019 and a maturity and issuer redemption provisions for each preferred stock held, the slopedate of October 11, 2023. See Note 6, Derivative Instruments, of the U.S. Treasury yield curve, the expected volatility of U.S. Treasury yields, and the costs of using futures and/or options. The following table demonstrates the impact of varying interest rate changes basedNotes to Consolidated Financial Statements included in this Annual Report on our preferred securities holdings and market yield and price relationships at June 30, 2017. This table is predicated on an “instantaneous” change in the general level of interest rates and assumes predictable relationships between the pricesForm 10‑K for further discussions of our preferred securities holdings and the yields on U.S. Treasury securities. At June 30, 2017, we had no futures contracts or put options with respect to our preferred securities portfolio designated as interest rate risk hedges. |
| | | | | | | | |
| ($ in thousands) | | Market Value of Preferred Securities at June 30, 2017 | | Change in Market Value |
| Interest Rate Changes | | |
| –150 basis points | | $ | 367.5 |
| | $ | (0.2 | ) |
| –100 basis points | | $ | 367.6 |
| | $ | (0.1 | ) |
| Unchanged | | $ | 367.7 |
| | $ | — |
|
| +100 basis points | | $ | 367.6 |
| | $ | (0.1 | ) |
| +150 basis points | | $ | 367.6 |
| | $ | (0.1 | ) |
Borrowings under our Revolving Facility bear interest based on average historical excess availability levels with a range of PRIME - 0.25% to PRIME + 0.50% or Adjusted LIBO Rate + 1.25% to Adjusted LIBO Rate + 2.00%.derivative instruments.
At June 30, 2017,2020, we were eligible to borrow up to a total of $125.0 million under the Amended Revolving Facility and had outstanding borrowings of $27.6$122.0 million and had utilized $0.1$2.3 million of the letters of credit sublimit, and had excess availability undersublimit. As a result of the Revolving Facility of $27.9 million.interest rate swap, only $57.0 million is now subject to interest rate variability. The weighted average interest rate on our outstanding borrowings subject to interest rate variability under the Amended Revolving Facility at June 30, 20172020 was 3.02%4.91%.
The following table demonstrates the impact of interest rate changes on our annual interest expense on outstanding borrowings subject to interest rate variability under the Amended Revolving Facility excluding interest on letters of credit, based on the weighted average interest rate on the outstanding borrowings as of June 30, 2017:2020:
| | | ($ in thousands) | | Principal | | Interest Rate | | Annual Interest Expense | | Principal | | Interest Rate | | Annual Interest Expense |
| –150 basis points | | $27,621 | | 1.52 | % | | $ | 420 |
| | $57,000 | | 3.41 | % | | $ | 1,944 |
|
| –100 basis points | | $27,621 | | 2.02 | % | | $ | 558 |
| | $57,000 | | 3.91 | % | | $ | 2,229 |
|
| Unchanged | | $27,621 | | 3.02 | % | | $ | 834 |
| | $57,000 | | 4.91 | % | | $ | 2,799 |
|
| +100 basis points | | $27,621 | | 4.02 | % | | $ | 1,110 |
| | $57,000 | | 5.91 | % | | $ | 3,369 |
|
| +150 basis points | | $27,621 | | 4.52 | % | | $ | 1,248 |
| | $57,000 | | 6.41 | % | | $ | 3,654 |
|
Commodity Price Risk
We are exposed to commodity price risk arising from changes in the market price of green coffee. We value green coffee inventory on the LIFOFIFO basis. In the normal course of business we hold a large green coffee inventory and enter into forward commodity purchase agreements with suppliers. We are subject to price risk resulting from the volatility of green
coffee prices. Due to competition and market conditions, volatile price increases cannot always be passed on to our customers.
We purchase over-the-counter coffee derivative instruments to enable us to lock in the price of green coffee commodity purchases. These derivative instruments also may be entered into at the direction See Note 6, Derivative Instruments, of the customer under commodity-based pricing arrangementsNotes to effectively lockConsolidated Financial Statements included in the purchase price of green coffee under such customer arrangements, in certain cases up to 18 months or longer in the future. We accountthis Annual Report on Form 10‑K for certain coffee-related derivative instruments as accounting hedges in order to minimize the volatility created in our quarterly results from utilizing these derivative contracts and to improve comparability between reporting periods.When we designate coffee-related derivative instruments as cash flow hedges, we formally document the hedging instruments and hedged items, and measure at each balance sheet date the effectivenessfurther discussions of our hedges. The effective portion of the change in fair value of the derivative is reported in AOCI and subsequently reclassified into cost of goods sold in the period or periods when the hedged transaction affects earnings. For the fiscal years ended June 30, 2017, 2016 and 2015, we reclassified $1.7 million in net gains, $(13.2) million in net losses and $4.2 million in net gains, respectively, into cost of goods sold from AOCI. Any ineffective portion of the derivative's change in fair value is recognized currently in “Other, net.” Gains or losses deferred in AOCI associated with terminated derivative instruments, derivative instruments that cease to be highly effective hedges, derivative instruments for which the forecasted transaction is reasonably possible but no longer probable of occurring, and cash flow hedges that have been otherwise discontinued remain in AOCI until the hedged item affects earnings. If it becomes probable that the forecasted transaction designated as the hedged item in a cash flow hedge will not occur, we recognize any gain or loss deferred in AOCI in “Other, net” at that time. For the fiscal years ended June 30, 2017, 2016 and 2015, we recognized in “Other, net” $(0.5) million, $(0.6) million and $(0.3) million, respectively, in net losses on coffee-related derivative instruments designated as cash flow hedges due to ineffectiveness.
For derivative instruments that are not designated in a hedging relationship, and for which the normal purchases and normal sales exception has not been elected, the changes in fair value are reported in “Other, net.”
For the fiscal years ended June 30, 2017, 2016 and 2015, we recorded in “Other, net” net (losses) gains on coffee-related derivative instruments not designated as accounting hedges in the amounts of $(1.8) million, $(0.3) million and $(3.0) million, respectively.instruments.
The following table summarizes the potential impact as of June 30, 20172020 to net income (loss) and AOCI from a hypothetical 10% change in coffee commodity prices. The information provided below relates only to the coffee-related derivative instruments and does not include, when applicable, the corresponding changes in the underlying hedged items:
| | | | | Increase (Decrease) to Net Income | | Increase (Decrease) to AOCI | | Increase (Decrease) to Net Income | | Increase (Decrease) to AOCI |
| | | 10% Increase in Underlying Rate | | 10% Decrease in Underlying Rate | | 10% Increase in Underlying Rate | | 10% Decrease in Underlying Rate | | 10% Increase in Underlying Rate | | 10% Decrease in Underlying Rate | | 10% Increase in Underlying Rate | | 10% Decrease in Underlying Rate |
| (In thousands) | | |
| Coffee-related derivative instruments(1) | | $ | 274 |
| | $ | (274 | ) | | $ | 4,474 |
| | $ | (4,474 | ) | | $ | 861 |
| | $ | (861 | ) | | $ | 3,813 |
| | $ | (3,813 | ) |
__________
(1) The Company's purchase contracts that qualify as normal purchases include green coffee purchase commitments for which the price has been locked in as of June 30, 2017.2020. These contracts are not included in the sensitivity analysis above as the underlying price has been fixed.
|
| |
| Item 8. | Financial Statements and Supplementary Data |
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of
Farmer Bros. Co.
Northlake, Texas
We have audited the accompanying consolidated balance sheets of Farmer Bros. Co. and subsidiaries (the “Company“) as of June 30, 2017 and 2016 and the related consolidated statements of operations, comprehensive income (loss), cash flows, and stockholders' equity for each of the three years in the period ended June 30, 2017. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Farmer Bros. Co. and subsidiaries as of June 30, 2017 and 2016, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2017, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of June 30, 2017, based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated September 28, 2017 expressed an unqualified opinion on the Company's internal control over financial reporting.
/s/ DELOITTE & TOUCHE LLP
Dallas, Texas
September 28, 2017
FARMER BROS. CO.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data) |
| | | | | | | |
| | June 30, 2017 | | June 30, 2016 |
| ASSETS | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 6,241 |
| | $ | 21,095 |
|
| Short-term investments | 368 |
| | 25,591 |
|
| Accounts receivable, net of allowance for doubtful accounts of $721 and $714, respectively | 46,446 |
| | 44,364 |
|
| Inventories | 56,251 |
| | 46,378 |
|
| Income tax receivable | 318 |
| | 247 |
|
| Short-term derivative assets | — |
| | 3,954 |
|
| Prepaid expenses | 7,540 |
| | 4,557 |
|
| Assets held for sale | — |
| | 7,179 |
|
| Total current assets | 117,164 |
| | 153,365 |
|
| Property, plant and equipment, net | 176,066 |
| | 118,416 |
|
| Goodwill | 10,996 |
| | 272 |
|
| Intangible assets, net | 18,618 |
| | 6,219 |
|
| Other assets | 6,837 |
| | 9,933 |
|
| Deferred income taxes | 63,055 |
| | 80,786 |
|
| Total assets | $ | 392,736 |
| | $ | 368,991 |
|
| LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
| Current liabilities: | | | |
| Accounts payable | 39,784 |
| | 23,919 |
|
| Accrued payroll expenses | 17,345 |
| | 24,540 |
|
| Short-term borrowings under revolving credit facility | 27,621 |
| | 109 |
|
| Short-term obligations under capital leases | 958 |
| | 1,323 |
|
| Short-term derivative liabilities | 1,857 |
| | — |
|
| Other current liabilities | 9,702 |
| | 6,946 |
|
| Total current liabilities | 97,267 |
| | 56,837 |
|
| Accrued pension liabilities | 51,281 |
| | 68,047 |
|
| Accrued postretirement benefits | 19,788 |
| | 20,808 |
|
| Accrued workers’ compensation liabilities | 7,548 |
| | 11,459 |
|
| Other long-term liabilities-capital leases | 237 |
| | 1,036 |
|
| Other long-term liabilities | 1,480 |
| | 28,210 |
|
| Total liabilities | $ | 177,601 |
| | $ | 186,397 |
|
| Commitments and contingencies (Note 23) | — |
| | — |
|
| Stockholders’ equity: | | | |
| Preferred stock, $1.00 par value, 500,000 shares authorized and none issued | — |
| | — |
|
| Common stock, $1.00 par value, 25,000,000 shares authorized; 16,846,002 and 16,781,561 shares issued and outstanding at June 30, 2017 and 2016, respectively | 16,846 |
| | 16,782 |
|
| Additional paid-in capital | 41,495 |
| | 39,096 |
|
| Retained earnings | 221,182 |
| | 196,782 |
|
| Unearned ESOP shares | (4,289 | ) | | (6,434 | ) |
| Accumulated other comprehensive loss | (60,099 | ) | | (63,632 | ) |
| Total stockholders’ equity | $ | 215,135 |
| | $ | 182,594 |
|
| Total liabilities and stockholders’ equity | $ | 392,736 |
| | $ | 368,991 |
|
The accompanying notes are an integral part of these consolidated financial statements.
FARMER BROS. CO.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
|
| | | | | | | | | | | |
| | Year Ended June 30, |
| | 2017 | | 2016 | | 2015 |
| Net sales | $ | 541,500 |
| | $ | 544,382 |
| | $ | 545,882 |
|
| Cost of goods sold | 327,765 |
| | 335,907 |
| | 348,846 |
|
| Gross profit | 213,735 |
| | 208,475 |
| | 197,036 |
|
| Selling expenses | 157,198 |
| | 150,198 |
| | 151,753 |
|
| General and administrative expenses | 42,933 |
| | 41,970 |
| | 31,173 |
|
| Restructuring and other transition expenses | 11,016 |
| | 16,533 |
| | 10,432 |
|
| Net gain from sale of Torrance Facility | (37,449 | ) | | — |
| | — |
|
| Net gains from sale of Spice Assets | (919 | ) | | (5,603 | ) | | — |
|
| Net (gains) losses from sales of other assets | (1,210 | ) | | (2,802 | ) | | 394 |
|
| Operating expenses | 171,569 |
| | 200,296 |
| | 193,752 |
|
| Income from operations | 42,166 |
| | 8,179 |
| | 3,284 |
|
| Other (expense) income: | | | | | |
| Dividend income | 1,007 |
| | 1,115 |
| | 1,172 |
|
| Interest income | 567 |
| | 496 |
| | 381 |
|
| Interest expense | (2,185 | ) | | (425 | ) | | (769 | ) |
| Other, net | (1,201 | ) | | 556 |
| | (3,014 | ) |
| Total other (expense) income | (1,812 | ) | | 1,742 |
| | (2,230 | ) |
| Income before taxes | 40,354 |
| | 9,921 |
| | 1,054 |
|
| Income tax expense (benefit) | 15,954 |
| | (79,997 | ) | | 402 |
|
| Net income | $ | 24,400 |
| | $ | 89,918 |
| | $ | 652 |
|
| Net income per common share—basic | $ | 1.46 |
| | $ | 5.45 |
| | $ | 0.04 |
|
| Net income per common share—diluted | $ | 1.45 |
| | $ | 5.41 |
| | $ | 0.04 |
|
| Weighted average common shares outstanding—basic | 16,668,745 |
| | 16,502,523 |
| | 16,127,610 |
|
| Weighted average common shares outstanding—diluted | 16,785,752 |
| | 16,627,402 |
| | 16,267,134 |
|
The accompanying notes are an integral part of these consolidated financial statements.
FARMER BROS. CO.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
|
| | | | | | | | | | | |
| | Year Ended June 30, |
| | 2017 | | 2016 | | 2015 |
| Net income | $ | 24,400 |
| | $ | 89,918 |
| | $ | 652 |
|
| Other comprehensive income (loss), net of tax: | | | | | |
| Unrealized (losses) gains on derivative instruments designated as cash flow hedges, net of tax | (2,875 | ) | | 185 |
| | (14,295 | ) |
| (Gains) losses on derivative instruments designated as cash flow hedges reclassified to cost of goods sold, net of tax | (1,058 | ) | | 8,064 |
| | (4,211 | ) |
| Change in the funded status of retiree benefit obligations, net of tax | 7,466 |
| | (11,461 | ) | | (14,122 | ) |
| Total comprehensive income (loss), net of tax | $ | 27,933 |
| | $ | 86,706 |
| | $ | (31,976 | ) |
The accompanying notes are an integral part of these consolidated financial statements.
|
| | | | | | | | | | | |
| FARMER BROS. CO. |
| CONSOLIDATED STATEMENTS OF CASH FLOWS |
| (In thousands) |
| | Year Ended June 30, |
| | 2017 | | 2016 | | 2015 |
| Cash flows from operating activities: | | | | | |
| Net income | $ | 24,400 |
| | $ | 89,918 |
| | $ | 652 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: | | |
| Depreciation and amortization | 22,970 |
| | 20,774 |
| | 24,179 |
|
| Provision for (recovery of) doubtful accounts | 325 |
| | 71 |
| | (8 | ) |
| Restructuring and other transition expenses, net of payments | 1,034 |
| | (2,697 | ) | | 6,608 |
|
| Interest on sale-leaseback financing obligation | 681 |
| | — |
| | — |
|
| Deferred income taxes | 15,482 |
| | (80,314 | ) | | 123 |
|
| Net gain from sale of Torrance Facility | (37,449 | ) | | — |
| | — |
|
| Net (gains) losses from sales of Spice Assets and other assets | (2,129 | ) | | (8,405 | ) | | 394 |
|
| ESOP and share-based compensation expense | 3,959 |
| | 4,342 |
| | 5,691 |
|
| Net (gains) losses on derivative instruments and investments | (205 | ) | | 12,910 |
| | (950 | ) |
| Change in operating assets and liabilities: | | |
| Restricted cash | — |
| | 1,002 |
| | (1,002 | ) |
| Purchases of trading securities | (5,136 | ) | | (7,255 | ) | | (3,661 | ) |
| Proceeds from sales of trading securities | 30,645 |
| | 5,901 |
| | 2,358 |
|
| Accounts receivable | (14 | ) | | (3,476 | ) | | 2,078 |
|
| Inventories | (8,504 | ) | | 3,608 |
| | 20,470 |
|
| Income tax receivable | (71 | ) | | 288 |
| | (307 | ) |
| Derivative assets (liabilities), net | 2,305 |
| | (10,583 | ) | | (7,269 | ) |
| Prepaid expenses and other assets | (2,506 | ) | | (111 | ) | | (1,332 | ) |
| Accounts payable | 8,885 |
| | (3,343 | ) | | (16,841 | ) |
| Accrued payroll expenses and other current liabilities | (2,983 | ) | | 5,829 |
| | (4,606 | ) |
| Accrued postretirement benefits | (1,020 | ) | | (358 | ) | | (1,507 | ) |
| Other long-term liabilities | (8,557 | ) | | (473 | ) | | 1,860 |
|
| Net cash provided by operating activities | $ | 42,112 |
| | $ | 27,628 |
| | $ | 26,930 |
|
| Cash flows from investing activities: | | |
| Acquisitions of businesses, net of cash acquired | $ | (25,853 | ) | | $ | — |
| | $ | (1,200 | ) |
| Purchases of property, plant and equipment | (45,195 | ) | | (31,050 | ) | | (19,216 | ) |
| Purchases of construction-in-progress assets for New Facility | (39,754 | ) | | (19,426 | ) | | — |
|
| Proceeds from sales of property, plant and equipment | 4,078 |
| | 10,946 |
| | 273 |
|
| Net cash used in investing activities | $ | (106,724 | ) | | $ | (39,530 | ) | | $ | (20,143 | ) |
|
| | | | | | | | | | | |
| FARMER BROS. CO. |
| CONSOLIDATED STATEMENTS OF CASH FLOWS |
| (In thousands) |
| | Year Ended June 30, |
| | 2017 | | 2016 | | 2015 |
| Cash flows from financing activities: | | |
| Proceeds from revolving credit facility | $ | 77,985 |
| | $ | 405 |
| | $ | 63,376 |
|
| Repayments on revolving credit facility | (50,473 | ) | | (374 | ) | | (63,947 | ) |
| Proceeds from sale-leaseback financing obligation | 42,455 |
| | — |
| | — |
|
| Proceeds from New Facility lease financing obligation | 16,346 |
| | 19,426 |
| | — |
|
| Repayments of New Facility lease financing | (35,772 | ) | | — |
| | — |
|
| Payments of capital lease obligations | (1,433 | ) | | (3,147 | ) | | (3,910 | ) |
| Payment of financing costs | — |
| | (8 | ) | | (571 | ) |
| Proceeds from stock option exercises | 688 |
| | 1,694 |
| | 1,548 |
|
| Tax withholding payment - net share settlement of equity awards | (38 | ) | | (159 | ) | | (116 | ) |
| Net cash provided by (used in) financing activities | $ | 49,758 |
| | $ | 17,837 |
| | $ | (3,620 | ) |
| | | | | | |
| Net (decrease) increase in cash and cash equivalents | $ | (14,854 | ) | | $ | 5,935 |
| | $ | 3,167 |
|
| Cash and cash equivalents at beginning of year | 21,095 |
| | 15,160 |
| | 11,993 |
|
| Cash and cash equivalents at end of year | $ | 6,241 |
| | $ | 21,095 |
| | $ | 15,160 |
|
|
| | | | | | | | | | | |
| Supplemental disclosure of cash flow information: | | | | | |
| Cash paid for interest | $ | 1,504 |
| | $ | 425 |
| | $ | 769 |
|
| Cash paid for income taxes | $ | 567 |
| | $ | 324 |
| | $ | 858 |
|
| Supplemental disclosure of non-cash investing and financing activities: | | | | | |
| Equipment acquired under capital leases | $ | 417 |
| | $ | — |
| | $ | 55 |
|
Net change in derivative assets and liabilities included in other comprehensive income (loss), net of tax | $ | (3,933 | ) | | $ | 8,249 |
| | $ | (18,506 | ) |
| Construction-in-progress assets under New Facility lease | $ | — |
| | $ | 8,684 |
| | $ | — |
|
| New Facility lease obligation | $ | — |
| | $ | 8,684 |
| | $ | — |
|
| Non-cash additions to property, plant and equipment | $ | 5,517 |
| | $ | 441 |
| | $ | 51 |
|
| Assets held for sale | $ | — |
| | $ | 7,179 |
| | $ | — |
|
| Non-cash portion of earnout receivable recognized-Spice Assets sale | $ | 419 |
| | $ | 496 |
| | $ | — |
|
| Non-cash portion of earnout payable recognized-China Mist acquisition | $ | 500 |
| | $ | — |
| | $ | — |
|
| Non-cash portion of earnout payable recognized-West Coast Coffee acquisition | $ | 600 |
| | $ | — |
| | $ | — |
|
| Non-cash working capital adjustment payable recognized-China Mist acquisition | $ | 553 |
| | $ | — |
| | $ | — |
|
| Option costs paid with exercised shares | $ | 550 |
| | $ | — |
| | $ | — |
|
The accompanying notes are an integral part of these consolidated financial statements.
FARMER BROS. CO.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands, except share and per share data)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Shares | | Stock Amount | | Additional Paid-in Capital | | Retained Earnings | | Unearned ESOP Shares | | Accumulated Other Comprehensive Income (Loss) | | Total |
| Balance at July 1, 2014 | 16,562,450 |
| | $ | 16,562 |
| | $ | 35,917 |
| | $ | 106,212 |
| | $ | (16,035 | ) | | $ | (27,792 | ) | | $ | 114,864 |
|
| Net income | — |
| | — |
| | — |
| | 652 |
| | — |
| | — |
| | 652 |
|
| Unrealized losses on derivative instruments designated as cash flow hedges, net of reclassifications to cost of goods sold | — |
| | — |
| | — |
| | — |
| | — |
| | (18,506 | ) | | (18,506 | ) |
| Change in the funded status of retiree benefit obligations, net of tax of zero | — |
| | — |
| | — |
| | — |
| | — |
| | (14,122 | ) | | (14,122 | ) |
| ESOP compensation expense, including reclassifications | — |
| | — |
| | (377 | ) | | — |
| | 4,801 |
| | — |
| | 4,424 |
|
| Share-based compensation | 4,272 |
| | 4 |
| | 1,263 |
| | — |
| | — |
| | — |
| | 1,267 |
|
| Stock option exercises | 95,723 |
| | 96 |
| | 1,452 |
| | — |
| | — |
| | — |
| | 1,548 |
|
| Shares withheld to cover taxes | (4,297 | ) | | (4 | ) | | (112 | ) | | — |
| | — |
| | — |
| | (116 | ) |
| Balance at June 30, 2015 | 16,658,148 |
| | $ | 16,658 |
| | $ | 38,143 |
| | $ | 106,864 |
| | $ | (11,234 | ) | | $ | (60,420 | ) | | $ | 90,011 |
|
| Net income | — |
| | — |
| | — |
| | 89,918 |
| | — |
| | — |
| | 89,918 |
|
| Unrealized gains on derivative instruments designated as cash flow hedges, net of reclassifications to cost of goods sold, net of tax expense of $5,238 | — |
| | — |
| | — |
| | — |
| | — |
| | 8,249 |
| | 8,249 |
|
| Change in the funded status of retiree benefit obligations, net of tax expense of $7,277 | — |
| | — |
| | — |
| | — |
| | — |
| | (11,461 | ) | | (11,461 | ) |
| ESOP compensation expense, including reclassifications | — |
| | — |
| | (1,413 | ) | | — |
| | 4,800 |
| | — |
| | 3,387 |
|
| Share-based compensation | 1,551 |
| | 2 |
| | 954 |
| | — |
| | — |
| | — |
| | 956 |
|
| Stock option exercises | 127,039 |
| | 127 |
| | 1,566 |
| | — |
| | — |
| | — |
| | 1,693 |
|
| Shares withheld to cover taxes | (5,177 | ) | | (5 | ) | | (154 | ) | | — |
| | — |
| | — |
| | (159 | ) |
| Balance at June 30, 2016 | 16,781,561 |
| | $ | 16,782 |
| | $ | 39,096 |
| | $ | 196,782 |
| | $ | (6,434 | ) | | $ | (63,632 | ) | | $ | 182,594 |
|
| Net income | — |
| | — |
| | — |
| | 24,400 |
| | — |
| | — |
| | 24,400 |
|
| Unrealized losses on derivative instruments designated as cash flow hedges, net of reclassifications to cost of goods sold, net of tax benefit of $2,504 | — |
| | — |
| | — |
| | — |
| | — |
| | (3,933 | ) | | (3,933 | ) |
| Change in the funded status of retiree benefit obligations, net of tax expense of $4,754 | — |
| | — |
| | — |
| | — |
| | — |
| | 7,466 |
| | 7,466 |
|
| ESOP compensation expense, including reclassifications | — |
| | — |
| | 342 |
| | — |
| | 2,145 |
| | — |
| | 2,487 |
|
| Share-based compensation | (889 | ) | | (1 | ) | | 1,473 |
| | — |
| | — |
| | — |
| | 1,472 |
|
| Stock option exercises | 82,803 |
| | 83 |
| | 604 |
| | — |
| | — |
| | — |
| | 687 |
|
| Shares withheld to cover taxes | (17,473 | ) | | (18 | ) | | (20 | ) | | — |
| | — |
| | — |
| | (38 | ) |
| Balance at June 30, 2017 | 16,846,002 |
| | $ | 16,846 |
| | $ | 41,495 |
| | $ | 221,182 |
| | $ | (4,289 | ) | | $ | (60,099 | ) | | $ | 215,135 |
|
The accompanying notes are an integral part of these consolidated financial statements.
FARMER BROS. CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Introduction and Basis of Presentation
Overview
Farmer Bros. Co., a Delaware corporation (including its consolidated subsidiaries unless the context otherwise requires, the “Company,” or “Farmer Bros.”),information required by this item is a national coffee roaster, wholesaler and distributor of coffee, tea and culinary products. The Company serves a wide variety of customers, from small independent restaurants and foodservice operatorsincorporated by reference to large institutional buyers like restaurant and convenience store chains, hotels, casinos, healthcare facilities, and gourmet coffee houses, as well as grocery chains with private brand and consumer-branded coffee and tea products. The Company’s product categories consist of roast and ground coffee, frozen liquid coffee; flavored and unflavored iced and hot teas; culinary products; spices; and other beverages including cappuccino, cocoa, granitas, and ready-to-drink iced coffee. The Company was founded in 1912, incorporated in California in 1923, and reincorporated in Delaware in 2004. The Company operates in one business segment.
In fiscal 2015 the Company began the process of relocating its corporate headquarters, product development lab, and manufacturing and distribution operations from Torrance, California to a new facility housing these operations in Northlake, Texas (the “New Facility”) (the “Corporate Relocation Plan”). In order to focus on the Company’s core product offerings, in the second quarter of fiscal 2016, the Company sold certain assets associated with its manufacture, processing and distribution of raw, processed and blended spices and certain other culinary products (collectively, the “Spice Assets”) to Harris Spice Company Inc. (“Harris”). In fiscal 2017, the Company completed the construction of and exercised the purchase option to acquire the New Facility, relocated its Torrance operations to the New Facility, and sold its facility in Torrance, California (the “Torrance Facility“). The Company commenced distribution activities at the New Facility during the second quarter of fiscal 2017 and initial production activities late in the third quarter of fiscal 2017. The Company began roasting coffee in the New Facility in the fourth quarter of fiscal 2017. The Company completed the Corporate Relocation Plan in the fourth quarter of fiscal 2017.
In fiscal 2017, the Company completed the following acquisitions. On October 11, 2016, the Company acquired substantially all of the assets and certain specified liabilities of China Mist Brands, Inc. dba China Mist Tea Company (“China Mist”), a provider of flavored iced teas and iced green teas, and on February 7, 2017, the Company acquired substantially all of the assets and certain specified liabilities of West Coast Coffee Company, Inc. (“West Coast Coffee”), a coffee roaster and distributor with a focus on the convenience store, grocery and foodservice channels.
In the third quarter of fiscal 2017, the Company commenced a restructuring plan to reorganize its direct-store-delivery, or DSD, operations in an effort to realign functions into a channel-based selling organization, streamline operations, acquire certain channel specific expertise, and improve selling effectiveness and financial results (the “DSD Restructuring Plan”). The Company expects to complete the DSD Restructuring Plan by the end of the second quarter of fiscal 2018.
The Company operates production facilities in Northlake, Texas; Houston, Texas; Portland, Oregon; Hillsboro, Oregon; and Scottsdale, Arizona. Distribution takes place out of the New Facility, the Portland, Hillsboro and Scottsdale facilities, as well as separate distribution centers in Northlake, Illinois; and Moonachie, New Jersey. The Company commenced distribution activities at the New Facility during the second quarter of fiscal 2017 and initial production activities late in the third quarter of fiscal 2017. The Company began roasting coffee in the New Facility in the fourth quarter of fiscal 2017.
The Company’s products reach its customers primarily in the following ways: through the Company’s nationwide direct-store-delivery, or DSD, network of 450 delivery routes and 114 branch warehouses as of June 30, 2017, or direct-shipped via common carriers or third-party distributors. The Company operates a large fleet of trucks and other vehicles to distribute and deliver its products, and relies on third-party logistic (“3PL”) service providers for its long-haul distribution. DSD sales are made “off-truck” by the Company to its customers at their places of business.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its direct and indirect wholly owned subsidiaries. All inter-company balances and transactions have been eliminated.
Use of Estimates
The preparation of financial statements in accordance with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. The Company reviews its estimatesnotes set forth in the F pages of this Annual Report on an ongoing basis using currently available information. Changes in facts and circumstances may result in revised estimates and actual results may differ from those estimates.Form 10-K.
|
| |
| Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
None.
Note 2. Summary of Significant Accounting Policies
Cash Equivalents
The Company considers all highly liquid investments with original maturity dates of 90 days or less to be cash equivalents. Fair values of cash equivalents approximate cost due to the short period of time to maturity.
Investments
The Company’s investments, from time to time, consist of money market instruments, marketable debt, equity and hybrid securities. Investments are held for trading purposes and stated at fair value. The cost of investments sold is determined on the specific identification method. Dividend and interest income are accrued as earned. See Note 9.Fair Value Measurements
The Company groups its assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:
•Level 1—Valuation is based upon quoted prices for identical instruments traded in active markets.
•Level 2—Valuation is based upon inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly (i.e. interest rate and yield curves observable at commonly quoted intervals, default rates, etc.). Observable inputs include quoted prices for similar instruments in active and non-active markets. Level 2 includes those financial instruments that are valued with industry standard valuation models that incorporate inputs that are observable in the marketplace throughout the full term of the instrument, or can otherwise be derived from or supported by observable market data in the marketplace. Level 2 inputs may also include insignificant adjustments to market observable inputs.
•Level 3—Valuation is based upon one or more unobservable inputs that are significant in establishing a fair value estimate. These unobservable inputs are used to the extent relevant observable inputs are not available and are developed based on the best information available. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value.
Securities with quotes that are based on actual trades or actionable bids and offers with a sufficient level of activity on or near the measurement date are classified as Level 1. Securities that are priced using quotes derived from implied values, indicative bids and offers, or a limited number of actual trades, or the same information for securities that are similar in many respects to those being valued, are classified as Level 2. If market information is not available for securities being valued, or materially-comparable securities, then those securities are classified as Level 3. In considering market information, management evaluates changes in liquidity, willingness of a broker to execute at the quoted price, the depth and consistency of prices from pricing services, and the existence of observable trades in the market (see Note 10).Derivative Instruments
The Company purchases various derivative instruments to create economic hedges of its commodity price risk. These derivative instruments consist primarily of forward and option contracts. The Company reports the fair value of derivative instruments on its consolidated balance sheets in “Short-term derivative assets,” “Other assets,” “Short-term derivative liabilities,” or “Other long-term liabilities.” The Company determines the current and noncurrent classification based on the
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
timing of expected future cash flows of individual trades and reports these amounts on a gross basis. Additionally, the Company reports cash held on deposit in margin accounts for coffee-related derivative instruments on a gross basis on its consolidated balance sheet in “Restricted cash” if restricted from withdrawal due to a net loss position in such margin accounts.
The accounting for the changes in fair value of the Company's derivative instruments can be summarized as follows: |
| | |
Derivative TreatmentItem 9A. | | Accounting Method |
Normal purchasesControls and normal sales exception | | Accrual accounting |
Designated in a qualifying hedging relationship | | Hedge accounting |
All other derivative instruments | | Mark-to-market accountingProcedures |
The Company enters into green coffee purchase commitments at a fixed price or at a price
Disclosure Controls and Procedures
Disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Exchange Act, are controls and other procedures that are designed to ensure that information required to be fixed (“PTF”). PTF contractsdisclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the rules and forms of the SEC. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information we are purchase commitments wherebyrequired to disclose in the quality, quantity, delivery period, price differentialreports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.
As of June 30, 2020, our management, with the coffee “C” market priceparticipation of our Chief Executive Officer and other negotiated termsChief Financial Officer, carried out an evaluation of the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15(e) promulgated under the Exchange Act. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of June 30, 2020, our disclosure controls and procedures are agreed upon, buteffective.
Changes in Internal Control Over Financial Reporting
There has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) promulgated under the date,Exchange Act) during our fiscal quarter ended June 30, 2020, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Management's Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and therefore the price at which the base “C” market price will be fixed has not yet been established. The coffee “C” market price is fixed at some point after the purchase contract date and before the futures market closesmaintaining adequate internal control over financial reporting for the delivery monthCompany. Internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of our financial reporting for external purposes in accordance with accounting principles generally accepted in the United States of America. Internal control over financial reporting includes maintaining records that in reasonable detail accurately and mayfairly reflect our transactions; providing reasonable assurance that transactions are recorded as necessary for preparation of our consolidated financial statements; providing reasonable assurance that receipts and expenditures of company assets are made in accordance with management authorization; and providing reasonable assurance that unauthorized acquisition, use or disposition of company assets that could have a material effect on our consolidated financial statements would be fixed either atprevented or detected on a timely basis. Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that a material misstatement of our consolidated financial statements would be prevented or detected.
Management conducted an evaluation of the directioneffectiveness of our internal control over financial reporting based on the framework in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that the Company's internal control over financial reporting was effective as of June 30, 2020. The Company's independent registered public accounting firm, Deloitte & Touche LLP, has issued an audit report on the effectiveness of the Company's internal control over financial reporting. Their report follows.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the stockholders and the Board of Directors of Farmer Bros. Co.
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Farmer Bros. Co. and subsidiaries (the “Company”) as of June 30, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of June 30, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended June 30, 2020, of the Company and our report dated September 10, 2020, expressed an unqualified opinion on those financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the vendor, or byCompany in accordance with the applicationU.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a derivativematerial weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that was separately purchased as a hedge. For both fixed-price and PTF contracts, the Company expects to take delivery of and to utilize the coffee inour audit provides a reasonable periodbasis for our opinion.
Definition and Limitations of time and inInternal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the conductreliability of normal business. Accordingly, these purchase commitments qualify as normal purchases and are not recorded at fair value on the Company's consolidated balance sheets.
The Company follows the guidelines of Accounting Standards Codification (“ASC”) 815, “Derivatives and Hedging” (“ASC 815”), to account for certain coffee-related derivative instruments as accounting hedges in order to minimize the volatility created in the Company's quarterly results from utilizing these derivative contracts and to improve comparability betweenfinancial reporting periods. For a derivative to qualify for designation in a hedging relationship, it must meet specific criteria and the Company must maintain appropriate documentation. The Company establishes hedging relationships pursuant to its risk management policies. The hedging relationships are evaluated at inceptionpreparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and on an ongoing basis to determine whether the hedging relationship is, and is expected to remain, highly effective in achieving offsetting changes in fair value or cash flows attributableprocedures that (1) pertain to the underlying risk being hedged. The Company also regularly assesses whethermaintenance of records that, in reasonable detail, accurately and fairly reflect the hedged forecasted transaction is probable of occurring. If a derivative ceases to be or is no longer expected to be highly effective, or if the Company believes the likelihood of occurrencetransactions and dispositions of the hedged forecasted transaction is no longer probable, hedge accounting is discontinued for that derivative, and future changes in the fair value of that derivative are recognized in “Other, net.”
For coffee-related derivative instruments designated as cash flow hedges, the effective portionassets of the changecompany; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in fair valueaccordance with generally accepted accounting principles, and that receipts and expenditures of the derivative is reported as accumulated other comprehensive income (loss) (“AOCI”)company are being made only in accordance with authorizations of management and subsequently reclassified into cost of goods sold in the period or periods when the hedged transaction affects earnings. Any ineffective portiondirectors of the derivative instrument's change in fair value is recognized currently in “Other, net.” Gainscompany; and (3) provide reasonable assurance regarding prevention or losses deferred in AOCI associated with terminated derivative instruments, derivative instruments that cease to be highly effective hedges, derivative instruments for which the forecasted transaction is reasonably possible but no longer probabletimely detection of occurring, and cash flow hedges that have been otherwise discontinued remain in AOCI until the hedged item affects earnings. If it becomes probable that the forecasted transaction designated as the hedged item in a cash flow hedge will not occur, any gainunauthorized acquisition, use, or loss deferred in AOCI is recognized in “Other, net” at that time. For derivative instruments that are not designated in a hedging relationship, and for which the normal purchases and normal sales exception has not been elected, the changes in fair value are reported in “Other, net.”
The following gains and losses on derivative instruments are netted together and reported in “Other, net” in the Company's consolidated statements of operations:
Gains and losses on all derivative instruments that are not designated as cash flow hedges and for which the normal purchases and normal sales exception has not been elected; and
The ineffective portion of unrealized gains and losses on derivative instruments that are designated as cash flow hedges.
The fair value of derivative instruments is based upon broker quotes. At June 30, 2017 and 2016 approximately 94% and 96%, respectively,disposition of the Company's outstanding coffee-related derivative instruments were designated as cash flow hedges. See Note 8.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Concentration of Credit Risk
At June 30, 2017, the financial instruments which potentially expose the Company to concentration of credit risk consist of cash in financial institutions (in excess of federally insured limits), short-term investments, investments in the preferred stocks of other companies, derivative instruments and trade receivables. Cash equivalents and short-term investments are not concentrated by issuer, industry or geographic area. Maturities are generally shorter than 180 days. Investments in the preferred stocks of other companies are limited to high quality issuers and are not concentrated by geographic area or issuer.
The Company does not have any credit-risk related contingent featurescompany’s assets that would require it to post additional collateral in support of its net derivative liability positions. At June 30, 2017 and 2016, because the Company had a net gain position in its coffee-related derivative margin accounts, none of the cash in these accounts was restricted. Changes in commodity prices and the number of coffee-related derivative instruments held could have a significant impact on cash deposit requirements under the Company's broker and counterparty agreements.
Concentration of credit risk with respect to trade receivables for the Company is limited due to the large number of customers comprising the Company’s customer base and their dispersion across many different geographic areas. The trade receivables are generally short-term and all probable bad debt losses have been appropriately considered in establishing the allowance for doubtful accounts. In fiscal 2017 and 2016, the Company increased the allowance for doubtful accounts by $7,000 and $71,000, respectively. In fiscal 2015, the Company decreased the allowance for doubtful accounts by $8,000.
Inventories
Inventories are valued at the lower of cost or market. The Company accounts for coffee, tea and culinary products on a last in, first out (“LIFO”) basis, and coffee brewing equipment parts on a first in, first out (“FIFO”) basis. The Company regularly evaluates these inventories to determine the provision for obsolete and slow-moving inventory. Inventory reserves are based on inventory obsolescence trends, historical experience and application of specific identification.
At the end of each quarter, the Company records the expectedmaterial effect of the liquidation of LIFO inventory quantities, if any, and records the actual impact at fiscal year-end. An actual valuation of inventory under the LIFO method is made only at the end of each fiscal year based on the inventory levels and costs at that time. If inventory quantities decline at the endfinancial statements.
Because of
the fiscal year comparedits inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to
the beginning of the fiscal year, the reduction results in the liquidation of LIFO inventory quantities carried at the cost prevailing in prior years. This LIFO inventory liquidation may result in a decrease or increase in cost of goods sold depending on whether the cost prevailing in prior years was lower or higher, respectively, than the current year cost. As these estimates are subject to many forces beyond management's control, interim resultsfuture periods are subject to the
final fiscal year-end LIFO inventory valuation. See Note 12.risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Property, Plant and Equipment
Property, plant and equipment is carried at cost, less accumulated depreciation. Depreciation is computed using the straight-line method. The following useful lives are used:
/s/ DELOITTE & TOUCHE LLP
Dallas, Texas
September 10, 2020
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Buildings and facilitiesItem 9B. | 10 to 30 years |
Machinery and equipment | 3 to 10 years |
Equipment under capital leases | Shorter of term of lease or estimated useful life |
Office furniture and equipment | 5 to 7 years |
Capitalized software | 3 to 5 yearsOther Information |
Leasehold improvements are depreciated on a straight-line basis over the lesser of the estimated useful life of the asset or the remaining lease term. When assets are sold or retired, the asset and related accumulated depreciation are removed from the respective account balances and any gain or loss on disposal is included in operations. Maintenance and repairs are charged to expense, and enhancements are capitalized. See Note 13.Assets to be disposed of by sale are recorded as held for sale at the lower of carrying value or estimated net realizable value. The Company considers properties to be assets held for sale when (1) management commits to a plan to sell the property; (2) it is unlikely that the disposal plan will be significantly modified or discontinued; (3) the property is available for immediate
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
sale in its present condition; (4) actions required to complete the sale of the property have been initiated; (5) sale of the property is probable and the Company expects the completed sale will occur within one year; and (6) the property is actively being marketed for sale at a price that is reasonable given the Company's estimate of current market value. Upon designation of a property as an asset held for sale, the Company records the property’s value at the lower of its carrying value or its estimated fair value less estimated costs to sell and ceases depreciation. See Note 7.Coffee Brewing Equipment and Service
The Company classifies certain expenses related to coffee brewing equipment provided to customers as cost of goods sold. These costs include the cost of the equipment as well as the cost of servicing that equipment (including service employees’ salaries, cost of transportation and the cost of supplies and parts) and are considered directly attributable to the generation of revenues from its customers. Accordingly, such costs included in cost of goods sold in the accompanying consolidated financial statements for the years ended June 30, 2017, 2016 and 2015 are $26.3 million, $27.0 million and $26.6 million, respectively.
The Company capitalizes coffee brewing equipment and depreciates it over five years and reports the depreciation expense in cost of goods sold. Such depreciation expense related to capitalized coffee brewing equipment reported in cost of goods sold in the fiscal years ended June 30, 2017, 2016 and 2015 was $9.1 million, $9.8 million and $10.4 million, respectively. The Company capitalized coffee brewing equipment (included in machinery and equipment) in the amounts of $10.8 million and $8.4 million in fiscal 2017 and 2016, respectively.
Leases
Leases are categorized as either operating or capital leases at inception. Operating lease costs are recognized on a straight-line basis over the term of the lease. An asset and a corresponding liability for the capital lease obligation are established for the cost of a capital lease. Capital lease obligations are amortized over the life of the lease.
For build-to-suit leases, the Company establishes an asset and liability for the estimated construction costs incurred to the extent that it is involved in the construction of structural improvements or takes construction risk prior to the commencement of the lease. A portion of the lease arrangement is allocated to the land for which the Company accrues rent expense during the construction period. The amount of rent expense to be accrued is determined using the fair value of the leased land at construction commencement and the Company’s incremental borrowing rate, and recognized on a straight-line basis. Upon exercise of the purchase option on a build-to-suit lease, the Company records an asset equal to the value of the option price that includes the value of the land and reverses the rent expense and the asset and liability established to record the construction costs incurred through the date of option exercise. See Note 5.Income Taxes
Deferred income taxes are determined based on the temporary differences between the financial reporting and tax bases of assets and liabilities using enacted tax rates in effect for the year in which differences are expected to reverse. Estimating the Company’s tax liabilities involves judgments related to uncertainties in the application of complex tax regulations. The Company makes certain estimates and judgments to determine tax expense for financial statement purposes as it evaluates the effect of tax credits, tax benefits and deductions, some of which result from differences in the timing of recognition of revenue or expense for tax and financial statement purposes. Changes to these estimates may result in significant changes to the Company’s tax provision in future periods. Each fiscal quarter the Company re-evaluates its tax provision and reconsiders its estimates and assumptions related to specific tax assets and liabilities, making adjustments as circumstances change.
Deferred Tax Asset Valuation Allowance
The Company evaluates its deferred tax assets quarterly to determine if a valuation allowance is required and considers whether a valuation allowance should be recorded against deferred tax assets based on the likelihood that the benefits of the deferred tax assets will or will not ultimately be realized in future periods. In making this assessment, significant weight is given to evidence that can be objectively verified, such as recent operating results, and less consideration is given to less objective indicators, such as future income projections. After consideration of positive and negative evidence, including the recent history of income, if the Company determines that it is more likely than not that it will generate future income sufficient to realize its deferred tax assets, the Company will record a reduction in the valuation allowance. See Note 21.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Revenue Recognition
The Company recognizes sales revenue when all of the following have occurred: (1) delivery; (2) persuasive evidence of an agreement exists; (3) pricing is fixed or determinable; and (4) collection is reasonably assured. When product sales are made “off-truck” to the Company’s customers at their places of business or products are shipped by third-party delivery “FOB Destination,“ title passes and revenue is recognized upon delivery. When customers pick up products at the Company's distribution centers, title passes and revenue is recognized upon product pick up.
Net Income Per Common Share
Net income per share (“EPS”) represents net income attributable to common stockholders divided by the weighted-average number of common shares outstanding for the period, excluding unallocated shares held by the Company's Employee Stock Ownership Plan (“ESOP”). See Note 17. Diluted EPS represents net income attributable to common stockholders divided by the weighted-average number of common shares outstanding, inclusive of the dilutive impact of common equivalent shares outstanding during the period. However, nonvested restricted stock awards (referred to as participating securities) are excluded from the dilutive impact of common equivalent shares outstanding in accordance with authoritative guidance under the two-class method. The nonvested restricted stockholders are entitled to participate in dividends declared on common stock as if the shares were fully vested and hence are deemed to be participating securities. Under the two-class method, net income attributable to nonvested restricted stockholders is excluded from net income attributable to common stockholders for purposes of calculating basic and diluted EPS. Computation of EPS for the years ended June 30, 2017, 2016 and 2015 includes the dilutive effect of 117,007, 124,879 and 139,524 shares, respectively, issuable under stock options with exercise prices below the closing price of the Company's common stock on the last trading day of the applicable period, but excludes the dilutive effect of 24,671, 30,931 and 10,455 shares, respectively, issuable under stock options with exercise prices above the closing price of the Company's common stock on the last trading day of the applicable period because their inclusion would be anti-dilutive. See Note 22.Employee Stock Ownership Plan
Compensation cost for the ESOP is based on the fair market value of shares released or deemed to be released to employees in the period in which they are committed. Dividends on allocated shares retain the character of true dividends, but dividends on unallocated shares are considered compensation cost. As a leveraged ESOP with the Company as lender, a contra equity account is established to offset the Company’s note receivable. The contra account will change as compensation expense is recognized. See Note 17. The cost of shares purchased by the ESOP which have not been committed to be released or allocated to participants are shown as a contra-equity account “Unearned ESOP Shares” and are excluded from earnings per share calculations.Share-based Compensation
The Company measures all share-based compensation cost at the grant date, based on the fair values of the awards that are ultimately expected to vest, and recognizes that cost as an expense on a straight line-basis in its consolidated statements of operations over the requisite service period. Fair value of restricted stock is the closing price of the Company's common stock on the date of grant. The Company estimates the fair value of option awards using the Black-Scholes option valuation model, which requires management to make certain assumptions for estimating the fair value of stock options at the date of grant. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. Because the Company’s stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimates, in management’s opinion, the existing models may not necessarily provide a reliable single measure of the fair value of the Company’s stock options. Although the fair value of stock options is determined using an option valuation model, that value may not be indicative of the fair value observed in a willing buyer/willing seller market transaction.
In addition, the Company estimates the expected impact of forfeited awards and recognizes share-based compensation cost only for those awards ultimately expected to vest. If actual forfeiture rates differ materially from the Company’s estimates, share-based compensation expense could differ significantly from the amounts the Company has recorded in the current period. The Company periodically reviews actual forfeiture experience and will revise its estimates, as necessary. The Company will recognize as compensation cost the cumulative effect of the change in estimated forfeiture rates on current and prior periods in earnings of the period of revision. As a result, if the Company revises its assumptions and estimates, the Company’s share-based compensation expense could change materially in the future.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
The Company has outstanding share-based awards that have performance-based vesting conditions in addition to time-based vesting. Awards with performance-based vesting conditions require the achievement of certain financial and other performance criteria as a condition to the vesting. The Company recognizes the estimated fair value of performance-based awards, net of estimated forfeitures, as share-based compensation expense over the performance period based upon the Company’s determination of whether it is probable that the performance targets will be achieved. At each reporting period, the Company reassesses the probability of achieving the performance criteria and the performance period required to meet those targets. Determining whether the performance criteria will be achieved involves judgment, and the estimate of share-based compensation expense may be revised periodically based on changes in the probability of achieving the performance criteria. Revisions are reflected in the period in which the estimate is changed. If performance goals are not met, no share-based compensation expense is recognized for the cancelled shares, and, to the extent share-based compensation expense was previously recognized for those cancelled shares, such share-based compensation expense is reversed. See Note 18.Impairment of Goodwill and Indefinite-lived Intangible Assets
The Company accounts for its goodwill and indefinite-lived intangible assets in accordance with ASC 350, “Intangibles-Goodwill and Other” (“ASC 350”). Goodwill and other indefinite-lived intangible assets are not amortized but instead are reviewed for impairment annually, or more frequently if an event occurs or circumstances change which indicate that an asset might be impaired. Pursuant to ASC 350, the Company performs a qualitative assessment of goodwill and indefinite-lived intangible assets on its consolidated balance sheets, to determine if there is a more likely than not indication that its goodwill and indefinite-lived intangible assets are impaired as of June 30. If the indicators of impairment are present, the Company performs a quantitative assessment to determine the impairment of these assets as of the measurement date.
Testing for impairment of goodwill is a two-step process. The first step requires the Company to compare the fair value of its reporting units to the carrying value of the reporting units, including goodwill. If the fair value of a reporting unit is less than its carrying value, goodwill of the reporting unit is potentially impaired and the Company then completes step two to measure the impairment loss, if any. The second step requires the calculation of the implied fair value of goodwill, which is the residual fair value remaining after deducting the fair value of all tangible and intangible net assets of the reporting unit from the fair value of the reporting unit. If the implied fair value of goodwill is less than the carrying amount of goodwill, an impairment loss is recognized equal to the difference.
Indefinite-lived intangible assets are tested for impairment by comparing their fair values to their carrying values. An impairment charge is recorded if the estimated fair value of such assets has decreased below their carrying values. There were no intangible asset or goodwill impairment charges recorded in the fiscal years ended June 30, 2017, 2016 and 2015.
Other Intangible Assets
Other intangible assets consist of finite-lived intangible assets including acquired recipes, non-compete agreements, customer relationships, trade names, trademarks and a brand name. These assets are amortized over their estimated useful lives and are tested for impairment by grouping them with other assets at the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities. The estimated future cash flows are based upon, among other things, assumptions about expected future operating performance, and may differ from actual cash flows. If the sum of the projected undiscounted cash flows (excluding interest) is less than the carrying value of the assets, the assets will be written down to the estimated fair value in the period in which the determination is made. The Company reviews the recoverability of its long-lived assets whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. There were no other intangible asset impairment charges recorded in the fiscal years ended June 30, 2017 and 2016.
Shipping and Handling Costs
Shipping and handling costs incurred through outside carriers are recorded as a component of the Company's selling expenses and were $23.5 million, $13.3 million and $8.3 million, respectively, in the fiscal years ended June 30, 2017, 2016 and 2015. The Company moved to 3PL for its long-haul distribution in the third quarter of fiscal 2016. As a result, payroll, benefits, vehicle costs and other costs associated with the Company’s internal operation of its long-haul distribution included elsewhere in selling expenses in the fiscal years ended June 30, 2016 and 2015, are represented in outsourced shipping and handling costs beginning in the third quarter of fiscal 2016. The amount associated with outside carriers for the Company's long-haul distribution recorded in shipping and handling costs in the fourth quarter of fiscal 2016 and in fiscal 2017 was less than the comparable aggregate operating costs associated with internally managing the Company’s long-haul distribution in the respective prior-year periods.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Collective Bargaining Agreements
Certain Company employees are subject to collective bargaining agreements. The duration of these agreements extend to 2020. At June 30, 2017, approximately 27% of the Company's workforce was covered by such agreements.
Self-Insurance
The Company uses a combination of insurance and self-insurance mechanisms to provide for the potential liability of certain risks including workers’ compensation, health care benefits, general liability, product liability, property insurance and director and officers’ liability insurance. Liabilities associated with risks retained by the Company are not discounted and are estimated by considering historical claims experience, demographics, exposure and severity factors and other actuarial assumptions.
The Company's self-insurance for workers’ compensation liability includes estimated outstanding losses of unpaid claims. and allocated loss adjustment expenses (“ALAE”), case reserves, the development of known claims and incurred but not reported claims. ALAE are the direct expenses for settling specific claims. The amounts reflect per occurrence and annual aggregate limits maintained by the Company. The estimated liability analysis does not include estimating a provision for unallocated loss adjustment expenses.
The estimated gross undiscounted workers’ compensation liability relating to such claims was $9.4 million and $14.7 million respectively, and the estimated recovery from reinsurance was $1.5 million and $2.4 million, respectively, as of June 30, 2017 and 2016. The short-term and long-term accrued liabilities for workers’ compensation claims are presented on the Company's consolidated balance sheets in “Other current liabilities” and in “Accrued workers' compensation liabilities,” respectively. The estimated insurance receivable is included in “Other assets” on the Company's consolidated balance sheets.
At June 30, 2016, the Company had posted a $7.4 million letter of credit, as a security deposit with the State of California Department of Industrial Relations Self-Insurance Plans for participation in the alternative security program for California self-insurers for workers’ compensation liability in California. The State of California notified the Company on December 13, 2016 that it had released and authorized the cancellation of the letter of credit. At June 30, 2017 and 2016, the Company had also posted $3.4 million in cash and a $4.3 million letter of credit, respectively, as a security deposit for self-insuring workers’ compensation, general liability and auto insurance coverages outside of California.
The estimated liability related to the Company's self-insured group medical insurance at June 30, 2017 and 2016 was $2.5 million and $1.3 million, respectively, recorded on an incurred but not reported basis, within deductible limits, based on actual claims and the average lag time between the date insurance claims are filed and the date those claims are paid.
The Company is self-insured for general liability, product liability and commercial auto liability and accrues the cost of the insurance based on estimates of the aggregate liability claims incurred using certain actuarial assumptions and historical claims experience.
The Company's liability reserve for such claims was $0.9 million at June 30, 2017 and 2016.
The estimated liability related to the Company's self-insured group medical insurance, general liability, product liability and commercial auto liability is included on the Company's consolidated balance sheets in “Other current liabilities.”
Pension Plans
The Company’s pension plans are not admitting new participants, therefore, changes to pension liabilities are primarily due to market fluctuations of investments for existing participants and changes in interest rates. All plans are accounted for using the guidance of ASC 710, “Compensation—General“ and ASC 715 “Compensation-Retirement Benefits“ and are measured as of the end of the fiscal year.
The Company recognizes the overfunded or underfunded status of a defined benefit pension or postretirement plan as an asset or liability on its consolidated balance sheets. Changes in the funded status are recognized through AOCI, in the year in which the changes occur. See Note 15.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Business Combinations
The Company accounts for business combinations under the acquisition method of accounting. The purchase price of each business acquired is allocated to the tangible and intangible assets acquired and the liabilities assumed based on information regarding their respective fair values on the date of acquisition. Any excess of the purchase price over the fair value of the separately identifiable assets acquired and the liabilities assumed is allocated to goodwill. Management determines the fair values used in purchase price allocations for intangible assets based on historical data, estimated discounted future cash flows, and expected royalty rates for trademarks and trade names, as well as certain other information. The valuation of assets acquired and liabilities assumed requires a number of judgments and is subject to revision as additional information about the fair value of assets and liabilities becomes available. Additional information, which existed as of the acquisition date but unknown to the Company at that time, may become known during the remainder of the measurement period, a period not to exceed twelve months from the acquisition date. Adjustments in the purchase price allocation may require a recasting of the amounts allocated to goodwill and intangible assets. If such an adjustment is required, the Company will recognize a measurement-period adjustment during the period in which it determines the amount of the adjustment, including the effect on earnings of any amounts it would have recorded in previous periods if the accounting had been completed at the acquisition date. Transaction costs, including legal and accounting expenses, are expensed as incurred and are included in general and administrative expenses in the Company's consolidated statements of operations. Contingent consideration, such as earnout, is deferred as a short-term or long-term liability based on an estimate of the timing of the future payment. These contingent consideration liabilities are recorded at fair value on the acquisition date and are re-measured quarterly based on the then assessed fair value and adjusted if necessary. The results of operations of businesses acquired are included in the Company's consolidated financial statements from their dates of acquisition. See Note 3.Restructuring Plans
The Company accounts for exit or disposal of activities in accordance with ASC 420, “Exit or Disposal Cost Obligations.“ The Company defines a business restructuring as an exit or disposal activity that includes but is not limited to a program which is planned and controlled by management and materially changes either the scope of a business or the manner in which that business is conducted. Business restructuring charges may include (i) one-time termination benefits related to employee separations, (ii) contract termination costs and (iii) other related costs associated with exit or disposal activities.
A liability is recognized and measured at its fair value for one-time termination benefits once the plan of termination is communicated to affected employees and it meets all of the following criteria: (i) management commits to a plan of termination, (ii) the plan identifies the number of employees to be terminated and their job classifications or functions, locations and the expected completion date, (iii) the plan establishes the terms of the benefit arrangement and (iv) it is unlikely that significant changes to the plan will be made or the plan will be withdrawn. Contract termination costs include costs to terminate a contract or costs that will continue to be incurred under the contract without benefit to the Company. A liability is recognized and measured at its fair value when the Company either terminates the contract or ceases using the rights conveyed by the contract.
Recently Adopted Accounting Standards
In December 2016, the Financial Accounting Standards Board (the “FASB“) issued Accounting Standards Update (“ASU“) No. 2016-19, “Technical Corrections and Improvements“ (“ASU 2016-19“). The amendments cover a wide range of topics in the FASB Accounting Standards Codification. The amendments represent changes to make corrections or improvements to the Accounting Standards Codification that are not expected to have a significant effect on current accounting practice or create a significant administrative cost to most entities. ASU 2016-19 is effective for the Company immediately. Adoption of ASU 2016-19 did not have a material effect on the results of operations, financial position or cash flows of the Company.
In September 2015, the FASB issued ASU No. 2015-16, “Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments” (“ASU 2015-16”). ASU 2015-16 eliminates the requirement that an acquirer in a business combination account for measurement-period adjustments retrospectively. Instead, an acquirer will recognize a measurement-period adjustment during the period in which it determines the amount of the adjustment, including the effect on earnings of any amounts it would have recorded in previous periods if the accounting had been completed at the acquisition date. The Company adopted ASU 2015-16 beginning July 1, 2016. Adoption of ASU 2015-16 did not have a material effect on the results of operations, financial position or cash flows of the Company.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
In July 2015, the FASB issued ASU No. 2015-12, “Plan Accounting: Defined Benefit Pension Plans (Topic 960), Defined Contribution Pension Plans (Topic 962), Health and Welfare Benefit Plans (Topic 965), (Part I) Fully Benefit-Responsive Investment Contracts, (Part II) Plan Investment Disclosures, (Part III) Measurement Date Practical Expedient” (“ASU 2015-12”). ASU 2015-12 eliminates requirements that employee benefit plans measure the fair value of fully benefit-responsive investment contracts (“FBRICs“) and provide the related fair value disclosures. As a result, FBRICs are measured, presented and disclosed only at contract value. Also, plans will be required to disaggregate their investments measured using fair value by general type, either on the face of the financial statements or in the notes, and self-directed brokerage accounts are one general type. Plans no longer have to disclose the net appreciation/depreciation in fair value of investments by general type or individual investments equal to or greater than 5% of net assets available for benefits. In addition, a plan with a fiscal year end that does not coincide with the end of a calendar month is allowed to measure its investments and investment-related accounts using the month end closest to its fiscal year end. The new guidance for FBRICs and plan investment disclosures should be applied retrospectively. The measurement date practical expedient should be applied prospectively. The guidance is effective for fiscal years beginning after December 15, 2015, with early adoption permitted. The Company adopted ASU 2015-12 beginning July 1, 2016. Adoption of ASU 2015-12 did not have a material effect on the results of operations, financial position or cash flows of the Company.
In May 2015, the FASB issued ASU No. 2015-07, “Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent)” (“ASU 2015-07”). ASU 2015-07 removes the requirement to categorize investments for which the fair values are measured using the net asset value per share practical expedient within the fair value hierarchy. It also limits certain disclosures to investments for which the entity has elected to measure the fair value using the practical expedient. ASU 2015-07 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015, with early adoption permitted. The Company adopted ASU 2015-07 beginning July 1, 2016. Adoption of ASU 2015-07 did not have a material effect on the results of operations, financial position or cash flows of the Company.
In August 2014, the FASB issued ASU No. 2014-15, “Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern“ (“ASU 2014-15“). ASU 2014-15 amended ASC 205-40-Presentation of Financial Statements-Going Concern and requires management to evaluate whether there are conditions and events that raise substantial doubt about an entity's ability to continue as a going concern within one year after the financial statements are available to be issued and provide related disclosures of such conditions and events. The amendments in ASU 2014-15 apply to all entities and are effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. The Company adopted ASU 2014-15 beginning July 1, 2016. Adoption of ASU 2014-15 did not have a material effect on the Company's results of operations, financial position and cash flows.
New Accounting Pronouncements
In March 2017, the FASB issued ASU No. 2017-07, “Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost“ (“ASU 2017-07“). ASU 2017-07 amends the requirements in GAAP related to the income statement presentation of the components of net periodic benefit cost for an entity’s sponsored defined benefit pension and other postretirement plans. The guidance in ASU 2017-07 is effective for annual periods beginning after December 15, 2017, including interim periods within those fiscal years, and is effective for the Company beginning July 1, 2018. The Company is evaluating the impact this guidance will have on its consolidated financial statements and expects the adoption will not have a significant impact on the results of operations, financial position or cash flows of the Company.
In January 2017, the FASB issued ASU No. 2017-04, “Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment“ (“ASU 2017-04“). The amendments in ASU 2017-04 address concerns regarding the cost and complexity of the two-step goodwill impairment test, and remove the second step of the test. An entity will apply a one-step quantitative test and record the amount of goodwill impairment as the excess of a reporting unit's carrying amount over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. ASU 2017-04 does not amend the optional qualitative assessment of goodwill impairment. The guidance in ASU 2017-04 is effective for annual and interim goodwill impairment tests in fiscal years beginning after December 15, 2019, and is effective for the Company beginning July 1, 2020. Adoption of ASU 2017-04 is not expected to have a material effect on the results of operations, financial position or cash flows of the Company.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
In January 2017, the FASB issued ASU No. 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business“ (“ASU 2017-01“). The amendments in ASU 2017-01 clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of businesses and provide a screen to determine when an integrated set of assets and activities (collectively referred to as a “set”) is not a business. If the screen is not met, the amendments (1) require that to be considered a business, a set must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output and (2) remove the evaluation of whether a market participant could replace the missing elements. The guidance in ASU 2017-01 is effective for public business entities for annual periods beginning after December 15, 2017, including interim periods within those fiscal years. Early application is permitted in certain circumstances. ASU 2017-01 is effective for the Company beginning July 1, 2018. Adoption of ASU 2017-01 is not expected to have a material effect on the results of operations, financial position or cash flows of the Company.
In November 2016, the FASB issued ASU No. 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash” (“ASU 2016-18”). The amendments require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. As a result, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amendments do not provide a definition of restricted cash or restricted cash equivalents. The guidance in ASU 2016-18 is effective for public business entities for annual periods beginning after December 15, 2017, including interim periods within those fiscal years. Early application is permitted in certain circumstances. ASU 2016-18 is effective for the Company beginning July 1, 2018. Adoption of ASU 2016-18 is not expected to have a material effect on the results of operations, financial position or cash flows of the Company.
In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230):Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force)” (“ASU 2016-15”). ASU 2016-15 addresses certain issues where diversity in practice was identified in classifying certain cash receipts and cash payments based on the guidance in ASC 230. ASC 230 is principles based and often requires judgment to determine the appropriate classification of cash flows as operating, investing or financing activities. The application of judgment has resulted in diversity in how certain cash receipts and cash payments are classified. Certain cash receipts and cash payments may have aspects of more than one class of cash flows. ASU 2016-15 clarifies that an entity will first apply any relevant guidance in ASC 230 and in other applicable topics. If there is no guidance that addresses those cash receipts and cash payments, an entity will determine each separately identifiable source or use and classify the receipt or payment based on the nature of the cash flow. If a receipt or payment has aspects of more than one class of cash flows and cannot be separated, classification will depend on the predominant source or use. The guidance in ASU 2016-15 is effective for public business entities for annual periods beginning after December 15, 2017, including interim periods within those fiscal years. Early application is permitted in certain circumstances. ASU 2016-15 is effective for the Company beginning July 1, 2018. Adoption of ASU 2016-15 is not expected to have a material effect on the results of operations, financial position or cash flows of the Company.
In March 2016, the FASB issued ASU No. 2016-09, “Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting“ (“ASU 2016-09“). ASU 2016-09 is being issued as part of the FASB's Simplification Initiative. The areas for simplification in ASU 2016-09 involve several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The guidance in ASU 2016-09 is effective for public business entities for annual periods beginning after December 15, 2016, including interim periods within those annual reporting periods. ASU 2016-09 is effective for the Company beginning July 1, 2017. Adoption of ASU 2016-09 is not expected to have a material effect on the results of operations, financial position or cash flows of the Company.
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)“ (“ASU 2016-02“), which introduces a new lessee model that brings substantially all leases onto the balance sheet. Under the new guidance, lessees are required to recognize a lease liability, which represents the discounted obligation to make future minimum lease payments and a related right-of-use asset. For public business entities, ASU 2016-02 is effective for financial statements issued for annual periods beginning after December 15, 2018, and interim periods within those annual periods. Early application is permitted. ASU 2016-02 is effective for the Company beginning July 1, 2019. The Company is evaluating the impact this guidance will have on its consolidated financial statements and expects the adoption will have a significant impact on the Company's financial position resulting from the increase in assets and liabilities.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
In January 2016, the FASB issued ASU No. 2016-01, “Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities” (“ASU 2016-01”). ASU 2016-01 requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) at fair value, with changes in fair value recognized in net income. Under ASU 2016-01, entities will no longer be able to recognize unrealized holding gains and losses on available-for-sale equity securities in other comprehensive income, and they will no longer be able to use the cost method of accounting for equity securities that do not have readily determinable fair values. The guidance to classify equity securities with readily determinable fair values into different categories (that is trading or available for sale) is no longer required. ASU 2016-01 eliminates certain disclosure requirements related to financial instruments measured at amortized cost and adds disclosures related to the measurement categories of financial assets and financial liabilities. The guidance is effective for annual periods beginning after December 15, 2017, including interim periods within those fiscal years. ASU 2016-01 is effective for the Company beginning July 1, 2018. Adoption of ASU 2016-01 is not expected to have a material effect on the results of operations, financial position or cash flows of the Company.
In July 2015, the FASB issued ASU No. 2015-11, “Inventory (Topic 330): Simplifying the Measurement of Inventory” (“ASU 2015-11”). ASU 2015-11 simplifies the subsequent measurement of inventory by requiring inventory to be measured at the lower of cost and net realizable value. Entities will continue to apply their existing impairment models to inventories that are accounted for using last-in first-out or LIFO and the retail inventory method or RIM. Under current guidance, net realizable value is one of several calculations an entity needs to make to measure inventory at the lower of cost or market. ASU 2015-11 is effective for public business entities for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted, and the guidance must be applied prospectively after the date of adoption. ASU 2015-11 is effective for the Company beginning July 1, 2017. Adoption of ASU 2015-11 is not expected to have a material effect on the results of operations, financial position or cash flows of the Company.
In May 2014, the FASB issued accounting guidance which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers under ASU No. 2014-09, “Revenue from Contracts with Customers” (“ASU 2014-09“). ASU 2014-09 will replace most existing revenue recognition guidance in GAAP when it becomes effective. On August 12, 2015, the FASB issued ASU No. 2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date,“ which defers the effective date of ASU 2014-09 by one year allowing early adoption as of the original effective date of January 1, 2017. The deferral results in the new accounting standard being effective for public business entities for annual reporting periods beginning after December 31, 2017, including interim periods within those fiscal years. ASU 2014-09 is effective for the Company beginning July 1, 2018. The Company is currently evaluating the impact of ASU 2014-09 along with the related amendments and interpretations issued under ASU 2016-08, ASU 2016-10, ASU 2016-12 and ASU 2016-20 on its results of operations, financial position and cash flows.
None
Note 3. AcquisitionsPART III
China Mist Brands, Inc.
On October 11, 2016, the Company, through a wholly owned subsidiary, acquired substantially all of the assets and certain specified liabilities of China Mist, a provider of flavored iced teas and iced green teas. As part of the transaction, the Company assumed the lease on China Mist’s existing 17,400 square foot production, distribution and warehouse facility in Scottsdale, Arizona which is terminable upon twelve months’ notice.
The Company acquired China Mist for aggregate purchase consideration of $12.2 million consisting of $11.2 million in cash paid at closing, including estimated working capital adjustments of $0.4 million, post-closing final working capital adjustments of $0.6 million and up to $0.5 million in contingent consideration to be paid as earnout if certain sales levels are achieved in the calendar years of 2017 or 2018. This contingent earnout liability is currently estimated to have a fair value of $0.5 million and is recorded in other long-term liabilities on the Company’s consolidated balance sheet at June 30, 2017. The earnout is estimated to be paid in calendar 2019.
In fiscal 2017, the Company incurred $0.2 million in transaction costs related to the China Mist acquisition, consisting primarily of legal and accounting expenses, which are included in general and administrative expenses in the Company's consolidated statements of operations for the fiscal year ended June 30, 2017.
The financial effect of this acquisition was not material to the Company’s consolidated financial statements. The Company has not presented pro forma results of operations for the acquisition because it is not significant to the Company's consolidated results of operations.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
The acquisition was accounted for as a business combination. The fair value of consideration transferred was allocated to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values on the acquisition date, with the remaining unallocated amount recorded as goodwill. The purchase price allocation is final.
The following table summarizes the final allocation of consideration transferred as of the acquisition date:
|
| | | | | |
| (In thousands) | Fair Value | | Estimated Useful Life (years) |
| | | | |
| Cash paid, net of cash acquired | $ | 11,183 |
| | |
| Post-closing final working capital adjustments | 553 |
| | |
| Contingent consideration | 500 |
| | |
| Total consideration | $ | 12,236 |
| | |
| | | | |
| Accounts receivable | $ | 811 |
| | |
| Inventory | 544 |
| | |
| Prepaid assets | 48 |
| | |
| Property, plant and equipment | 189 |
| | |
| Goodwill | 2,927 |
| | |
| Intangible assets: | | | |
| Recipes | 930 |
| | 7 |
| Non-compete agreement | 100 |
| | 5 |
| Customer relationships | 2,000 |
| | 10 |
| Trade name/Trademark—indefinite-lived | 5,070 |
| | |
| Accounts payable | (383 | ) | | |
| Total consideration, net of cash acquired | $ | 12,236 |
| | |
In connection with this acquisition, the Company recorded goodwill of $2.9 million, which is deductible for tax purposes. The Company also recorded $3.0 million in finite-lived intangible assets that included recipes, a non-compete agreement and customer relationships and $5.1 million in indefinite-lived trade name/trademark. The weighted average amortization period for the finite-lived intangible assets is 8.9 years.
The determination of the fair value of intangible assets acquired was primarily based on significant inputs not observable in an active market and thus represent Level 3 fair value measurements as defined under GAAP.
The fair value assigned to the recipes was determined utilizing the replacement cost method, which captures the direct cost of the development effort plus lost profits over the time to re-create the recipes.
The fair value assigned to the non-compete agreement was determined utilizing the with and without method. Under the with and without method, the fair value of the intangible asset is estimated based on the difference in projected earnings with the agreement in place versus projected earnings based on starting with no agreement in place. Revenue and earnings projections were significant inputs into estimating the value of China Mist's non-compete agreement.
The fair value assigned to the customer relationships was determined based on management's estimate of the retention rate and utilizing certain benchmarks. Revenue and earnings projections were also significant inputs into estimating the value of customer relationships.
The fair value assigned to the trade name/trademark was determined utilizing a multi-period excess earnings approach. Under the multi-period excess earnings approach, the fair value of the intangible asset is estimated to be the present value of future earnings attributable to the asset and this method utilizes revenue and cost projections including an assumed contributory asset charge.
West Coast Coffee Company, Inc.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
On February 7, 2017, the Company acquired substantially all of the assets and certain specified liabilities of West Coast Coffee, a coffee roaster and distributor with a focus on the convenience store, grocery and foodservice channels. As part of the transaction, the Company entered into a three-year lease on West Coast Coffee’s existing 20,400 square foot production, distribution and warehouse facility in Hillsboro, Oregon, which expires January 31, 2020, and assumed leases on six branch warehouses consisting of an aggregate of 24,150 square feet in Oregon, California and Nevada, expiring on various dates through November 2020. The Company acquired West Coast Coffee for aggregate purchase consideration of $15.7 million, which included $14.7 million in cash paid at closing including working capital adjustments of $1.2 million, and up to $1.0 million in contingent consideration to be paid as earnout if certain sales levels are achieved in the twenty-four months following the closing. This contingent earnout liability is currently estimated to have a fair value of $0.6 million and is recorded in other long-term liabilities on the Company’s consolidated balance sheet at June 30, 2017. The earnout is estimated to be paid within the next twenty-four months.
In fiscal 2017, the Company incurred $0.3 million in transaction costs related to the West Coast Coffee acquisition, consisting primarily of legal and accounting expenses, which are included in general and administrative expenses in the Company's consolidated statements of operations for the fiscal year ended June 30, 2017.
The financial effect of this acquisition was not material to the Company’s consolidated financial statements. The Company has not presented pro forma results of operations for the acquisition because it is not significant to the Company's consolidated results of operations.
The acquisition was accounted for as a business combination. The fair value of consideration transferred was allocated to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values on the acquisition date, with the remaining unallocated amount recorded as goodwill. The purchase price allocation is preliminary as the Company is in the process of finalizing the valuation.
The following table summarizes the preliminary allocation of consideration transferred as of the acquisition date:
|
| | | | | |
| (In thousands) | Fair Value | | Estimated Useful Life (years) |
| | | | |
| Cash paid, net of cash acquired | $ | 14,671 |
| | |
| Contingent consideration | 600 |
| | |
| Total consideration | $ | 15,271 |
| | |
| | | | |
| Accounts receivable | $ | 955 |
| | |
| Inventory | 939 |
| | |
| Prepaid assets | 20 |
| | |
| Property, plant and equipment | 1,546 |
| | |
| Goodwill | 7,797 |
| | |
| Intangible assets: | | | |
| Non-compete agreements | 100 |
| | 5 |
| Customer relationships | 4,400 |
| | 10 |
| Trade name—finite-lived | 260 |
| | 7 |
| Brand name—finite-lived | 250 |
| | 1.7 |
| Accounts payable | (814 | ) | | |
| Other liabilities | (182 | ) | | |
| Total consideration, net of cash acquired | $ | 15,271 |
| | |
The preliminary purchase price allocation is subject to change based on numerous factors, including the final adjusted purchase price and the final estimated fair value of the assets acquired and liabilities assumed.
In connection with this acquisition, the Company recorded goodwill of $7.8 million, which is deductible for tax purposes. The Company also recorded $5.0 million in finite-lived intangible assets that included non-compete agreements,
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
customer relationships, a trade name and a brand name. The weighted average amortization period for the finite-lived intangible assets is 9.3 years.
The determination of the fair value of intangible assets acquired was primarily based on significant inputs not observable in an active market and thus represent Level 3 fair value measurements as defined under GAAP.
The fair value assigned to the non-compete agreements was determined utilizing the with and without method. Under the with and without method, the fair value of the intangible asset is estimated based on the difference in projected earnings with the agreements in place versus projected earnings based on starting with no agreements in place. Revenue and earnings projections were significant inputs into estimating the value of West Coast Coffee's non-compete agreements.
The fair value assigned to the customer relationships was determined utilizing a multi-period excess earnings approach. Under the multi-period excess earnings approach, the fair value of the intangible asset is estimated to be the present value of future earnings attributable to the asset and this method utilizes revenue and cost projections including an assumed contributory asset charge.
The fair values assigned to the trade name and the brand name were determined utilizing the relief from royalty method. The relief from royalty method is based on the premise that the intangible asset owner would be willing to pay a royalty rate to license the subject asset. The analysis involves forecasting revenue over the life of the asset, applying a royalty rate and a tax rate, and then discounting the savings back to present value at an appropriate discount rate.
Rae’ Launo Corporation
On January 12, 2015, the Company acquired substantially all of the assets of Rae’ Launo Corporation (“RLC”) relating to its DSD and in-room distribution business in the Southeastern United States (the “RLC Acquisition”). The purchase price was $1.5 million, consisting of $1.2 million in cash paid at closing and annual earnout payments of $0.1 million each year over a three-year period based on achievement of certain milestones.
The following table summarizes the estimated fair values of the assets acquired at the date of acquisition, based on the final purchase price allocation: |
| | | | | |
| Fair Values of Assets Acquired | | Estimated Useful Life (years) |
| (In thousands) | | | |
| Property, plant and equipment | $ | 338 |
| | |
| Intangible assets: | | | |
| Non-compete agreement | 20 |
| | 3.0 |
| Customer relationships | 870 |
| | 4.5 |
| Total finite-lived intangible assets | 890 |
| | |
| Goodwill | 272 |
| | |
| Total assets acquired | $ | 1,500 |
| | |
Definite-lived intangible assets consist of a non-compete agreement and customer relationships. Total net carrying value of definite-lived intangible assets as of June 30, 2017 and 2016 was $0.4 million and $0.6 million, respectively, and accumulated amortization as of June 30, 2017 and 2016 was $0.5 million and $0.3 million, respectively. Estimated aggregate amortization of definite-lived intangible assets, calculated on a straight-line basis and based on estimated fair values is $0.2 million in each of the next two fiscal years.
Note 4. Restructuring Plans
Corporate Relocation Plan
On February 5, 2015, the Company announced the Corporate Relocation Plan to close its Torrance, California facility and relocate its corporate headquarters, product development lab, and manufacturing and distribution operations from Torrance, California to the New Facility in Northlake, Texas. Approximately 350 positions were impacted as a result of the
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Torrance Facility closure. The Company’s decision resulted from a comprehensive review of alternatives designed to make the Company more competitive and better positioned to capitalize on growth opportunities.
Expenses related to the Corporate Relocation Plan in fiscal 2017 consisted of $1.1 million in employee retention and separation benefits, $6.2 million in facility-related costs including lease of temporary office space, costs associated with the move of the Company's headquarters and the relocation of certain distribution operations and $1.3 million in other related costs including travel, legal, consulting and other professional services. Facility-related costs in fiscal 2017 also included $2.5 million in non-cash charges, including $1.1 million in depreciation expense associated with the Torrance production facility resulting from the consolidation of coffee production operations with the Houston and Portland production facilities and $1.4 million in non-cash rent expense recognized in the sale-leaseback of the Torrance Facility.
The following table sets forth the activity in liabilities associated with the Corporate Relocation Plan for the fiscal year ended June 30, 2017: |
| | | | | | | | | | | | | | | | | | | | | | | |
| (In thousands) | Balances, June 30, 2016 | | Additions | | Payments | | Non-Cash Settled(2) | | Adjustments | | Balances, June 30, 2017(1) |
| Employee-related costs(1) | $ | 2,342 |
| | $ | 1,109 |
| | $ | 3,150 |
| | $ | — |
| | $ | — |
| | $ | 301 |
|
| Facility-related costs | — |
| | 6,187 |
| | 3,712 |
| | 2,475 |
| | — |
| | — |
|
| Other | 200 |
| | 1,294 |
| | 1,494 |
| | — |
| | — |
| | — |
|
| Total | $ | 2,542 |
| | $ | 8,590 |
| | $ | 8,356 |
| | $ | 2,475 |
| | $ | — |
| | $ | 301 |
|
| | | | | | | | | | | | |
| Current portion | $ | 2,542 |
| | | | | | | | | | $ | 301 |
|
| Non-current portion | $ | — |
| | | | | | | | | | $ | — |
|
| Total | $ | 2,542 |
| | | | | | | | | | $ | 301 |
|
_______________
(1) Included in “Accrued payroll expenses” on the Company's consolidated balance sheets.
(2) Non-cash settled facility-related costs represent (a) depreciation expense associated with the Torrance production facility resulting from the consolidation of coffee production operations with the Houston and Portland production facilities and included in “Property, plant and equipment, net” on the Company's consolidated balance sheets, and (b) non-cash rent expense recognized in the sale-leaseback of the Torrance Facility.
The Company estimated that it would incur approximately $31 million in cash costs in connection with the Corporate Relocation Plan consisting of $18 million in employee retention and separation benefits, $5 million in facility-related costs and $8 million in other related costs. Since the adoption of the Corporate Relocation Plan through June 30, 2017, the Company has recognized a total of $31.5 million in aggregate cash costs including $17.1 million in employee retention and separation benefits, $7.0 million in facility-related costs related to the temporary office space, costs associated with the move of the Company's headquarters, relocation of the Company’s Torrance operations and certain distribution operations and $7.4 million in other related costs. The Company completed the Corporate Relocation Plan in the fourth quarter of fiscal 2017 and had $0.3 million in accrued costs remaining to be paid in fiscal 2018. The Company also recognized from inception through June 30, 2017 non-cash depreciation expense of $2.3 million associated with the Torrance production facility resulting from the consolidation of coffee production operations with the Houston and Portland production facilities and $1.4 million in non-cash rent expense recognized in the sale-leaseback of the Torrance Facility. On July 13, 2017, the Company received correspondence from the WCT Pension Trust stating that it had liability for a share of the WCTPP unfunded vested benefits based on the WCT Pension Trust’s claim that certain of our employment actions resulting from the Corporate Relocation Plan amounted to a partial withdrawal from the WCTPP. See Note 26.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
The following table sets forth the activity in liabilities associated with the Corporate Relocation Plan from the time of adoption of the Corporate Relocation Plan through the fiscal year ended June 30, 2017: |
| | | | | | | | | | | | | | | | | | | | | | | |
| (In thousands) | Balances, June 30, 2014 | | Additions | | Payments | | Non-Cash Settled | | Adjustments | | Balances,
June 30, 2017 |
| Employee-related costs(1) | $ | — |
| | $ | 17,352 |
| | $ | 17,051 |
| | $ | — |
| | $ | — |
| | $ | 301 |
|
| Facility-related costs(2) | — |
| | 10,779 |
| | 7,048 |
| | 3,731 |
| | — |
| | — |
|
| Other | — |
| | 7,424 |
| | 7,424 |
| | — |
| | — |
| | — |
|
| Total(2) | $ | — |
| | $ | 35,555 |
| | $ | 31,523 |
| | $ | 3,731 |
| | $ | — |
| | $ | 301 |
|
_______________
(1) Included in “Accrued payroll expenses” on the Company's consolidated balance sheets.
(2) Non-cash settled facility-related costs represent (a) depreciation expense associated with the Torrance production facility resulting from the consolidation of coffee production operations with the Houston and Portland production facilities and included in “Property, plant and equipment, net” on the Company's consolidated balance sheets and (b) non-cash rent expense recognized in the sale-leaseback of the Torrance Facility.
DSD Restructuring Plan
On February 21, 2017, the Company announced the DSD Restructuring Plan to reorganize its DSD operations in an effort to realign functions into a channel-based selling organization, streamline operations, acquire certain channel specific expertise, and improve selling effectiveness and financial results. The strategic decision to undertake the DSD Restructuring Plan resulted from an ongoing operational review of various initiatives within the DSD selling organization. The Company expects to complete the DSD Restructuring Plan by the end of the second quarter of fiscal 2018.
The Company estimates that it will recognize approximately $3.7 million to $4.9 million of pre-tax restructuring charges by the end of the second quarter of fiscal 2018 consisting of approximately $1.9 million to $2.7 million in employee-related costs, including severance, prorated bonuses for bonus eligible employees, contractual termination payments and outplacement services, and $1.8 million to $2.2 million in other related costs, including legal, recruiting, consulting, other professional services, and travel. The Company may also incur other charges not currently contemplated due to events that may occur as a result of, or associated with, the DSD Restructuring Plan.
Expenses related to the DSD Restructuring Plan in fiscal 2017 consisted of $1.1 million in employee-related costs and $1.3 million in other related costs. As of June 30, 2017, the Company had paid a total of $1.7 million of these costs and had a balance of $0.7 million in DSD Restructuring Plan-related liabilities on the Company's consolidated balance sheet.
Note 5. New Facility
Lease Agreement and Purchase Option Exercise
On June 15, 2016, the Company exercised the purchase option to purchase the land and the partially constructed New Facility located thereon pursuant to the terms of the lease agreement dated as of July 17, 2015, as amended (the “Lease Agreement“). On September 15, 2016 (“Purchase Option Closing Date“), the Company closed the purchase option and acquired the land and the partially constructed New Facility located thereon for an aggregate purchase price of $42.5 million (the “Purchase Price”), consisting of the purchase option price of $42.0 million based on actual construction costs incurred as of the Purchase Option Closing Date plus the option exercise fee, plus amounts paid in respect of real estate commissions, title insurance, and recording fees. Upon closing of the purchase option, the Company recorded the aggregate purchase price of the New Facility in “Property, plant and equipment, net“ on its consolidated balance sheet. The asset related to the New Facility lease obligation included in “Property, plant and equipment, net,“ the offsetting liability for the lease obligation included in “Other long-term liabilities“ and the rent expense related to the land were reversed. Concurrent with the purchase option closing, on September 15, 2016, the Company terminated the Lease Agreement. The Company did not pay any early termination penalties in connection with the termination of the Lease Agreement.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Development Management Agreement
In conjunction with the Lease Agreement, the Company also entered into a Development Management Agreement with an affiliate of Stream Realty Partners (the “DMA“) to manage, coordinate, represent, assist and advise the Company on matters from the pre-development through construction of the New Facility. Pursuant to the DMA, the Company will pay the developer a development fee, an oversight fee and a development services fee the amounts of which are included in the construction costs incurred-to-date. As of June 30, 2017, the DMA has concluded and the Company had incurred $4.0 million under this agreement which amount is included in “Building and Facilities—New Facility“ (see Note 13) of which $0.4 million remains to be paid which is included in Accounts payable on the Company's consolidated balance sheet at June 30, 2017.Amended Building Contract
On September 17, 2016, the Company and The Haskell Company (“Builder”) entered into a Change Order, which, among other things, amended the building contract previously entered into between the Company and Builder to provide a guaranteed maximum price and the basis for the price and the scope of Builder’s services in connection with the construction of the New Facility (the “Amended Building Contract“).
Pursuant to the Amended Building Contract, Builder will provide pre-construction and construction services, including specialized industrial design and construction work in connection with Builder’s construction of certain production equipment that will be installed in portions of the New Facility (the “Project”). The Company engaged other designers and builders to provide traditional construction work on the Project site, including for the foundation, building envelope and roof of the New Facility. Pursuant to the Amended Building Contract, the Company will pay Builder up to $21.9 million for Builder’s services in connection with the Project. This amount is a guaranteed maximum price and is subject to adjustment in accordance with the terms of the Amended Building Contract. The Amended Building Contract includes an “IDB Work Contract Schedule,” which sets forth interim milestones, durations and material dates in relation to the performance and timing of Builder’s work. The Amended Building Contract includes remedies for the Company in the event agreed milestone dates relating to Builder’s services are not met. The Amended Building Contract is subject to customary undertakings, covenants, obligations, rights and conditions. In April 2017, the Company and Builder entered into a change order to change the scope of work which added $0.6 million to the Amended Building Contract. Builder’s work on the Project has been completed as of June 30, 2017. As of June 30, 2017, the Company has paid $20.3 million under this agreement, with a remaining $2.2 million to be paid which amount is included in “Building and Facilities—New Facility.“ See Note 13.New Facility Costs
The Company estimated that the total construction costs including the cost of land for the New Facility would be approximately $60 million. As of June 30, 2017, the Company has incurred an aggregate of $60.8 million and has outstanding contractual obligations of $1.6 million, which amounts are included in “Building and Facilities-New Facility.” See Notes 13 and 23. In addition to the costs to complete the construction of the New Facility, the Company estimated that it would incur approximately $35 million to $39 million for machinery and equipment, furniture and fixtures and related expenditures of which the Company has incurred an aggregate of $33.2 million as of June 30, 2017, including $20.3 million under the Amended Building Contract, and has outstanding contractual obligations of $2.8 million. See Note 23. The majority of the capital expenditures associated with machinery and equipment, furniture and fixtures, and related expenditures for the New Facility were incurred in the first three quarters of fiscal 2017. The Company commenced distribution activities at the New Facility during the second quarter of fiscal 2017 and initial production activities late in the third quarter of fiscal 2017. The Company began roasting coffee in the New Facility in the fourth quarter of fiscal 2017.
Note 6. Sales of Assets
Sale of Spice Assets
In order to focus on its core products, on December 8, 2015, the Company completed the sale of the Spice Assets to Harris. Harris acquired substantially all of the Company’s personal property used exclusively in connection with the
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
manufacture, processing and distribution of raw, processed and blended spices and certain other culinary products (collectively, the “Spice Assets”), including certain equipment; trademarks, trade names and other intellectual property assets; contract rights under sales and purchase orders and certain other agreements; and a list of certain customers, other than the Company’s DSD customers, and assumed certain liabilities relating to the Spice Assets. The Company received $6.0 million in cash at closing, and is eligible to receive an earnout amount of up to $5.0 million over a three year period based upon a percentage of certain institutional spice sales by Harris following the closing. Gain from the earnout on the sale is recognized when earned and when realization is assured beyond a reasonable doubt. The Company recognized $1.0 million and $0.5 million in earnout during the fiscal years ended June 30, 2017 and 2016, respectively, a portion of which is included in “Net gains from sale of Spice Assets” in the Company's consolidated statements of operations. The sale of the Spice Assets does not represent a strategic shift for the Company and is not expected to have a material impact on the Company's results of operations because the Company will continue to sell a complete portfolio of spice and other culinary products purchased from Harris under a supply agreement to its DSD customers.
Sale of Torrance Facility
On July 15, 2016, the Company completed the sale of the Torrance Facility, consisting of approximately 665,000 square feet of buildings located on approximately 20.3 acres of land, for an aggregate cash sale price of $43.0 million, which sale price was subject to customary adjustments for closing costs and documentary transfer taxes. Cash proceeds from the sale of the Torrance Facility were $42.5 million.
Following the closing of the sale, the Company leased back the Torrance Facility on a triple net basis through October 31, 2016 at zero base rent, and exercised two one-month extensions at a base rent of $100,000 per month. In accordance with ASC 840, “Leases,” due to the Company’s continuing involvement with the property, the Company accounted for the transaction as a financing transaction, deferred the gain on sale of the Torrance Facility and recorded the net sale proceeds of $42.5 million and accrued non-cash interest expense on the financing transaction in “Sale-leaseback financing obligation” on the Company's consolidated balance sheet at September 30, 2016. The Company vacated the Torrance Facility in December 2016 and concluded the leaseback transaction. See Note 7. As a result, at December 31, 2016, the financing transaction qualified for sales recognition under ASC 840. Accordingly, in the fiscal year ended June 30, 2017, the Company recognized the net gain from sale of the Torrance Facility in the amount of $37.4 million, including non-cash interest expense of $0.7 million and non-cash rent expense of $1.4 million, representing the rent for the zero base rent period previously recorded in “Other current liabilities” and removed the amounts recorded in “Assets held for sale” and the “Sale-leaseback financing obligation” on its consolidated balance sheet.Sale of Northern California Branch Property
On September 30, 2016, the Company completed the sale of its branch property in Northern California for a sale price of $2.2 million and leased it back through March 31, 2017, at a base rent of $10,000 per month. The Company recognized a net gain on sale of the Northern California property in the fiscal year ended June 30, 2017 in the amount of $2.0 million.
Note 7. Assets Held for Sale
The Company had designated its Torrance Facility and one of its branch properties in Northern California as assets held for sale and recorded the carrying values of these properties in the aggregate amount of $7.2 million as “Assets held for sale“ on the Company's consolidated balance sheet at June 30, 2016. As of June 30, 2017, these assets were sold. See Note 6.
Note 8. Derivative Instruments
Derivative Instruments Held
Coffee-Related Derivative Instruments
The Company is exposed to commodity price risk associated with its PTF green coffee purchase contracts, which are described further in Note 2. The Company utilizes forward and option contracts to manage exposure to the variability in expected future cash flows from forecasted purchases of green coffee attributable to commodity price risk. Certain of these
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
coffee-related derivative instruments utilized for risk management purposes have been designated as cash flow hedges, while other coffee-related derivative instruments have not been designated as cash flow hedges or do not qualify for hedge accounting despite hedging the Company's future cash flows on an economic basis.
The following table summarizes the notional volumes for the coffee-related derivative instruments held by the Company at June 30, 2017 and 2016: |
| | | | | | |
| | | June 30, |
| (In thousands) | | 2017 | | 2016 |
| Derivative instruments designated as cash flow hedges: | | | | |
| Long coffee pounds | | 33,038 |
| | 32,550 |
|
| Derivative instruments not designated as cash flow hedges: | | | | |
| Long coffee pounds | | 2,121 |
| | 1,618 |
|
| Less: Short coffee pounds | | — |
| | (188 | ) |
| Total | | 35,159 |
| | 33,980 |
|
Coffee-related derivative instruments designated as cash flow hedges outstanding as of June 30, 2017 will expire within 18 months.
Effect of Derivative Instruments on the Financial Statements
Balance Sheets
Fair values of derivative instruments on the Company's consolidated balance sheets: |
| | | | | | | | | | | | | | | | |
| | | Derivative Instruments Designated as Cash Flow Hedges | | Derivative Instruments Not Designated as Accounting Hedges |
| | | June 30, | | June 30, |
| (In thousands) | | 2017 | | 2016 | | 2017 | | 2016 |
| Financial Statement Location: | | | | | | | | |
| Short-term derivative assets: | | | | | | | | |
| Coffee-related derivative instruments(1) | | $ | 66 |
| | $ | 3,771 |
| | $ | — |
| | $ | 183 |
|
| Long-term derivative assets: | | | | | | | | |
| Coffee-related derivative instruments(2) | | $ | 66 |
| | $ | 2,575 |
| | $ | — |
| | $ | 57 |
|
| Short-term derivative liabilities: | | | | | | | | |
| Coffee-related derivative instruments | | $ | 1,733 |
| | $ | — |
| | $ | 190 |
| | $ | — |
|
| Long-term derivative liabilities: | | | | | | | | |
| Coffee-related derivative instruments(2) | | $ | 446 |
| | $ | — |
| | $ | — |
| | $ | — |
|
________________
(1) Included in “Short-term derivative liabilities” on the Company's consolidated balance sheet at June 30, 2017.
(2) Included in “Other long-term liabilities” on the Company's consolidated balance sheet at June 30, 2017.
Statements of Operations
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
The following table presents pretax net gains and losses for the Company's coffee-related derivative instruments designated as cash flow hedges, as recognized in “AOCI,” “Cost of goods sold” and “Other, net”: |
| | | | | | | | | | | | | | |
| | | Year Ended June 30, | | Financial Statement Classification |
| (In thousands) | | 2017 | | 2016 | | 2015 | |
| Net (losses) gains recognized in AOCI (effective portion) | | $ | (4,705 | ) | | $ | 303 |
| | $ | (14,295 | ) | | AOCI |
| Net gains (losses) recognized in earnings (effective portion) | | $ | 1,732 |
| | $ | (13,184 | ) | | $ | 4,211 |
| | Costs of goods sold |
| Net losses recognized in earnings (ineffective portion) | | $ | (456 | ) | | $ | (575 | ) | | $ | (325 | ) | | Other, net |
For the fiscal years ended June 30, 2017, 2016 and 2015, there were no gains or losses recognized in earnings as a result of excluding amounts from the assessment of hedge effectiveness or as a result of reclassifications to earnings following the discontinuance of any cash flow hedges.
Net losses (gains) on derivative instruments in the Company's consolidated statements of cash flows also includes net losses (gains) on coffee-related derivative instruments designated as cash flow hedges reclassified to cost of goods sold from AOCI in the fiscal years ended June 30, 2017, 2016 and 2015. Gains and losses on derivative instruments not designated as accounting hedges are included in “Other, net” in the Company's consolidated statements of operations and in “Net losses (gains) on derivative instruments and investments” in the Company's consolidated statements of cash flows.
Net gains and losses recorded in “Other, net” are as follows: |
| | | | | | | | | | | | |
| | | Year Ended June 30, |
| (In thousands) | | 2017 | | 2016 | | 2015 |
| Net losses on coffee-related derivative instruments | | $ | (1,812 | ) | | $ | (298 | ) | | $ | (2,992 | ) |
| Net gains (losses) on investments | | 286 |
| | 611 |
| | (270 | ) |
| Net (losses) gains on derivative instruments and investments(1) | | (1,526 | ) | | 313 |
| | (3,262 | ) |
| Other gains, net | | 325 |
| | 243 |
| | 248 |
|
| Other, net | | $ | (1,201 | ) | | $ | 556 |
| | $ | (3,014 | ) |
___________
(1) Excludes net losses and net gains on coffee-related derivative instruments designated as cash flow hedges recorded in cost of goods sold in the fiscal years ended June 30, 2017, 2016 and 2015.
Offsetting of Derivative Assets and Liabilities
The Company has agreements in place that allow for the financial right of offset for derivative assets and liabilities at settlement or in the event of default under the agreements. Additionally, the Company maintains accounts with its brokers to facilitate financial derivative transactions in support of its risk management activities. Based on the value of the Company’s positions in these accounts and the associated margin requirements, the Company may be required to deposit cash into these broker accounts.
The following table presents the Company’s net exposure from its offsetting derivative asset and liability positions, as well as cash collateral on deposit with its counterparty as of the reporting dates indicated: |
| | | | | | | | | | | | | | | | | | |
| (In thousands) | | | | Gross Amount Reported on Balance Sheet | | Netting Adjustments | | Cash Collateral Posted | | Net Exposure |
| June 30, 2017 | | Derivative Assets | | $ | 132 |
| | $ | (132 | ) | | $ | — |
| | $ | — |
|
| | | Derivative Liabilities | | $ | 2,369 |
| | $ | (132 | ) | | $ | — |
| | $ | 2,237 |
|
| June 30, 2016 | | Derivative Assets | | $ | 6,586 |
| | $ | — |
| | $ | — |
| | $ | 6,586 |
|
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Cash Flow Hedges
Changes in the fair value of the Company's coffee-related derivative instruments designated as cash flow hedges, to the extent effective, are deferred in AOCI and reclassified into cost of goods sold in the same period or periods in which the hedged forecasted purchases affect earnings, or when it is probable that the hedged forecasted transaction will not occur by the end of the originally specified time period. Based on recorded values at June 30, 2017, $(1.6) million of net losses on coffee-related derivative instruments designated as cash flow hedges are expected to be reclassified into cost of goods sold within the next twelve months. These recorded values are based on market prices of the commodities as of June 30, 2017. Due to the volatile nature of commodity prices, actual gains or losses realized within the next twelve months will likely differ from these values.
Note 9. Investments
In fiscal 2017, the Company liquidated substantially all of its trading securities to fund expenditures associated with its New Facility in Northlake, Texas. The Company had $0.4 million and $25.6 million in short-term investments at June 30, 2017 and 2016, respectively. The following table shows gains and losses on trading securities by the Company:
|
| | | | | | | | | | | | |
| | | Year Ended June 30, |
| (In thousands) | | 2017 | | 2016 | | 2015 |
| Total gains (losses) recognized from trading securities | | $ | 286 |
| | $ | 611 |
| | $ | (270 | ) |
| Less: Realized gains from sales of trading securities | | 1,909 |
| | 29 |
| | 89 |
|
| Unrealized (losses) gains from trading securities | �� | $ | (1,623 | ) | | $ | 582 |
| | $ | (359 | ) |
Note 10. Fair Value Measurements
Assets and liabilities measured and recorded at fair value on a recurring basis were as follows:
|
| | | | | | | | | | | | | | | | |
| (In thousands) | | Total | | Level 1 | | Level 2 | | Level 3 |
| June 30, 2017 | | | | | | | | |
| Preferred stock(1) | | $ | 368 |
| | $ | — |
| | $ | 368 |
| | $ | — |
|
| Derivative instruments designated as cash flow hedges: | | | | | | | | |
| Coffee-related derivative assets(2) | | $ | 132 |
| | $ | — |
| | $ | 132 |
| | $ | — |
|
| Coffee-related derivative liabilities(2) | | $ | 2,179 |
| | $ | — |
| | $ | 2,179 |
| | $ | — |
|
| Derivative instruments not designated as accounting hedges: | | | | | | | | |
| Coffee-related derivative liabilities(2) | | $ | 190 |
| | $ | — |
| | $ | 190 |
| | $ | — |
|
| | | | | | | | | |
| (In thousands) | | Total | | Level 1 | | Level 2 | | Level 3 |
| June 30, 2016 | | | | | | | | |
| Preferred stock(1) | | $ | 25,591 |
| | $ | 21,976 |
| | $ | 3,615 |
| | $ | — |
|
| Derivative instruments designated as cash flow hedges: | | | | | | | | |
| Coffee-related derivative assets(2) | | $ | 6,346 |
| | $ | — |
| | $ | 6,346 |
| | $ | — |
|
| Derivative instruments not designated as accounting hedges: | | | | | | | | |
| Coffee-related derivative assets(2) | | $ | 240 |
| | $ | — |
| | $ | 240 |
| | $ | — |
|
| | | | | | | | | |
____________________
|
| |
(1)Item 10. | Included in “Short-term investments” on the Company's consolidated balance sheets.Directors, Executive Officers and Corporate Governance |
The information required by this item will be set forth in the Proxy Statement and is incorporated in this report by reference.
Code of Conduct and Ethics
We maintain a written Code of Conduct and Ethics for all employees, officers and directors, including our principal executive officer, principal financial officer, principal accounting officer or controller, and other persons performing similar functions. To view this Code of Conduct and Ethics free of charge, please visit our website at www.farmerbros.com. We intend to satisfy the disclosure requirements under Item 5.05 of Form 8-K regarding an amendment to, or waiver from, a provision of this Code of Conduct and Ethics, if any, by posting such information on our website as set forth above.
Compliance with Section 16(a) of the Exchange Act
To the Company’s knowledge, based solely on a review of the copies of such reports furnished to the Company and written representations from certain reporting persons that no other reports were required during the fiscal year ended June 30, 2020, its officers, directors and ten percent stockholders complied with all applicable Section 16(a) filing requirements. The foregoing is in addition to any filings that may be listed in the Company's Proxy Statement expected to be dated and filed with the SEC not later than 120 days after the conclusion of the Company's fiscal year ended June 30, 2020.
|
| |
(2)Item 11. | The Company's coffee derivative instruments are traded over-the-counter and, therefore, classified as Level 2.Executive Compensation |
DuringThe information required by this item will be set forth in the fiscal years ended June 30, 2017Proxy Statement and 2016, there were no transfers between the levels.is incorporated in this report by reference.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Note 11. Accounts Receivable, Net |
| | | | | | | | |
| | | June 30, |
| (In thousands) | | 2017 | | 2016 |
| Trade receivables | | $ | 44,531 |
| | $ | 43,113 |
|
| Other receivables(1) | | 2,636 |
| | 1,965 |
|
| Allowance for doubtful accounts | | (721 | ) | | (714 | ) |
| Accounts receivable, net | | $ | 46,446 |
| | $ | 44,364 |
|
__________
(1) At June 30, 2017 and 2016, respectively, the Company had recorded $0.4 million and $0.5 million in “Other receivables“ included in “Accounts receivable, net“ on its consolidated balance sheets representing earnout receivable from Harris.
Allowance for doubtful accounts:
|
| | | |
| (In thousands) | |
| Balance at June 30, 2014 | $ | (651 | ) |
| Recovery | 8 |
|
| Balance at June 30, 2015 | $ | (643 | ) |
| Provision | (71 | ) |
| Write-off | $ | — |
|
| Balance at June 30, 2016 | $ | (714 | ) |
| Provision | (325 | ) |
| Write-off | 318 |
|
| Balance at June 30, 2017 | $ | (721 | ) |
|
| | | | | | | | |
| | | June 30, |
| (In thousands) | | 2017 | | 2016 |
| Coffee | | | | |
| Processed | | $ | 14,085 |
| | $ | 12,362 |
|
| Unprocessed | | 17,083 |
| | 13,534 |
|
| Total | | $ | 31,168 |
| | $ | 25,896 |
|
| Tea and culinary products | | | | |
| Processed | | $ | 20,741 |
| | $ | 15,384 |
|
| Unprocessed | | 74 |
| | 377 |
|
| Total | | $ | 20,815 |
| | $ | 15,761 |
|
| Coffee brewing equipment parts | | $ | 4,268 |
| | $ | 4,721 |
|
| Total inventories | | $ | 56,251 |
| | $ | 46,378 |
|
In addition to product cost, inventory costs include expenditures such as direct labor and certain supply and overhead expenses incurred in bringing the inventory to its existing condition and location. The “Unprocessed” inventory values as stated in the above table represent the value of raw materials and the “Processed” inventory values represent all other products consisting primarily of finished goods.
Inventories were higher at the end of fiscal 2017 due to the commencement of the New Facility's manufacturing operations and incremental inventory from China Mist and West Coast Coffee as compared to lower levels of inventory at the Torrance Facility at the end of fiscal 2016 due to its anticipated closing. Notwithstanding this increase in total inventories at the end of fiscal 2017 compared to fiscal 2016 levels, inventories of manufactured spice products decreased at the end of fiscal 2017 compared to fiscal 2016 levels, primarily due to the liquidation of spice inventories in connection with the sale of the
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Spice Assets. As a result, the Company recorded $3.4 million in beneficial effect of the liquidation of LIFO inventory quantities in cost of goods sold in fiscal 2017, which increased income before taxes in fiscal 2017 by $3.4 million.
Inventories decreased at the end of fiscal 2016 compared to fiscal 2015, primarily due to production consolidation and the sale of certain processed and unprocessed inventories to Harris at cost upon conclusion of the transition services provided by the Company in connection with the sale of the Spice Assets. Inventories decreased at the end of fiscal 2015 compared to fiscal 2014, primarily due to the consolidation and the sale of certain manufactured inventories to Harris. As a result, the Company recorded in cost of goods sold $4.2 million and $4.9 million in beneficial effect of liquidation of LIFO inventory quantities in the fiscal years ended June 30, 2016 and 2015, respectively, which increased income before taxes in fiscal 2016 and 2015 by $4.2 million and $4.9 million, respectively.
Current cost of coffee, tea and culinary product inventories exceeds the LIFO cost by: |
| | | | | | | | |
| | | June 30, |
| (In thousands) | | 2017 | | 2016 |
| Coffee | | $ | 13,351 |
| | $ | 14,462 |
|
| Tea and culinary products | | 4,043 |
| | 7,139 |
|
| Total | | $ | 17,394 |
| | $ | 21,601 |
|
|
| |
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
Note 13. Property, PlantThe information required by this item will be set forth in the Proxy Statement and Equipmentis incorporated in this report by reference.
Equity Compensation Plan Information
Information about our equity compensation plans at June 30, 2020 that were either approved or not approved by our stockholders were as follows:
|
| | | | | | | | |
| | | June 30, |
| (In thousands) | | 2017 | | 2016 |
| Buildings and facilities | | $ | 108,682 |
| | $ | 82,878 |
|
| Machinery and equipment | | 201,236 |
| | 182,227 |
|
| Equipment under capital leases | | 7,540 |
| | 11,982 |
|
| Capitalized software | | 21,794 |
| | 21,545 |
|
| Office furniture and equipment | | 12,758 |
| | 16,077 |
|
| | | $ | 352,010 |
| | $ | 314,709 |
|
| Accumulated depreciation | | (192,280 | ) | | (206,162 | ) |
| Land | | 16,336 |
| | 9,869 |
|
| Property, plant and equipment, net | | $ | 176,066 |
| | $ | 118,416 |
|
|
| | | | | | |
| Plan Category | | Number of Shares to be Issued Upon Exercise / Vesting of Outstanding Options or Rights(2) | | Weighted Average Exercise Price of Outstanding Options(3) | | Number of Shares Remaining Available for Future Issuance(4) |
| Equity compensation plans approved by stockholders(1) | | 535,430 | | $13.56 | | 458,947 |
| Equity compensation plans not approved by stockholders (5) | | 88,495 | | $6.72 | | 211,505 |
| Total | | 623,925 | | | | 670,452 |
________________
Capital leases consisted mainly
(1) Includes shares issued under the Prior Plans and the 2017 Plan. The 2017 Plan succeeded the Prior Plans. On the Effective Date of vehicle leases at June 30,the 2017 Plan, the Company ceased granting awards under the Prior Plans; however, awards outstanding under the Prior Plans will remain subject to the terms of the applicable Prior Plan.
(2) Includes shares that may be issued upon the achievement of certain financial and 2016. Depreciation and amortization expense includes amortization expense for assets recordedother performance criteria as a condition to vesting in addition to time-based vesting pursuant to PBRSUs granted under capitalized leases.
the 2017 Plan. The Company capitalized coffee brewing equipment (included in machinery and equipment)PBRSUs included in the amountstable include the maximum number of $10.8 millionshares that may be issued under the awards. Under the terms of the awards, the recipient may earn between 0% and $8.4 million150% of the target number of PBRSUs depending on the extent to which the Company meets or exceeds the achievement of the applicable financial performance goals.
(3) Does not include outstanding PBRSUs.
(4) The 2017 Plan authorizes the issuance of (i) 900,000 shares of common stock plus (ii) the number of shares of common stock subject to awards under the Company’s Prior Plans that are outstanding as of the Effective Date and that expire or are forfeited, cancelled or similarly lapse following the Effective Date. Subject to certain limitations, shares of common stock covered by awards granted under the 2017 Plan that are forfeited, expire or lapse, or are repurchased for or paid in fiscalcash, may be used again for new grants under the 2017 and 2016, respectively. Depreciation expense relatedPlan. Shares of common stock granted under the 2017 Plan may be authorized but unissued shares, shares purchased on the open market or treasury shares. In no event will more than 900,000 shares of common stock be issuable pursuant to the capitalized coffee brewing equipment reported as costexercise of goods sold was $9.1 million, $9.8 million and $10.4 million in fiscalincentive stock options under the 2017 2016 and 2015, respectively.
Maintenance and repairs to property, plant and equipment charged to expensePlan. The 2017 Plan provides for the years ended June 30,grant of stock options (including incentive stock options and non-qualified stock options), stock appreciation rights, restricted stock, restricted stock units, dividend equivalents, performance shares and other stock- or cash-based awards to eligible participants. Non-employee directors of the Company and employees of the Company or any of its subsidiaries are eligible to receive awards under the 2017 2016, and 2015 were $8.0 million, $7.7 million and $8.2 million, respectively.
Plan.
(5) Consists of grants made under the Farmer Bros. Co.
Notes 2020 Inducement Incentive Award Plan (the “Inducement Award Plan”), which in accordance with Rule 5635(c)(4) of the Nasdaq Stock Market LLC listing rules (“Rule 5635(c)(4)”) permits grants of up to Consolidated Financial Statements (continued)
Note 14. Goodwill and Intangible Assets
The300,000 shares of common stock to newly hired employees who have not previously been a member of the Board, or to an employee who is being rehired following is a summarybona fide period of changes innon-employment by the carrying value of goodwill: |
| | | | |
| (In thousands) |
| Balance at June 30, 2015 | | $ | 272 |
|
| Additions | | — |
|
| Balance at June 30, 2016 | | $ | 272 |
|
| Additions (China Mist) | | 2,927 |
|
| Additions (West Coast Coffee)(1) | | 7,797 |
|
| Balance at June 30, 2017 | | $ | 10,996 |
|
___________
(1) ReflectsCompany or a subsidiary, as a material inducement to the preliminary purchase price allocation for West Coast Coffee.employee's entering into employment with the Company or its subsidiary. Subject to change based on numerous factors, includingcertain limitations, shares of common stock covered by awards granted under the final adjusted purchase price andInducement Award Plan that are forfeited, expire or lapse, or are repurchased for or paid in cash, may be used again for new grants under the final estimated fair value of the assets acquired and the liabilities assumed. Adjustments in the purchase price allocation may require a recasting of the amounts allocated to goodwill and intangible assets.
2017 Plan. The following is a summary of the Company’s amortized and unamortized intangible assets other than goodwill:
|
| | | | | | | | | | | | | | | | |
| | | June 30, 2017 | | June 30, 2016 |
| (In thousands) | | Gross Carrying Amount(1) | | Accumulated Amortization(1) | | Gross Carrying Amount | | Accumulated Amortization |
| Amortized intangible assets: | | | | | | | | |
| Customer relationships | | $ | 17,353 |
| | $ | (10,883 | ) | | $ | 10,953 |
| | $ | (10,373 | ) |
| Non-compete agreements | | 220 |
| | (38 | ) | | 20 |
| | (10 | ) |
| Recipes | | 930 |
| | (88 | ) | | — |
| | — |
|
| Trade name/brand name | | 510 |
| | (84 | ) | | — |
| | — |
|
| Total amortized intangible assets | | $ | 19,013 |
| | $ | (11,093 | ) | | $ | 10,973 |
| | $ | (10,383 | ) |
| Unamortized intangible assets: | | | | | | | | |
| Trade names with indefinite lives | | $ | 3,640 |
| | $ | — |
| | $ | 3,640 |
| | $ | — |
|
| Trademarks and brand name with indefinite lives | | 7,058 |
| | — |
| | 1,988 |
| | — |
|
| Total unamortized intangible assets | | $ | 10,698 |
| | $ | — |
| | $ | 5,628 |
| | $ | — |
|
| Total intangible assets | | $ | 29,711 |
| | $ | (11,093 | ) | | $ | 16,601 |
| | $ | (10,383 | ) |
___________
(1) Reflects the preliminary purchase price allocation for West Coast Coffee. Subject to change based on numerous factors, including the final adjusted purchase price and the final estimated fair value of the assets acquired and the liabilities assumed. Adjustments in the purchase price allocation may require a recasting of the amounts allocated to goodwill and intangible assets.
Aggregate amortization expenseInducement Award Plan allows for the past three fiscal years:grant of non-qualified stock options, stock appreciation rights, restricted stock, restricted stock units, and dividend equivalents
|
| | | | |
| (In thousands) | | |
| For the fiscal year ended: | | |
| June 30, 2017 | | $ | 710 |
|
| June 30, 2016 | | $ | 200 |
|
| June 30, 2015 | | $ | 99 |
|
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Estimated amortization expense for the next five fiscal years:
|
| | | | |
| (In thousands) | | |
| For the fiscal year ending: | | |
| June 30, 2018 | | $ | 1,197 |
|
| June 30, 2019 | | $ | 1,081 |
|
| June 30, 2020 | | $ | 866 |
|
| June 30, 2021 | | $ | 850 |
|
| June 30, 2022 | | $ | 828 |
|
Remaining weighted average amortization periods for intangible assets with finite lives are as follows: |
| | | | | | | | |
(In years)Item 13. | | |
Customer relationships | | 9.1 |
Non-compete agreements | | 4.4 |
Recipes | | 6.3 |
Trade name/brand name | | 4.3Certain Relationships and Related Transactions, and Director Independence |
The information required by this item will be set forth in the Proxy Statement and is incorporated in this report by reference.
Note 15. Employee Benefit Plans |
| |
| Item 14. | Principal Accountant Fees and Services |
The Company provides benefit plans for most full-time employees, including 401(k), health and other welfare benefit plans and, in certain circumstances, pension benefits. Generally the plans provide benefits based on years of service and/or a combination of years of service and earnings. In addition, the Company contributes to two multiemployer defined benefit pension plans, one multiemployer defined contribution pension plan and ten multiemployer defined contribution plans other than pension plans that provide medical, vision, dental and disability benefits for active, union-represented employees subject to collective bargaining agreements. In addition, the Company sponsors a postretirement defined benefit plan that covers qualified non-union retirees and certain qualified union retirees and provides retiree medical coverage and, depending on the age of the retiree, dental and vision coverage. The Company also provides a postretirement death benefit to certain of its employees and retirees.
The Company isinformation required to recognize the funded status of a benefit plan in its consolidated balance sheets. The Company is also required to recognize in other comprehensive income (loss) (“OCI”) certain gains and losses that arise during the period but are deferred under pension accounting rules.
Single Employer Pension Plans
The Company has a defined benefit pension plan, the Farmer Bros. Co. Pension Plan for Salaried Employees (the “Farmer Bros. Plan”), for Company employees hired prior to January 1, 2010, who are not covered under a collective bargaining agreement. The Company amended the Farmer Bros. Plan, freezing the benefit for all participants effective June 30, 2011. After the plan freeze, participants do not accrue any benefits under the Farmer Bros. Plan, and new hires are not eligible to participateby this item will be set forth in the Farmer Bros. Plan. As all plan participants became inactive followingProxy Statement and is incorporated in this pension curtailment, net (gain) loss is now amortized based on the remaining life expectancy of these participants instead of the remaining service period of these participants.report by reference.
The Company also has two defined benefit pension plans for certain hourly employees covered under collective bargaining agreements (the “Brewmatic Plan” and the “Hourly Employees' Plan”). Effective October 1, 2016, the Company froze benefit accruals and participation in the Hourly Employees' Plan. After the plan freeze, participants do not accrue any benefits under the plan, and new hires are not eligible to participate in the plan. After the freeze the participants in the plan are eligible to receive the Company's matching contributions to their 401(k).
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Obligations and Funded StatusPART IV
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Farmer Bros. Plan June 30, | | Brewmatic Plan June 30, | | Hourly Employees’ Plan June 30, |
| ($ in thousands) | | 2017 | | 2016 | | 2017 | | 2016 | | 2017 | | 2016 |
| Change in projected benefit obligation | | | | | | | | | | | | |
| Benefit obligation at the beginning of the year | | $ | 152,325 |
| | $ | 136,962 |
| | $ | 4,574 |
| | $ | 4,064 |
| | $ | 4,329 |
| | $ | 3,145 |
|
| Service cost | | — |
| | — |
| | — |
| | — |
| | 124 |
| | 389 |
|
| Interest cost | | 5,277 |
| | 5,875 |
| | 157 |
| | 172 |
| | 152 |
| | 137 |
|
| Actuarial (gain) loss | | (4,556 | ) | | 15,999 |
| | (370 | ) | | 682 |
| | (233 | ) | | 687 |
|
| Benefits paid | | (6,755 | ) | | (6,511 | ) | | (282 | ) | | (344 | ) | | (43 | ) | | (29 | ) |
| Projected benefit obligation at the end of the year | | $ | 146,291 |
| | $ | 152,325 |
| | $ | 4,079 |
| | $ | 4,574 |
| | $ | 4,329 |
| | $ | 4,329 |
|
| Change in plan assets | | | | | | | | | | | | |
| Fair value of plan assets at the beginning of the year | | $ | 91,201 |
| | $ | 94,815 |
| | $ | 2,989 |
| | $ | 3,291 |
| | $ | 2,447 |
| | $ | 2,104 |
|
| Actual return on plan assets | | 10,874 |
| | 1,556 |
| | 337 |
| | 42 |
| | 256 |
| | 85 |
|
| Employer contributions | | 1,984 |
| | 1,341 |
| | 71 |
| | — |
| | 339 |
| | 287 |
|
| Benefits paid | | (6,755 | ) | | (6,511 | ) | | (282 | ) | | (344 | ) | | (43 | ) | | (29 | ) |
| Fair value of plan assets at the end of the year | | $ | 97,304 |
| | $ | 91,201 |
| | $ | 3,115 |
| | $ | 2,989 |
| | $ | 2,999 |
| | $ | 2,447 |
|
| Funded status at end of year (underfunded) overfunded | | $ | (48,987 | ) | | $ | (61,124 | ) | | $ | (964 | ) | | $ | (1,585 | ) | | $ | (1,330 | ) | | $ | (1,882 | ) |
| Amounts recognized in consolidated balance sheets | | | | | | | | | | | | |
| Non-current liabilities | | (48,987 | ) | | (61,124 | ) | | (964 | ) | | (1,585 | ) | | (1,330 | ) | | (1,882 | ) |
| Total | | $ | (48,987 | ) | | $ | (61,124 | ) | | $ | (964 | ) | | $ | (1,585 | ) | | $ | (1,330 | ) | | $ | (1,882 | ) |
| Amounts recognized in AOCI | | | | | | | | | | | | |
| Net loss | | 59,007 |
| | 70,246 |
| | 2,135 |
| | 2,756 |
| | 618 |
| | 988 |
|
| Total AOCI (not adjusted for applicable tax) | | $ | 59,007 |
| | $ | 70,246 |
| | $ | 2,135 |
| | $ | 2,756 |
| | $ | 618 |
| | $ | 988 |
|
| Weighted average assumptions used to determine benefit obligations | | | | | | | | | | | | |
| Discount rate | | 3.80 | % | | 3.55 | % | | 3.80 | % | | 3.55 | % | | 3.80 | % | | 3.55 | % |
| Rate of compensation increase | | N/A |
| | N/A |
| | N/A |
| | N/A |
| | N/A |
| | N/A |
|
|
| |
| Item 15. | Exhibits and Financial Statement Schedules |
| |
| (a) | List of Financial Statements and Financial Statement Schedules: |
Farmer Bros. Co.
Notes to Consolidated1. Financial Statements (continued)
Componentsincluded in Part II, Item 8 of Net Periodic Benefit Cost and
Other Changes Recognized in Other Comprehensive Income (Loss) (OCI)
this report:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Farmer Bros. Plan June 30, | | Brewmatic Plan June 30, | | Hourly Employees’ Plan June 30, |
| ($ in thousands) | | 2017 | | 2016 | | 2017 | | 2016 | | 2017 | | 2016 |
| Components of net periodic benefit cost | | | | | | | | | | | | |
| Service cost | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 124 |
| | $ | 389 |
|
| Interest cost | | 5,277 |
| | 5,875 |
| | 157 |
| | 172 |
| | 152 |
| | 137 |
|
| Expected return on plan assets | | (6,067 | ) | | (6,470 | ) | | (188 | ) | | (219 | ) | | (172 | ) | | (149 | ) |
| Amortization of net loss | | 1,875 |
| | 1,411 |
| | 102 |
| | 68 |
| | 53 |
| | — |
|
| Net periodic benefit cost | | $ | 1,085 |
| | $ | 816 |
| | $ | 71 |
| | $ | 21 |
| | $ | 157 |
| | $ | 377 |
|
| Other changes recognized in OCI | | | | | | | | | | | | |
| Net loss | | $ | (9,363 | ) | | $ | 20,913 |
| | $ | (519 | ) | | $ | 859 |
| | $ | (317 | ) | | $ | 750 |
|
| Amortization of net loss | | (1,875 | ) | | (1,411 | ) | | (102 | ) | | (68 | ) | | (53 | ) | | — |
|
| Total recognized in OCI | | $ | (11,238 | ) | | $ | 19,502 |
| | $ | (621 | ) | | $ | 791 |
| | $ | (370 | ) | | $ | 750 |
|
| Total recognized in net periodic benefit cost and OCI | | $ | (10,153 | ) | | $ | 20,318 |
| | $ | (550 | ) | | $ | 812 |
| | $ | (213 | ) | | $ | 1,127 |
|
| Weighted-average assumptions used to determine net periodic benefit cost | | | | | | | | | | | | |
| Discount rate | | 3.55 | % | | 4.40 | % | | 3.55 | % | | 4.40 | % | | 3.55 | % | | 4.40 | % |
| Expected long-term return on plan assets | | 7.75 | % | | 7.50 | % | | 7.75 | % | | 7.50 | % | | 7.75 | % | | 7.50 | % |
| Rate of compensation increase | | N/A |
| | N/A |
| | N/A |
| | N/A |
| | N/A |
| | N/A |
|
|
|
|
| Consolidated Balance Sheets as of June 30, 2020 and 2019. |
|
| Consolidated Statements of Operations for the Years Ended June 30, 2020, 2019 and 2018. |
|
| Consolidated Statements of Comprehensive Income (Loss) for the Years Ended June 30, 2020, 2019 and 2018. |
|
| Consolidated Statements of Cash Flows for the Years Ended June 30, 2020, 2019 and 2018. |
|
| Consolidated Statements of Stockholders’ Equity for the Years Ended June 30, 2020, 2019 and 2018. |
|
| Notes to Consolidated Financial Statements. |
Basis Used2. Financial Statement Schedules: Financial Statement Schedules are omitted as they are not applicable, or the required information is given in the consolidated financial statements and notes thereto.
3. The exhibits to Determine Expected Long-term Returnthis Annual Report on Plan Assets
The expected long-term return on plan assets assumption was developed as a weighted average rate basedForm 10-K are listed on the target asset allocationaccompanying index to exhibits and are incorporated herein by reference or are filed as part of the Annual Report on Form 10-K. Each management contract or compensation plan and the Long-Term Capital Market Assumptions (CMA) 2014. The capital market assumptions were developed with a primary focus on forward-looking valuation models and market indicators. The key fundamental economic inputs for these models are future inflation, economic growth, and interest rate environment. Duerequired to the long-term nature of the pension obligations, the investment horizon for the CMA 2014be filed as an exhibit is 20 to 30 years. In addition to forward-looking models, historical analysis of market data and trends was reflected, as well as the outlook of recognized economists, organizations and consensus CMA from other credible studies.
Description of Investment Policy
The Company’s investment strategy is to buildidentified by an efficient, well-diversified portfolio based on a long-term, strategic outlook of the investment markets. The investment markets outlook utilizes both the historical-based and forward-looking return forecasts to establish future return expectations for various asset classes. These return expectations are used to develop a core asset allocation based on the specific needs of each plan. The core asset allocation utilizes investment portfolios of various asset classes and multiple investment managers in order to maximize the plan’s return while providing multiple layers of diversification to help minimize risk.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Farmer Bros. Plan June 30, | | Brewmatic Plan June 30, | | Hourly Employees’ Plan June 30, |
| ($ in thousands) | | 2017 | | 2016 | | 2017 | | 2016 | | 2017 | | 2016 |
| Comparison of obligations to plan assets | | | | | | | | | | | | |
| Projected benefit obligation | | $ | 146,291 |
| | $ | 152,325 |
| | $ | 4,079 |
| | $ | 4,574 |
| | $ | 4,329 |
| | $ | 4,329 |
|
| Accumulated benefit obligation | | $ | 146,291 |
| | $ | 152,325 |
| | $ | 4,079 |
| | $ | 4,574 |
| | $ | 4,329 |
| | $ | 4,329 |
|
| Fair value of plan assets at measurement date | | $ | 97,304 |
| | $ | 91,201 |
| | $ | 3,115 |
| | $ | 2,989 |
| | $ | 2,999 |
| | $ | 2,447 |
|
| Plan assets by category | | | | | | | | | | | | |
| Equity securities | | $ | 65,270 |
| | $ | 58,094 |
| | $ | 2,133 |
| | $ | 1,909 |
| | $ | 1,973 |
| | $ | 1,542 |
|
| Debt securities | | 26,241 |
| | 27,586 |
| | 793 |
| | 899 |
| | 851 |
| | 758 |
|
| Real estate | | 5,793 |
| | 5,521 |
| | 189 |
| | 181 |
| | 175 |
| | 147 |
|
| Total | | $ | 97,304 |
| | $ | 91,201 |
| | $ | 3,115 |
| | $ | 2,989 |
| | $ | 2,999 |
| | $ | 2,447 |
|
| Plan assets by category | | | | | | | | | | | | |
| Equity securities | | 67 | % | | 64 | % | | 69 | % | | 64 | % | | 66 | % | | 63 | % |
| Debt securities | | 27 | % | | 30 | % | | 25 | % | | 30 | % | | 28 | % | | 31 | % |
| Real estate | | 6 | % | | 6 | % | | 6 | % | | 6 | % | | 6 | % | | 6 | % |
| Total | | 100.0 | % | | 100.0 | % | | 100 | % | | 100 | % | | 100 | % | | 100 | % |
Fair values of plan assets were as follows:asterisk (*).
|
| | | | | | | | | | | | | | | | |
| | | June 30, 2017 |
| (In thousands) | | Total | | Level 1 | | Level 2 | | Level 3 |
| Farmer Bros. Plan | | $ | 97,304 |
| | $ | — |
| | $ | 97,304 |
| | $ | — |
|
| Brewmatic Plan | | $ | 3,115 |
| | $ | — |
| | $ | 3,115 |
| | $ | — |
|
| Hourly Employees’ Plan | | $ | 2,999 |
| | $ | — |
| | $ | 2,999 |
| | $ | — |
|
| | | June 30, 2016 |
| (In thousands) | | Total | | Level 1 | | Level 2 | | Level 3 |
| Farmer Bros. Plan | | $ | 91,201 |
| | $ | — |
| | $ | 91,201 |
| | $ | — |
|
| Brewmatic Plan | | $ | 2,989 |
| | $ | — |
| | $ | 2,989 |
| | $ | — |
|
| Hourly Employees’ Plan | | $ | 2,447 |
| | $ | — |
| | $ | 2,447 |
| | $ | — |
|
As of June 30, 2017, approximately 6% of the assets of each of the Farmer Bros. Plan, the Brewmatic Plan and the Hourly Employees’ Plan were invested in pooled separate accounts which invested mainly in commercial real estate and included mortgage loans which were backed by the associated properties. These underlying real estate investments are able to be redeemed at net asset value per share and therefore, are considered Level 2 assets.
The following is the target asset allocation for the Company's single employer pension plans—Farmer Bros. Plan, Brewmatic Plan and Hourly Employees' Plan—for fiscal 2018:
|
| | |
| Exhibit No. | Fiscal 2018 |
U.S. large cap equity securities | 40.0 | % |
U.S. small cap equity securities | 4.8 | % |
International equity securities | 19.2 | % |
Debt securities | 30.0 | % |
Real estate | 6.0 | % |
Total | 100.0 | % |
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Estimated Amounts in OCI Expected To Be Recognized
In fiscal 2018, the Company expects to recognize net periodic benefit cost of $1.5 million for the Farmer Bros. Plan and $68,000 for the Brewmatic Plan, and a net periodic benefit credit of $(4,000) for the Hourly Employees’ Plan.
Estimated Future Contributions and Refunds
In fiscal 2018, the Company expects to contribute $2.6 million to the Farmer Bros. Plan, $0.1 million to the Brewmatic Plan, and $0.4 million to the Hourly Employees’ Plan. The Company is not aware of any refunds expected from single employer pension plans.
Estimated Future Benefit Payments
The following benefit payments are expected to be paid over the next 10 fiscal years:
|
| | | | | | | | | | | | |
| (In thousands) | | Farmer Bros. Plan | | Brewmatic Plan | | Hourly Employees’ Plan |
| Year Ending: | | |
| June 30, 2018 | | $ | 7,490 |
| | $ | 310 |
| | $ | 100 |
|
| June 30, 2019 | | $ | 7,650 |
| | $ | 290 |
| | $ | 110 |
|
| June 30, 2020 | | $ | 7,930 |
| | $ | 280 |
| | $ | 130 |
|
| June 30, 2021 | | $ | 8,130 |
| | $ | 280 |
| | $ | 150 |
|
| June 30, 2022 | | $ | 8,330 |
| | $ | 270 |
| | $ | 160 |
|
| June 30, 2023 to June 30, 2027 | | $ | 42,660 |
| | $ | 1,220 |
| | $ | 990 |
|
These amounts are based on current data and assumptions and reflect expected future service, as appropriate.
Multiemployer Pension Plans
The Company participates in two multiemployer defined benefit pension plans that are union sponsored and collectively bargained for the benefit of certain employees subject to collective bargaining agreements, of which the WCTPP is individually significant. The Company makes contributions to these plans generally based on the number of hours worked by the participants in accordance with the provisions of negotiated labor contracts.
The risks of participating in multiemployer pension plans are different from single-employer plans in that: (i) assets contributed to a multiemployer plan by one employer may be used to provide benefits to employees of other participating employers; (ii) if a participating employer stops contributing to the plan, the unfunded obligations of the plan may be borne by the remaining participating employers; and (iii) if the Company stops participating in the multiemployer plan, the Company may be required to pay the plan an amount based on the underfunded status of the plan, referred to as a withdrawal liability.
The Company's participation in WCTPP is outlined in the table below. The Pension Protection Act (“PPA”) Zone Status available in the Company's fiscal year 2017 and fiscal year 2016 is for the plan's year ended December 31, 2016 and December 31, 2015, respectively. The zone status is based on information obtained from WCTPP and is certified by WCTPP's actuary. Among other factors, plans in the green zone are generally more than 80% funded. Based on WCTPP's 2016 Annual Funding Notice, WCTPP was 91.7% and 91.8% funded for its plan year beginning January 1, 2016 and 2015, respectively, and is expected to be 90.0% funded for its plan year beginning January 1, 2017. The “FIP/RP Status Pending/Implemented” column indicates if a funding improvement plan (“FIP”) or a rehabilitation plan (“RP”) is either pending or has been implemented.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
|
| | | | | | | | | | | | | | | Description |
| | Pension Plan | |
| 2.1 | | Employer
Identification
Number
| | Pension
Plan
Number
| | PPA Zone Status | | FIP/RP
Status
Pending/
Implemented
| | Surcharge
Imposed
| | Expiration Date
Bargaining
AgreementsNovember 16, 2015, by and between Farmer Bros. Co. and Harris Spice Company Inc. (filed as Exhibit 2.1 to the Company’s Current Report on Form 8-K filed with the SEC on November 20, 2015 and incorporated herein by reference).*
|
| |
| | July 1, 2016 |
| 2.2 | | July 1,
2015Purchase Agreement, dated as of September 9, 2016, among Tea Leaf Acquisition Corp., China Mist Brands, Inc., certain stockholders of China Mist Brands, Inc., for certain limited purposes, Daniel W. Schweiker and John S. Martinson, and Daniel W. Schweiker, in his capacity as the sellers’ representative (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on September 14, 2016 and incorporated herein by reference).* |
| | | |
| 2.3 | | |
| | Western Conference of Teamsters Pension Plan | |
| 2.4 | | 91-6145047 |
| | 001 |
| 3.1 | | Green |
| | Green | | No | | No | | January 31, 2020 |
Based upon the most recent information available from the trustees managing WCTPP, the Company's share of the unfunded vested benefit liability for the plan was estimated to be approximately $7.0 million if the withdrawal had occurred in the plan year ending December 31, 2016. These estimates were calculated by the trustees managing WCTPP. Although the Company believes the most recent plan data available from WCTPP was used in computing this 2016 estimate, the actual withdrawal liability amount is subject to change based on, among other things, the plan's investment returns and benefit levels, interest rates, financial difficulty of other participating employers in the plan such as bankruptcy, and continued participation by the Company and other employers in the plan, each of which could impact the ultimate withdrawal liability.
If withdrawal liability were to be triggered, the withdrawal liability assessment can be paid in a lump sum or on a monthly basis. The amount of the monthly payment is determined as follows: Average number of hours reported to the pension plan trust during the three consecutive years with highest number of hours in the 10-year period prior to the withdrawal is multiplied by the highest hourly contribution rate during the 10-year period ending with the plan year in which the withdrawal occurred to determine the amount of withdrawal liability that has to be paid annually. The annual amount is divided by 12 to arrive at the monthly payment due. If monthly payments are elected, interest is assessed on the unpaid balance after 12 months at the rate of 7% per annum.
On July 13, 2017, the Company received correspondence from the Western Conference of Teamsters Pension Trust (the “WCT Pension Trust”) stating that the Company had liability for a share of the WCTPP unfunded vested benefits based on the WCT Pension Trust’s claim that certain of the Company’s employment actions resulting from the Corporate Relocation Plan amounted to a partial withdrawal from the WCTPP. See Note 26.In fiscal 2012, the Company withdrew from the Local 807 Labor-Management Pension Fund (“Pension Fund”) and recorded a charge of $4.3 million associated with withdrawal from this plan, representing the present value of the estimated withdrawal liability expected to be paid in quarterly installments of $0.1 million over 80 quarters. On November 18, 2014, the Pension Fund sent the Company a notice of assessment of withdrawal liability in the amount of $4.4 million, which the Pension Fund adjusted to $4.9 million on January 5, 2015. The Company is in the process of negotiating a reduced liability amount. The Company has commenced quarterly installment payments to the Pension Fund of $91,000 pending the final settlement of the liability. The present value of the total estimated withdrawal liability of $4.0 million and $3.8 million, respectively, is reflected in the Company's consolidated balance sheets at June 30, 2017 and June 30, 2016, with the short-term and long-term portions reflected in current and long-term liabilities, respectively. At June 30, 2017, the Company has classified the present value of the total estimated withdrawal liability as short-term with the expectation of paying off the liability in fiscal 2018. See Note 23.Future collective bargaining negotiations may result in the Company withdrawing from the remaining multiemployer pension plans in which it participates and, if successful, the Company may incur a withdrawal liability, the amount of which could be material to the Company's results of operations and cash flows.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Company contributions to the multiemployer pension plans:
|
| | | | | | | | |
| (In thousands) | | WCTPP(1)(2)(3) | | All Other Plans(4) |
| Year Ended: | | | | |
| June 30, 2017 | | $ | 2,114 |
| | $ | 39 |
|
| June 30, 2016 | | $ | 2,587 |
| | $ | 39 |
|
| June 30, 2015 | | $ | 3,593 |
| | $ | 41 |
|
____________
| |
(1) | Individually significant plan. |
| |
(2) | Less than 5% of total contribution to WCTPP based on WCTPP's FASB Disclosure Statement for the calendar year ended December 31, 2016.
|
| |
(3) | The Company guarantees that one hundred seventy-three (173) hours will be contributed upon for all employees who are compensated for all available straight time hours for each calendar month. An additional 6.5% of the basic contribution must be paid for PEER or the Program for Enhanced Early Retirement.
|
| |
(4) | Includes one plan that is not individually significant. |
The Company's contribution to multiemployer plans decreased in fiscal 2017 as compared to fiscal 2016 and 2015, as a result of reduction in employees due to the Corporate Relocation Plan. The Company expects to contribute an aggregate of $2.2 million towards multiemployer pension plans in fiscal 2018.
Multiemployer Plans Other Than Pension Plans
The Company participates in ten multiemployer defined contribution plans other than pension plans that provide medical, vision, dental and disability benefits for active, union-represented employees subject to collective bargaining agreements. The plans are subject to the provisions of the Employee Retirement Income Security Act of 1974, and provide that participating employers make monthly contributions to the plans in an amount as specified in the collective bargaining agreements. Also, the plans provide that participants make self-payments to the plans, the amounts of which are negotiated through the collective bargaining process. The Company's participation in these plans is governed by collective bargaining agreements which expire on or before July 31, 2020. The Company's aggregate contributions to multiemployer plans other than pension plans in the fiscal years ended June 30, 2017, 2016 and 2015 were $5.3 million, $6.3 million and $6.9 million, respectively. The Company expects to contribute an aggregate of $5.0 million towards multiemployer plans other than pension plans in fiscal 2018.
401(k) Plan
The Company's 401(k) Plan is available to all eligible employees who have worked more than 1,000 hours during a calendar year and were employed at the end of the calendar year. Participants in the 401(k) Plan may choose to contribute a percentage of their annual pay subject to the maximum contribution allowed by the Internal Revenue Service. The Company's matching contribution is discretionary, based on approval by the Company's Board of Directors. For the calendar years 2017, 2016 and 2015, the Company's Board of Directors approved a Company matching contribution of 50% of an employee's annual contribution to the 401(k) Plan, up to 6% of the employee's eligible income. The matching contributions (and any earnings thereon) vest at the rate of 20% for each of the participant's first 5 years of vesting service, so that a participant is fully vested in his or her matching contribution account after 5 years of vesting service, subject to accelerated vesting under certain circumstances in connection with the Corporate Relocation Plan due to the closure of the Company’s Torrance Facility or a reduction-in-force at another Company facility designated by the Administrative Committee of the Farmer Bros. Co. Qualified Employee Retirement Plans. A participant is automatically vested in the event of death, disability or attainment of age 65 while employed by the Company. Employees are 100% vested in their contributions. For employees subject to a collective bargaining agreement, the match is only available if so provided in the labor agreement.
The Company recorded matching contributions of $1.6 million, $1.6 million and $1.4 million in operating expenses for the fiscal years ended June 30, 2017, 2016 and 2015, respectively.
Postretirement Benefits
The Company sponsors a postretirement defined benefit plan that covers qualified non-union retirees and certain qualified union retirees (“Retiree Medical Plan”). The plan provides medical, dental and vision coverage for retirees under age 65 and
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
medical coverage only for retirees age 65 and above. Under this postretirement plan, the Company’s contributions toward premiums for retiree medical, dental and vision coverage for participants and dependents are scaled based on length of service, with greater Company contributions for retirees with greater length of service, subject to a maximum monthly Company contribution. The Company's retiree medical, dental and vision plan is unfunded, and its liability was calculated using an assumed discount rate of 4.1% at June 30, 2017. The Company projects an initial medical trend rate of 8.6% in fiscal 2018, ultimately reducing to 4.5% in 10 years.
The Company also provides a postretirement death benefit (“Death Benefit”) to certain of its employees and retirees, subject, in the case of current employees, to continued employment with the Company until retirement and certain other conditions related to the manner of employment termination and manner of death. The Company records the actuarially determined liability for the present value of the postretirement death benefit. The Company has purchased life insurance policies to fund the postretirement death benefit wherein the Company owns the policy but the postretirement death benefit is paid to the employee's or retiree's beneficiary. The Company records an asset for the fair value of the life insurance policies which equates to the cash surrender value of the policies. In fiscal 2016, the Company actuarially determined that no postretirement benefit costs related to the Corporate Relocation Plan were required to be recognized.
Retiree Medical Plan and Death Benefit
The following table shows the components of net periodic postretirement benefit cost for the Retiree Medical Plan and Death Benefit for the fiscal years ended June 30, 2017, 2016 and 2015. Net periodic postretirement benefit cost for fiscal 2017 was based on employee census information as of June 30, 2017.
|
| | | | | | | | | | | | |
| | | Year Ended June 30, |
| (In thousands) | | 2017 | | 2016 | | 2015 |
| Components of Net Periodic Postretirement Benefit Cost (Credit): | | | | | | |
| Service cost | | $ | 760 |
| | $ | 1,388 |
| | $ | 1,195 |
|
| Interest cost | | 829 |
| | 1,194 |
| | 943 |
|
| Amortization of net gain | | (630 | ) | | (196 | ) | | (500 | ) |
| Amortization of prior service credit | | (1,757 | ) | | (1,757 | ) | | (1,757 | ) |
| Net periodic postretirement benefit (credit) cost | | $ | (798 | ) | | $ | 629 |
| | $ | (119 | ) |
The difference between the assets and the Accumulated Postretirement Benefit Obligation (APBO) at the adoption of ASC 715-60 was established as a transition (asset) obligation and is amortized over the average expected future service for active employees as measured at the date of adoption. Any plan amendments that retroactively increase benefits create prior service cost. The increase in the APBO due to any plan amendment is established as a base and amortized over the average remaining years of service to the full eligibility date of active participants who are not yet fully eligible for benefits at the plan amendment date. Gains and losses due to experience different than that assumed or from changes in actuarial assumptions are not immediately recognized. The tables below show the remaining bases for the transition (asset) obligation, prior service cost (credit), and the calculation of the amortizable gain or loss.
|
| | |
Amortization ScheduleExhibit No. | | Description |
| 3.2 | | |
| | |
Transition (Asset) Obligation: The transition (asset) obligations have been fully amortized.3.3 | | |
| | |
| 3.4 | | |
| | |
| 3.5 | |
|
| | |
| 3.6 | | |
| | |
| 4.1 | | |
| | |
| 4.2 | | |
| | |
| 4.3 | | |
| | |
| 10.1 | | Credit Agreement, dated as of March 2, 2015, by and among Farmer Bros. Co., Coffee Bean International, Inc., FBC Finance Company, Coffee Bean Holding Co., Inc., the Lenders party thereto and JPMorgan Chase Bank, N.A., as Administrative Agent (filed as Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the SEC on March 6, 2015 and incorporated herein by reference). |
| | |
| 10.2 | | Pledge and Security Agreement, dated as of March 2, 2015, by and among Farmer Bros. Co., Coffee Bean International, Inc., FBC Finance Company, Coffee Bean Holding Co., Inc. and JPMorgan Chase Bank, N.A., as Administrative Agent (filed as Exhibit 10.2 to the Company's Current Report on Form 8-K filed with the SEC on March 6, 2015 and incorporated herein by reference). |
| | |
| 10.3 | | Joinder Agreement, dated as of October 11, 2016, by and among China Mist Brands, Inc., Farmer Bros. Co., as the Borrower Representative, and JPMorgan Chase Bank, N.A., as Administrative Agent, under that certain Credit Agreement dated as of March 2, 2015 (filed as Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 2016 filed with the SEC on February 9, 2017 and incorporated herein by reference). |
| | |
| 10.4 | | Joinder to Pledge and Security Agreement, dated as of October 11, 2016, by and among Farmer Bros. Co., Coffee Bean International, Inc., FBC Finance Company, Coffee Bean Holding Co., Inc., China Mist Brands, Inc. and JPMorgan Chase Bank, N.A., as Administrative Agent (filed as Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2016 filed with the SEC on February 9, 2017 and incorporated herein by reference). |
| | |
| 10.5 | | First Amendment to Credit Agreement and First Amendment to Pledge and Security Agreement, dated as of August 25, 2017, by and among Farmer Bros. Co., China Mist Brands, Inc., Coffee Bean International, Inc., FBC Finance Company, Coffee Bean Holding Company, Inc., the Lenders party thereto and JPMorgan Chase Bank, N.A., as Administrative Agent (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on August 30, 2017 and incorporated herein by reference). |
| | |
Prior service cost (credit)-Medical only ($ in thousands):
|
| | | | | | | | | | | | | | | | | |
| Date Established | | Balance at July 1, 2016 | | Annual Amortization | | Years Remaining | | Curtailment | | Balance at June 30, 2017 |
| January 1, 2008 | | $ | (732 | ) | | $ | 230 |
| | 2.2 | | — |
| | $ | (502 | ) |
| July 1, 2012 | | (11,475 | ) | | 1,526 |
| | 6.5 | | — |
| | (9,949 | ) |
| | | $ | (12,207 | ) | | $ | 1,756 |
| | | | | | $ | (10,451 | ) |
|
| | |
| Exhibit No. | | Description |
| 10.6 | | Second Amendment to Credit Agreement, dated as of September 10, 2018, by and among Farmer Bros. Co., China Mist Brands, Inc., Boyd Assets Co., Coffee Bean International, Inc., FBC Finance Company, Coffee Bean Holding Company, Inc., the Lenders party thereto and JPMorgan Chase Bank, N.A., as Administrative Agent (filed as Exhibit 10.6 to the Company’s Annual Report on Form 10-K filed with the SEC on September 13, 2018 and incorporated herein by reference).
|
| | |
| 10.7 | | Third Amendment to Credit Agreement and Second Amendment to Pledge and Security Agreement, dated as of October 18, 2018, by and among Farmer Bros. Co., China Mist Brands, Inc., Boyd Assets Co., Coffee Bean International, Inc., FBC Finance Company, Coffee Bean Holding Co., Inc., the Lenders party thereto and JPMorgan Chase Bank, N.A., as Administrative Agent (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on October 23, 2018 and incorporated herein by reference) |
| | |
| 10.8 | | Amended and Restated Credit Agreement dated as of November 6, 2018, by and among Farmer Bros. Co., China Mist Brands, Inc., Boyd Assets Co., Coffee Bean International, Inc., FBC Finance Company, Coffee Bean Holding Co., Inc., the Lenders party thereto and JPMorgan Chase Bank, N.A., as Administrative Agent (filed as Exhibit 10.10 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2018 filed with the SEC on November 9, 2018 and incorporated herein by reference). |
| | |
| 10.9 | | Amended and Restated Pledge and Security Agreement, dated as of November 6, 2018, by and among Farmer Bros. Co., China Mist Brands, Inc., Coffee Bean International, Inc., FBC Finance Company, Coffee Bean Holding Company, Inc., the Grantors party thereto and JPMorgan Chase Bank, N.A., as Administrative Agent (filed as Exhibit 10.11 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2018 filed with the SEC on November 9, 2018 and incorporated herein by reference).
|
| | |
| 10.10 | | |
| | |
| 10.11 | | |
| | |
| 10.12 | | Amendment No. 3 to Amended and Restated Credit Agreement, dated as of July 23, 2020, by and among Farmer Bros. Co., a Delaware corporation, the other loan parties named therein, the lenders named therein, and JPMorgan Chase Bank, N.A., as administrative agent (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on July 29, 2020 and incorporated herein by reference). |
| | |
| 10.13 | | |
| | |
| 10.14 | | |
| | |
| 10.15 | | Joinder Agreement, dated as of November 29, 2017, by and among Boyd Assets Co., Farmer Bros. Co., as the Borrower’s Representative, and JPMorgan Chase Bank, N.A., as Administrative Agent, under that certain Credit Agreement dated as of March 2, 2015, as amended by that certain First Amendment to Credit Agreement, dated as of August 25, 2017 (filed as Exhibit 10.6 to the Company’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2017 filed with the SEC on February 7, 2018 and incorporated herein by reference). |
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
|
| | | | | | | | | | | | | | | | |
| | | Retiree Medical Plan | | Death Benefit |
| | | Year Ended June 30, | | Year Ended June 30, |
| ($ in thousands) | | 2017 | | 2016 | | 2017 | | 2016 |
| Amortization of Net (Gain) Loss: | | | | | | | | |
| Net (gain) loss as of July 1 | | $ | (10,298 | ) | | $ | (8,710 | ) | | $ | 1,523 |
| | $ | 690 |
|
| Net (gain) loss subject to amortization | | (10,298 | ) | | (8,710 | ) | | 1,523 |
| | 690 |
|
| Corridor (10% of greater of APBO or assets) | | 1,214 |
| | 1,724 |
| | (854 | ) | | (729 | ) |
| Net (gain) loss in excess of corridor | | $ | (9,084 | ) | | $ | (6,986 | ) | | $ | 669 |
| | $ | — |
|
| Amortization years | | 9.7 |
| | 10.0 |
| | 7.0 |
| | 7.7 |
|
|
| | |
| Exhibit No. | | Description |
| | |
| 10.16 | | Joinder to Pledge and Security Agreement, dated as of November 29, 2017, by and among Farmer Bros. Co., Coffee Bean International, Inc., FBC Finance Company, Coffee Bean Holding Co., Inc., China Mist Brands, Inc., Boyd Assets Co. and JPMorgan Chase Bank, N.A., as Administrative Agent (filed as Exhibit 10.7 to the Company’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2017 filed with the SEC on February 7, 2018 and incorporated herein by reference). |
| | |
| 10.17 | | |
| | |
| 10.18 | | |
| | |
| 10.19 | | |
| | |
| 10.20 | | |
| | |
| 10.21 | | |
| | |
| 10.22 | | |
| | |
| 10.23 | | |
| | |
| 10.24 | | |
| | |
| 10.25 | | |
| | |
| 10.26 | | |
| |
| 10.27 | | |
| | |
The following tables provide a reconciliation of the benefit obligation and plan assets:
|
| | | | | | | | |
| | | Year Ended June 30, |
| (In thousands) | | 2017 | | 2016 |
| Change in Benefit Obligation: | | | | |
| Projected postretirement benefit obligation at beginning of year | | $ | 21,867 |
| | $ | 24,522 |
|
| Service cost | | 760 |
| | 1,388 |
|
| Interest cost | | 829 |
| | 1,194 |
|
| Participant contributions | | 741 |
| | 795 |
|
| Actuarial losses | | (2,377 | ) | | (4,259 | ) |
| Benefits paid | | (1,140 | ) | | (1,773 | ) |
| Projected postretirement benefit obligation at end of year | | $ | 20,680 |
| | $ | 21,867 |
|
|
| | |
| Exhibit No. | | Description |
| 10.28 | | |
| | |
| 10.29 | | |
| | |
| 10.30 | | |
| |
| 10.31 | | |
| |
| 10.32 | | |
| |
| 10.33 | | |
| | |
| 10.34 | | |
| | |
| 10.35 | | |
| | |
| 10.36 | | |
| | |
| 10.37 | | |
| | |
| 10.38 | | |
| | |
| 10.39 | | |
| | |
| 10.40 | | |
| | |
|
| | | | | | | | |
| | | Year Ended June 30, |
| (In thousands) | | 2017 | | 2016 |
| Change in Plan Assets: | | | | |
| Fair value of plan assets at beginning of year | | $ | — |
| | $ | — |
|
| Employer contributions | | 399 |
| | 978 |
|
| Participant contributions | | 741 |
| | 795 |
|
| Benefits paid | | (1,140 | ) | | (1,773 | ) |
| Fair value of plan assets at end of year | | $ | — |
| | $ | — |
|
| Projected postretirement benefit obligation at end of year | | 20,680 |
| | 21,867 |
|
| Funded status of plan | | $ | (20,680 | ) | | $ | (21,867 | ) |
|
| | |
| Exhibit No. | | Description |
| 10.41 | | |
| | |
| 10.42 | | |
| | |
| 10.43 | | |
| | |
| 10.44 | | |
| | |
| 10.45 | |
|
| | |
| 10.46 | | |
| | |
| | |
| 10.47 | | |
| | |
| 10.48 | | |
| | |
| 10.49 | | |
| | |
| 10.50 | |
|
| | |
| 10.51 | | |
| | |
| 10.52 | |
|
| | |
| 10.53 | |
|
| | |
| 10.54 | | |
|
| | | | | | | | |
| | | June 30, |
| (In thousands) | | 2017 | | 2016 |
| Amounts Recognized in the Consolidated Balance Sheets Consist of: | | | | |
| Non-current assets | | $ | — |
| | $ | — |
|
| Current liabilities | | (893 | ) | | (1,060 | ) |
| Non-current liabilities | | (19,787 | ) | | (20,807 | ) |
| Total | | $ | (20,680 | ) | | $ | (21,867 | ) |
|
| | | | | | | | |
| | | Year Ended June 30, |
| (In thousands) | | 2017 | | 2016 |
| Amounts Recognized in AOCI Consist of: | | | | |
| Net gain | | $ | (8,775 | ) | | $ | (7,027 | ) |
| Prior service credit | | (10,450 | ) | | (12,207 | ) |
| Total AOCI | | $ | (19,225 | ) | | $ | (19,234 | ) |
|
| | |
| Exhibit No. | | Description |
| | |
| 10.55 | | |
| | |
| 10.56 | | |
| | |
| 10.57 | | |
| | |
| 10.58 | | |
| | |
| 10.59 | | |
| | |
| 10.60 | | |
| | |
| 10.61 | | |
| | |
| 10.62 | | |
| | |
| 10.63 | |
|
| | |
| 10.64 | | |
| | |
| 10.65 | |
|
| | |
| 10.66 | | |
| | |
| 10.67 | | |
| | |
| 10.68 | | |
| | |
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
|
| | | | | | | | |
| | | Year Ended June 30, |
| (In thousands) | | 2017 | | 2016 |
| Other Changes in Plan Assets and Benefit Obligations Recognized in OCI: | | | | |
| Unrecognized actuarial loss | | $ | (2,377 | ) | | $ | (4,259 | ) |
| Amortization of net loss | | 630 |
| | 196 |
|
| Amortization of prior service cost | | 1,757 |
| | 1,757 |
|
| Total recognized in OCI | | 10 |
| | (2,306 | ) |
| Net periodic benefit (cost) credit | | (798 | ) | | 629 |
|
| Total recognized in net periodic benefit cost and OCI | | $ | (788 | ) | | $ | (1,677 | ) |
|
| | |
| Exhibit No. | | Description |
| 10.69 | | |
| | |
| 10.70 | | |
| | |
| 10.71 | | |
| | |
| 10.72 | | |
| | |
| 14.1 | | |
| | |
| 21.1 | | |
| | |
| 23.1 | | |
| | |
| 31.1 | | |
| |
| 31.2 | | |
| | |
| 32.1 | | |
| |
| 32.2 | | |
| | |
| 101.INS | | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document (furnished herewith). |
| 101.SCH | | Inline XBRL Taxonomy Extension Schema Document (furnished herewith). |
| 101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document (furnished herewith). |
| 101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document (furnished herewith). |
| 101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document (furnished herewith). |
| 101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document (furnished herewith). |
| 104 | | Cover Page Interactive Data File - the cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document (furnished herewith). |
The estimated net gain and prior service credit that will be amortized from AOCI into net periodic benefit cost in fiscal 2018 are $0.8 million and $1.8 million, respectively.________________
|
| | | |
| (In thousands) | |
| Estimated Future Benefit Payments: | |
| Year Ending: | |
| June 30, 2018 | $ | 911 |
|
| June 30, 2019 | $ | 956 |
|
| June 30, 2020 | $ | 1,004 |
|
| June 30, 2021 | $ | 1,049 |
|
| June 30, 2022 | $ | 1,082 |
|
| June 30, 2023 to June 30, 2027 | $ | 5,830 |
|
| | |
| Expected Contributions: | |
| June 30, 2018 | $ | 911 |
|
|
| |
| * | Pursuant to Item 601(b)(2) of Regulation S-K, the schedules and/or exhibits to this agreement have been omitted. The Registrant undertakes to supplementally furnish copies of the omitted schedules and/or exhibits to the Securities and Exchange Commission upon request. |
| ** | Management contract or compensatory plan or arrangement. |
Sensitivity in Fiscal 2018 Results
Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plan. A one percentage point change in assumed health care cost trend rates would have the following effects in fiscal 2018:
|
| | | | | | | | |
| | | 1-Percentage Point |
| (In thousands) | | Increase | | Decrease |
| Effect on total of service and interest cost components | | $ | 96 |
| | $ | (92 | ) |
| Effect on accumulated postretirement benefit obligation | | $ | 983 |
| | $ | (963 | ) |
Note 16. Bank Loan
The Company maintains a senior secured revolving credit facility (“Revolving Facility”) with JPMorgan Chase Bank, N.A. and SunTrust Bank (collectively, the “Lenders”), with revolving commitments of $75.0 million as of June 30, 2017, and a sublimit on letters of credit and swingline loans of $30.0 million and $15.0 million, respectively. The Revolving Facility includes an accordion feature whereby the Company may increase the Revolving Commitment by up to an additional $50.0 million, subject to certain conditions. Advances are based on the Company’s eligible accounts receivable, eligible inventory, and the value of certain real property and trademarks, less required reserves. As of June 30, 2017, the commitment fee ranges from 0.25% to 0.375% per annum based on average revolver usage. Outstanding obligations are collateralized by all of the Company’s assets, excluding certain real property not included in the borrowing base, machinery and equipment (other than inventory), and the Company's preferred stock portfolio. Borrowings under the Revolving Facility bear interest based on average historical excess availability levels with a range of PRIME - 0.25% to PRIME + 0.50% or Adjusted LIBO Rate + 1.25% to Adjusted LIBO Rate + 2.00%. The Company is subject to a variety of affirmative and negative covenants of types customary in an asset-based lending facility, including financial covenants relating to the maintenance of a fixed charge coverage ratio in certain circumstances, and the right of the Lenders to establish reserve requirements, which may reduce the amount of credit otherwise available to the Company. The Company is allowed to pay dividends, provided, among other things, certain excess availability requirements are met, and no event of default exists or has occurred and is continuing as of the date
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
of any such payment and after giving effect thereto. The Revolving Facility expires on March 2, 2020. Subsequent to the year ended June 30, 2017, the Company, together with its wholly owned subsidiaries and its Lenders, amended the credit facility to provide additional borrowing capacity and extended the term of the Revolving Facility. See Note 26. Subsequent Events.At June 30, 2017, the Company was eligible to borrow up to a total of $55.6 million under the Revolving Facility and had outstanding borrowings of $27.6 million, utilized $0.1 million of the letters of credit sublimit, and had excess availability under the Revolving Facility of $27.9 million. Fair value of the loan approximates carrying value. At June 30, 2017, the weighted average interest rate on the Company's outstanding borrowings under the Revolving Facility was 3.02% and the Company was in compliance with all of the restrictive covenants under the Revolving Facility.
Note 17. Employee Stock Ownership Plan
The Company’s ESOP was established in 2000. The plan is a leveraged ESOP in which the Company is the lender. One of the two loans established to fund the ESOP matured in fiscal 2016 and the remaining loan is scheduled to mature in December 2018. The loan is repaid from the Company’s discretionary plan contributions over the original 15 year term with a variable rate of interest. The annual interest rate was 2.50% at June 30, 2017, which is updated on a quarterly basis.
|
| | | | | | |
| | | As of and for the years ended June 30, |
| | | 2017 | | 2016 | | 2015 |
| Loan amount (in thousands) | | $4,289 | | $6,434 | | $11,234 |
Shares are held by the plan trustee for allocation among participants as the loan is repaid. The unencumbered shares are allocated to participants using a compensation-based formula. Subject to vesting requirements, allocated shares are owned by participants and shares are held by the plan trustee until the participant retires.
Historically, the Company used the dividends, if any, on ESOP shares to pay down the loans, and allocated to the ESOP participants shares equivalent to the fair market value of the dividends they would have received. No dividends were paid in fiscal 2017, 2016 or 2015.
During the fiscal years ended June 30, 2017, 2016 and 2015, the Company charged $2.5 million, $3.4 million and $4.4 million, respectively, to compensation expense related to the ESOP. The decrease in ESOP expense in fiscal 2017 and 2016 was primarily due to the reduction in the number of shares being allocated to participant accounts as a result of paying down the loan amount. The difference between cost and fair market value of committed to be released shares, which was $0.5 million, $36,000 and $1.0 million for the fiscal years ended June 30, 2017, 2016 and 2015, respectively, is recorded as additional paid-in capital. |
| | | | | | | | |
| | | June 30, |
| | | 2017 | | 2016 |
| Allocated shares | | 1,717,608 |
| | 1,941,934 |
|
| Committed to be released shares | | 74,983 |
| | 169,603 |
|
| Unallocated shares | | 145,941 |
| | 220,925 |
|
| Total ESOP shares | | 1,938,532 |
| | 2,332,462 |
|
| | | | | |
| (In thousands) | | | | |
| Fair value of ESOP shares | | $ | 58,641 |
| | $ | 74,779 |
|
|
| |
| Item 16. | Form 10-K Summary |
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
| | | | | |
| | | | | |
| FARMER BROS. CO. |
| | |
| By: | | /s/ Deverl Maserang |
| | | Deverl Maserang
President and Chief Executive Officer
(principal executive officer) |
| | | September 10, 2020 |
| | | |
| By: | | /s/ Scott R. Drake |
| | | Scott R. Drake
Chief Financial Officer
(principal financial officer) |
| | | September 10, 2020 |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
|
| | | | |
| | | | |
| /s/ Christopher P. Mottern | | Chairman of the Board and Director | | September 10, 2020 |
| Christopher P. Mottern | | | | |
| | | | |
| /s/ Deverl Maserang | | President and Chief Executive Officer | | September 10, 2020 |
Deverl Maserang
| | | | |
| | | | |
| /s/ Allison M. Boersma | | Director | | September 10, 2020 |
| Allison M. Boersma | | | | |
| | | | |
| /s/ Randy E. Clark | | Director | | September 10, 2020 |
| Randy E. Clark | | | | |
| | | | |
| /s/ Stacy Loretz-Congdon | | Director | | September 10, 2020 |
| Stacy Loretz-Congdon | | | | |
| | | | |
| /s/ Charles F. Marcy | | Director | | September 10, 2020 |
| Charles F. Marcy | | | | |
| | | | |
| /s/ David W. Ritterbush | | Director | | September 10, 2020 |
| David W. Ritterbush | | | | |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the stockholders and the Board of Directors of Farmer Bros. Co.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Farmer Bros. Co. and subsidiaries (the "Company") as of June 30, 2020 and 2019, and the related consolidated statements of operations, comprehensive income (loss), stockholders' equity, and cash flows for each of the three years in the period ended June 30, 2020, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of June 30, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2020, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of June 30, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated September 10, 2020, expressed an unqualified opinion on the Company's internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ DELOITTE & TOUCHE LLP
Dallas, Texas
September 10, 2020
We have served as the Company’s auditor since fiscal 2014.
FARMER BROS. CO.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data) |
| | | | | | | |
| | As of June 30, |
| | 2020 | | 2019 |
| ASSETS | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 60,013 |
| | $ | 6,983 |
|
| Accounts receivable, net of allowance for doubtful accounts of $1,796 and $1,324, respectively | 40,882 |
| | 55,155 |
|
| Inventories | 67,408 |
| | 87,910 |
|
| Income tax receivable | 831 |
| | 1,191 |
|
| Short-term derivative assets | 165 |
| | 1,865 |
|
| Prepaid expenses | 7,414 |
| | 6,804 |
|
| Total current assets | 176,713 |
| | 159,908 |
|
| Property, plant and equipment, net | 165,633 |
| | 189,458 |
|
| Goodwill | 0 |
| | 36,224 |
|
| Intangible assets, net | 20,662 |
| | 28,878 |
|
| Other assets | 8,564 |
| | 9,468 |
|
| Long-term derivative assets | 10 |
| | 674 |
|
| Right-of-use operating lease assets | 21,117 |
| | — |
|
| Total assets | $ | 392,699 |
| | $ | 424,610 |
|
| LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
| Current liabilities: | | | |
| Accounts payable | 36,987 |
| | 72,771 |
|
| Accrued payroll expenses | 9,394 |
| | 14,518 |
|
| Operating leases liabilities - current | 5,854 |
| | — |
|
| Short-term derivative liabilities | 5,255 |
| | 1,474 |
|
| Other current liabilities | 6,802 |
| | 7,309 |
|
| Total current liabilities | 64,292 |
| | 96,072 |
|
| Long-term borrowings under revolving credit facility | 122,000 |
| | 92,000 |
|
| Accrued pension liabilities | 58,772 |
| | 47,216 |
|
| Accrued postretirement benefits | 9,993 |
| | 23,024 |
|
| Accrued workers’ compensation liabilities | 4,569 |
| | 4,747 |
|
| Operating lease liabilities - noncurrent | 15,628 |
| | — |
|
| Other long-term liabilities | 5,532 |
| | 4,057 |
|
| Total liabilities | 280,786 |
| | 267,116 |
|
| Commitments and contingencies |
| |
|
| Stockholders’ equity: | | | |
| Preferred stock, $1.00 par value, 500,000 shares authorized; Series A Convertible Participating Cumulative Perpetual Preferred Stock, 21,000 shares authorized; 14,700 shares issued and outstanding as of June 30, 2020 and 2019, respectively; liquidation preference of $16,178 and $15,624 as of June 30, 2020 and 2019, respectively | 15 |
| | 15 |
|
| Common stock, $1.00 par value, 25,000,000 shares authorized; 17,347,774 and 17,042,132 shares issued and outstanding at June 30, 2020 and 2019, respectively | 17,348 |
| | 17,042 |
|
| Additional paid-in capital | 62,043 |
| | 57,912 |
|
| Retained earnings | 108,536 |
| | 146,177 |
|
| Accumulated other comprehensive loss | (76,029 | ) | | (63,652 | ) |
| Total stockholders’ equity | $ | 111,913 |
| | $ | 157,494 |
|
| Total liabilities and stockholders’ equity | $ | 392,699 |
| | $ | 424,610 |
|
FARMER BROS. CO.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
|
| | | | | | | | | | | |
| | For the Years Ended June 30, |
| | 2020 | | 2019 | | 2018 |
| Net sales | $ | 501,320 |
| | $ | 595,942 |
| | $ | 606,544 |
|
| Cost of goods sold | 363,198 |
| | 416,840 |
| | 399,155 |
|
| Gross profit | 138,122 |
| | 179,102 |
| | 207,389 |
|
| Selling expenses | 121,762 |
| | 139,647 |
| | 153,391 |
|
| General and administrative expenses | 42,569 |
| | 48,959 |
| | 49,429 |
|
| Restructuring and other transition expenses | 0 |
| | 4,733 |
| | 662 |
|
| Net (gains) losses from sales of assets | (25,237 | ) | | 465 |
| | (966 | ) |
| Impairment of goodwill and intangible assets | 42,030 |
| | 0 |
| | 3,820 |
|
| Operating expenses | 181,124 |
| | 193,804 |
| | 206,336 |
|
| (Loss) income from operations | (43,002 | ) | | (14,702 | ) | | 1,053 |
|
| Other (expense) income: | | | | | |
| Dividend income | 0 |
| | 0 |
| | 12 |
|
| Interest income | 0 |
| | 0 |
| | 2 |
|
| Interest expense | (10,483 | ) | | (12,000 | ) | | (9,757 | ) |
| Postretirement benefits curtailment gains and pension settlement (charge) | 5,760 |
| | (10,948 | ) | | 0 |
|
| Other, net | 10,443 |
| | 4,166 |
| | 7,722 |
|
| Total other income (expense) | 5,720 |
| | (18,782 | ) | | (2,021 | ) |
| Loss before taxes | (37,282 | ) | | (33,484 | ) | | (968 | ) |
| Income tax (benefit) expense | (195 | ) | | 40,111 |
| | 17,312 |
|
| Net loss | $ | (37,087 | ) | | $ | (73,595 | ) | | $ | (18,280 | ) |
| Less: Cumulative preferred dividends, undeclared and unpaid | 554 |
| | 535 |
| | 389 |
|
| Net loss available to common stockholders | $ | (37,641 | ) | | $ | (74,130 | ) | | $ | (18,669 | ) |
| Net loss available to common stockholders per common share—basic | $ | (2.19 | ) | | $ | (4.36 | ) | | $ | (1.11 | ) |
| Net loss available to common stockholders per common share—diluted | $ | (2.19 | ) | | $ | (4.36 | ) | | $ | (1.11 | ) |
| Weighted average common shares outstanding—basic | 17,205,849 |
| | 16,996,354 |
| | 16,815,020 |
|
| Weighted average common shares outstanding—diluted | 17,205,849 |
| | 16,996,354 |
| | 16,815,020 |
|
The accompanying notes are an integral part of these consolidated financial statements.
FARMER BROS. CO.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(In thousands)
|
| | | | | | | | | | | |
| | For the Years Ended June 30, |
| | 2020 | | 2019 | | 2018 |
| Net loss | $ | (37,087 | ) | | $ | (73,595 | ) | | $ | (18,280 | ) |
| Other comprehensive (loss) income, net of tax: | | | | | |
| Unrealized losses on derivative instruments designated as cash flow hedges, net of tax | (7,518 | ) | | (9,198 | ) | | (5,922 | ) |
| Losses on derivative instruments designated as cash flow hedges reclassified to cost of goods sold, net of tax | 8,863 |
| | 9,197 |
| | 800 |
|
| Change in pension and retiree benefit obligations, net of tax | (13,722 | ) | | (1,612 | ) | | 4,576 |
|
| Total comprehensive loss, net of tax | $ | (49,464 | ) | | $ | (75,208 | ) | | $ | (18,826 | ) |
The accompanying notes are an integral part of these consolidated financial statements.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
FARMER BROS. CO. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (In thousands, except share and per share data) |
| | | | | | | | | | | | | | | | | | |
| | Preferred Shares | | Preferred Stock Amount | | Common Shares | | Common Stock Amount | | Additional Paid-in Capital | | Retained Earnings | | Unearned ESOP Shares | | Accumulated Other Comprehensive Income (Loss) | | Total |
| Balance at June 30, 2017 | 0 |
| | 0 |
| | 16,846,002 |
| | 16,846 |
| | 41,495 |
| | 236,993 |
| | (4,289 | ) | | (61,493 | ) | | 229,552 |
|
| Net loss | — |
| | — |
| | — |
| | — |
| | — |
| | (18,280 | ) | | — |
| | — |
| | (18,280 | ) |
| Adjustment due to the adoption of ASU 2017-12 | — |
| | — |
| | — |
| | — |
| | — |
| | 342 |
| | — |
| | (209 | ) | | 133 |
|
| Adjustment due to the adoption of ASU 2016-09 | — |
| | — |
| | — |
| | — |
| | — |
| | 1,641 |
| | — |
| | — |
| | 1,641 |
|
| Unrealized losses on derivative instruments designated as cash flow hedges, net of reclassifications to cost of goods sold, net of tax | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (4,913 | ) | | (4,913 | ) |
| Change in the funded status of retiree benefit obligations, net of tax | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 4,576 |
| | 4,576 |
|
| ESOP compensation expense, including reclassifications | — |
| | — |
| | — |
| | — |
| | 150 |
| | — |
| | 2,144 |
| | — |
| | 2,294 |
|
| Share-based compensation | — |
| | — |
| | 9,155 |
| | 9 |
| | 1,518 |
| | — |
| | — |
| | — |
| | 1,527 |
|
| Stock option exercises | — |
| | — |
| | 96,502 |
| | 97 |
| | 1,245 |
| | — |
| | — |
| | — |
| | 1,342 |
|
| Consideration for Boyd Coffee acquisition | 14,700 |
| | 15 |
| | — |
| | — |
| | 11,557 |
| | — |
| | — |
| | — |
| | 11,572 |
|
| Cumulative preferred dividends, undeclared and unpaid | — |
| | — |
| | — |
| | — |
| | — |
| | (389 | ) | | — |
| | — |
| | (389 | ) |
| Balance at June 30, 2018 | 14,700 |
| | 15 |
| | 16,951,659 |
| | 16,952 |
| | 55,965 |
| | 220,307 |
| | (2,145 | ) | | (62,039 | ) | | 229,055 |
|
| Net loss | — |
| | — |
| | — |
| | — |
| | — |
| | (73,595 | ) | | — |
| | — |
| | (73,595 | ) |
| Net reclassification of unrealized losses on cash flow hedges, net of tax | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (1 | ) | | (1 | ) |
| Change in pension and retiree benefit obligations, net of tax | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (1,612 | ) | | (1,612 | ) |
| ESOP compensation expense, including reclassifications | — |
| | — |
| | 37,571 |
| | 37 |
| | 364 |
| | — |
| | 2,145 |
| | — |
| | 2,546 |
|
| Share-based compensation | — |
| | — |
| | 18,298 |
| | 18 |
| | 1,111 |
| | — |
| | — |
| | — |
| | 1,129 |
|
| Stock option exercises | — |
| | — |
| | 34,604 |
| | 35 |
| | 472 |
| | — |
| | — |
| | — |
| | 507 |
|
| Cumulative preferred dividends, undeclared and unpaid | — |
| | — |
| | — |
| | — |
| | — |
| | (535 | ) | | — |
| | — |
| | (535 | ) |
| Balance at June 30, 2019 | 14,700 |
| | $ | 15 |
| | 17,042,132 |
| | $ | 17,042 |
| | $ | 57,912 |
| | $ | 146,177 |
| | $ | 0 |
| | $ | (63,652 | ) | | $ | 157,494 |
|
| Net loss | — |
| | — |
| | — |
| | — |
| | — |
| | (37,087 | ) | | — |
| | — |
| | (37,087 | ) |
| Net reclassification of unrealized gains on cash flow hedges, net of taxes | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1,345 |
| | 1,345 |
|
| Change in retiree benefit obligations, net of taxes | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (13,722 | ) | | (13,722 | ) |
| ESOP compensation expense, including reclassifications | — |
| | — |
| | 266,429 |
| | 266 |
| | 2,719 |
| | — |
| | — |
| | — |
| | 2,985 |
|
| Share-based compensation | — |
| | — |
| | — |
| | — |
| | 1,323 |
| | — |
| | — |
| | — |
| | 1,323 |
|
| Issuance of common stock and stock option exercises | — |
| | — |
| | 39,213 |
| | 40 |
| | 89 |
| | — |
| | — |
| | — |
| | 129 |
|
| Cumulative preferred dividends, undeclared and unpaid | — |
| | — |
| | — |
| | — |
| | — |
| | (554 | ) | | — |
| | — |
| | (554 | ) |
| Balance at June 30, 2020 | 14,700 |
| | $ | 15 |
| | 17,347,774 |
| | $ | 17,348 |
| | $ | 62,043 |
| | $ | 108,536 |
| | $ | 0 |
| | $ | (76,029 | ) | | $ | 111,913 |
|
The accompanying notes are an integral part of these consolidated financial statements.
|
| | | | | | | | | | | |
| FARMER BROS. CO. |
| CONSOLIDATED STATEMENTS OF CASH FLOWS |
| (In thousands) |
| | For the Years Ended June 30, |
| | 2020 | | 2019 | | 2018 |
| Cash flows from operating activities: | | | | | |
| Net loss | $ | (37,087 | ) | | $ | (73,595 | ) | | $ | (18,280 | ) |
| Adjustments to reconcile net (loss) income to net cash provided by operating activities: |
| Depreciation and amortization | 29,896 |
| | 31,065 |
| | 30,464 |
|
| Provision for doubtful accounts | 1,379 |
| | 1,363 |
| | 137 |
|
| Impairment of goodwill and intangible assets | 42,030 |
| | 0 |
| | 3,820 |
|
| Change in estimated fair value of contingent earnout consideration | 0 |
| | 0 |
| | (500 | ) |
| Restructuring and other transition expenses, net of payments | 0 |
| | 1,172 |
| | (1,185 | ) |
| Deferred income taxes | (300 | ) | | 41,654 |
| | 17,155 |
|
| Postretirement benefits and pension settlement cost | (5,760 | ) | | 10,948 |
| | 0 |
|
| Net (gains) losses from sales of assets | (25,237 | ) | | 466 |
| | (995 | ) |
| ESOP and share-based compensation expense | 4,309 |
| | 3,674 |
| | 3,822 |
|
| Net losses on derivative instruments and investments | 9,818 |
| | 9,196 |
| | 1,982 |
|
| Change in operating assets and liabilities: |
| Accounts receivable | 12,893 |
| | 2,757 |
| | (4,628 | ) |
| Inventories | 19,530 |
| | 16,192 |
| | (15,513 | ) |
| Derivative (liabilities) assets, net | (1,082 | ) | | (18,901 | ) | | (7,782 | ) |
| Other assets | 990 |
| | 114 |
| | 1,073 |
|
| Accounts payable | (35,784 | ) | | 16,546 |
| | 3,864 |
|
| Accrued expenses and other | (14,140 | ) | | (7,201 | ) | | (4,579 | ) |
| Net cash provided by operating activities | $ | 1,455 |
| | $ | 35,450 |
| | $ | 8,855 |
|
| Cash flows from investing activities: |
| Acquisitions of businesses, net of cash acquired | $ | 0 |
| | $ | 0 |
| | $ | (39,608 | ) |
| Purchases of property, plant and equipment | (17,560 | ) | | (34,760 | ) | | (35,443 | ) |
| Purchases of assets for construction of New Facility | 0 |
| | 0 |
| | (1,577 | ) |
| Proceeds from sales of property, plant and equipment | 39,477 |
| | 2,399 |
| | 1,988 |
|
| Net cash provided (used) in investing activities | $ | 21,917 |
| | $ | (32,361 | ) | | $ | (74,640 | ) |
| Cash flows from financing activities: |
| Proceeds from revolving credit facility | $ | 90,000 |
| | $ | 50,642 |
| | $ | 85,315 |
|
| Repayments on revolving credit facility | (60,000 | ) | | (48,429 | ) | | (23,149 | ) |
| Payments of finance lease obligations | (53 | ) | | (215 | ) | | (947 | ) |
| Payment of financing costs | (418 | ) | | (1,049 | ) | | (579 | ) |
| Proceeds from stock option exercises | 129 |
| | 507 |
| | 1,342 |
|
| Net cash provided by financing activities | $ | 29,658 |
| | $ | 1,456 |
| | $ | 61,982 |
|
| Net increase (decrease) in cash and cash equivalents | $ | 53,030 |
| | $ | 4,545 |
| | $ | (3,803 | ) |
| Cash and cash equivalents at beginning of year | 6,983 |
| | 2,438 |
| | 6,241 |
|
| Cash and cash equivalents at end of year | $ | 60,013 |
| | $ | 6,983 |
| | $ | 2,438 |
|
The accompanying notes are an integral part of these consolidated financial statements.
|
| | | | | | | | | | | |
| FARMER BROS. CO. |
| CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) |
| (In thousands) |
| | For the Years Ended June 30, |
| | 2020 | | 2019 | | 2018 |
| Supplemental disclosure of cash flow information: | | | | | |
| Cash paid for interest | $ | 4,426 |
| | $ | 5,512 |
| | $ | 3,177 |
|
| Cash paid for income taxes | $ | 21 |
| | $ | 107 |
| | $ | 144 |
|
| Supplemental disclosure of non-cash investing and financing activities: | | | | | |
| Non-cash additions to property, plant and equipment | $ | 446 |
| | $ | 2,619 |
| | $ | 2,814 |
|
| Non-cash portion of earnout receivable recognized—Spice Assets sale | $ | 0 |
| | $ | 0 |
| | $ | 298 |
|
| Non-cash portion of earnout payable recognized—West Coast Coffee acquisition | $ | 0 |
| | $ | 400 |
| | $ | 0 |
|
| Non-cash receivable from West Coast Coffee—post-closing final working capital adjustment | $ | 0 |
| | $ | 0 |
| | $ | 218 |
|
| Non-cash post-closing working capital adjustment—Boyd Coffee acquisition | $ | 0 |
| | $ | 2,277 |
| | $ | 1,056 |
|
| Non-cash Issuance of 401-K shares of Common Stock | $ | 266 |
| | $ | 37 |
| | $ | 0 |
|
| Non-cash consideration given-Issuance of Series A Preferred Stock | $ | 0 |
| | $ | 0 |
| | $ | 11,756 |
|
| Cumulative preferred dividends, undeclared and unpaid | $ | 554 |
| | $ | 535 |
| | $ | 389 |
|
The accompanying notes are an integral part of these consolidated financial statements.
FARMER BROS. CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 18. Share-based Compensation1. Introduction and Basis of Presentation
Description of Business
Farmer Bros. Co. 2017 Long-Term Incentive Plan, a Delaware corporation (including its consolidated subsidiaries unless the context otherwise requires, the “Company,” or “Farmer Bros.”), is a national coffee roaster, wholesaler and distributor of coffee, tea and culinary products. The Company serves a wide variety of customers, from small independent restaurants and foodservice operators to large institutional buyers like restaurant, department and convenience store chains, hotels, casinos, healthcare facilities, and gourmet coffee houses, as well as grocery chains with private brand and consumer-branded coffee and tea products, and foodservice distributors. The Company’s product categories consist of roast and ground coffee, frozen liquid coffee; flavored and unflavored iced and hot teas; culinary products; spices; and other beverages including cappuccino, cocoa, granitas, and concentrated and ready-to-drink cold brew and iced coffee. The Company was founded in 1912, incorporated in California in 1923, and reincorporated in Delaware in 2004. The Company's principal office and product development lab is located in Northlake, Texas ("Northlake facility"). The Company operates in 1 business segment.
On June 20, 2017 (the “Effective Date“),The Company operates production facilities in Northlake, Texas; Houston, Texas; Portland, Oregon; and Hillsboro, Oregon. Distribution takes place out of the Northlake facility, the Portland and Hillsboro facilities, as well as separate distribution centers in Northlake, Illinois; and Moonachie, New Jersey.
The Company’s products reach its customers primarily in the following ways: through the Company’s stockholders approvednationwide direct-store-delivery or DSD network of 186 delivery routes and 97 branch warehouses as of June 30, 2020, or direct-shipped via common carriers or third-party distributors. The Company operates a large fleet of trucks and other vehicles to distribute and deliver its products through its DSD network, and relies on third-party logistic (“3PL”) service providers for its long-haul distribution. DSD sales are primarily made “off-truck” by the Farmer Bros. Co. 2017 Long-Term Incentive Plan (the “2017 Plan”). The 2017 Plan succeeded the Company's prior long-term incentive plans, the Farmer Bros. Co. Amended and Restated 2007 Long-Term Incentive Plan (the “Amended Equity Plan“) and the Farmer Bros. Co. 2007Company to its customers at their places of business.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Omnibus Plan (collectively, the “Prior Plans“). On the Effective Date, the Company ceased granting awards under the Prior Plans; however, awards outstanding under the Prior Plans will remain subject to the terms of the applicable Prior Plan.
The 2017 Plan provides for the grant of stock options (including incentive stock options and non-qualified stock options), stock appreciation rights, restricted stock, restricted stock units, dividend equivalents, performance shares and other stock- or cash-based awards to eligible participants. The 2017 Plan also authorizes the grant of awards that are intended to qualify as “qualified performance-based compensation” within the meaning of Section 162(m) of the Internal Revenue Code (the “Code”). Non-employee directors of the Company and employees of the Company or any of its subsidiaries are eligible to receive awards under the 2017 Plan. The 2017 Plan authorizes the issuance of (i) 900,000 shares of common stock plus (ii) the number of shares of common stock subject to awards under the Company’s Prior Plans that are outstanding as of the Effective Date and that expire or are forfeited, cancelled or similarly lapse following the Effective Date. Subject to certain limitations, shares of common stock covered by awards granted under the 2017 Plan that are forfeited, expire or lapse, or are repurchased for or paid in cash, may be used again for new grants under the 2017 Plan. Shares of common stock granted under the 2017 Plan may be authorized but unissued shares, shares purchased on the open market or treasury shares. In no event will more than 900,000 shares of common stock be issuable pursuant to the exercise of incentive stock options under the 2017 Plan.
The 2017 Plan is administered by the Board or another Board committee or subcommittee, as may be determined by the Board from time to time (subject to limitations that may be imposed under Section 162(m) of the Code, Section 16 of the Securities Exchange Act of 1934, as amended, and/or stock exchange rules, as applicable). The administrator of the 2017 Plan (the “Administrator”) or its delegatee will have the authority to determine which eligible persons receive awards and to set the terms and conditions applicable to awards within the confines of the 2017 Plan’s terms. The Administrator will have the authority to make all determinations and interpretations under, and adopt rules and guidelines for the administration of, the 2017 Plan. In addition, the Administrator (which, for purposes of any such awards will be a Board committee comprised solely of two or more directors, each of whom is intended to be an “outside director” within the meaning of Section 162(m) of the Code) will determine whether specific awards are intended to constitute “qualified performance-based compensation,” within the meaning of Section 162(m) of the Code.
The 2017 Plan includes annual limits on certain awards that may be granted to any individual participant. The maximum aggregate number of shares of common stock with respect to all stock options and stock appreciation rights that may be granted to any one person during any calendar year is 250,000 shares. The maximum number of shares of common stock with respect to all awards of restricted stock, restricted stock units, performance shares and other stock- or cash-based awards that are intended to qualify as “qualified performance-based compensation” within the meaning of Section 162(m) of the Code that may be granted to any one person during any calendar year is 250,000 shares. The 2017 Plan also includes limits on the maximum aggregate amount that may become payable pursuant to all performance bonus awards that may be granted to any one person during any calendar year and the maximum amount that may become payable pursuant to all cash-based awards granted under the 2017 Plan and the aggregate grant date fair value of all equity-based awards granted under the 2017 Plan to any non-employee director during any calendar year for services as a member of the Board.
The 2017 Plan contains a minimum vesting requirement, subject to limited exceptions, that awards made under the 2017 Plan may not vest earlier than the date that is one year following the grant date of the award. The 2017 Plan also contains provisions with respect to payment of exercise or purchase prices, vesting and expiration of awards, adjustments and treatment of awards upon certain corporate transactions, including stock splits, recapitalizations and mergers, transferability of awards and tax withholding requirements.
The 2017 Plan may be amended or terminated by the Board at any time, subject to certain limitations requiring stockholder consent or the consent of the applicable participant. In addition, the Administrator may not, without the approval of the Company’s stockholders, authorize certain re-pricings of any outstanding stock options or stock appreciation rights granted under the 2017 Plan. The 2017 Plan will expire on June 20, 2027.
As of June 30, 2017, no awards have been granted under the 2017 Plan.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Non-qualified stock options with time-based vesting (“NQOs”)
In fiscal 2017, the Company granted no shares issuable upon the exercise of NQOs. In fiscal 2016 and 2015, the Company granted 21,595 and 25,703 shares, respectively, issuable upon the exercise of NQOs with a weighted average exercise price of $29.48 and $23.91 per share, respectively, to eligible employees under the Amended Equity Plan which vest ratably over a three-year period. Following are the assumptions used in the Black-Scholes valuation model for NQOs granted during the fiscal years ended June 30, 2016 and 2015:
|
| | | | | | | | |
| | | Year Ended June 30, |
| | | 2016 | | 2015 |
| Weighted average fair value of NQOs | | $ | 12.63 |
| | $ | 10.38 |
|
| Risk-free interest rate | | 1.6 | % | | 1.5 | % |
| Dividend yield | | — |
| | — |
|
| Average expected term (years) | | 5.1 |
| | 5.1 |
|
| Expected stock price volatility | | 47.1 | % | | 47.9 | % |
The Company’s assumption regarding expected stock price volatility is based on the historical volatility of the Company’s stock price. The risk-free interest rate is based on U.S. Treasury zero-coupon issues at the date of grant with a remaining term equal to the expected life of the stock options. The average expected term is based on historical weighted time outstanding and the expected weighted time outstanding calculated by assuming the settlement of outstanding awards at the midpoint between the vesting date and the end of the contractual term of the award. Currently, management estimates an annual forfeiture rate of 4.8% based on actual forfeiture experience. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
The following table summarizes NQO activity for the three most recent fiscal years: |
| | | | | | | | | | | | |
| Outstanding NQOs: | | Number of NQOs | | Weighted Average Exercise Price ($) | | Weighted Average Grant Date Fair Value ($) | | Weighted Average Remaining Life (Years) | | Aggregate Intrinsic Value ($ in thousands) |
| Outstanding at June 30, 2014 | | 412,454 |
| | 12.44 | | 5.30 | | 4.4 | | 3,782 |
|
| Granted | | 25,703 |
| | 23.91 | | 10.38 | | 6.8 | | — |
| Exercised | | (95,723 | ) | | 16.17 | | 5.86 | | — | | 747 |
|
| Cancelled/Forfeited | | (13,134 | ) | | 11.26 | | 5.00 | | — | | — |
| Outstanding at June 30, 2015 | | 329,300 |
| | 12.30 | | 5.54 | | 3.9 | | 3,700 |
|
| Granted | | 21,595 |
| | 29.48 | | 12.63 | | 6.4 | | — |
|
| Exercised | | (112,895 | ) | | 12.35 | | 5.37 | | — | | 1,853 |
|
| Cancelled/Forfeited | | (18,371 | ) | | 13.45 | | 6.17 | | — | | — |
|
| Outstanding at June 30, 2016 | | 219,629 |
| | 13.87 | | 6.28 | | 3.7 | | 3,995 |
|
| Granted | | — |
| | — | | — | | — | | — |
|
| Exercised(1) | | (67,482 | ) | | 12.38 | | 5.57 | | — | | 1,407 |
|
| Cancelled/Forfeited | | (18,683 | ) | | 25.13 | | 10.90 | | — | | — |
|
| Outstanding at June 30, 2017 | | 133,464 |
| | 13.05 | | 5.99 | | 2.6 | | 2,299 |
|
| Vested and exercisable at June 30, 2017 | | 125,376 |
| | 12.13 | | 5.64 | | 2.5 | | 2,274 |
|
| Vested and expected to vest at June 30, 2017 | | 133,073 |
| | 13.00 | | 5.97 | | 2.6 | | 2,298 |
|
___________
(1) Includes 11,147 shares that were withheld to cover option cost and meet the employees' minimum statutory tax withholding and retired.
The aggregate intrinsic values outstanding at the end of each fiscal period in the table above represent the total pretax intrinsic value, based on the Company’s closing stock price of $30.25 at June 30, 2017, $32.06 at June 30, 2016 and $23.50 at
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
June 30, 2015, representing the last trading day of the respective fiscal years, which would have been received by NQO holders had all award holders exercised their NQOs that were in-the-money as of those dates. The aggregate intrinsic value of NQO exercises in each fiscal period above represents the difference between the exercise price and the value of the Company’s common stock at the time of exercise. NQOs outstanding that are expected to vest are net of estimated forfeitures.
Total fair value of NQOs vested during fiscal 2017, 2016, and 2015 was $0.2 million, $0.3 million and $0.5 million, respectively. The Company received $0.5 million, $1.4 million and $1.5 million in proceeds from exercises of vested NQOs in fiscal 2017, 2016 and 2015, respectively.
The following table summarizes nonvested NQO activity for the three most recent fiscal years: |
| | | | | | | | | |
| Nonvested NQOs: | | Number of NQOs | | Weighted Average Exercise Price ($) | | Weighted Average Grant Date Fair Value ($) | | Weighted Average Remaining Life (Years) |
| Outstanding at June 30, 2014 | | 167,798 |
| | 10.65 | | 5.06 | | 5.3 |
| Granted | | 25,703 |
| | 23.91 | | 10.38 | | 6.8 |
| Vested | | (101,172 | ) | | 9.87 | | 4.72 | | — |
| Forfeited | | (12,134 | ) | | 10.31 | | 4.91 | | — |
| Outstanding at June 30, 2015 | | 80,195 |
| | 15.94 | | 7.21 | | 5.2 |
| Granted | | 21,595 |
| | 29.48 | | 12.63 | | 6.4 |
| Vested | | (47,418 | ) | | 14.05 | | 6.44 | | — |
| Forfeited | | (15,641 | ) | | 12.95 | | 6.09 | | — |
| Outstanding at June 30, 2016 | | 38,731 |
| | 27.02 | | 11.63 | | 6.1 |
| Vested | | (15,765 | ) | | 26.45 | | 11.41 | | — |
| Forfeited | | (14,878 | ) | | 27.44 | | 11.96 | | — |
| Outstanding at June 30, 2017 | | 8,088 |
| | 27.33 | | 11.47 | | 5.3 |
As of June 30, 2017 and 2016, respectively, there was $80,000 and $0.4 million of unrecognized compensation cost related to NQOs. The unrecognized compensation cost related to NQOs at June 30, 2017 is expected to be recognized over the weighted average period of 1.3 years. Total compensation expense for NQOs was $0.1 million, $0.2 million and $0.4 million in fiscal 2017, 2016 and 2015, respectively.
Non-qualified stock options with performance-based and time-based vesting (“PNQs”)
In the fiscal year ended June 30, 2017, the Company granted 149,223 shares issuable upon the exercise of PNQs to eligible employees under the Amended Equity Plan, with 20% of each such grant subject to forfeiture if a target modified net income goal for fiscal 2017 (“Fiscal 2017 Target”) is not attained. For this purpose, “Modified Net Income” is defined as net income (GAAP) before taxes and excluding any gains or losses from sales of assets, and excluding the effect of restructuring and other transition expenses related to the relocation of the Company’s corporate headquarters to Northlake, Texas. These PNQs have an exercise price of $32.85 per share which was the closing price of the Company’s common stock as reported on the NASDAQ Global Select Market on the date of grant. One-third of the total number of shares subject to each such stock option vest ratably on each of the first three anniversaries of the grant date, contingent on continued employment, and subject to accelerated vesting in certain circumstances.
In the fiscal year ended June 30, 2016, the Company granted 143,466 shares issuable upon the exercise of PNQs with an exercise price of $29.48 per share to eligible employees under the Amended Equity Plan. With the exception of a portion of the award to the Company’s President and Chief Executive Officer as described below, these PNQs vest over a three-year period with one-third of the total number of shares subject to each such PNQ becoming exercisable each year on the anniversary of the grant date, based on the Company’s achievement of modified net income targets for fiscal 2016 (“Fiscal 2016 Target“) as approved by the Compensation Committee, subject to the participant’s employment by the Company or service on the Board of Directors of the Company on the applicable vesting date and the acceleration provisions contained in the Amended Equity Plan and the applicable award agreement. But if actual modified net income for fiscal 2016 is less than the Fiscal 2016 Target, then only 80% of the total shares issuable under such grant will vest subject to continued employment with the Company on the relevant vesting dates.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
On June 3, 2016, the Compensation Committee of the Board of Directors of the Company determined that a portion of the performance non-qualified stock option granted to Michael H. Keown, the Company's President and Chief Executive Officer, on December 3, 2015 (the “Original Option”) was invalid because such portion caused the total number of option shares granted to Mr. Keown in calendar year 2015 to exceed the limit of 75,000 shares that may be granted to a participant in a single calendar year under the Amended Equity Plan by 22,862 shares. Therefore, the Compensation Committee reduced the total number of shares of common stock issuable under the Original Option by 22,862 shares. The reduction of the 22,862 excess option shares brought the total number of option shares granted to Mr. Keown in calendar 2015 within the limitation of the Amended Equity Plan.
In addition, on June 3, 2016, the Compensation Committee, in accordance with the provisions of the Amended Equity Plan, granted Mr. Keown a performance non-qualified stock option to purchase 22,862 shares of the Company's common stock (the “New Option”) with an exercise price of $29.48 per share, which was the greater of the exercise price of the Original Option and the closing price of the Company's common stock as reported on the NASDAQ Global Select Market on June 3, 2016, the date of grant. The New Option is subject to the same terms and conditions of the Original Option including an expiration date of December 3, 2022, and the three-year vesting schedule, except that to comply with the Amended Equity Plan's minimum vesting schedule of one year from the grant date, one-third of shares issuable under the New Option will vest on June 3, 2017, and the remainder of the New Option shares will vest one-third each on the second and third anniversaries of the grant date of the Original Option, based on the Company’s achievement of the same performance goals as the Original Option, subject to Mr. Keown’s continued employment on the applicable vesting date.
In the fiscal year ended June 30, 2015, the Company granted 121,024 shares issuable upon the exercise of PNQs with an exercise price of $23.44 per share to eligible employees under the Amended Equity Plan. These PNQs vest over a three-year period with one-third of the total number of shares subject to each such PNQ becoming exercisable each year on the anniversary of the grant date, based on the Company’s achievement of modified net income targets for fiscal years within the performance period as approved by the Compensation Committee, subject to catch-up vesting of previously unvested shares in a subsequent year within the three year period in which a cumulative modified net income target as approved by the Compensation Committee is achieved, in each case, subject to the participant’s employment by the Company or service on the Board of Directors of the Company on the applicable vesting date and the acceleration provisions contained in the Amended Equity Plan and the applicable award agreement.
Following are the assumptions used in the Black-Scholes valuation model for PNQs granted during the fiscal years ended June 30, 2017, 2016 and 2015:
|
| | | | | | | | | | | | |
| | | Year Ended June 30, |
| | | 2017 | | 2016 | | 2015 |
| Weighted average fair value of PNQs | | $ | 11.42 |
| | $ | 11.38 |
| | $ | 10.16 |
|
| Risk-free interest rate | | 1.5 | % | | 1.6 | % | | 1.5 | % |
| Dividend yield | | — |
| | — |
| | — |
|
| Average expected term (years) | | 4.9 |
| | 4.9 |
| | 5.0 |
|
| Expected stock price volatility | | 37.7 | % | | 42.5 | % | | 47.9 | % |
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
The following table summarizes PNQ activity for the three most recent fiscal years:
|
| | | | | | | | | | | | |
| Outstanding PNQs: | | Number of PNQs | | Weighted Average Exercise Price ($) | | Weighted Average Grant Date Fair Value ($) | | Weighted Average Remaining Life (Years) | | Aggregate Intrinsic Value ($ in thousands) |
| Outstanding at June 30, 2014 | | 112,442 |
| | 21.27 | | 10.49 | | 6.5 | | 38 |
|
| Granted | | 121,024 |
| | 23.44 | | 10.16 | | 6.6 | | — |
|
| Cancelled/Forfeited | | (9,399 | ) | | 21.33 | | 10.52 | | — | | — |
|
| Outstanding at June 30, 2015 | | 224,067 |
| | 22.44 | | 10.31 | | 6.0 | | 237 |
|
| Granted | | 143,466 |
| | 29.48 | | 11.38 | | 6.2 | | — |
|
| Exercised | | (14,144 | ) | | 21.20 | | 10.45 | | — | | 107 |
|
| Cancelled/Forfeited | | (64,790 | ) | | 23.20 | | 10.37 | | — | | — |
|
| Outstanding at June 30, 2016 | | 288,599 |
| | 25.83 | | 10.82 | | 5.7 | | 1,798 |
|
| Granted | | 149,223 |
| | 32.85 | | 11.42 | | 4.6 | | — |
|
| Exercised(1) | | (15,321 | ) | | 26.26 | | 10.98 | | — | | 109 |
|
| Cancelled/Forfeited | | (63,715 | ) | | 31.39 | | 11.39 | | — | | — |
|
| Outstanding at June 30, 2017 | | 358,786 |
| | 27.75 | | 10.96 | | 5.2 | | 1,181 |
|
| Vested and exercisable at June 30, 2017 | | 150,761 |
| | 23.97 | | 10.58 | | 4.3 | | 947 |
|
| Vested and expected to vest at June 30, 2017 | | 347,766 |
| | 27.64 | | 10.95 | | 5.2 | | 1,173 |
|
___________
(1) Includes 6,326 shares that were withheld to cover option cost and meet the employees' minimum statutory tax withholding and retired.
The aggregate intrinsic values outstanding at the end of each fiscal period in the table above represent the total pretax intrinsic values, based on the Company’s closing stock price of $30.25 at June 30, 2017, $32.06 at June 30, 2016 and $23.50 at June 30, 2015 representing the last trading day of the respective fiscal years, which would have been received by PNQ holders had all award holders exercised their PNQs that were in-the-money as of those dates. The aggregate intrinsic value of PNQ exercises in each fiscal period represents the difference between the exercise price and the value of the Company’s common stock at the time of exercise. PNQs outstanding that are expected to vest are net of estimated forfeitures.
Total fair value of PNQs vested during the fiscal years ended June 30, 2017, 2016 and 2015 was $1.3 million, $0.3 million and $0.4 million, respectively. The Company received $0.2 million and $0.3 million in proceeds from exercises of vested PNQs in fiscal 2017 and 2016, respectively. No PNQs were exercised during the fiscal year ended June 30, 2015.
As of June 30, 2017, the Company met the performance targets for the fiscal 2016 PNQ awards and the first two tranches of the fiscal 2015 PNQ awards. The Company expects to meet the performance targets for the remainder of the fiscal 2015 and fiscal 2016 awards, and for the fiscal 2017 awards.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
The following table summarizes nonvested PNQ activity for the three most recent fiscal years: |
| | | | | | | | | | | | |
| Nonvested PNQs: | | Number of PNQs | | Weighted Average Exercise Price ($) | | Weighted Average Grant Date Fair Value ($) | | Weighted Average Remaining Life (Years) |
| Outstanding at June 30, 2014 | | 112,442 |
| | 21.27 |
| | 10.49 |
| | 6.5 |
|
| Granted | | 121,024 |
| | 23.44 |
| | 10.16 |
| | 6.6 |
|
| Vested | | (34,959 | ) | | 21.27 |
| | 10.49 |
| | — |
|
| Forfeited | | (9,399 | ) | | 21.33 |
| | 10.52 |
| | — |
|
| Outstanding at June 30, 2015 | | 189,108 |
| | 22.66 |
| | 10.28 |
| | 6.2 |
|
| Granted | | 143,466 |
| | 29.48 |
| | 11.38 |
| | 6.2 |
|
| Vested | | (27,317 | ) | | 10.16 |
| | 23.44 |
| | — |
|
| Forfeited | | (64,790 | ) | | 23.20 |
| | 10.37 |
| | — |
|
| Outstanding at June 30, 2016 | | 240,467 |
| | 26.49 |
| | 10.92 |
| | 5.9 |
|
| Granted | | 149,223 |
| | 32.85 |
| | 11.42 |
| | 4.6 |
|
| Vested | | (119,403 | ) | | 24.91 |
| | 10.75 |
| | — |
|
| Forfeited | | (62,262 | ) | | 31.39 |
| | 11.39 |
| | — |
|
| Outstanding at June 30, 2017 | | 208,025 |
| | 30.48 |
| | 11.24 |
| | 5.8 |
|
As of June 30, 2017 and 2016, there was $1.8 million and $1.9 million , respectively, of unrecognized compensation cost related to PNQs. The unrecognized compensation cost related to PNQs at June 30, 2017 is expected to be recognized over the weighted average period of 1.3 years. Total compensation expense related to PNQs in fiscal 2017, 2016 and 2015 was $1.1 million, $0.5 million and $0.5 million, respectively.
Restricted Stock
During fiscal 2017, 2016 and 2015 the Company granted 5,106 shares, 10,170 shares and 13,256 shares of restricted stock under the Amended Equity Plan, respectively, with a weighted average grant date fair value of $35.25, $29.99 and $23.64 per share, respectively, to eligible employees and directors. Shares of restricted stock generally vest at the end of three years for eligible employees. Unlike prior-year awards to non-employee directors, which vest ratably over a period of three years, the fiscal 2017 restricted stock awards cliff vest on the first anniversary of the date of grant subject to continued service to the Company through the vesting date and the acceleration provisions of the LTIP and restricted stock agreement. During the fiscal year ended June 30, 2017, 7,458 shares of restricted stock vested and were released.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
The following table summarizes restricted stock activity for the three most recent fiscal years: |
| | | | | | | | | | | |
| Outstanding and Nonvested Restricted Stock Awards: | | Shares Awarded | | Weighted Average Grant Date Fair Value ($) | | Weighted Average Remaining Life (Years) | | Aggregate Intrinsic Value ($ in thousands) |
| Outstanding at June 30, 2014 | | 96,212 |
| | 10.27 |
| | 1.5 | | 2,079 |
|
| Granted | | 13,256 |
| | 23.64 |
| | — | | 313 |
|
| Exercised/Released(1) | | (53,402 | ) | | 8.43 |
| | — | | 1,377 |
|
| Cancelled/Forfeited | | (8,984 | ) | | 8.36 |
| | — | | — |
|
| Outstanding at June 30, 2015 | | 47,082 |
| | 16.48 |
| | 1.2 | | 1,106 |
|
| Granted | | 10,170 |
| | 29.99 |
| | — | | 305 |
|
| Exercised/Released(2) | | (24,841 | ) | | 14.08 |
| | — | | 747 |
|
| Cancelled/Forfeited | | (8,619 | ) | | 13.06 |
| | — | | — |
|
| Outstanding at June 30, 2016 | | 23,792 |
| | 26.00 |
| | 1.8 | | 763 |
|
| Granted | | 5,106 |
| | 35.25 |
| | — | | 180 |
|
| Exercised/Released | | (7,458 | ) | | 24.16 |
| | — | | 253 |
|
| Cancelled/Forfeited | | (5,995 | ) | | 26.41 |
| | — | | — |
|
| Outstanding at June 30, 2017 | | 15,445 |
| | 29.79 |
| | 0.9 | | 467 |
|
| Expected to vest at June 30, 2017 | | 14,989 |
| | 29.79 |
| | 0.9 | | 453 |
|
__________
(1) Includes 4,297 shares that were withheld to meet the employees' minimum statutory tax withholding and retired.
(2) Includes 5,177 shares that were withheld to meet the employees' minimum statutory tax withholding and retired.
The aggregate intrinsic value of shares outstanding at the end of each fiscal period in the table above represent the total pretax intrinsic values, based on the Company’s closing stock price of $30.25 at June 30, 2017, $32.06 at June 30, 2016 and $23.50 at June 30, 2015, representing the last trading day of the respective fiscal years. Restricted stock that is expected to vest is net of estimated forfeitures.
As of June 30, 2017 and 2016, there was $0.3 million and $0.5 million of unrecognized compensation cost related to restricted stock. The unrecognized compensation cost related to restricted stock at June 30, 2017 is expected to be recognized over the weighted average period of 1.0 year. Total compensation expense for restricted stock was $0.2 million, $0.2 million, and $0.3 million, for the fiscal years ended June 30, 2017, 2016 and 2015, respectively.
Note 19. Other Current Liabilities
Other current liabilities consist of the following:
|
| | | | | | | | |
| | | June 30, |
| (In thousands) | | 2017 | | 2016 |
| Accrued postretirement benefits | | $ | 893 |
| | $ | 1,060 |
|
| Accrued workers’ compensation liabilities | | 1,885 |
| | 3,225 |
|
| Short-term pension liabilities | | 3,956 |
| | 347 |
|
| Earnout payable—RLC acquisition | | 100 |
| | 100 |
|
| Other (including net taxes payable) | | 2,868 |
| | 2,214 |
|
| Other current liabilities | | $ | 9,702 |
| | $ | 6,946 |
|
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Note 20. Other Long-Term Liabilities2. Summary of Significant Accounting Policies
Other long-term liabilitiesBasis of Presentation
The accompanying consolidated financial statements are prepared in accordance with the generally accepted accounting principles in the United States (“GAAP”).
Principles of Consolidation
The consolidated financial statements include the
following: |
| | | | | | | | |
| | | June 30, |
| (In thousands) | | 2017 | | 2016 |
| New Facility lease obligation(1) | | $ | — |
| | $ | 28,110 |
|
| Earnout payable(2) | | 1,100 |
| | 100 |
|
| Derivative liabilities—noncurrent | | 380 |
| | — |
|
| Other long-term liabilities | | $ | 1,480 |
| | $ | 28,210 |
|
___________
(1) Lease obligation associated with constructionaccounts of the New Facility. Company and its direct and indirect wholly owned subsidiaries. All inter-company balances and transactions have been eliminated.
Use of Estimates
The lease obligation was reversed upon terminationpreparation of financial statements in accordance with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and the accompanying notes. The Company reviews its estimates on an ongoing basis using currently available information. Changes in facts and circumstances may result in revised estimates and actual results may differ from those estimates.
Cash Equivalents
The Company considers all highly liquid investments with original maturity dates of 90 days or less to be cash equivalents. Fair values of cash equivalents approximate cost due to the short period of time to maturity.
Allowance for doubtful accounts
A portion of our accounts receivable is not expected to be collected due to non-payment, bankruptcies and deductions. Our accounting policy for the allowance for doubtful accounts requires us to reserve an amount based on the evaluation of the Lease Agreement concurrentaging of accounts receivable, detailed analysis of high-risk customers’ accounts, and the overall market and economic conditions of our customers. This evaluation considers the customer demographic, such as large commercial customers as compared to small businesses or individual customers. We consider our accounts receivable delinquent or past due based on payment terms established with each customer. Accounts receivable are written off when the closingaccount are determined to be uncollectible.
Investments
The Company’s investments, from time to time, consist of money market instruments, marketable debt, equity and hybrid securities. Investments are held for trading purposes and stated at fair value. The cost of investments sold is determined on the specific identification method. Dividend and interest income are accrued as earned.
Fair Value Measurements
The Company groups its assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the
purchase option on September 15, 2016. See Note 5.assumptions used to determine fair value. These levels are: (2) Includes•Level 1—Valuation is based upon quoted prices for identical instruments traded in fiscal 2017, $0.5 millionactive markets.
•Level 2—Valuation is based upon inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly (i.e. interest rate and $0.6 millionyield curves observable at commonly quoted intervals, default rates, etc.). Observable inputs include quoted prices for similar instruments in earnout payableactive and non-active markets. Level 2 includes those financial instruments that are valued with industry standard valuation models that incorporate inputs that are observable in connection with the Company’s acquisition of substantially allmarketplace throughout the full term of the assets of China Mist completed on October 11, 2016 andinstrument, or can otherwise be derived from or supported by observable market data in the Company's acquisition of West Coast Coffee completed on February 7, 2017, respectively; includesmarketplace. Level 2 inputs may also include insignificant adjustments to market observable inputs.
•Level 3—Valuation is based upon one or more unobservable inputs that are significant in fiscal 2016 $0.1 million in earnout payable in connection with the Company's acquisition of substantially all of the assets of RLC in fiscal 2016. See Note 3.
Note 21. Income Taxes
The current and deferred components of the provision for income taxes consist of the following:
|
| | | | | | | | | | | | |
| | | June 30, |
| (In thousands) | | 2017 | | 2016 | | 2015 |
| Current: | | | | | | |
| Federal | | $ | 132 |
| | $ | 214 |
| | $ | (30 | ) |
| State | | 340 |
| | 103 |
| | 309 |
|
| Total current income tax expense | | 472 |
| | 317 |
| | 279 |
|
| Deferred: | | | | | | |
| Federal | | 13,110 |
| | (66,648 | ) | | 106 |
|
| State | | 2,372 |
| | (13,666 | ) | | 17 |
|
| Total deferred income tax expense (benefit) | | 15,482 |
| | (80,314 | ) | | 123 |
|
| Income tax expense (benefit) | | $ | 15,954 |
| | $ | (79,997 | ) | | $ | 402 |
|
A reconciliation of income tax expense (benefit)establishing a fair value estimate. These unobservable inputs are used to the federal statutory tax rate is as follows:extent relevant observable inputs are not available and are developed based on the best information available. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value.
|
| | | | | | | | | | | | |
| | | June 30, |
| (In thousands) | | 2017 | | 2016 | | 2015 |
| Statutory tax rate | | 35 | % | | 35 | % | | 34 | % |
| Income tax expense at statutory rate | | $ | 14,121 |
| | $ | 3,472 |
| | $ | 358 |
|
| State income tax expense, net of federal tax benefit | | 1,819 |
| | 557 |
| | 260 |
|
| Dividend income exclusion | | (134 | ) | | (140 | ) | | (54 | ) |
| Valuation allowance | | (13 | ) | | (83,230 | ) | | (185 | ) |
| Change in tax rate | | — |
| | (1,061 | ) | | — |
|
| Retiree life insurance | | (69 | ) | | 135 |
| | — |
|
| Change in contingency reserve (net) | | 1 |
| | — |
| | — |
|
| Other (net) | | 229 |
| | 270 |
| | 23 |
|
| Income tax expense (benefit) | | $ | 15,954 |
| | $ | (79,997 | ) | | $ | 402 |
|
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Securities with quotes that are based on actual trades or actionable bids and offers with a sufficient level of activity on or near the measurement date are classified as Level 1. Securities that are priced using quotes derived from implied values, indicative bids and offers, or a limited number of actual trades, or the same information for securities that are similar in many respects to those being valued, are classified as Level 2. If market information is not available for securities being valued, or materially-comparable securities, then those securities are classified as Level 3. In considering market information, management evaluates changes in liquidity, willingness of a broker to execute at the quoted price, the depth and consistency of prices from pricing services, and the existence of observable trades in the market.
Derivative Instruments
The primary componentsCompany executes various derivative instruments to hedge its commodity price and interest rate risks. These derivative instruments consist primarily of forward, option and swap contracts. The Company reports the fair value of derivative instruments on its consolidated balance sheets in “Short-term derivative assets,” “Long-term derivative assets,” “Short-term derivative liabilities,” or “Other long-term liabilities.” The Company determines the current and noncurrent classification based on the timing of expected future cash flows of individual trades and reports these amounts on a gross basis. Additionally, the Company reports, if any, cash held on deposit in margin accounts for coffee-related derivative instruments on a gross basis on its consolidated balance sheet in “Restricted cash.”
The accounting for the changes in fair value of the temporary differences which give riseCompany's derivative instruments can be summarized as follows: |
| | |
| Derivative Treatment | | Accounting Method |
| Normal purchases and normal sales exception | | Accrual accounting |
| Designated in a qualifying hedging relationship | | Hedge accounting |
| All other derivative instruments | | Mark-to-market accounting |
The Company enters into green coffee purchase commitments at a fixed price or at a price to be fixed (“PTF”). PTF contracts are purchase commitments whereby the quality, quantity, delivery period, price differential to the Company’scoffee “C” market price and other negotiated terms are agreed upon, but the date, and therefore the price at which the base “C” market price will be fixed has not yet been established. The coffee “C” market price is fixed at some point after the purchase contract date and before the futures market closes for the delivery month and may be fixed either at the direction of the Company to the vendor, or by the application of a derivative that was separately purchased as a hedge. For both fixed-price and PTF contracts, the Company expects to take delivery of and to utilize the coffee in a reasonable period of time and in the conduct of normal business. Accordingly, these purchase commitments qualify as normal purchases and are not recorded at fair value on the Company's consolidated balance sheets.
The Company follows the guidelines of Accounting Standards Codification (“ASC”) 815, “Derivatives and Hedging” (“ASC 815”), to account for certain coffee-related derivative instruments as accounting hedges, in order to minimize the volatility created in the Company's quarterly results from utilizing these derivative instruments and to improve comparability between reporting periods. For a derivative to qualify for designation in a hedging relationship, it must meet specific criteria and the Company must maintain appropriate documentation. The Company establishes hedging relationships pursuant to its risk management policies. The hedging relationships are evaluated at inception and on an ongoing basis to determine whether the hedging relationship is, and is expected to remain, highly effective in achieving offsetting changes in fair value or cash flows attributable to the underlying risk being hedged. The Company also regularly assesses whether the hedged forecasted transaction is probable of occurring. If a derivative ceases to be or is no longer expected to be highly effective, or if the Company believes the likelihood of occurrence of the hedged forecasted transaction is no longer probable, hedge accounting is discontinued for that derivative, and future changes in the fair value of that derivative are recognized in “Other, net.”
For coffee-related derivative instruments designated as cash flow hedges, the change in fair value of the derivative is reported as accumulated other comprehensive income (loss) (“AOCI”) and subsequently reclassified into cost of goods sold in the period or periods when the hedged transaction affects earnings. Gains or losses deferred tax assets (liabilities)in AOCI associated with terminated derivative instruments, derivative instruments that cease to be highly effective hedges, derivative instruments for which the forecasted transaction is reasonably possible but no longer probable of occurring, and cash flow hedges that have been otherwise discontinued remain in AOCI until the hedged item affects earnings. If it becomes probable that the forecasted transaction designated as the hedged item in a cash flow hedge will not occur, any gain or loss deferred in AOCI is recognized in “Other, net” at that time. For derivative instruments that are as follows:not designated in a hedging relationship, and for which the normal purchases and normal sales exception has not been elected, the changes in fair value are reported in “Other, net.” See Note 8.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
|
| | | | | | | | | | | | |
| | | June 30, |
| (In thousands) | | 2017 | | 2016 | | 2015 |
| Deferred tax assets: | | | | | | |
| Postretirement benefits | | $ | 30,253 |
| | $ | 33,273 |
| | $ | 31,100 |
|
| Accrued liabilities | | 7,885 |
| | 11,760 |
| | 10,091 |
|
| Net operating loss carryforwards | | 38,985 |
| | 38,196 |
| | 41,544 |
|
| Intangible assets | | — |
| | 71 |
| | 594 |
|
| Other | | 6,824 |
| | 6,881 |
| | 6,794 |
|
| Total deferred tax assets | | 83,947 |
| | 90,181 |
| | 90,123 |
|
| Deferred tax liabilities: | | | | | | |
| Unrealized gain on investments | | — |
| | (609 | ) | | (2,242 | ) |
| Fixed assets | | (17,096 | ) | | (5,370 | ) | | (2,647 | ) |
| Other | | (2,181 | ) | | (1,789 | ) | | (1,943 | ) |
| Total deferred tax liabilities | | (19,277 | ) | | (7,768 | ) | | (6,832 | ) |
| Valuation allowance | | (1,615 | ) | | (1,627 | ) | | (84,857 | ) |
| Net deferred tax assets (liabilities) | | $ | 63,055 |
| | $ | 80,786 |
| | $ | (1,566 | ) |
For interest rate swap derivative instrument designated as a cash flow hedge, the change in fair value of the derivative is reported as AOCI and subsequently reclassified into interest expense in the period or periods when the hedged transaction affects earnings.
Concentration of Credit Risk
At June 30, 2017,2020, the financial instruments which potentially expose the Company had approximately $101.8 millionto concentration of credit risk consist of cash in federalfinancial institutions (in excess of federally insured limits), derivative instruments and $97.7 milliontrade receivables.
The Company does not have any credit-risk related contingent features that would require it to post additional collateral in statesupport of its net operating loss carryforwards that will begin to expirederivative liability positions. At June 30, 2020 and 2019, none of the cash in the years ending June 30, 2030Company’s coffee-related derivative margin accounts was restricted. Further changes in commodity prices and June 30, 2017, respectively. Additionally,the number of coffee-related derivative instruments held, could have a significant impact on cash deposit requirements under certain of the Company's broker and counterparty agreements.
Approximately 39% and 28% of the Company’s trade accounts receivable balance was with five customers at June 30, 2017,2020 and 2019, respectively. The Company estimates its maximum credit risk for accounts receivable at the amount recorded on the balance sheet. The trade accounts receivables are generally short-term and all probable bad debt losses have been appropriately considered in establishing the allowance for doubtful accounts.
Inventories
Inventories are valued at the lower of cost or net realizable value. Effective June 30, 2018, the Company had $0.8 millionchanged its method of federal businessaccounting for coffee, tea and culinary products from the last in, first out (“LIFO”) basis to the first in, first out ("FIFO") basis. The impact of this change in accounting principle has been reflected through retrospective application to the financial statements for each period presented. The Company continues to account for coffee brewing equipment parts on a FIFO basis. The Company regularly evaluates these inventories to determine the provision for obsolete and slow-moving inventory. Inventory reserves are based on inventory obsolescence trends, historical experience and application of specific identification.
Property, Plant and Equipment
Property, plant and equipment is carried at cost, less accumulated depreciation. Depreciation is computed using the straight-line method. The following useful lives are used:
|
| |
| Buildings and facilities | 10 to 30 years |
| Machinery and equipment | 3 to 15 years |
| Equipment under finance leases | Shorter of term of lease or estimated useful life |
| Office furniture and equipment | 5 to 7 years |
| Capitalized software | 3 to 5 years |
Leasehold improvements are depreciated on a straight-line basis over the lesser of the estimated useful life of the asset or the remaining lease term. When assets are sold or retired, the asset and related accumulated depreciation are removed from the respective account balances and any gain or loss on disposal is included in operations. Maintenance and repairs are charged to expense, and enhancements are capitalized.
Coffee Brewing Equipment and Service
The Company capitalizes coffee brewing equipment and depreciates it over five years and reports the depreciation expense in cost of goods sold. Other non-depreciation expenses related to coffee brewing equipment provided to customers, such as the cost of servicing that equipment (including service employees’ salaries, cost of transportation and the cost of supplies and parts), are considered directly attributable to the generation of revenues from the customers. These non-depreciation expenses are also included in cost of goods sold. See Note 11 for details of the depreciation amounts and non-depreciation expenses.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Leases
The Company makes a determination if an arrangement constitutes a lease at inception, and categorizes the lease as either an operating or finance lease. Operating leases are included in right-of-use operating lease assets and operating lease liabilities in the Company's Condensed Consolidated Balance Sheets. Finance leases are included in property, plant and equipment, net and other long-term liabilities in the Condensed Consolidated Balance Sheets. Leases with an initial term of 12 months or less are not recorded on the Condensed Consolidated Balance Sheets.
The Company has entered into leases for building facilities, vehicles and other equipment. The Company’s leases have remaining contractual terms of up to 8 years, some of which have options to extend the lease for up to an additional 10 years. For purposes of calculating operating lease liabilities, lease terms are deemed not to include options to extend the lease renewals until it is reasonably certain that the Company will exercise that option. The Company's lease agreements do not contain any material residual value guarantees or material restrictive covenants.
Right-of-use lease assets represent the Company's right to use an underlying asset for the lease term and lease liabilities represent the Company's obligation to make lease payments arising from the lease. Operating lease right-of-use assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of the Company's leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The Company uses the implicit rate when readily determinable. Lease terms may include options to extend or terminate the lease when it is reasonably certain that the company will exercise that option. Lease expense is primarily recognized on a straight-line basis over the lease term. The Company has lease agreements with lease and non-lease components, which are combined for certain assets classes.
Income Taxes
Deferred income taxes are determined based on the temporary differences between the financial reporting and tax bases of assets and liabilities using enacted tax rates in effect for the year in which differences are expected to reverse. Estimating the Company’s tax liabilities involves judgments related to uncertainties in the application of complex tax regulations. The Company makes certain estimates and judgments to determine tax expense for financial statement purposes as it evaluates the effect of tax credits, that begintax benefits and deductions, some of which result from differences in the timing of recognition of revenue or expense for tax and financial statement purposes. Changes to expirethese estimates may result in June 30, 2025significant changes to the Company’s tax provision in future periods. Each fiscal quarter the Company re-evaluates its tax provision and approximately $1.7 million of federal alternative minimumreconsiders its estimates and assumptions related to specific tax credits that do not expire.assets and liabilities, making adjustments as circumstances change.
Deferred Tax Asset Valuation Allowance
The Company
recognizes windfall tax benefits associated with the exercise of share-based compensation directly to stockholders' equity only when realized. Accordinglyevaluates its deferred tax assets
are not recognized for net operating loss carryforwards resulting from windfall tax benefits occurring from July 1, 2006 onward. At June 30, 2017, deferred tax assets do not include $1.6 million in excess tax benefits from stock compensation. As discussed in Note 2, the Company will adopt ASU 2016-09 beginning July 1, 2017. Upon adoption the excess tax benefits of $1.6 million will be recorded as an increasequarterly to deferred tax assets anddetermine if a corresponding increase to retained earnings.At June 30, 2017, the Company had total deferred tax assets of $83.9 million and net deferred tax assets before valuation allowance of $64.7 million. The Company consideredis required and considers whether a valuation allowance should be recorded against deferred tax assets based on the likelihood that the benefits of the deferred tax assets wouldwill or wouldwill not ultimately be realized in future periods. In making suchthis assessment, significant weight wasis given to evidence that couldcan be objectively verified, such as recent operating results, and less consideration wasis given to less objective indicators, such as future income projections.
After consideration of positive and negative evidence, including the recent history of income,if the Company concludeddetermines that it is more likely than not that the Companyit will generate future income sufficient to realize the majority of the Company’sits deferred tax assets, as of June 30, 2017. As of June 30, 2017, the Company cannot conclude that certain state net operating loss carry forwards and tax credit carryovers will be utilized before expiration. Accordingly, the Company will maintainrecord a valuation allowance of $1.6 million to offset this deferred tax asset. There was no change toreduction in the valuation allowance in fiscal 2017. The valuation allowance decreased $83.2 million and increased $12.3 million, in fiscal 2016 and 2015, respectively.allowance.
Total unrecognized tax benefits attributable to uncertain tax positions taken in tax returns in each of fiscal 2017, 2016 and 2015 were zero and at June 30, 2017 and 2016, the Company had no unrecognized tax benefits.
Revenue Recognition
The Company files income tax returnsrecognizes revenue in accordance with the way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. The Company performs the following steps to determine revenue recognition for an arrangement: (1) identify the contract(s) with a customer, (2) identify the performance obligations in the U.S.contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and in various state jurisdictions with varying statutes(5) recognize revenue when (or as) the performance obligations are satisfied.
Net (Loss) Income Per Common Share
Net (loss) income per share (“EPS”) represents net (loss) income available to common stockholders divided by the weighted-average number of limitations. The Company is no longer subject to U.S. income tax examinationscommon shares outstanding for the fiscal years prior to June 30, 2013. The Internal Revenue Service completed its examination ofperiod, excluding unallocated shares held by the Company's tax years ended June 30, 2013 and 2014 and accepted the returns as filed.
The Company’s policy is to recognize interest expense and penalties related to income tax matters as a component of income tax expense. In each of the fiscal years ended June 30, 2017 and 2016, the Company recorded $0 in accrued interest and
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
penalties associatedEmployee Stock Ownership Plan (“ESOP”). Dividends on the Company's outstanding Series A Convertible Participating Cumulative Perpetual Preferred Stock, par value $1.00 per share ("Series A Preferred Stock"), that the Company has paid or intends to pay are deducted from net (loss) income in computing net (loss) income available to common stockholders.
Under the two-class method, net (loss) income available to nonvested restricted stockholders and holders of Series A Preferred Stock is excluded from net (loss) income available to common stockholders for purposes of calculating basic and diluted EPS.
Diluted EPS represents net income available to holders of common stock divided by the weighted-average number of common shares outstanding, inclusive of the dilutive impact of common equivalent shares outstanding during the period. Common equivalent shares include potentially dilutive shares from share-based compensation including stock options, unvested restricted stock, performance-based restricted stock units, and shares of Series A Preferred Stock, as converted, because they are deemed participating securities. In the absence of contrary information, the Company assumes 100% of the target shares are issuable under performance-based restricted stock units.
The dilutive effect of Series A Preferred Stock is reflected in diluted EPS by application of the if-converted method. In applying the if-converted method, conversion will not be assumed for purposes of computing diluted EPS if the effect would be anti-dilutive. The Series A Preferred Stock is antidilutive whenever the amount of the dividend declared or accumulated in the current period per common share obtainable upon conversion exceeds basic EPS.
Employee Stock Ownership Plan
Compensation cost for the ESOP is based on the fair market value of shares released or deemed to be released to employees in the period in which they are committed. As a leveraged ESOP with uncertain tax positions.the Company as lender, a contra equity account is established to offset the Company’s note receivable. The contra account will change as compensation expense is recognized. The cost of shares purchased by the ESOP which have not been committed to be released or allocated to participants are shown as a contra-equity account “Unearned ESOP Shares” and are excluded from EPS calculations.
On December 31, 2018, the Company froze the ESOP such that (i) no employees of the Company may commence participation in the ESOP on or after December 31, 2018; (ii) no Company contributions will be made to the ESOP with respect to services performed or compensation received after December 31, 2018; and (iii) the ESOP accounts of all individuals who are actively employed by the Company and participating in the ESOP on December 31, 2018 will be fully vested as of such date. Additionally, the Company recorded income of $0 related to interest and penalties on uncertain tax positions inAdministrative Committee, with the fiscal years ended June 30, 2017, 2016 and 2015, respectively.
Note 22. Net Income Per Common Share
|
| | | | | | | | | | | | |
| | | Year Ended June 30, |
| (In thousands, except share and per share amounts) | | 2017 | | 2016 | | 2015 |
| Net income attributable to common stockholders—basic | | $ | 24,370 |
| | $ | 89,812 |
| | $ | 651 |
|
| Net income attributable to nonvested restricted stockholders | | 30 |
| | 106 |
| | 1 |
|
| Net income | | $ | 24,400 |
| | $ | 89,918 |
| | $ | 652 |
|
| | | | | | | |
| Weighted average common shares outstanding—basic | | 16,668,745 |
| | 16,502,523 |
| | 16,127,610 |
|
| Effect of dilutive securities: | | | | | | |
| Shares issuable under stock options | | 117,007 |
| | 124,879 |
| | 139,524 |
|
| Weighted average common shares outstanding—diluted | | 16,785,752 |
| | 16,627,402 |
| | 16,267,134 |
|
| Net income per common share—basic | | $ | 1.46 |
| | $ | 5.45 |
| | $ | 0.04 |
|
| Net income per common share—diluted | | $ | 1.45 |
| | $ | 5.41 |
| | $ | 0.04 |
|
Note 23. Commitments and Contingencies
Leases
As partconsent of the China Mist transaction,Board of Directors, designated certain employees who were terminated in connection with certain reductions-in-force in 2018 to be fully vested in their ESOP accounts as of their severance dates.
Effective January 1, 2019, the Company assumed the lease on China Mist’s existing 17,400 square foot production, distributionamended and warehouse facility in Scottsdale, Arizona which is terminable upon twelve months’ notice. As partrestated its 401(k) Plan to, among other things, provide for annual contribution of shares of the West Coast Coffee transaction, the Company entered into a three-year lease on West Coast Coffee’s existing production, distribution and warehouse facility in Hillsboro, Oregon, which expires January 31, 2020, and assumed leases on six branch warehouses in Oregon, California and Nevada, expiring on various dates through November 2020.Company’s common stock equal to 4% of each eligible participant’s annual plan compensation. SeeNote 313. for details. Share-based Compensation
The Company measures all share-based compensation cost at the grant date, based on the fair values of the awards that are ultimately expected to vest, and recognizes that cost as an expense on a straight line-basis in its consolidated statements of operations over the requisite service period. Fair value of restricted stock and performance-based restricted stock units is also obligated under operating leasesthe closing price of the Company's common stock on the date of grant. The Company estimates the fair value of option awards using the Black-Scholes option valuation model, which requires management to make certain assumptions for branch warehouses, distribution centers and its production facility in Portland, Oregon. Some operating leases have renewalestimating the fair value of stock options that allowat the date of grant.
In addition, the Company estimates the expected impact of forfeited awards and recognizes share-based compensation cost only for those awards ultimately expected to vest. If actual forfeiture rates differ materially from the Company’s estimates, share-based compensation expense could differ significantly from the amounts the Company has recorded in the current period. The Company periodically reviews actual forfeiture experience and will revise its estimates, as lessee, to extendnecessary. The Company will recognize as compensation cost the leases. Rent expenses paid forcumulative effect of the fiscal years ended June 30, 2017, 2016change in estimated forfeiture rates on current and 2015 were $5.1 million, $4.5 millionprior periods in earnings of the period of revision. As a result, if the Company revises its assumptions and $3.8 million, respectively.estimates, the Company’s share-based compensation expense could change materially in the future.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Contractual obligations for future fiscal years are as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Contractual Obligations |
| (In thousands) | | Capital Lease Obligations | | Operating Lease Obligations | | New Facility Construction and Equipment Contracts (1) | | Pension Plan Obligations(2) | | Postretirement Benefits Other Than Pension Plans(3) | | Revolving Credit Facility | | Purchase Commitments (4) |
| Year Ended June 30, | | | | | | | | | | | | | | |
| 2018 | | $ | 994 |
| | $ | 4,907 |
| | $ | 4,439 |
| | $ | 14,097 |
| | $ | 5,880 |
| | $ | 27,621 |
| | $ | 76,359 |
|
| 2019 | | $ | 186 |
| | $ | 3,996 |
| | $ | — |
| | $ | 8,050 |
| | $ | 956 |
| | $ | — |
| | $ | — |
|
| 2020 | | $ | 51 |
| | $ | 2,151 |
| | $ | — |
| | $ | 8,340 |
| | $ | 1,004 |
| | $ | — |
| | $ | — |
|
| 2021 | | $ | 4 |
| | $ | 769 |
| | $ | — |
| | $ | 8,560 |
| | $ | 1,049 |
| | $ | — |
| | $ | — |
|
| 2022 | | $ | — |
| | $ | 186 |
| | $ | — |
| | $ | 8,760 |
| | $ | 1,082 |
| | $ | — |
| | $ | — |
|
| Thereafter | | $ | — |
| | $ | — |
| | $ | — |
| | $ | 44,870 |
| | $ | 5,830 |
| | $ | — |
| | $ | — |
|
| | | | | $ | 12,009 |
| | $ | 4,439 |
| | $ | 92,677 |
| | $ | 15,801 |
| | $ | 27,621 |
| | $ | 76,359 |
|
| Total minimum lease payments | | $ | 1,235 |
| | | | | | | | | | | | |
Less: imputed interest (0.82% to 10.66%) | | $ | (40 | ) | | | | | | | | | | | | |
| Present value of future minimum lease payments | | $ | 1,195 |
| | | | | | | | | | | | |
| Less: current portion | | $ | 958 |
| | | | | | | | | | | | |
| Long-term capital lease obligations | | $ | 237 |
| | | | | | | | | | | | |
___________
(1) Includes $1.6 million inThe Company's outstanding contractual obligations for the construction of the New Facility including $0.4 million outstanding under the DMA (see Note 5share-based awards include performance-based non-qualified stock options ("PNQs") and $2.8 millionperformance-based restricted stock units ("PBRSUs") that have performance-based vesting conditions in outstanding contractual obligations foraddition to time-based vesting. Awards with performance-based vesting conditions require the purchase of machinery and equipment for the New Facility, including $2.2 million under the Amended Building Contract. See Note 5.(2) Includes $86.5 million in estimated future benefit payments on single employer pension plan obligations, $4.0 million in estimated payments in fiscal 2018 towards settlement of withdrawal liability associated with the Company’s withdrawal from the Local 807 Labor Management Pension Plan and $2.2 million in estimated fiscal 2018 contributions to the multiemployer pension plans. See Note 15.(3) Includes $10.8 million in estimated future benefit payments on postretirement benefit plan obligations and $5.0 million in estimated 2018 contributions to multiemployer plans other than pension plans. See Note 15.(4) Purchase commitments include commitments under coffee purchase contracts for which all delivery terms have been finalized but the related coffee has not been received as of June 30, 2017. Amounts shown in the table above: (a) include all coffee purchase contracts that the Company considers to be from normal purchases; and (b) do not include amounts related to derivative instruments that are recorded at fair value on the Company’s consolidated balance sheets.
Earn-Out Obligations
Certain of the Company’s business acquisitions involve the payment of contingent consideration. Certain of these payments are based on achievement of certain sales levels duringfinancial and other performance criteria as a condition to the earn-out period and, consequently,vesting. The Company recognizes the Company cannot currently determine the total payments. However, the Company have developed an estimate of the maximum potential contingent consideration for each of its acquisitions with an outstanding earn-out obligation. The estimated maximum fair value of future contingent considerationperformance-based awards, net of estimated forfeitures, as share-based compensation expense over the service period based upon the Company’s determination of whether it is probable that the performance targets will be achieved. At each reporting period, the Company could bereassesses the probability of achieving the performance criteria and the performance period required to paymeet those targets. Determining whether the performance criteria will be achieved involves judgment, and the estimate of share-based compensation expense may be revised periodically based on changes in the probability of achieving the performance criteria. Revisions are reflected in the period in which the estimate is changed. If performance goals are not met, no share-based compensation expense is recognized for the cancelled PNQs or PBRSUs, and, to the extent share-based compensation expense was previously recognized for those cancelled PNQs or PBRSUs, such share-based compensation expense is reversed. If performance goals are exceeded and the payout is more than 100% of the target shares in the case of PBRSUs, additional compensation expense is recorded in the period when that determination is certified by the Compensation Committee of the Board of Directors.
Impairment of Goodwill and Indefinite-lived Intangible Assets
The Company accounts for its goodwill and indefinite-lived intangible assets in accordance with Accounting Standards Codification ("ASC") 350, “Intangibles-Goodwill and Other” (“ASC 350”). Goodwill and other indefinite-lived intangible assets are not amortized but instead are reviewed for impairment annually, or more frequently if an event occurs or circumstances change which indicate that an asset might be impaired. Pursuant to ASC 350, the Company performs a qualitative assessment of goodwill and indefinite-lived intangible assets on its consolidated balance sheets, to determine if there is a more likely than not indication that its goodwill and indefinite-lived intangible assets are impaired as of January 31. If the indicators of impairment are present, the Company performs a quantitative assessment to determine the impairment of these assets as of the measurement date. See Note 12 for details of the goodwill and indefinite-lived intangible assets impairment test. The Company test for impairment of goodwill by comparing the fair value of its reporting units to the carrying value of the reporting units. If the fair value of a reporting unit is less than its carrying value, an impairment loss is recognized equal to the excess of the carrying amount of the reporting unit over its fair value.
Indefinite-lived intangible assets consist of certain acquired trademarks, trade names and a brand name. Indefinite-lived intangible assets are tested for impairment by comparing their fair values to their carrying values. An impairment charge is recorded if the estimated fair value of such assets has decreased below their carrying values.
Other Intangible Assets
Other intangible assets consist of finite-lived intangible assets including acquired recipes, non-compete agreements, customer relationships, a trade name/brand name and certain trademarks. These assets are amortized over their estimated useful lives and are tested for impairment by grouping them with other assets at the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities. The estimated future cash flows are based upon, among other things, assumptions about expected future operating performance, and may differ from actual cash flows. If the sum of the projected undiscounted cash flows (excluding interest) is less than the carrying value of the assets, the assets will be written down to the estimated fair value in the period in which the determination is made. The Company reviews the recoverability of its finite-lived intangible assets whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable.
Shipping and Handling Costs
The Company’s shipping and handling costs are included in both cost of goods sold and selling expenses, depending on the nature of such costs. Shipping and handling costs included in cost of goods sold reflect inbound freight of raw materials and finished goods, and product loading and handling costs at the Company’s production facilities to the distribution centers and branches. Shipping and handling costs included in selling expenses consist primarily of those costs associated with its business acquisitions is $1.2moving finished goods to customers. Shipping and handling costs that were recorded as a component of the Company's selling expenses were $9.8 million, recorded$11.4 million and $11.9 million, respectively, in “Other current liabilities“the fiscal years ended June 30, 2020, 2019 and “Other long-term liabilities” on the2018.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Company’sCollective Bargaining Agreements
Certain Company employees are subject to collective bargaining agreements which expire on or before January 31, 2025. At June 30, 2020 approximately 19% of the Company's workforce was covered by such agreements.
Self-Insurance
The Company uses a combination of insurance and self-insurance mechanisms to provide for the potential liability of certain risks including workers’ compensation, health care benefits, general liability, product liability, property insurance and director and officers’ liability insurance. Liabilities associated with risks retained by the Company are not discounted and are estimated by considering historical claims experience, demographics, exposure and severity factors and other actuarial assumptions.
The Company's self-insurance for workers’ compensation liability includes estimated outstanding losses of unpaid claims, and allocated loss adjustment expenses (“ALAE”), case reserves, the development of known claims and incurred but not reported claims. ALAE are the direct expenses for settling specific claims. The amounts reflect per occurrence and annual aggregate limits maintained by the Company. The estimated liability analysis does not include estimating a provision for unallocated loss adjustment expenses.
The estimated gross undiscounted workers’ compensation liability relating to such claims was $5.2 million and $5.4 million, as of June 30, 2020 and 2019, respectively and the estimated recovery from reinsurance was $0.8 million for both periods. The short-term and long-term accrued liabilities for workers’ compensation claims are presented on the Company's consolidated balance
sheet at June 30, 2017 (see Note 19sheets in “Other current liabilities” and Note 20). Subject to achievement of certain milestones, the contingent considerationin “Accrued workers' compensation liabilities,” respectively. The estimated insurance receivable is estimated to be paid before the end of calendar 2019. Since it is not possible to estimate when, or even if, the acquired companies will reach their performance milestones or the amount of contingent consideration payable based on future sales, the maximum contingent consideration has not been included in “Other assets” on the table above. Self-InsuranceCompany's consolidated balance sheets.
At June 30, 2016,2020 the Company had posted a $7.4 million letter of credit as a security deposit with the State of California Department of Industrial Relations Self-Insurance Plans for participation in the alternative security program for California self-insurers for workers’ compensation liability in California. The State of California notified the Company on December 13, 2016 that it had released and authorized the cancellation of the letter of credit. At June 30, 2017 and 2016, the Company had also posted $3.4$1.5 million in cash and a $4.3$2.3 million letter of credit, respectively,and at June 30, 2019 the Company had posted $1.4 million in cash and a $2.3 million letter of credit, as a security deposit for self-insuring workers’ compensation, general liability and auto insurance coverages outsidecoverages.
The estimated liability related to the Company's self-insured group medical insurance was $0.9 million in each of California.
Non-cancelable Purchase Orders
As ofthe years ended June 30, 2017,2020 and 2019, recorded on an incurred but not reported basis, within deductible limits, based on actual claims and the Company had committed to purchase green coffee inventory totaling $66.7 million under fixed-price contracts, equipment foraverage lag time between the New Facility totaling $3.5 milliondate insurance claims are filed and other purchases totaling $6.1 million under non-cancelable purchase orders.
Legal Proceedings
Council for Education and Research on Toxics (“CERT”) v. Brad Berry Company Ltd., et al., Superior Court of the State of California, County of Los Angeles
On August 31, 2012, CERT filed an amendment to a private enforcement action adding a number of companies as defendants, including CBI, which sell coffee in California. The suit alleges that the defendants have failed to issue clear and reasonable warnings in accordance with Proposition 65 that the coffee they produce, distribute and sell contains acrylamide. This lawsuit was filed in Los Angeles Superior Court (the “Court”). CERT has demanded that the alleged violators remove acrylamide from their coffee or provide Proposition 65 warnings on their products and pay $2,500 per day for each and every violation while theydate those claims are in violation of Proposition 65.
Acrylamide is produced naturally in connection with the heating of many foods, especially starchy foods, and is believed to be caused by the Maillard reaction, though it has also been found in unheated foods such as olives. With respect to coffee, acrylamide is produced when coffee beans are heated during the roasting process-it is the roasting itself that produces the acrylamide. While there has been a significant amount of research concerning proposals for treatments and other processes aimed at reducing acrylamide content of different types of foods, to our knowledge there is currently no known strategy for reducing acrylamide in coffee without negatively impacting the sensorial properties of the product.paid.
The Company has joined a Joint Defense Group, or JDG,accrues the cost for general liability, product liability and along with the other co-defendants, has answered the complaint, denying, generally, the allegationscommercial auto liability insurance based on estimates of the complaint, includingaggregate liability claims incurred using certain actuarial assumptions and historical claims experience. The Company's liability reserve for such claims was $1.6 million and $1.8 million at June 30, 2020 and 2019, respectively. The estimated liability related to the claimed violationCompany's self-insured group medical insurance, general liability, product liability and commercial auto liability is included on the Company's consolidated balance sheets in “Other current liabilities.”
Pension Plans
The Company’s defined benefit pension plans are not admitting new participants, therefore, changes to pension liabilities are primarily due to market fluctuations of Proposition 65investments for existing participants and further denying CERT’s right to any relief or damages, includingchanges in interest rates. The Company’s defined benefit pension plans are accounted for using the right to require a warning on products. The Joint Defense Group contends that based on proper scientific analysisguidance of ASC 710, “Compensation—General“ and proper applicationASC 715, “Compensation-Retirement Benefits“ and are measured as of the standards set forth in Proposition 65, exposures to acrylamide from the coffee products pose no significant risk of cancer and, thus, these exposures are exempt from Proposition 65’s warning requirement.
To date, the pleadings stageend of the case has been completed. fiscal year.
The Court has phased trial so thatCompany recognizes the “no significant risk level” defense,overfunded or underfunded status of a defined benefit pension as an asset or liability on its consolidated balance sheets. Changes in the First Amendment defense, andfunded status are recognized through AOCI, in the preemption defense will be tried first. Fact discovery and expert discovery on these “Phase 1” defenses have been completed, andyear in which the parties filed trial briefs. Trial commenced on September 8, 2014, and testimony completed on November 4, 2014, for the three Phase 1 defenses.changes occur. See Note 13. Following final trial briefing, the Court heard, on April 9, 2015, final arguments on the Phase 1 issues. On September 1, 2015, the Court ruled against the JDG on the Phase 1 affirmative defenses. The JDG received permission to file an interlocutory appeal, which was filed by writ petition on October 14, 2015. On January 14, 2016, the Court of Appeals denied the JDG’s writ petition thereby denying the interlocutory appeal so that the case stays with the trial court.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
On February 16, 2016,Business Combinations
The Company accounts for business combinations under the Plaintiff filed a motion for summary adjudication arguing thatacquisition method of accounting. The purchase price of each business acquired is allocated to the tangible and intangible assets acquired and the liabilities assumed based upon facts that had been stipulated byon information regarding their respective fair values on the JDG, the Plaintiff had proven its prima facie case and all that remains is a determinationdate of whether any affirmative defenses are available to Defendants. On March 16, 2016, the Court reinstated the stay on discovery for all parties except for the four largest defendants. Following a hearing on April 20, 2016, the Court granted Plaintiff’s motion for summary adjudication on its prima facie case. Plaintiff filed its motion for summary adjudication of affirmatives defenses on May 16, 2016. At the August 19, 2016 hearing on Plaintiff’s motion for summary adjudication (and the JDG’s opposition), the Court denied Plaintiff’s motion, thus maintaining the abilityacquisition. Any excess of the JDGpurchase price over the fair value of the separately identifiable assets acquired and the liabilities assumed is allocated to defendgoodwill. Management determines the issues at trial. On October 7, 2016, the Court continued the Plaintiff’s motionfair values used in purchase price allocations for preliminary injunction until the trialintangible assets based on historical data, estimated discounted future cash flows, and expected royalty rates for Phase 2.
In November 2016, the parties pursued mediation, but were not able to resolve the dispute.
In December 2016, discovery resumed for all defendants. Depositionstrademarks and trade names, as well as certain other information. The valuation of “person most knowledgeable” witnesses for each defendant in the JDG commenced in late Decemberassets acquired and proceeded through early 2017, followed by new interrogatories served upon the defendants. The Court set a fact and discovery cutoff of May 31, 2017 and an expert discovery cutoff of August 4, 2017. Depositions of expert witnesses were completed by the end of July. On July 6, 2017, the Court held hearings onliabilities assumed requires a number of discovery motionsjudgments and denied Plaintiff’s motion for sanctionsis subject to revision as to alladditional information about the defendants.
All pre-trial motionsfair value of assets and briefs have been filed withliabilities becomes available. Additional information, which existed as of the Court. There was a final case management conference on August 21, 2017 at which the Court set August 31, 2017 as the new trialacquisition date for Phase 2, though later changed the starting date for trialbut unknown to September 5, 2017. Phase 2 will focus on remedies and the plain meaning of “alternative significant risk level.” Trial is currently ongoing at this time.
At this time, the Company is not able to predictat that time, may become known during the probabilityremainder of the outcomemeasurement period, a period not to exceed twelve months from the acquisition date. Adjustments in the purchase price allocation may require a recasting of the amounts allocated to goodwill and intangible assets. If such an adjustment is required, the Company will recognize a measurement-period adjustment during the period in which it determines the amount of the adjustment, including the effect on earnings of any amounts it would have recorded in previous periods if the accounting had been completed at the acquisition date. Transaction costs, including legal, accounting and integration expenses, are expensed as incurred and are included in operating expenses in the Company's consolidated statements of operations. Contingent consideration, such as earnout, is deferred as a short-term or long-term liability based on an estimate of loss,the timing of the future payment. These contingent consideration liabilities are recorded at fair value on the acquisition date and are re-measured quarterly based on the then assessed fair value and adjusted if any, related to this matter. necessary. The results of operations of businesses acquired are included in the Company's consolidated financial statements from their dates of acquisition.
Restructuring Plans
The Company is a party to various other pending legal and administrative proceedings. It is management’s opinion that the outcomeaccounts for exit or disposal of such proceedings will not have a material impact on the Company’s financial position, results of operations,activities in accordance with ASC 420, “Exit or cash flows.
Note 24. Unusual and Infrequent Expenses
Disposal Cost Obligations.“ The Company incurred expensesdefines a business restructuring as an exit or disposal activity that includes but is not limited to a program which is planned and controlled by management and materially changes either the scope of $5.2 million,a business or $0.31 per diluted common share, during the fiscal year ended June 30, 2017manner in which were unusual in naturethat business is conducted. Business restructuring charges may include (i) one-time termination benefits related to employee separations, (ii) contract termination costs and infrequent in occurrence. These expenses incurred(iii) other related costs associated with exit or disposal activities.
A liability is recognized and measured at its fair value for successfully defending againstone-time termination benefits once the 2016 proxy contest included non-recurring legal fees, financial advisory fees, proxy solicitor fees, mailingplan of termination is communicated to affected employees and printing costs of proxy solicitation materials and other costs.
Note 25. Selected Quarterly Financial Data (Unaudited)
The following tables set forth certain unaudited quarterly information for eachit meets all of the eight fiscal quarters infollowing criteria: (i) management commits to a plan of termination, (ii) the two year period ended June 30, 2017. This quarterly information has been prepared on a consistent basis withplan identifies the audited consolidated financial statementsnumber of employees to be terminated and intheir job classifications or functions, locations and the opinion of management, includes all adjustments which management believes are necessary for a fair presentationexpected completion date, (iii) the plan establishes the terms of the information forbenefit arrangement and (iv) it is unlikely that significant changes to the periods presented.plan will be made or the plan will be withdrawn. Contract termination costs include costs to terminate a contract or costs that will continue to be incurred under the contract without benefit to the Company. A liability is recognized and measured at its fair value when the Company either terminates the contract or ceases using the rights conveyed by the contract.
The Company's quarterly operating results may fluctuate significantly as a result of a variety of factors, and operating results for any fiscal quarter are not necessarily indicative of results for a full fiscal year or future fiscal quarters.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Recent Accounting Pronouncements
The Company considers the applicability and impact of all ASUs issued. ASUs not listed below were assessed and either determined to be not applicable or expected to have minimal impact on its condensed consolidated financial statements.
The following table provides a brief description of the applicable recent ASUs issued by the FASB:
|
| | | | | | | | | | | | | | | | |
| | | September 30,
2016 | | December 31,
2016 | | March 31,
2017 | | June 30,
2017 |
| (In thousands, except per share data) | | | | | | | | |
| Net sales | | $ | 130,488 |
| | $ | 139,025 |
| | $ | 138,187 |
| | $ | 133,800 |
|
| Gross profit | | $ | 51,198 |
| | $ | 55,096 |
| | $ | 53,820 |
| | $ | 53,618 |
|
| Income from operations | | $ | 2,505 |
| | $ | 35,910 |
| | $ | 2,058 |
| | $ | 1,693 |
|
| Net income | | $ | 1,618 |
| | $ | 20,076 |
| | $ | 1,594 |
| | $ | 1,112 |
|
| Net income per common share—basic | | $ | 0.10 |
| | $ | 1.21 |
| | $ | 0.10 |
| | $ | 0.07 |
|
| Net income per common share—diluted | | $ | 0.10 |
| | $ | 1.20 |
| | $ | 0.10 |
| | $ | 0.07 |
|
|
| | | | | | |
| Standard | | Description | | Effective Date | | Effect on the Financial Statements or Other Significant Matters |
| In March 2020, the FASB issued ASU No. 2020-04, “Facilitation of the Effect of Reference Rate Reform on Financial Reporting” (“ASU 2020-04”). | | The London Interbank Offered Rate (LIBOR) is set to expire at the end of 2021. Contracts affected by the rate change would be required to be modified. Under current U.S. GAAP, those modifications would have to be evaluated to determine whether they result in new contracts or continuation of the existing contracts. ASU 2020-04 provides temporary optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships, and other transactions affected by the transition from LIBOR to alternative reference rate. | | Issuance date of March 12, 2020 through December 31, 2022. | | The Company is currently evaluating the impact ASU 2020-04 will have on its consolidated financial statements. |
| In December 2019, the FASB issued ASU 2019-12, "Simplifying the Accounting for Income Taxes" ("ASU 2019-12"). | | ASU 2019-12 guidance simplifies the accounting for income taxes by removing the exception to the incremental approach for intraperiod tax allocation when there is a loss from continuing operations and income or a gain from other items (for example, discontinued operations or other comprehensive income). With the removal of this exception, entities will determine the tax effect of pre-tax income or loss from continuing operations without consideration of the tax effects of other items that are not included in continuing operations. | | Annual periods beginning after December 15, 2020, and interim periods within those fiscal years. Early adoption is permitted, including adoption in any interim period. | | The Company is currently evaluating the impact ASU 2019-12 will have on its consolidated financial statements. |
| In August 2018, the FASB issued ASU No. 2018-15, “Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract” (“ASU 2018-15”). | | ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. | | Annual periods beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted, including adoption in any interim period. | | The Company will adopt the new guidance effective July 1, 2020, on a prospective basis, which will not require the Company to adjust comparative periods. Adoption of ASU 2018-15 will not have a material impact on the results of operations, financial position or cash flows of the Company.
|
| In August 2018, the FASB issued ASU No. 2018-14, “Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans” (“ASU 2018-14”). | | ASU 2018-14 modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans by removing disclosures that no longer are considered cost beneficial, clarifying the specific requirements of disclosures and adding disclosure requirements identified as relevant. | | Annual periods beginning after December 15, 2020. Early adoption is permitted. | | Effective for the Company beginning July 1, 2021. The Company is currently evaluating the impact ASU 2018-14 will have on its consolidated financial statements. |
| In February 2018, the FASB issued ASU No. 2018-02, “Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income” (“ASU 2018-02”). | | ASU 2018-02 provides entities an option to reclassify certain stranded tax effects resulting from the tax reform from accumulated other comprehensive income to retained earnings.
| | The guidance in ASU 2018-02 is effective for annual periods beginning after December 15, 2018, and interim periods within those fiscal years, and should be applied either in the period of adoption or retrospectively. | | The Company did not elect the option to reclassify certain stranded tax effects resulting from the tax reform from accumulated other comprehensive income to retained earnings.
|
| | | | | | |
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
|
| | | | | | | | | | | | | | | | |
| | | September 30,
2015 | | December 31,
2015 | | March 31,
2016 | | June 30,
2016 |
| (In thousands, except per share data) | | | | | | | | |
| Net sales | | $ | 133,445 |
| | $ | 142,307 |
| | $ | 134,468 |
| | $ | 134,162 |
|
| Gross profit | | $ | 50,579 |
| | $ | 52,908 |
| | $ | 52,560 |
| | $ | 52,428 |
|
| (Loss) income from operations | | $ | (563 | ) | | $ | 5,361 |
| | $ | 306 |
| | $ | 3,075 |
|
| Net (loss) income | | $ | (1,074 | ) | | $ | 5,561 |
| | $ | 1,192 |
| | $ | 84,239 |
|
| Net (loss) income) per common share—basic | | $ | (0.07 | ) | | $ | 0.34 |
| | $ | 0.07 |
| | $ | 5.09 |
|
| Net (loss) income per common share—diluted | | $ | (0.07 | ) | | $ | 0.34 |
| | $ | 0.07 |
| | $ | 5.05 |
|
|
| | | | | | |
| Standard | | Description | | Effective Date | | Effect on the Financial Statements or Other Significant Matters |
| In January 2017, the FASB issued ASU No. 2017-04, “Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment” (“ASU 2017-04”). | | The amendments in ASU 2017-04 address concerns regarding the cost and complexity of the two-step goodwill impairment test, and remove the second step of the test. An entity will apply a one-step quantitative test and record the amount of goodwill impairment as the excess of a reporting unit’s carrying amount over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. ASU 2017-04 does not amend the optional qualitative assessment of goodwill impairment. | | Annual and interim goodwill impairment tests in fiscal years beginning after December 15, 2019. | | The Company adopted the new guidance effective January 1, 2020, on a prospective basis, which did not require the Company to adjust comparative periods. Adoption of ASU 2017-04 did not have a material impact on the results of operations, financial position or cash flows of the Company. |
| In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. Since that date, the FASB has issued additional ASUs clarifying certain aspects of ASU 2016-13. | | The objective of the guidance in ASU 2016-13 is to allow entities to recognize estimated credit losses in the period that the change in valuation occurs. The amendments in ASU 2016-13 requires an entity to present financial assets measured on an amortized cost basis on the balance sheet net of an allowance for credit losses. The model requires an estimate of the credit losses expected over the life of an exposure or pool of exposures. The income statement will reflect the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period. | | Annual reporting periods beginning after December 15, 2019 and interim periods within those reporting periods. | | The Company will adopt the guidance effective beginning July 1, 2020. The Company has completed its assessment of the guidance and has concluded that it will not have a material impact on its consolidated financial statements. |
| In February 2016, the FASB issued ASU 2016-02, Leases. Since that date, the FASB has issued additional ASUs clarifying certain aspects of ASU 2016-02. | | ASU 2016-02 requires a lessee to recognize in the statement of financial position a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term for both finance and operating leases. Subsequent guidance issued after February 2016 did not change the core principle of ASU 2016-02. | | Annual periods beginning after December 15, 2018, and interim periods within those annual periods. Early application is permitted. | | The Company adopted the new guidance effective July 1, 2019, using the modified retrospective transition method, which did not require the Company to adjust comparative periods. See Note 7 for the applicable disclosure of ASU 2016-02 adoption. . |
In the fourth quarter
Adoption of fiscal 2016,ASC 842 - Leases
Effective July 1, 2019, the Company concluded that it is more likely thanadopted the FASB Topic 842 (“ASC 842”), Leases. The Company adopted ASC 842 under the modified retrospective approach using the practical expedients; therefore, the presentation of prior year periods has not thatbeen adjusted. No cumulative effect of initially adopting ASC 842 as an adjustment to the opening balance of components of equity as of July 1, 2019 was necessary. The adoption of ASC 842 resulted in the recording of Operating lease right-of-use assets and Operating lease liabilities of $16.3 million, as of July 1, 2019. The adoption of ASC 842 had no impact on retained earnings. See Note 7 for detail disclosure.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Note 3. Acquisitions
Boyd Coffee Company
On October 2, 2017 (“Closing Date”), the Company will generate future earnings sufficientacquired substantially all of the assets and certain specified liabilities of Boyd Coffee, a coffee roaster and distributor with a focus on restaurants, hotels, and convenience stores on the West Coast of the United States. The acquired business of Boyd Coffee (the “Boyd Business”) is expected to realizeadd to the majorityCompany’s product portfolio, improve the Company's growth potential, deepen the Company’s distribution footprint and increase the Company's capacity utilization at its production facilities.
At closing, as consideration for the purchase, the Company paid the Seller $38.9 million in cash from borrowings under its senior secured revolving credit facility, and issued to Boyd Coffee 14,700 shares of the Company’s deferred taxSeries A Preferred Stock Convertible Participating Cumulative Perpetual Preferred Stock, par value $1.00 per share (“Series A Preferred Stock”), with a fair value of $11.8 million as of the Closing Date. Additionally, the Company held back $3.2 million in cash (“Holdback Cash Amount”) and 6,300 shares of Series A Preferred Stock (“Holdback Stock”) with a fair value of $4.8 million as of the Closing Date, for the satisfaction of any post-closing net working capital adjustment and to secure the Seller’s (and the other seller parties’) indemnification obligations under the purchase agreement.
In addition to the Holdback Cash, as part of the consideration for the purchase, at closing the Company held back $1.1 million in cash (the “Multiemployer Plan Holdback”) to pay, on behalf of the Seller, any assessment of withdrawal liability made against the Seller following the Closing Date in respect of the Seller’s multiemployer pension plan, which amount was recorded on the Company's consolidated balance sheet in "Other long-term liabilities" at June 30, 2018. On January 8, 2019, the Seller notified the Company of the assessment of $0.5 million in withdrawal liability against the Seller, which the Company timely paid from the Multiemployer Plan Holdback during the twelve months ended June 30, 2019. The Company has applied the remaining amount of the Multiemployer Plan Holdback of $0.5 million towards satisfaction of the Seller's post-closing net working capital deficiency under the Asset Purchase Agreement as of March 31, 2019 as described below.
The acquisition was accounted for as a business combination. The fair value of consideration transferred was allocated to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values on the acquisition date, with the remaining unallocated amount recorded as goodwill. The fair value of consideration transferred reflected the Company’s best estimate of the post-closing net working capital adjustment of $8.1 million due to the Company at June 30, 2018 when the purchase price allocation was finalized. On January 23, 2019, PricewaterhouseCoopers LLP (“PwC”), as the “Independent Expert” designated under the Asset Purchase Agreement to resolve working capital disputes, issued its determination letter with respect to adjustments to working capital. The post-closing net working capital adjustment, as determined by the Independent Expert, was $6.3 million due to the Company.
During the year ended June 30, 2019 and updated as of June 30, 2016. Accordingly,2020, the Company satisfied the $6.3 million amount by applying the remaining amount of the Multiemployer Plan Holdback of $0.5 million, retaining all of the Holdback Cash Amount of $3.2 million and canceling 5,386 shares of Holdback Stock with a fair value of $2.6 million based on the stated value and deemed conversion price under the Asset Purchase Agreement. The Company has retained the remaining 914 shares of the Holdback Stock pending satisfaction of certain indemnification claims against the Seller following which the remaining Holdback Stock, if any, will be released to the Seller.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
The following table summarizes the final allocation of consideration transferred as of the acquisition date:
|
| | | | | |
| (In thousands) | Fair Value | | Estimated Useful Life (years) |
| | | | |
| Cash paid | $ | 38,871 |
| | |
| Holdback Cash Amount | 3,150 |
| | |
| Multiemployer Plan Holdback | 1,056 |
| | |
| Fair value of Series A Preferred Stock (14,700 shares)(1) | 11,756 |
| | |
| Fair value of Holdback Stock (6,300 shares)(1) | 4,825 |
| | |
| Estimated post-closing net working capital adjustment | (8,059 | ) | | |
| Total consideration | $ | 51,599 |
| | |
| | | | |
| Accounts receivable | $ | 7,503 |
| | |
| Inventory | 9,415 |
| | |
| Prepaid expense and other assets | 1,951 |
| | |
| Property, plant and equipment | 4,936 |
| | |
| Goodwill | 25,395 |
| | |
| Intangible assets: | | | |
| Customer relationships | 16,000 |
| | 10 |
| Trade name/trademark—indefinite-lived | 3,100 |
| | |
| Accounts payable | (15,080 | ) | | |
| Other liabilities | (1,621 | ) | | |
| Total consideration | $ | 51,599 |
| | |
______________
(1) Fair value of Series A Preferred Stock and Holdback Stock as of the Closing Date, estimated as the sum of (a) the present value of the dividends payable thereon and (b) the stated value of the Series A Preferred Stock or Holdback Stock, as the case may be, adjusted for both the conversion premium and the discount for lack of marketability arising from conversion restrictions.
In connection with this acquisition, the Company recorded goodwill of $25.4 million, which is deductible for tax purposes. The Company also recorded $16.0 million in finite-lived intangible assets that included customer relationships and $3.1 million in indefinite-lived intangible assets that included a reductiontrade name/trademark. The amortization period for the finite-lived intangible assets is 10.0 years. The purchase price allocation is final. The goodwill amount was impaired and written-off in its valuation allowancefiscal year ended June 30, 2020. See Note 12 for further details.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
The following table presents the net sales and income before taxes from the Boyd Business operations that are included in the fourth quarterCompany’s consolidated statements of operations for the fiscal year ended June 30, 2018:
|
| | | | |
| (In thousands) | | For the Year Ended June 30, |
| | | 2018 |
| Net sales | | $ | 67,385 |
|
| Income before taxes | | $ | 1,572 |
|
The Company considers the acquisition to be material to the Company’s consolidated financial statements and has provided certain pro forma disclosures pursuant to ASC 805, “Business Combinations.”
The following table sets forth certain unaudited pro forma financial results for the Company for the fiscal years ended June 30, 2018, as if the acquisition of the Boyd Business was consummated on the same terms as of the first day of the applicable fiscal year. |
| | | | | |
| | | For the Year Ended June 30, |
| (In thousands) | | | 2018 |
| Net sales | | | $ | 628,526 |
|
| (Loss) income before taxes | | | $ | (642 | ) |
The unaudited pro forma financial results for the Company are based on estimates and assumptions, which the Company believes are reasonable. These results are not necessarily indicative of the Company’s consolidated statements of operations in future periods or the results that actually would have been realized had the Company acquired the Boyd Business during the periods presented.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Note 4. Restructuring Plans
DSD Restructuring Plan
On February 21, 2017, the Company announced the DSD Restructuring Plan to reorganize its DSD operations in an effort to realign functions into a channel-based selling organization, streamline operations, acquire certain channel specific expertise, and improve selling effectiveness and financial results. The strategic decision to undertake the DSD Restructuring Plan resulted from an ongoing operational review of various initiatives within the DSD selling organization. The Company had revised its estimated time of completion of the DSD Restructuring Plan from the end of calendar 2018 to the end of fiscal 2016 in2019.
The Company recognized approximately $4.5 million of pre-tax restructuring charges by the
amount of $83.2 million. See Note 21. In the second quarterend of fiscal 2017,2020 consisting of approximately $2.6 million in employee-related costs and contractual termination payments, including severance, prorated bonuses for bonus eligible employees and outplacement services, and $1.9 million in other related costs, including legal, recruiting, consulting, other professional services, and travel.
The following table sets forth the activity in liabilities associated with the DSD Restructuring Plan from the time of adoption through the fiscal year ended June 30, 2020:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| (In thousands) | Balances as of June 30, 2017 | | Additions | | Payments | | Non-Cash Settled | | Adjustments | | Balances as of
June 30, 2020 |
| Employee-related costs | $ | 0 |
| | $ | 2,634 |
| | $ | 2,634 |
| | $ | 0 |
| | $ | 0 |
| | $ | 0 |
|
| Other | 0 |
| | 1,949 |
| | 1,949 |
| | 0 |
| | 0 |
| | 0 |
|
| Total | $ | 0 |
| | $ | 4,583 |
| | $ | 4,583 |
| | $ | 0 |
| | $ | 0 |
| | $ | 0 |
|
The following table sets forth the expenses associated with the DSD Restructuring Plan for the fiscal years ended June 30, 2020, 2019 and 2018:
|
| | | | | | | | | | | |
| | Year Ended June 30, |
| (In thousands) | 2020 | | 2019 | | 2018 |
| Employee-related costs | $ | 30 |
| | $ | 1,487 |
| | $ | 612 |
|
| Other | 0 |
| | 284 |
| | 429 |
|
| Total | $ | 30 |
| | $ | 1,771 |
| | $ | 1,041 |
|
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Note 5. Sales of Assets
Sale of Office Coffee Assets
In order to focus on its core product offerings, in July 2019, the Company completed the sale of certain assets associated with its office coffee customers for $9.3 million in cash paid at the Torrance Facility,time of closing plus an earnout of up to an additional $2.3 million if revenue expectations were achieved during test periods scheduled to occur at various branches at various times and concluded by early third quarter of fiscal year 2020. The earnout of up to an additional $2.3 million was not paid to the Company because the revenue expectations were not achieved. The Company recognized a net gain fromon the asset sales of $7.2 million during the fiscal year ended June 30, 2020. The sale of office coffee assets did not represent a strategic shift for the Company and did not have a material impact on the Company's results of operations because the Company signed a supply agreement to provide certain coffee products to the assets purchaser.
Sale of Branch Properties
During the fiscal year ended June 30, 2020, the Company completed the sale of nine branch properties and entered into two operating lease agreements with the purchasers of two of the branch properties as detailed in the amountfollowing table:
|
| | | | | | | | | | | | | | | | | | | | | | |
| (In thousands) | | | | | | | | | | | | | | |
| Name of Branch Property | | Date Sold | | Sales Price | | Net Proceed | | Gain (loss) | | Long-Term Leaseback | | Lease Term | | Monthly Base Rent |
| Seattle, Washington | | 8/28/2019 | | $ | 7,900 |
| | $ | 7,300 |
| | $ | 6,800 |
| | No | | N/A | | N/A |
| Indianapolis, Indiana | | 11/19/2019 | | $ | 250 |
| | $ | 186 |
| | $ | (173 | ) | | No | | N/A | | N/A |
| Hayward, California(1) | | 12/23/2019 | | $ | 7,050 |
| | $ | 6,569 |
| | $ | 2,016 |
| | Yes | | 5 years | | $ | 28 |
|
| Denver, Colorado(1) | | 12/31/2019 | | $ | 2,300 |
| | $ | 2,075 |
| | $ | 1,989 |
| | Yes | | 7 years | | $ | 17 |
|
| Casper, Wyoming | | 12/31/2019 | | $ | 385 |
| | $ | 355 |
| | $ | 304 |
| | No | | N/A | | N/A |
| Tempe, Arizona | | 1/28/2020 | | $ | 1,150 |
| | $ | 1,077 |
| | $ | 841 |
| | No | | N/A | | N/A |
| Great Falls, Montana | | 2/28/2020 | | $ | 385 |
| | $ | 356 |
| | $ | 283 |
| | No | | N/A | | N/A |
| Fort Collins, Colorado | | 6/24/2020 | | $ | 1,275 |
| | $ | 1,179 |
| | $ | 1,112 |
| | No | | N/A | | N/A |
| Oxnard, California | | 6/25/2020 | | $ | 1,650 |
| | $ | 1,545 |
| | $ | 1,390 |
| | No | | N/A | | N/A |
___________
(1) Has an option to renew the lease for additional five years.
Sale leaseback of $37.4Houston Facility
In November 2019, the Company completed the sale of its Houston, Texas manufacturing facility and warehouse (the “Property”) for an aggregate purchase price, exclusive of closing costs, of $10.0 million. Cash proceeds from the sale of the Property were $9.0 million. The Company recognized a net gain on the Property sale of $7.3 million including non-cash interest expenseduring the fiscal year ended June 30, 2020. The Property did not meet the accounting guidance criteria to be classified as discontinued operations.
Following the close of
$0.7 millionthe sale of the Property, the Company and
non-cashthe purchaser of the Property entered into a three-year leaseback agreement with respect to the Property for a base rent
expense of
$1.4 million. See Note 6.$50,000 per month. The Company may terminate the leaseback no earlier than the first day of the eighteenth full calendar month of the term providing at least nine months’ notice. The purchaser of the Property does not have any material relationship with the Company or its subsidiaries.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Note 26. Subsequent Events6. Derivative Instruments
Boyd CoffeeDerivative Instruments Held
Coffee-Related Derivative Instruments
The Company Purchase Agreementis exposed to commodity price risk associated with its PTF green coffee purchase contracts, which are described further in Note 2. The Company utilizes forward and option contracts to manage exposure to the variability in expected future cash flows from forecasted purchases of green coffee attributable to commodity price risk. Certain of these coffee-related derivative instruments utilized for risk management purposes have been designated as cash flow hedges, while other coffee-related derivative instruments have not been designated as cash flow hedges or do not qualify for hedge accounting despite hedging the Company's future cash flows on an economic basis. On August 18, 2017,The following table summarizes the notional volumes for the coffee-related derivative instruments held by the Company at June 30, 2020 and its wholly-owned subsidiary Boyd Assets Co.2019:
|
| | | | | | |
| | | As of June 30, |
| (In thousands) | | 2020 | | 2019 |
| Derivative instruments designated as cash flow hedges: | | | | |
| Long coffee pounds | | 36,413 |
| | 42,113 |
|
| Derivative instruments not designated as cash flow hedges: | | | | |
| Long coffee pounds | | 8,348 |
| | 6,070 |
|
| Total | | 44,761 |
| | 48,183 |
|
Coffee-related derivative instruments designated as cash flow hedges outstanding as of June 30, 2020 will expire within 18 months. At June 30, 2020 and 2019 approximately 81% and 87%, a Delaware corporationrespectively, of the Company's outstanding coffee-related derivative instruments were designated as cash flow hedges.
Interest Rate Swap Derivative Instruments
Pursuant to an International Swap Dealers Association, Inc. Master Agreement (“Buyer“ISDA”), effective March 20, 2019, the Company on March 27, 2019, entered into a swap transaction utilizing a notional amount of $80.0 million, with an Asset Purchase Agreementeffective date of April 11, 2019 and a maturity date of October 11, 2023 (the “Purchase Agreement”“Rate Swap”) with Boyd Coffee. In December 2019, the Company (“Seller”), and each ofamended the parties set forthnotional amount to $65.0 million. The Rate Swap is intended to manage the Company’s interest rate risk on Exhibit A toits floating-rate indebtedness under the Purchase Agreement (collectively with Seller, the “Seller Parties”).Company’s revolving credit facility. Under the terms of the Purchase Agreement, Seller will sellRate Swap, the Company receives 1-month LIBOR, subject to a 0% floor, and Buyer will purchase substantially allmakes payments based on a fixed rate of 2.1975%. The Company’s obligations under the assets of Seller (the “Transaction”) in consideration of cash and preferred stock.
Each share of Preferred Stock will have a purchase price and an initial stated value of $1,000.00 (“Stated Value”). Each holder of Preferred Stock will be entitled to receive dividends, when and if declaredISDA are secured by the Company’s Board of Directors, equal to 3.5% per annum ofcollateral which secures the Stated Valueloans under the revolving credit facility on a pari passu and pro rata basis with the principal of such share in effect onloans. The Company has designated the applicable regular dividend record date (“Regular Dividends”). Regular Dividends on each share of Preferred Stock will begin to accrue from, and including, the closing date; and if not declared and paid, will be cumulative.Rate Swap derivative instruments as a cash flow hedge.
Each share of Preferred Stock may be converted at the election of the holder thereof (i) upon a change of control of the Company or (ii) as follows: of the initial 21,000 shares of Preferred Stock, (x) 4,200 shares may be converted beginning one year after the closing date, (y) 6,300 additional shares may be converted beginning two years after the closing date, and (z) the remaining 10,500 shares may be converted beginning three years after the closing date. In addition, the Company will have the right, at any time on or after the first anniversary of the closing date, to cause all, but not less than all, of the outstanding shares of Preferred Stock to automatically convert, based on certain market conditions.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
InEffect of Derivative Instruments on the eventFinancial Statements
Balance Sheets
Fair values of any liquidation, dissolution or winding upderivative instruments on the Company's consolidated balance sheets: |
| | | | | | | | | | | | | | | | |
| | | Derivative Instruments Designated as Cash Flow Hedges | | Derivative Instruments Not Designated as Accounting Hedges |
| | | As of June 30, | | As of June 30, |
| (In thousands) | | 2020 | | 2019 | | 2020 | | 2019 |
| Financial Statement Location: | | | | | | | | |
| Short-term derivative assets: | | | | | | | | |
| Coffee-related derivative instruments(1) | | $ | 35 |
| | $ | 1,254 |
| | $ | 130 |
| | $ | 611 |
|
| Long-term derivative assets: | | | | | | | | |
| Coffee-related derivative instruments(2) | | $ | 10 |
| | $ | 671 |
| | $ | 0 |
| | $ | 3 |
|
| Short-term derivative liabilities: | | | | | | | | |
| Coffee-related derivative instruments(3) | | $ | 3,322 |
| | $ | 1,114 |
| | $ | 706 |
| | $ | 114 |
|
| Interest rate swap derivative instruments(3) | | $ | 1,228 |
| | $ | 246 |
| | $ | 0 |
| | $ | 0 |
|
| Long-term derivative liabilities: | | | | | | | | |
| Coffee-related derivative instruments(4) | | $ | 246 |
| | $ | 13 |
| | $ | 0 |
| | $ | 0 |
|
| Interest rate swap derivative instruments(4) | | $ | 2,613 |
| | $ | 1,599 |
| | $ | 0 |
| | $ | 0 |
|
________________
(1) Included in “Short-term derivative assets” on the Company's consolidated balance sheets.
(2) Included in “Long-term derivative assets” on the Company's consolidated balance sheets.
(3) Included in “Short-term liabilities” on the Company's consolidated balance sheets.
(4) Included in “Other long-term liabilities” on the Company's consolidated balance sheets.
Statements of the affairs of the Company, the holder(s) of Preferred Stock will be entitled to receive, per share of Preferred Stock, out of the assets of the Company or proceeds thereof legally available for distribution to the Company’s stockholders, before any distribution of such assets or proceeds is made or set asideOperations
The following table presents pretax net gains and losses for the holdersCompany's derivative instruments designated as cash flow hedges, as recognized in “AOCI,” “Cost of junior stock, an amount equalgoods sold” and “Other, net”.
|
| | | | | | | | | | | | | | | |
| | | Year Ended June 30, | | Financial Statement Classification |
| (In thousands) | | 2020 | | 2019 | | 2018 | | |
| Net losses recognized in AOCI - Interest rate swap | | $ | (2,863 | ) | | $ | (1,791 | ) | | $ | 0 |
| | | AOCI |
| Net (losses) gains recognized from AOCI to earnings - Interest rate swap | | $ | (383 | ) | | $ | 45 |
| | $ | 0 |
| | | Interest Expense |
| Net losses reclassified from AOCI to earnings for partial unwind of interest swap - Interest rate swap (1) | | $ | (407 | ) | | $ | 0 |
| | $ | 0 |
| | | Interest Expense |
| Net losses recognized in AOCI - Coffee-related | | $ | (4,655 | ) | | $ | (7,407 | ) | | $ | (8,420 | ) | | | AOCI |
| Net losses recognized in earnings - Coffee-related | | $ | (8,073 | ) | | $ | (9,242 | ) | | $ | (1,179 | ) | | | Costs of goods sold |
| Net gains (losses) recognized in earnings (ineffective portion) | | $ | 0 |
| | $ | 0 |
| | $ | 48 |
| | | Other, net |
________________
| |
| (1) | The 407 thousand of realized loss was due to partial unwinding of interest rate swap resulting from the amendment of the notional amount from $80.0 million to $65.0 million. |
For the Preferred Stock liquidation preference. The liquidation preference will befiscal years ended June 30, 2020, 2019 and 2018, there were 0 gains or losses recognized in earnings as a result of excluding amounts from the greaterassessment of the (x) the Stated Value, plus accrued and unpaid Regular Dividends, per share of Preferred Stock as of the date the liquidation preference is paid, and (x) the amount, per share of Preferred Stock, that the holder thereof would have received is such holder had converted such share into the Company’s common stock immediately before such liquidation, dissolution or winding up.hedge effectiveness.
Except as otherwise required by applicable law, each share of Preferred Stock outstanding will entitle the holder(s) thereof to vote together with the holders of the Company’s common stockNet losses (gains) on all matters submitted for a vote of, or consent by, holders of the Company’s common stock. For these purposes, each holder will be deemed to be the holder of record of a number of shares of the Company’s common stock equal to the quotient (rounded down to the nearest whole number) obtained by dividing (i) the aggregate Stated Value of the shares of Preferred Stock held by such holder on such record date by (ii) the Conversion Price in effect on such record date.
The Purchase Agreement contains representations, warranties, and indemnification provisions of the parties customary for transactions of this type. The Purchase Agreement contains specified termination rights for the parties, including a mutual termination right in the event the closing has not occurred on or prior to November 30, 2017. Subject to the satisfaction or waiver of the foregoing conditions and the other terms and conditions contained in the Purchase Agreement, the Transaction is expected to closederivative instruments in the Company's second quarterconsolidated statements of fiscal 2018.
Amendmentcash flows also includes net losses (gains) on coffee-related derivative instruments designated as cash flow hedges reclassified to Revolving Facility
On August 25, 2017, the Company and China Mist Brands, Inc., a Delaware corporation, (together with the Company, the “Borrowers”), together with the Company’s wholly owned subsidiaries, as additional Loan Parties and as Guarantors, entered into that certain First Amendment to Credit Agreement and First Amendment to Pledge and Security Agreement (the “Amendment”) with JPMorgan Chase Bank, N.A. (“Chase”), as Administrative Agent, and the financial institutions party thereto as lenders (the “Lenders”). The Amendment amends (i) the Company’s original Credit Agreement dated ascost of March 2, 2015 (the “Original Credit Agreement”), entered into by the Borrowers, the guarantor subsidiaries party thereto, the Administrative Agent and the financial institutions party thereto as lenders (the Original Credit Agreement as amended by the Amendment, the “Amended Credit Agreement”), and (ii) the Company’s original Pledge and Security Agreement dated as of March 2, 2015 (the “Original Pledge and Security Agreement”). Capitalized terms used without definition below are definedgoods sold from AOCI in the Amended Credit Agreement.fiscal years ended June 30, 2020, 2019 and 2018. Gains and losses on derivative instruments not designated as accounting
The Amended Credit Agreement increases the aggregate commitments (“Revolving Commitment”) of the Revolving Facility from $75.0 million to 125.0 million. Chase agreed to provide $75.0 million of the Revolving Commitment and SunTrust Bank agreed to provide $50.0 million of the Revolving Commitment. The Amended Credit Agreement also includes an accordion feature whereby the Company may increase the Revolving Commitment by an aggregate amount not to exceed $50.0 million, subject to certain conditions.
The Amended Credit Agreement increases (i) the advance rate on Borrowers’ eligible accounts receivable that are with investment grade customers from 85% to 90% and (ii) the amount of Borrowers’ eligible real property which can be included in the Borrowing Base from the lesser of $25.0 million and 75% of the fair market value of such eligible real property, to the lesser of $60.0 million and 75% of the fair market value of such eligible real property, subject to certain limitations.
The Amended Credit Agreement provides for an increase to the margin of 0.375% per annum on any drawn loans under the Revolving Facility up to an amount equal to the value of eligible real property in the Borrowing Base. The interest rates are otherwise unchanged in the Amended Credit Agreement and continue to be based on Average Historical Excess Availability levels with a range of PRIME - 0.25% to PRIME + 0.50% or Adjusted LIBO Rate + 1.25% to Adjusted LIBO Rate + 2.00%. The Amended Credit Agreement reduces the commitment fee from a range of between 0.25% to 0.375% per annum based on Average Revolver Usage, to a flat fee of 0.25% per annum irrespective of Average Revolver Usage. The Amended Credit Agreement also extends the maturity date of the Revolving Facility from March 2, 2020 to August 25, 2022.
The Amended Credit Agreement contains a variety of affirmative and negative covenants of types customary in an
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
asset-based lending facility, including financial covenants relatinghedges are included in “Other, net” in the Company's consolidated statements of operations and in “Net losses (gains) on derivative instruments and investments” in the Company's consolidated statements of cash flows.
Net gains and losses recorded in “Other, net” are as follows: |
| | | | | | | | | | | | |
| | | Year Ended June 30, |
| (In thousands) | | 2020 | | 2019 | | 2018 |
| Net losses on coffee-related derivative instruments | | $ | (1,362 | ) | | $ | (2,252 | ) | | $ | (469 | ) |
| Net gains on investments | | 0 |
| | 0 |
| | 7 |
|
| Net losses on derivative instruments and investments(1) | | (1,362 | ) | | (2,252 | ) | | (462 | ) |
| Non-operating pension and other postretirement benefit plans cost(2) | | 11,651 |
| | 6,315 |
| | 6,651 |
|
| Other gains, net | | 154 |
| | 103 |
| | 1,533 |
|
| Other, net | | $ | 10,443 |
| | $ | 4,166 |
| | $ | 7,722 |
|
___________
(1) Excludes net losses and net gains on coffee-related derivative instruments designated as cash flow hedges recorded in cost of goods sold in the fiscal years ended June 30, 2020, 2019 and 2018.
(2) Presented in accordance with implementation of ASU 2017-07. Includes amortized gains on postretirement medical benefit plan due to the maintenancecurtailment announced in March 2020.
Offsetting of a fixed charge coverage ratioDerivative Assets and Liabilities
The Company has agreements in place that allow for the financial right of offset for derivative assets and liabilities at settlement or in the event of default under the agreements. Additionally, under certain circumstances. The Amended Credit Agreement also allows the Lenders to establish reserve requirements, which may reduce the amount of credit otherwise available to the Borrowers, and provides for customary Events of Default.
Western Conference of Teamsters Pension Trust
On July 13, 2017,coffee derivative agreements, the Company received correspondence (the “WCT Letter”)maintains accounts with its counterparties to facilitate financial derivative transactions in support of its risk management activities.
The following table presents the Company’s net exposure from the Western Conference of Teamsters Pension Trust (the “WCT Pension Trust”) stating that the Company hadits offsetting derivative asset and liability for a sharepositions, as well as cash collateral on deposit with its counterparty as of the Western Conference of Teamsters Pension Plan (the “Plan”) unfunded vested benefits based onreporting dates indicated: |
| | | | | | | | | | | | | | | | | | |
| (In thousands) | | | | Gross Amount Reported on Balance Sheet | | Netting Adjustments | | Cash Collateral Posted | | Net Exposure |
| As of June 30, 2020 | | Derivative Assets | | $ | 175 |
| | $ | (175 | ) | | $ | 0 |
| | $ | 0 |
|
| | | Derivative Liabilities | | $ | 8,115 |
| | $ | (176 | ) | | $ | 0 |
| | $ | 7,939 |
|
| As of June 30, 2019 | | Derivative Assets | | $ | 2,539 |
| | $ | (698 | ) | | $ | 0 |
| | $ | 1,841 |
|
| | | Derivative Liabilities | | $ | 3,086 |
| | $ | (698 | ) | | $ | 0 |
| | $ | 2,388 |
|
Cash Flow Hedges
Changes in the WCT Pension Trust’s claim that certainfair value of the Company’s employment actions resultingcoffee-related derivative instruments designated as cash flow hedges are deferred in AOCI and subsequently reclassified into cost of goods sold in the same period or periods in which the hedged forecasted purchases affect earnings, or when it is probable that the hedged forecasted transaction will not occur by the end of the originally specified time period. Based on recorded values at June 30, 2020, $2.6 million of net losses on coffee-related derivative instruments designated as cash flow hedge are expected to be reclassified into cost of goods sold within the next twelve months. These recorded values are based on market prices of the commodities as of June 30, 2020.
Changes in the fair value of the Company's interest rate swap derivative instruments designated as a cash flow hedge are deferred in AOCI and subsequently reclassified into interest expense in the period or periods when the hedged transaction affects earnings or when it is probable that the hedged forecasted transaction will not occur by the end of the originally specified time period. As of June 30, 2020, $1.2 million of net losses on interest rate swap derivative instruments designated as a cash flow hedge are expected to be reclassified into interest expense within the next twelve months assuming no significant changes in the LIBOR rates. Due to LIBOR volatility, actual gains or losses realized within the next twelve months will likely differ from these values.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Note 7. Leases
See Note 2 for additional information regarding the Corporate Relocation Plan amountedadoption of ASU 2016-02, Leases.
Supplemental consolidated balance sheet information related to a partial withdrawal from the Plan. leases is as follows:
|
| | | | | | |
| | | Classification | | As of June 30, 2020 |
| (In thousands) | | | | |
| Operating lease assets | | Right-of-use operating lease assets | | $ | 21,117 |
|
| Finance lease assets | | Property, plant and equipment, net | | 9 |
|
| Total lease assets | | | | $ | 21,126 |
|
| | | | | |
| Operating lease liabilities - current | | Operating lease liabilities - current | | $ | 5,854 |
|
| Operating lease liabilities - noncurrent | | Operating lease liabilities - noncurrent | | 15,628 |
|
| Finance lease liabilities | | Other long-term liabilities | | 9 |
|
| Total lease liabilities | | | | $ | 21,491 |
|
The Company has not yet decided whether it will submit a request for reviewcomponents of lease expense are as follows:
|
| | | | | | | |
| | | Classification | | For the Year Ended June 30, 2020 | |
| (In thousands) | | | | | |
| Operating lease expense | | General and administrative expenses and cost of goods sold | | $ | 5,354 |
| |
| Finance lease expense: | | | | | |
| Amortization of finance lease assets | | General and administrative expenses | | 52 |
| |
| Interest on finance lease liabilities | | Interest expense | | 2 |
| |
| Total lease expense | | | | $ | 5,408 |
| |
|
| | | | | | | | |
| | | For the Years Ended June 30, |
| (In thousands) | | Operating Leases | | Finance Leases |
| Maturities of lease liabilities are as follows: | | | | |
| 2021 | | $ | 5,854 |
| | $ | 9 |
|
| 2022 | | 4,454 |
| | 0 |
|
| 2023 | | 3,894 |
| | 0 |
|
| 2024 | | 3,654 |
| | 0 |
|
| 2025 | | 2,503 |
| | 0 |
|
| Thereafter | | 3,954 |
| | 0 |
|
| Total lease payments | | 24,313 |
| | 9 |
|
| Less: interest | | (2,831 | ) | | 0 |
|
| Total lease obligations | | $ | 21,482 |
| | $ | 9 |
|
Farmer Bros. Co.
Notes to the WCT Pension Trust with respect to the asserted liability or take any other action.Consolidated Financial Statements (continued)
Lease term and discount rate:
|
| | | |
Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | As of June 30, 2020 |
| Weighted-average remaining lease terms (in years): | | |
| Operating lease | | 8.3 |
|
| Finance lease | | 0.2 |
|
| | |
| Weighted-average discount rate: | | |
| Operating lease | | 4.50 | % |
| Finance lease | | 4.50 | % |
None.
Other Information:
|
| | | | |
| | | For the Year Ended June 30, 2020 |
| Cash paid for amounts included in the measurement of lease liabilities: | | |
| Operating cash flows from operating leases | | $ | 5,000 |
|
| Operating cash flows from finance leases | | $ | 2 |
|
| Financing cash flows from finance leases | | $ | 51 |
|
| | | |
| Leased assets obtained in exchange for new finance lease liabilities | | $ | 0 |
|
| Leased assets obtained in exchange for new operating lease liabilities | | $ | 0 |
|
Disclosures related to periods prior to adoption of ASU 2016-02
Rent expense paid for the fiscal years ended June 30, 2019 and 2018 were $6.4 million and $5.5 million, respectively.
The minimum annual payments under operating and capital leases as of June 30, 2019 are as follows:
|
| | | | | | | | |
| (In thousands) | | Operating
Lease
Obligations | | Capital
Lease
Obligations |
| Year Ended June 30, | | | | |
| 2020 | | $ | 4,434 |
| | $ | 36 |
|
| 2021 | | 3,238 |
| | 1 |
|
| 2022 | | 2,472 |
| | 0 |
|
| 2023 | | 2,131 |
| | 0 |
|
| 2024 | | 2,025 |
| | 0 |
|
| Thereafter | | 4,389 |
| | 0 |
|
| Total minimum lease payments | | $ | 18,689 |
| | 37 |
|
Less: imputed interest
(0.82% to 10.66%) | | | | (2 | ) |
| Present value of future minimum lease payments | | | | 35 |
|
| Less: current portion | | | | (34 | ) |
| Long-term capital lease obligations | | | | $ | 1 |
|
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Note 8. Fair Value Measurements
Assets and liabilities measured and recorded at fair value on a recurring basis were as follows:
|
| | | | | | | | | | | | | | | | |
| (In thousands) | | Total | | Level 1 | | Level 2 | | Level 3 |
| As of June 30, 2020 | | | | | | | | |
| Derivative instruments designated as cash flow hedges: | | | | | | | | |
| Coffee-related derivative assets(1) | | $ | 45 |
| | $ | 0 |
| | $ | 45 |
| | $ | 0 |
|
| Coffee-related derivative liabilities(1) | | $ | 3,568 |
| | $ | 0 |
| | $ | 3,568 |
| | $ | 0 |
|
| Interest rate swap derivative liabilities(2) | | $ | 3,841 |
| | $ | 0 |
| | $ | 3,841 |
| | $ | 0 |
|
| Derivative instruments not designated as accounting hedges: | | | |
|
| |
|
| |
|
| Coffee-related derivative assets(1) | | $ | 130 |
| | $ | 0 |
| | $ | 130 |
| | $ | 0 |
|
| Coffee-related derivative liabilities(1) | | $ | 706 |
| | $ | 0 |
| | $ | 706 |
| | $ | 0 |
|
| | | | | | | | | |
| | | | | | | | | |
| (In thousands) | | Total | | Level 1 | | Level 2 | | Level 3 |
| As of June 30, 2019 | | | | | | | | |
| Derivative instruments designated as cash flow hedges: | | | | | | | | |
| Coffee-related derivative assets(1) | | $ | 1,925 |
| | $ | 0 |
| | $ | 1,925 |
| | $ | 0 |
|
| Coffee-related derivative liabilities(1) | | $ | 1,127 |
| | $ | 0 |
| | $ | 1,127 |
| | $ | 0 |
|
| Interest rate swap derivative liabilities(2) | | $ | 1,845 |
| | $ | 0 |
| | $ | 1,845 |
| | $ | 0 |
|
| Derivative instruments not designated as accounting hedges: | | | | | | | | |
| Coffee-related derivative assets(1) | | $ | 614 |
| | $ | 0 |
| | $ | 614 |
| | $ | 0 |
|
| Coffee-related derivative liabilities(1) | | $ | 114 |
| | $ | 0 |
| | 114 |
| | $ | 0 |
|
____________________
| |
| (1) | The Company's coffee-related derivative instruments are traded over-the-counter and, therefore, classified as Level 2. |
| |
| (2) | The Company's interest rate swap derivative instrument are model-derived valuations with directly or indirectly observable significant inputs such as interest rate and, therefore, classified as Level 2. |
During the fiscal years ended June 30, 2020 and 2019, there were no transfers between the levels.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Note 9. Accounts Receivable, Net |
| | | | | | | | |
| | | As of June 30, |
| (In thousands) | | 2020 | | 2019 |
| Trade receivables | | $ | 40,695 |
| | $ | 53,593 |
|
| Other receivables(1) | | 1,983 |
| | 2,886 |
|
| Allowance for doubtful accounts | | (1,796 | ) | | (1,324 | ) |
| Accounts receivable, net | | $ | 40,882 |
| | $ | 55,155 |
|
__________
(1)Includes vendor rebates and other non-trade receivables.
Allowance for doubtful accounts:
|
| | | |
| (In thousands) | |
| Balance at June 30, 2017 | $ | (721 | ) |
| Provision | (909 | ) |
| Write-off | 1,530 |
|
| Recoveries | (395 | ) |
| Balance at June 30, 2018 | $ | (495 | ) |
| Provision | (1,761 | ) |
| Write-off | 533 |
|
| Recoveries | 399 |
|
| Balance at June 30, 2019 | $ | (1,324 | ) |
| Provision | (1,872 | ) |
| Write-off | 1,196 |
|
| Recoveries | 204 |
|
| Balance at June 30, 2020 | $ | (1,796 | ) |
Note 10. Inventories |
| | | | | | | | |
| | | As of June 30, |
| (In thousands) | | 2020 | | 2019 |
| Coffee | | | | |
| Processed | | $ | 17,840 |
| | $ | 25,769 |
|
| Unprocessed | | 32,913 |
| | 33,259 |
|
| Total | | $ | 50,753 |
| | $ | 59,028 |
|
| Tea and culinary products | | | | |
| Processed | | $ | 10,627 |
| | $ | 21,767 |
|
| Unprocessed | | 45 |
| | 74 |
|
| Total | | $ | 10,672 |
| | $ | 21,841 |
|
| Coffee brewing equipment parts | | $ | 5,983 |
| | $ | 7,041 |
|
| Total inventories | | $ | 67,408 |
| | $ | 87,910 |
|
In addition to product cost, inventory costs include expenditures such as direct labor and certain supply, freight, warehousing, overhead variances, PPVs and other expenses incurred in bringing the inventory to its existing condition and location. The “Unprocessed” inventory values as stated in the above table represent the value of raw materials and the “Processed” inventory values represent all other products consisting primarily of finished goods.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
|
| |
Item 9A. | Controls and Procedures |
Note 11. Property, Plant and Equipment
Disclosure Controls and Procedures |
| | | | | | | | |
| | | As of June 30, |
| (In thousands) | | 2020 | | 2019 |
| Buildings and facilities (1) | | $ | 98,293 |
| | $ | 107,915 |
|
| Machinery and equipment (2) | | 240,431 |
| | 249,477 |
|
| Capitalized software | | 29,765 |
| | 27,666 |
|
| Office furniture and equipment | | 14,042 |
| | 14,035 |
|
| | | $ | 382,531 |
| | $ | 399,093 |
|
| Accumulated depreciation | | (229,829 | ) | | (225,826 | ) |
| Land (1) | | 12,931 |
| | 16,191 |
|
| Property, plant and equipment, net | | $ | 165,633 |
| | $ | 189,458 |
|
Disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Exchange Act, are controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the rules and forms of the SEC. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information we are required to disclose in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.__________
As of June 30, 2017, our management, with the participation of our Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15(e) promulgated under the Exchange Act. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that,(1) Decrease as of June 30, 2017, our disclosure controls and procedures are effective.
Management's Report on Internal Control Over Financial Reporting
Our management2020 is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Internal control over financial reporting refersdue to the process designed by, or under the supervisionsale of our Chief Executive Officer and Chief Financial Officer, and effected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statementsassets. See Note 5 for external purposes in accordance with generally accepted accounting principles. Due to its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions or that the degree of compliance with policies or procedures may deteriorate.details.
With the participation of the Chief Executive Officer and Chief Financial Officer, our management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework and criteria established in the 2013 “Internal Control—Integrated Framework,” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our internal control over financial reporting was effective(2) Decrease as of June 30, 2017.2020 is due to retirements and sale of assets.
The effectiveness of our internal control over financial reporting has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report which appears herein.
Changes in Internal Control Over Financial Reporting
There has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f)Depreciation expense was $29.9 million, $31.1 million, and 15d-15(f) promulgated under$30.5 million, for the Exchange Act) during our fiscal quarteryears ended June 30, 2017,2020, 2019, and 2018, respectively.
Maintenance and repairs to property, plant and equipment charged to expense for the years ended June 30, 2020, 2019, and 2018 were $8.6 million, $10.3 million and $9.6 million, respectively.
Coffee Brewing Equipment (“CBE”) and Service
Capitalized CBE included in machinery and equipment above are:
|
| | | | | | | | |
| | | As of June 30, |
| (In thousands) | | 2020 | | 2019 |
| Coffee Brewing Equipment (1) | | $ | 98,734 |
| | $ | 106,593 |
|
| Accumulated depreciation (1) | | (67,800 | ) | | (70,202 | ) |
| Coffee Brewing Equipment, net | | $ | 30,934 |
| | $ | 36,391 |
|
(1) Decrease as of June 30, 2020 is due to retirement of assets.
Depreciation expense related to capitalized CBE and other CBE related expenses (excluding CBE depreciation) provided to customers and reported in cost of goods sold were as follows:
|
| | | | | | | | | | | | |
| | | For the Years Ended June 30, |
| (In thousands) | | 2020 | | 2019 | | 2018 |
| Depreciation expense | | $ | 9,572 |
| | $ | 9,109 |
| | $ | 8,629 |
|
| | | | | | | |
| Other CBE expenses | | $ | 27,906 |
| | $ | 33,855 |
| | $ | 30,172 |
|
Other expenses related to CBE provided to customers, such as the cost of servicing that has materially affected, or is reasonably likelyequipment (including service employees’ salaries, cost of transportation and the cost of supplies and parts), are considered directly attributable to materially affect, our internal control over financial reporting.the generation of revenues from the customers. Therefore, these costs are included in cost of goods sold.
Report of Independent Registered Public Accounting FirmF - 32
To the Board of Directors and Stockholders of
Farmer Bros. Co.
Northlake, TexasNotes to Consolidated Financial Statements (continued)
We have audited the internal control over financial reporting of Farmer Bros. Co.
Note 12. Goodwill and subsidiaries (the “Company“) as of June 30, 2017, based on criteria established in Internal Control - Integrated Framework (2013)issued by the Committee of Sponsoring Organizations of the Treadway Commission. Intangible Assets
The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reportingfollowing is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate becausesummary of changes in conditions,the carrying value of goodwill (in thousands):
|
| | | | |
| Balance at June 30, 2017 | | $ | 10,996 |
|
| Final Purchase Price Allocation Adjustment (West Coast Coffee) | | (167 | ) |
| Additions (Boyd Coffee) | | 25,395 |
|
| Balance at June 30, 2018 | | $ | 36,224 |
|
| Additions | | — |
|
| Balance at June 30, 2019 | | 36,224 |
|
| Additions | | — |
|
| Impairment | | (36,224 | ) |
| Balance at June 30, 2020 | | $ | 0 |
|
The carrying value of goodwill was fully impaired and written down to 0 at June 30, 2020. There was no impairment of goodwill recorded during the years ended June 30, 2019 and 2018.
The Company tests goodwill and indefinite-lived intangible assets for impairment annually, as of January 31, or when events or changes in circumstances would indicate that more likely than not the degreefair values may be below the carrying amounts of compliance with the policies or procedures may deteriorate.
In our opinion,assets. Additionally, because of the COVID-19 pandemic during the second half of the Company's fiscal year ended June 30, 2020, and the resulting deterioration in the business environment and the general economic outlook, the fair value of these assets were negatively impacted. As a result of the test for impairment, the Company maintained, in all material respects, effective internal control over financial reporting asrecorded $36.2 million of June 30, 2017, based on the criteria established in Internal Control - Integrated Framework (2013)issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and forimpairment to goodwill during the year ended June 30, 20172020.
The following is a summary of the Company’s amortized and unamortized intangible assets other than goodwill:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | As of June 30, |
| | | Weighted Average Amortization Period as of June 30, 2020 | | 2020 | | 2019 |
| (In thousands) | | | Gross Carrying Amount | | Accumulated Amortization | | Impairment | | Net | | Gross Carrying Amount | | Accumulated Amortization | | Net |
| Amortized intangible assets: | | | | | | | | | | | | | | | | |
| Customer relationships | | 6.7 | | $ | 33,003 |
| | $ | (17,492 | ) | | $ | — |
| | $ | 15,511 |
| | $ | 33,003 |
| | $ | (15,291 | ) | | $ | 17,712 |
|
| Non-compete agreements | | 1.5 | | 220 |
| | (161 | ) | | — |
| | 59 |
| | 220 |
| | (122 | ) | | 98 |
|
| Recipes | | 3.3 | | 930 |
| | (487 | ) | | — |
| | 443 |
| | 930 |
| | (354 | ) | | 576 |
|
| Trade name/brand name | | 3.4 | | 510 |
| | (383 | ) | | — |
| | 127 |
| | 510 |
| | (346 | ) | | 164 |
|
| Total amortized intangible assets | | | | $ | 34,663 |
| | $ | (18,523 | ) | | $ | — |
| | $ | 16,140 |
| | $ | 34,663 |
| | $ | (16,113 | ) | | $ | 18,550 |
|
| Unamortized intangible assets: | | | | | | | | | | | | | | | | |
| Trademarks, trade names and brand name with indefinite lives | | | | $ | 10,328 |
| | $ | — |
| | $ | (5,806 | ) | | $ | 4,522 |
| | $ | 10,328 |
| | $ | — |
| | $ | 10,328 |
|
| Total unamortized intangible assets | | | | $ | 10,328 |
| | $ | — |
| | $ | (5,806 | ) | | $ | 4,522 |
| | $ | 10,328 |
| | $ | — |
| | $ | 10,328 |
|
| Total intangible assets | | | | $ | 44,991 |
| | $ | (18,523 | ) | | $ | (5,806 | ) | | $ | 20,662 |
| | $ | 44,991 |
| | $ | (16,113 | ) | | $ | 28,878 |
|
As a result of the test for impairment, the Company recorded $5.8 million and our report dated September 28, 2017 expressed$3.5 million, respectively, of impairment to indefinite-lived intangibles during the year ended June 30, 2020 and 2018. There were 0 indefinite-lived intangible asset impairment charges recorded in the fiscal year ended June 30, 2019.
The Company also assessed the recoverability of certain finite-lived intangible assets. No impairment was recorded for the finite-lived intangibles for the years ended June 30, 2020 and 2019. In fiscal year ended June 30, 2018, the Company recorded an unqualified opinion on those financial statements.impairment charge related to finite-lived intangibles of $0.3 million.
/s/ DELOITTE & TOUCHE LLP
Dallas, Texas
September 28, 2017
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
|
| |
Item 9B. | Other Information |
None.
Amortization expense for the years ended June 30, 2020, 2019, and 2018 were $2.4 million, $2.6 million, and $2.4 million, respectively.
At June 30, 2020, future annual amortization of finite-lived intangible assets for the years 2021 through 2025 and thereafter is estimated to be (in thousands):
|
| | | | |
| For the fiscal year ending: | | |
| June 30, 2021 | | $ | 2,412 |
|
| June 30, 2022 | | 2,388 |
|
| June 30, 2023 | | 2,370 |
|
| June 30, 2024 | | 2,260 |
|
| June 30, 2025 | | 2,200 |
|
| Thereafter | | 4,510 |
|
| Total | | $ | 16,140 |
|
PART III
|
| |
Item 10. | Directors, Executive Officers and Corporate Governance |
Note 13. Employee Benefit Plans
The information required by this item will be set forthCompany provides the following benefit plans for full-time employees who work 30 hours or more per week:
•401(k);
•health and other welfare benefit plans; and
•in certain circumstances, pension and postretirement benefits.
See below for detail description of each benefit plan. Generally, the plans provide health benefits after 30 days of employment and other retirement benefits based on years of service and/or a combination of years of service and earnings.
Single Employer Pension Plans
As of June 30, 2020, the Company has two defined benefit pension plans for certain hourly employees covered under collective bargaining agreements (the “Brewmatic Plan” and the “Hourly Employees' Plan”). Effective October 1, 2016, the Company froze benefit accruals and participation in the Proxy StatementHourly Employees' Plan. After the plan freeze, participants do not accrue any benefits under the plan, and is incorporatednew hires are not eligible to participate in this report by reference. the plan. After the freeze the participants in the plan are eligible to receive the Company's matching contributions to their 401(k).
Code of ConductEffective December 1, 2018 the Company amended and Ethics
We maintainterminated the Farmer Bros. Co. Pension Plan for Salaried Employees (the “Farmer Bros. Plan”), a written Code of Conduct and Ethicsdefined benefit pension plan for Company employees hired prior to January 1, 2010 who were not covered under a collective bargaining agreement. The Company previously amended the Farmer Bros. Plan, freezing the benefit for all employees, officers and directors, including our principal executive officer, principal financial officer, principal accounting officer or controller, and other persons performing similar functions. To view this Code of Conduct and Ethics free of charge, please visit our website at www.farmerbros.com (this website address is not intendedparticipants effective June 30, 2011.
Prior to function as a hyperlink, and the information contained in our website is not intended to be a part of this filing). We intend to satisfy the disclosure requirements under Item 5.05 of Form 8-K regarding an amendment to, or waiver from, a provision of this Code of Conduct and Ethics, if any, by posting such information on our website as set forth above.
Compliance with Section 16(a)termination of the Exchange Act
ToFarmer Bros. Plan, the Company’s knowledge, based solely on a reviewCompany spun off the benefit liability and obligations, and all allocable assets for all retirement plan benefits of certain active employees with accrued benefits in excess of $25,000, retirees and beneficiaries currently receiving benefit payments under the Farmer Bros. Plan, and former employees who have deferred vested benefits under the Farmer Bros. Plan, to the Brewmatic Plan. Upon termination of the copiesFarmer Bros. Plan, all remaining plan participants elected to receive a distribution of such reports furnishedhis/her entire accrued benefit under the Farmer Bros. Plan in a single cash lump sum or an individual insurance company annuity contract, in either case, funded directly by Farmer Bros. Plan assets.
Termination of the Farmer Bros. Plan triggered re-measurement and settlement of the Farmer Bros. Plan and re-measurement of the Brewmatic Plan. As a result of the distributions to the remaining plan participants of the Farmer Bros. Plan, the Company recognized a non-cash pension settlement charge of $10.9 million for the year ended June 30, 2019.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Obligations and written representations from certain reporting persons that no other reports were required during theFunded Status
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Brewmatic Plan As of June 30, | | Hourly Employees’ Plan As of June 30, | | Farmer Bros. Plan
As of June 30, | | Total |
| ($ in thousands) | | 2020 | | 2019 | | 2020 | | 2019 | | 2019 | | 2020 | | 2019 |
| Change in projected benefit obligation | | | | | | | | | | | | | | |
| Benefit obligation at the beginning of the year | | $ | 121,752 |
| | $ | 3,724 |
| | $ | 4,475 |
| | $ | 4,040 |
| | $ | 137,175 |
| | $ | 126,227 |
| | $ | 144,939 |
|
| Interest cost | | 4,084 |
| | 2,339 |
| | 152 |
| | 161 |
| | 2,722 |
| | 4,236 |
| | 5,222 |
|
| Actuarial (gain) loss | | 13,433 |
| | 8,482 |
| | 561 |
| | 349 |
| | (1,571 | ) | | 13,994 |
| | 7,260 |
|
| Benefits paid | | (5,943 | ) | | (3,097 | ) | | (102 | ) | | (75 | ) | | (3,574 | ) | | (6,045 | ) | | (6,746 | ) |
| Pension settlement | | 0 |
| | (21,286 | ) | | 0 |
| | 0 |
| | (3,162 | ) | | 0 |
| | (24,448 | ) |
| Other - Plan merger | | 0 |
| | 131,590 |
| | 0 |
| | 0 |
| | (131,590 | ) | | 0 |
| | 0 |
|
| Projected benefit obligation at the end of the year | | $ | 133,326 |
| | $ | 121,752 |
| | $ | 5,086 |
| | $ | 4,475 |
| | $ | 0 |
| | $ | 138,412 |
| | $ | 126,227 |
|
| Change in plan assets | | | | | | | | | | | | | | |
| Fair value of plan assets at the beginning of the year | | $ | 75,411 |
| | $ | 3,719 |
| | $ | 3,778 |
| | $ | 3,629 |
| | $ | 97,211 |
| | $ | 79,189 |
| | $ | 104,559 |
|
| Actual return on plan assets | | 3,382 |
| | 9,325 |
| | 239 |
| | 224 |
| | (6,236 | ) | | 3,621 |
| | 3,313 |
|
| Employer contributions | | 3,054 |
| | 1,800 |
| | 0 |
| | 0 |
| | 1,525 |
| | 3,054 |
| | 3,325 |
|
| Benefits paid | | (5,943 | ) | | (3,097 | ) | | (102 | ) | | (75 | ) | | (3,574 | ) | | (6,045 | ) | | (6,746 | ) |
| Pension settlement | | 0 |
| | (22,100 | ) | | 0 |
| | 0 |
| | $ | (3,162 | ) | | 0 |
| | (25,262 | ) |
| Other - Plan merger | | 0 |
| | 85,764 |
| | 0 |
| | 0 |
| | $ | (85,764 | ) | | 0 |
| | 0 |
|
| Fair value of plan assets at the end of the year | | $ | 75,904 |
| | $ | 75,411 |
| | $ | 3,915 |
| | $ | 3,778 |
| | $ | 0 |
| | $ | 79,819 |
| | $ | 79,189 |
|
| Funded status at end of year (underfunded) overfunded | | $ | (57,422 | ) | | $ | (46,341 | ) | | $ | (1,171 | ) | | $ | (697 | ) | | $ | 0 |
| | $ | (58,593 | ) | | $ | (47,038 | ) |
| Amounts recognized in consolidated balance sheets | | | | | | | | | | | |
| |
|
| Non-current liabilities | | (57,422 | ) | | (46,341 | ) | | (1,171 | ) | | (697 | ) | | 0 |
| | (58,593 | ) | | (47,038 | ) |
| Total | | $ | (57,422 | ) | | $ | (46,341 | ) | | $ | (1,171 | ) | | $ | (697 | ) | | $ | 0 |
| | $ | (58,593 | ) | | $ | (47,038 | ) |
| Amounts recognized in AOCI | | | | | | | | | | | | | | |
| Net loss | | 62,830 |
| | 50,080 |
| | 1,115 |
| | 565 |
| | 0 |
| | 63,945 |
| | 50,645 |
|
| Total AOCI (not adjusted for applicable tax) | | $ | 62,830 |
| | $ | 50,080 |
| | $ | 1,115 |
| | $ | 565 |
| | $ | 0 |
| | $ | 63,945 |
| | $ | 50,645 |
|
| Weighted average assumptions used to determine benefit obligations | | | | | | | | | | | | | | |
| Discount rate | | 2.55 | % | | 3.45 | % | | 2.55 | % | | 3.45 | % | | 4.10 | % | | 2.55 | % | | 4.05 | % |
| Rate of compensation increase | | N/A |
| | N/A |
| | N/A |
| | N/A |
| | N/A |
| | N/A |
| | N/A |
|
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Components of Net Periodic Benefit Cost and
Other Changes Recognized in Other Comprehensive Income (Loss) (OCI)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Brewmatic Plan June 30, | | Hourly Employees’ Plan June 30, | | Farmer Bros. Plan
June 30, | | Total |
| ($ in thousands) | | 2020 | | 2019 | | 2020 | | 2019 | | 2019 | | 2020 | | 2019 |
| Components of net periodic benefit cost | | | | | | | | | | | | | | |
| Interest cost | | 4,084 |
| | 2,339 |
| | 152 |
| | 161 |
| | 2,722 |
| | 4,236 |
| | 5,222 |
|
| Expected return on plan assets | | (4,174 | ) | | (2,257 | ) | | (232 | ) | | (222 | ) | | (2,767 | ) | | (4,406 | ) | | (5,246 | ) |
| Amortization of net loss | | 1,475 |
| | 796 |
| | 4 |
| | 0 |
| | 710 |
| | 1,479 |
| | 1,506 |
|
| Pension settlement charge | | 0 |
| | 9,586 |
| | 0 |
| | 0 |
| | 1,356 |
| | 0 |
| | 10,942 |
|
| Net periodic benefit cost | | $ | 1,385 |
| | $ | 10,464 |
| | $ | (76 | ) | | $ | (61 | ) | | $ | 2,021 |
| | $ | 1,309 |
| | $ | 12,424 |
|
| Other changes recognized in OCI | | | | | | | | | | | | | | |
| Net loss (1) | | $ | 14,225 |
| | $ | 1,413 |
| | $ | 554 |
| | $ | 347 |
| | $ | 7,433 |
| | $ | 14,779 |
| | $ | 9,193 |
|
| Prior service cost (credit) | | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
|
| Amortization of net loss | | (1,475 | ) | | (796 | ) | | (4 | ) | | 0 |
| | (710 | ) | | (1,479 | ) | | (1,506 | ) |
| Pension settlement charge | | 0 |
| | (9,586 | ) | | 0 |
| | 0 |
| | (1,356 | ) | | 0 |
| | (10,942 | ) |
| Allocation of net Loss - Plan merger | | 0 |
| | 56,446 |
| | 0 |
| | 0 |
| | (56,446 | ) | | 0 |
| | 0 |
|
| Net loss due to annuity purchase | | 0 |
| | 814 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 814 |
|
| Total recognized in OCI | | $ | 12,750 |
| | $ | 48,291 |
| | $ | 550 |
| | $ | 347 |
| | $ | (51,079 | ) | | $ | 13,300 |
| | $ | (2,441 | ) |
| Total recognized in net periodic benefit cost and OCI | | $ | 14,135 |
| | $ | 58,755 |
| | $ | 474 |
| | $ | 286 |
| | $ | (49,058 | ) | | $ | 14,609 |
| | $ | 9,983 |
|
| Weighted-average assumptions used to determine net periodic benefit cost | | | | | | | | | | | | | | |
| Discount rate | | 3.45 | % | | 4.10 | % | | 3.45 | % | | 4.05 | % | | 4.05 | % | | 3.45 | % | | 4.05 | % |
| Expected long-term return on plan assets | | 6.75 | % | | 6.75 | % | | 6.75 | % | | 6.75 | % | | 0 | % | | 6.75 | % | | 6.75 | % |
| Rate of compensation increase | | N/A |
| | N/A |
| | N/A |
| | N/A |
| | N/A |
| | N/A |
| | N/A |
|
(1) Net loss for fiscal year ended June 30, 2017, its officers, directors2020 was primarily due to decline in interest rate, and ten percent stockholders complied with all applicable Section 16(a) filing requirements, withto a less extent decline in plan assets returns.
Basis Used to Determine Expected Long-term Return on Plan Assets
The expected long-term return on plan assets assumption was developed as a weighted average rate based on the exceptiontarget asset allocation of the membersplan and the Long-Term Capital Market Assumptions (CMA) 2020. The capital market assumptions were developed with a primary focus on forward-looking valuation models and market indicators. The key fundamental economic inputs for these models are future inflation, economic growth, and interest rate environment. Due to the long-term nature of a “group”the pension obligations, the investment horizon for the purposesCMA 2020 is 20 to 30 years. In addition to forward-looking models, historical analysis of Section 13(d)(3)market data and trends was reflected, as well as the outlook of recognized economists, organizations and consensus CMA from other credible studies.
Description of Investment Policy
The Company’s investment strategy is to build an efficient, well-diversified portfolio based on a long-term, strategic outlook of the Securities Exchange Actinvestment markets. The investment markets outlook utilizes both the historical-based and forward-looking return forecasts to establish future return expectations for various asset classes. These return expectations are used to develop a core asset allocation based on the specific needs of 1934,each plan. The core asset allocation utilizes investment portfolios of various asset classes and multiple investment managers in order to maximize the plan’s return while providing multiple layers of diversification to help minimize risk.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Additional Disclosures |
| | | | | | | | | | | | | | | | | | | | | | | |
| | Brewmatic Plan June 30, | | Hourly Employees’ Plan June 30, | | Total |
| ($ in thousands) | 2020 | | 2019 | | 2020 | | 2019 | | 2020 | | 2019 |
| Comparison of obligations to plan assets | | | | | | | | | | | |
| Projected benefit obligation | $ | 133,326 |
| | $ | 121,752 |
| | $ | 5,086 |
| | $ | 4,475 |
| | $ | 138,412 |
| | $ | 126,227 |
|
| Accumulated benefit obligation | $ | 133,326 |
| | $ | 121,752 |
| | $ | 5,086 |
| | $ | 4,475 |
| | $ | 138,412 |
| | $ | 126,227 |
|
| Fair value of plan assets at measurement date | $ | 75,904 |
| | $ | 75,411 |
| | $ | 3,915 |
| | $ | 3,778 |
| | $ | 79,819 |
| | $ | 79,189 |
|
| Plan assets by category | | | | | | | | | | | |
| Equity securities | $ | 49,744 |
| | $ | 48,464 |
| | $ | 2,572 |
| | $ | 2,440 |
| | $ | 52,316 |
| | $ | 50,904 |
|
| Debt securities | 21,439 |
| | 22,461 |
| | 1,111 |
| | 1,100 |
| | 22,550 |
| | 23,561 |
|
| Real estate | 4,721 |
| | 4,486 |
| | 232 |
| | 238 |
| | 4,953 |
| | 4,724 |
|
| Total | $ | 75,904 |
| | $ | 75,411 |
| | $ | 3,915 |
| | $ | 3,778 |
| | $ | 79,819 |
| | $ | 79,189 |
|
| Plan assets by category | | | | | | | | | | | |
| Equity securities | 66 | % | | 64 | % | | 66 | % | | 65 | % | | 66 | % | | 64 | % |
| Debt securities | 28 | % | | 30 | % | | 28 | % | | 29 | % | | 28 | % | | 30 | % |
| Real estate | 6 | % | | 6 | % | | 6 | % | | 6 | % | | 6 | % | | 6 | % |
| Total | 100 | % | | 100 | % | | 100 | % | | 100 | % | | 100 | % | | 100 | % |
Fair values of plan assets were as amended, identified in a Schedule 13D/A (Amendment No. 3) filed withfollows:
|
| | | | | | | | | | | | | | | | | | | | |
| | | As of June 30, 2020 |
| (In thousands) | | Total | | Level 1 | | Level 2 | | Level 3 | | Investments measured at NAV |
| Brewmatic Plan | | $ | 75,904 |
| | $ | 0 |
| | $ | 0 |
| | $ | 0 |
| | $ | 75,904 |
|
| Hourly Employees’ Plan | | $ | 3,915 |
| | $ | 0 |
| | $ | 0 |
| | $ | 0 |
| | $ | 3,915 |
|
| | | As of June 30, 2019 |
| (In thousands) | | Total | | Level 1 | | Level 2 | | Level 3 | | Investments measured at NAV |
| Brewmatic Plan | | $ | 75,411 |
| | $ | 0 |
| | $ | 0 |
| | $ | 0 |
| | $ | 75,411 |
|
| Hourly Employees’ Plan | | $ | 3,778 |
| | $ | 0 |
| | $ | 0 |
| | $ | 0 |
| | $ | 3,778 |
|
The following is the SEC on August 29, 2017 and a Schedule 13D/A (Amendment No. 4) filed with the SEC on September 8, 2016 (collectively, the “Waite Group Schedule 13D/A”), including Carol Farmer Waite, as trustee, co-trustee, and/or sole beneficiary of certain family trusts named in the Waite Group Schedule 13D/A; Jonathan Michael Waite, as trustee and sole beneficiary of the 2012 Waite Irrevocable Trust; and individuals Suzanna Waite, Austin Waite, Emily Waite, Scott Grossman, Brett Grossman, Brynn Grossman, Tom Mortensen, John Samore, Jr. and Jennifer Gonzalez-Yousef (Mr. Samore and Ms. Gonzalez-Yousef each signed the Waite Group Schedule 13D/A but reported that they beneficially owned no shares of the Company’s common stock), who did not timely file or failed to file such reports upon becoming members of the identified Section 13(d)(3) group. The foregoing is in addition to any filings that may be listed intarget asset allocation for the Company's Proxy Statement expected to be datedsingle employer pension plans— Brewmatic Plan and filed with the SEC not later than 120 days after the conclusion of the Company'sHourly Employees' Plan—for fiscal year ended June 30, 2017.2021:
|
| | |
Item 11. | Executive CompensationFiscal 2021 |
| U.S. large cap equity securities | 37.7 | % |
| U.S. small cap equity securities | 4.6 | % |
| International equity securities | 23.2 | % |
| Debt securities | 28.3 | % |
| Real estate | 6.2 | % |
| Total | 100.0 | % |
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Estimated Amounts in OCI Expected To Be Recognized
In fiscal 2021, the Company expects to recognize net periodic benefit costs of $1.3 million for the Brewmatic Plan and recognize net periodic benefit credit of $41,000 for the Hourly Employees’ Plan.
Estimated Future Contributions and Refunds
In fiscal 2021, the Company expects to contribute $5.8 million to the Brewmatic Plan and does not expect to contribute to the Hourly Employees’ Plan. The Company is not aware of any refunds expected from single employer pension plans.
Estimated Future Benefit Payments
The information requiredfollowing benefit payments are expected to be paid over the next 10 fiscal years:
|
| | | | | | | | | |
| (In thousands) | | | Brewmatic Plan | | Hourly Employees’ Plan |
| Year Ending: | | |
| June 30, 2021 | | | $ | 7,100 |
| | $ | 160 |
|
| June 30, 2022 | | | $ | 6,820 |
| | $ | 160 |
|
| June 30, 2023 | | | $ | 7,010 |
| | $ | 180 |
|
| June 30, 2024 | | | $ | 7,110 |
| | $ | 190 |
|
| June 30, 2025 | | | $ | 7,200 |
| | $ | 200 |
|
| June 30, 2026 to June 30, 2030 | | | $ | 35,510 |
| | $ | 1,150 |
|
These amounts are based on current data and assumptions and reflect expected future service, as appropriate.
Multiemployer Pension Plans
The Company participates in 2 multiemployer defined benefit pension plans that are union sponsored and collectively bargained for the benefit of certain employees subject to collective bargaining agreements, of which the Western Conference of Teamsters Pension Plan ("WCTPP") is individually significant. The Company makes contributions to these plans generally based on the number of hours worked by this item will be set forththe participants in accordance with the Proxy Statement and is incorporated in this reportprovisions of negotiated labor contracts.
Contributions made by reference.
the Company to the multiemployer pension plans are as follows:
|
| | | | | | | | |
| (In thousands) | | WCTPP(1)(2)(3)(5) | | All Other Plans(4) |
| Year Ended: | | | | |
| June 30, 2020 | | $ | 1,685 |
| | $ | 34 |
|
| June 30, 2019 | | $ | 3,634 |
| | $ | 39 |
|
| June 30, 2018 | | $ | 1,605 |
| | $ | 35 |
|
____________
| |
| (1) | Individually significant plan. |
| |
| (2) | Less than 5% of total contribution to WCTPP based on WCTPP's FASB Disclosure Statement for the calendar year ended December 31, 2019. |
| |
| (3) | The Company guarantees that one hundred seventy-three (173) hours will be contributed upon for all employees who are compensated for all available straight time hours for each calendar month. An additional 6.5% of the basic contribution must be paid for PEER or the Program for Enhanced Early Retirement. |
| |
| (4) | Includes one plan that is not individually significant. |
| |
| (5) | June 30, 2019 includes WCT monthly settlement obligations of $190,507. |
The risks of participating in multiemployer pension plans are different from single-employer plans in that: (i) assets contributed to a multiemployer plan by one employer may be used to provide benefits to employees of other participating employers; (ii) if a participating employer stops contributing to the plan, the unfunded obligations of the plan may be borne by the remaining participating employers; and (iii) if the Company stops participating in the multiemployer plan, the Company may be required to pay the plan an amount based on the underfunded status of the plan, referred to as a withdrawal liability.
The Company received a letter dated July 10, 2018 from the WCT Pension Trust assessing withdrawal liability against the Company for a share of the WCTPP unfunded vested benefits, on the basis claimed by the WCT Pension Trust that employment actions by the Company in 2016 in connection with the Corporate Relocation Plan constituted a partial withdrawal from the WCTPP. Additionally, in fiscal 2012, the Company withdrew from the Local 807 Labor-Management Pension Fund.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Outstanding balance of settlement obligations of the Company to WCT and Local 807 multiemployer pension plans are as follows:
|
| | | | | | | | |
| (In thousands) | | June 30, 2020 |
| | June 30, 2019 |
|
| WCT Pension Trust (1) | | 0 |
| | $ | 1,487 |
|
| Local 807 Pension Fund (2) | | $ | 182 |
| | $ | 182 |
|
__________
(1) Initial liability amount of $3.4 million, including interest, commencing in September 10, 2018, payable in 17 monthly installments of $190,507 followed by a final monthly installment of $153,822 in February 2020.
(2) Lump sum cash settlement payment of $3.0 million in fiscal 2019 plus two remaining installment payments of $91,000 due on or before October 1, 2034 and on or before January 1, 2035. As of June 30, 2020, the Company has paid the Local 807 Pension Fund $3.0 million and has accrued $0.2 million within “Accrued pension liabilities” on the Company’s consolidated balance sheet.
Future collective bargaining negotiations may result in the Company withdrawing from the remaining multiemployer pension plans in which it participates and, if successful, the Company may incur a withdrawal liability, the amount of which could be material to the Company's results of operations and cash flows.
Multiemployer Plans Other Than Pension Plans
The Company participates in 9 multiemployer defined contribution plans other than pension plans that provide medical, vision, dental and disability benefits for active, union-represented employees subject to collective bargaining agreements. The plans are subject to the provisions of the Employee Retirement Income Security Act of 1974, and provide that participating employers make monthly contributions to the plans in an amount as specified in the collective bargaining agreements. Also, the plans provide that participants make self-payments to the plans, the amounts of which are negotiated through the collective bargaining process. The Company's participation in these plans is governed by collective bargaining agreements which expires on or before January 31, 2025. The Company's aggregate contributions to multiemployer plans other than pension plans in the fiscal years ended June 30, 2020, 2019 and 2018 were $4.2 million, $5.2 million and $4.8 million, respectively. The Company expects to contribute an aggregate of approximately $4.5 million towards multiemployer plans other than pension plans in fiscal 2021.
401(k) Plan
The Company's 401(k) Plan is available to all eligible employees. The Company's 401(k) match portion is available to all eligible employees who have worked more than 1,000 hours during a calendar year and were employed at the end of the calendar year. Participants in the 401(k) Plan may choose to contribute a percentage of their annual pay subject to the maximum contribution allowed by the Internal Revenue Service. The Company's matching contribution is discretionary, based on approval by the Company's Board of Directors. The Company matching contribution for the calendar years 2020, 2019 and 2018, was 50% of an employee's annual contribution to the 401(k) Plan, up to 6% of the employee's eligible income. The Company recorded matching contributions of $1.8 million, $2.2 million and $2.0 million in operating expenses for the fiscal years ended June 30, 2020, 2019 and 2018, respectively. Effective March 31, 2020, the Company temporarily suspended its 401K matching program in response to the COVID-19 pandemic.
Effective January 1, 2019, the Company amended and restated the 401(k) Plan to, among other things, provide for: (i) an annual safe harbor non-elective contribution of shares of the Company’s common stock equal to 4% of each eligible participant’s annual plan compensation; (ii) an elective matching contribution for non-collectively bargained employees and certain union-represented employees equal to 100% of the first 3% of such eligible participant’s tax-deferred contributions to the 401(k) Plan; and (iii) profit-sharing contributions at the Company’s discretion. Participants are immediately vested in their contributions, the safe harbor non-elective contributions, the employer’s elective matching contributions, and the employer’s discretionary contributions. For the fiscal years ended June 30, 2020 and 2019, the Company contributed a total of 290,567 and 90,105 shares of the Company’s common stock with a value of $2.9 million and $1.6 million, respectively, to eligible participants’ annual plan compensation.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Postretirement Benefits
The Company sponsors a postretirement defined benefit plan that covers qualified non-union retirees and certain qualified union retirees (“Retiree Medical Plan”). On March 23, 2020, the Company announced a plan to amend and terminate the Retiree Medical Plan effective January 1, 2021. The plan provides medical, dental and vision coverage for retirees under age 65 and medical coverage only for retirees age 65 and above. Under this postretirement plan, the Company’s contributions toward premiums for retiree medical, dental and vision coverage for participants and dependents are scaled based on length of service, with greater Company contributions for retirees with greater length of service, subject to a maximum monthly Company contribution. The Company's retiree medical, dental and vision plan is unfunded, and its liability was calculated using an assumed discount rate of 0.06% at June 30, 2020. The Company projects an initial medical trend rate of 7.65% in fiscal 2021, ultimately reducing to 4.50% through the plan termination effective January 1, 2021.
The Company’s communication of its intention to amend and terminate the Retiree Medical Plan triggered re-measurement and curtailment of the plan. As a result, the re-measurement generated a prior service credit of $13.4 million to be amortized over the remaining months of the plan, and a revised net periodic postretirement benefit credit for fiscal 2021 of $14.6 million. Also, the Company recognized a one-time non-cash curtailment credit of $5.8 million for the year ended June 30, 2020.
The Company continues to provide a postretirement death benefit (“Death Benefit”) to certain of its employees and retirees, subject, in the case of current employees, to continued employment with the Company until retirement and certain other conditions related to the manner of employment termination and manner of death. The Company records the actuarially determined liability for the present value of the postretirement death benefit. The Company has purchased life insurance policies to fund the postretirement death benefit wherein the Company owns the policy but the postretirement death benefit is paid to the employee's or retiree's beneficiary. The Company records an asset for the fair value of the life insurance policies which equates to the cash surrender value of the policies.
The following table shows the components of net periodic postretirement benefit cost for the Retiree Medical Plan and Death Benefit for the fiscal years ended June 30, 2020, 2019 and 2018. Net periodic postretirement benefit cost for fiscal 2020 was based on employee census information as of June 30, 2020.
|
| | | | | | | | | | | | |
| | | Year Ended June 30, |
| (In thousands) | | 2020 | | 2019 | | 2018 |
| Components of Net Periodic Postretirement Benefit Cost (Credit): | | | | | | |
| Service cost | | $ | 446 |
| | $ | 530 |
| | $ | 609 |
|
| Interest cost | | 725 |
| | 887 |
| | 835 |
|
| Amortization of net gain | | (3,067 | ) | | (834 | ) | | (841 | ) |
| Curtailment credit - Retiree Medical | | (5,750 | ) | | 0 |
| | 0 |
|
| Amortization of prior service credit | | (5,666 | ) | | (1,757 | ) | | (1,757 | ) |
| Net periodic postretirement benefit (credit) cost | | $ | (13,312 | ) | | $ | (1,174 | ) | | $ | (1,154 | ) |
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
The tables below show the remaining bases for the transition (asset) obligation, prior service cost (credit), and the calculation of the amortizable gain or loss.
|
| | | | | | | | | | | | | | | | |
| | | Retiree Medical Plan | | Death Benefit |
| | | Year Ended June 30, | | Year Ended June 30, |
| ($ in thousands) | | 2020(1) | | 2019 | | 2020 | | 2019 |
| Amortization of Net (Gain) Loss: | | | | | | | | |
| Net (gain) loss as of July 1 | | $ | 0 |
| | $ | (7,039 | ) | | $ | 2,903 |
| | $ | 1,878 |
|
| Net (gain) loss subject to amortization | | 0 |
| | (7,039 | ) | | 2,903 |
| | 1,878 |
|
| Corridor (10% of greater of APBO or assets) | | 0 |
| | 1,490 |
| | 1,043 |
| | 919 |
|
| Net (gain) loss in excess of corridor | | $ | 0 |
| | $ | (5,549 | ) | | $ | 1,860 |
| | $ | 959 |
|
| Amortization years | | — |
| | 8.6 |
| | 5.8 |
| | 6.5 |
|
__________
(1) Amounts are zero due to the plan termination effective January 1, 2021.
The following tables provide a reconciliation of the benefit obligation and plan assets:
|
| | | | | | | | |
| | | As of June 30, |
| (In thousands) | | 2020 | | 2019 |
| Change in Benefit Obligation: | | | | |
| Projected postretirement benefit obligation at beginning of year | | $ | 24,092 |
| | $ | 21,283 |
|
| Service cost | | 446 |
| | 530 |
|
| Interest cost | | 725 |
| | 887 |
|
| Participant contributions | | 593 |
| | 605 |
|
| Amendments | | (13,441 | ) | | 0 |
|
| Actuarial gains (losses) | | (621 | ) | | 2,010 |
|
| Benefits paid | | (1,055 | ) | | (1,223 | ) |
| Projected postretirement benefit obligation at end of year | | $ | 10,739 |
| | $ | 24,092 |
|
|
| | | | | | | | |
| | | Year Ended June 30, |
| (In thousands) | | 2020 | | 2019 |
| Change in Plan Assets: | | | | |
| Fair value of plan assets at beginning of year | | $ | 0 |
| | $ | 0 |
|
| Employer contributions | | 462 |
| | 618 |
|
| Participant contributions | | 593 |
| | 605 |
|
| Benefits paid | | (1,055 | ) | | (1,223 | ) |
| Fair value of plan assets at end of year | | $ | 0 |
| | $ | 0 |
|
| Projected postretirement benefit obligation at end of year | | 10,739 |
| | 24,092 |
|
| Funded status of plan | | $ | (10,739 | ) | | $ | (24,092 | ) |
|
| | | | | | | | |
| | | June 30, |
| (In thousands) | | 2020 | | 2019 |
| Amounts Recognized in the Consolidated Balance Sheets Consist of: | | | | |
| Current liabilities | | $ | (744 | ) | | $ | (1,068 | ) |
| Non-current liabilities | | (9,995 | ) | | (23,024 | ) |
| Total | | $ | (10,739 | ) | | $ | (24,092 | ) |
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
|
| | | | | | | | |
| | | Year Ended June 30, |
| (In thousands) | | 2020 | | 2019 |
| Amounts Recognized in AOCI Consist of: | | | | |
| Net gain | | $ | (2,714 | ) | | $ | (5,160 | ) |
| Prior service credit | | (8,961 | ) | | (6,936 | ) |
| Total AOCI | | $ | (11,675 | ) | | $ | (12,096 | ) |
|
| | | | | | | | |
| | | Year Ended June 30, |
| (In thousands) | | 2020 | | 2019 |
| Other Changes in Plan Assets and Benefit Obligations Recognized in OCI: | | | | |
| Unrecognized actuarial gains (loss) | | $ | (621 | ) | | $ | 2,010 |
|
| Prior service (credit) cost | | (13,441 | ) | | 0 |
|
| Unrecognized prior service cost | | — |
| | — |
|
| Amortization of net loss | | 3,068 |
| | 835 |
|
| Amortization of prior service cost | | 11,416 |
| | 1,757 |
|
| Total recognized in OCI | | 422 |
| | 4,602 |
|
| Net periodic benefit cost | | (13,312 | ) | | (1,174 | ) |
| Total recognized in net periodic benefit credit and OCI | | $ | (12,890 | ) | | $ | 3,428 |
|
The estimated net gain that will be amortized from AOCI into net periodic benefit cost in fiscal 2021 is $5.6 million. Prior service credit that will be amortized from AOCI into net periodic benefit cost in fiscal 2021 is $9.0 million.
|
| | | |
| (In thousands) | |
| Estimated Future Benefit Payments: | |
| Year Ending: | |
| June 30, 2021 | $ | 750 |
|
| June 30, 2022 | $ | 451 |
|
| June 30, 2023 | $ | 464 |
|
| June 30, 2024 | $ | 476 |
|
| June 30, 2025 | $ | 487 |
|
| June 30, 2026 to June 30, 2030 | $ | 2,538 |
|
| | |
| Expected Contributions: | |
| June 30, 2021 | $ | 750 |
|
Sensitivity in Fiscal 2021 Results
Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plan. A one percentage point change in assumed health care cost trend rates would have the following effects in fiscal 2021:
|
| | | | | | | | |
| | | 1-Percentage Point |
| (In thousands) | | Increase | | Decrease |
| Effect on total of service and interest cost components | | $ | 50 |
| | $ | (43 | ) |
| Effect on accumulated postretirement benefit obligation | | $ | 0 |
| | $ | 0 |
|
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Note 14. Debt Obligations
The following table summarizes the Company’s debt obligations:
|
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | June 30, 2020 | | June 30, 2019 |
| (In thousands) | | Debt Origination Date | | Maturity | | Original Borrowing Amount | | Carrying Value | | Weighted Average Interest Rate | | Carrying Value | | Weighted Average Interest Rate |
| Credit Facility | | Revolver | | 11/6/2023 | | N/A | | $ | 122,000 |
| | 4.91 | % | | $ | 92,000 |
| | 3.98 | % |
In March 2020, pursuant to Amendment No. 2 to Amended and Restated Credit Agreement (the “Second Amendment”) the Company amended its existing senior secured revolving credit facility (such facility as amended to date, including pursuant to the Second Amendment, the “Amended Revolving Facility”) with certain financial institutions. The Second Amendment, among other things: (i) decreased the size of the revolving credit facility to $125.0 million from $150.0 million;(ii) made certain adjustments to the commitment fee rates and interest rates; (iii) increased the maximum total net leverage ratio financial covenant until the quarter ending December 31, 2021; (iv) added a minimum EBITDA financial covenant until the quarter ending December 31, 2021; (v) amended the definitions of “EBITDA” and “Permitted Acquisition”; (vi) removed the accordion feature; (vii) removed the Company’s option to request and agree to an extension of the maturity date with individual lenders; (viii) provided for a mortgage on certain of the Company’s real property; (ix) provides for the revolving commitments to be reduced upon the occurrence of certain asset dispositions and incurrences of other indebtedness; (x) added a monthly reporting requirement; and (xi) modified certain of the Company’s covenant-related baskets.
The Amended Revolving Facility otherwise retained many of its previous terms, including the sublimit on letters of credit and swingline loans of $15.0 million each. The commitment fee is based on a leverage grid and ranges from 0.20% to 0.50%. Borrowings under the Amended Revolving Facility bear interest on base rate loans based on a leverage grid with a range of PRIME + 0.50% to 2.50%, and on Eurodollar loans based on a leverage grid with a range of Adjusted LIBO Rate + 1.50% to 3.50%. Effective March 27, 2019, the Company entered into a rate swap agreement and in December 2019 amended the agreement to reduce the notional amount. The impact of the amendment for the year ended June 30, 2020, was $0.4 million of realized loss due to the partial unwinding of interest rate swap resulting from the amendment of the notional amount from $80.0 million to $65.0 million. See Note 6 for details. Under the Amended Revolving Facility, the Company is subject to a variety of affirmative and negative covenants of types customary in a senior secured lending facility, including financial covenants relating to leverage, interest expense coverage and (until the quarter ending December 31, 2021) minimum adjusted EBITDA. The Company is allowed to pay dividends, provided, among other things, a total net leverage ratio is met, and no default exists or has occurred and is continuing as of the date of any such payment and after giving effect thereto. The Amended Revolving Facility has no scheduled payback required on the principal prior to the maturity date on November 6, 2023.
At June 30, 2020, the Company had outstanding borrowings of $122.0 million and had utilized $2.3 million of the letters of credit sublimit.
On July 23, 2020 (the "Effective Date"), pursuant to Amendment No. 3 to Amended and Restated Credit Agreement (the “Third Amendment”), the Company amended its existing senior secured revolving credit facility with certain financial institutions.
The Third Amendment, among other things:
| |
| (1) | retained the revolving commitments under the Credit Agreement of $125.0 million and the sublimit on letters of credit and swingline loans of $15.0 million each; |
| |
| (2) | added a $5.0 million quarterly commitment reduction beginning September 30, 2021; |
| |
| (3) | adjusted from cash flow-based to an asset-based lending structure with borrowing a base of 85% of eligible accounts receivable plus 50% of eligible inventory with certain permitted maximum over advance amounts; |
| |
| (4) | removed all previous financial covenants of net leverage ratio, interest coverage ratio and minimum EBITDA; |
| |
| (5) | added a covenant relief period (commencing on the effective date of the Third Amendment and ending upon delivery of a compliance certificate on or after fiscal month ending September 30, 2021), during which the Company must comply with the following: |
(i) a minimum cumulative EBITDA covenant, tested on a monthly basis until the last day of June 2021;
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
(ii) a standalone minimum monthly EBITDA covenant tested on the last day of July 2021 and August 2021; and
(iii) a restriction on capital expenditures such that the amount of capital expenditures shall not exceed $25.0 million in the aggregate.
| |
| (6) | added covenant requiring the Company to maintain a minimum liquidity covenant, tested on a weekly basis; |
| |
| (7) | added an anti-cash hoarding provision; |
| |
| (8) | added a minimum fixed charge coverage ratio of 1.05:1.00 commencing with fiscal quarter ending September 30, 2021, and tested on a quarterly basis thereafter; |
| |
| (9) | modified the applicable margin for base rate loans to range from PRIME + 3.50% to PRIME + 4.50% per annum and the applicable margin for Eurodollar loans to range from Adjusted LIBO Rate + 4.50% to Adjusted LIBO Rate + 5.50% per annum and fixed the commitment fee at 0.50%; |
| |
| (10) | provided for the revolving commitments to be reduced upon the occurrence of certain asset dispositions and incurrence of non-permitted indebtedness and imposed additional restrictions on the Company’s ability to utilize certain other negative covenant baskets; and |
| |
| (11) | added a requirement to provide mortgages and related mortgage instruments with respect to certain specified real property owned by the Company. |
Upon executing the foregoing Third Amendment, the Company was in compliance with all of the financial covenants under the Amended Revolving Facility, and no event of default has occurred or existed through the Third Amendment effective date. Furthermore, the Company believes it will be in compliance with the related financial covenants under the Third Amendment for the next twelve months.
Note 15. Employee Stock Ownership Plan
The Company’s ESOP was established in 2000. As of December 31, 2018, the Company froze the ESOP such that (i) no employees of the Company may commence participation in the ESOP on or after December 31, 2018; (ii) no Company contributions will be made to the ESOP with respect to services performed or compensation received after December 31, 2018; and (iii) the ESOP accounts of all individuals who are actively employed by the Company and participating in the ESOP on December 31, 2018 will be fully vested as of such date. Additionally, the Administrative Committee, with the consent of the Board of Directors, designated certain employees who were terminated in connection with certain reductions-in-force in 2018 to be fully vested in their ESOP accounts as of their severance dates.
Shares were held by the plan trustee for allocation among participants using a compensation-based formula. Subject to vesting requirements, allocated shares are owned by participants and shares are held by the plan trustee until the participant retires.
During the fiscal years ended June 30, 2019 and 2018, the Company charged $0.9 million and $2.3 million, respectively, to compensation expense related to the ESOP. No expenses were recorded for fiscal year ended June 30, 2020. The difference between cost and fair market value of committed to be released shares was recorded as additional paid-in-capital.
|
| | | | | | | | |
| | | As of June 30, |
| | | 2020 | | 2019 |
| Allocated shares | | 1,170,015 |
| | 1,393,530 |
|
| Committed to be released shares | | 0 |
| | 0 |
|
| Unallocated shares | | 0 |
| | 0 |
|
| Total ESOP shares | | 1,170,015 |
| | 1,393,530 |
|
| | | | | |
| (In thousands) | | | | |
| Fair value of ESOP shares | | $ | 8,588 |
| | $ | 22,812 |
|
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
|
| |
Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
Note 16. Share-based Compensation
Farmer Bros. Co. 2017 Long-Term Incentive Plan
On June 20, 2017 (the “Effective Date“), the Company’s stockholders approved the Farmer Bros. Co. 2017 Long-Term Incentive Plan (the “2017 Plan”). The information required by this item will be set forth in2017 Plan succeeded the Proxy StatementCompany's prior long-term incentive plans, the Farmer Bros. Co. Amended and is incorporated in this report by reference.
Restated 2007 Long-Term Incentive Plan (the “Amended Equity CompensationPlan“) and the Farmer Bros. Co. 2007 Omnibus Plan Information
Information about our equity compensation plans at June 30, 2017 that were either approved or not approved by our stockholders was as follows:
|
| | | | | | |
| Plan Category | | Number of Shares to be Issued Upon Exercise of Outstanding Options | | Weighted Average Exercise Price of Outstanding Options | | Number of Shares Remaining Available for Future Issuance(3) |
| Equity compensation plans approved by stockholders(1) | | 492,250 | | $23.76 | | — |
| Equity compensation plans approved by stockholders(2) | | — | | — | | 900,000 |
| Equity compensation plans not approved by stockholders | | — | | — | | — |
| Total | | 492,250 | | $23.76 | | 900,000 |
________________
(1) Includes shares issued(collectively, the “Prior Plans“). On the Effective Date, the Company ceased granting awards under the Prior Plans.Plans; however, awards outstanding under the Prior Plans will remain subject to the terms of the applicable Prior Plan.
(2) IncludesThe 2017 Plan provides for the grant of stock options (including incentive stock options and non-qualified stock options), stock appreciation rights, restricted stock, restricted stock units, dividend equivalents, performance shares and other stock- or cash-based awards to eligible participants. Non-employee directors of the Company and employees of the Company or any of its subsidiaries are eligible to receive awards under the 2017 Plan. The 2017 Plan authorizes the issuance of (i) 900,000 shares of common stock plus (ii) the number of shares of common stock subject to awards under the Company’s Prior Plans that are outstanding as of the Effective Date and that expire or are forfeited, cancelled or similarly lapse following the Effective Date. Subject to certain limitations, shares of common stock covered by awards granted under the 2017 Plan that are forfeited, expire or lapse, or are repurchased for or paid in cash, may be used again for new grants under the 2017 Plan. As of June 30, 2020, there were 458,947 shares remain available under the 2017 Plan including shares that were forfeited under the Prior Plans for future issuance. Shares of common stock granted under the 2017 Plan may be authorized but unissued shares, shares purchased on the open market or treasury shares. In no event will more than 900,000 shares of common stock be issuable pursuant to the exercise of incentive stock options under the 2017 Plan.
The 2017 Plan includes annual limits on certain awards that may be granted to any individual participant. The maximum aggregate number of shares of common stock with respect to all stock options and stock appreciation rights that may be granted to any one person during any calendar year is 250,000 shares. The 2017 Plan also includes limits on the maximum aggregate amount that may become payable pursuant to all performance bonus awards that may be granted to any one person during any calendar year and the maximum amount that may become payable pursuant to all cash-based awards granted under the 2017 Plan and the aggregate grant date fair value of all equity-based awards granted under the 2017 Plan to any non-employee director during any calendar year for services as a member of the Board.
The 2017 Plan contains a minimum vesting requirement, subject to limited exceptions, that awards made under the 2017 Plan may not vest earlier than the date that is one year following the grant date of the award. The 2017 Plan also contains provisions with respect to payment of exercise or purchase prices, vesting and expiration of awards, adjustments and treatment of awards upon certain corporate transactions, including stock splits, recapitalizations and mergers, transferability of awards and tax withholding requirements.
The 2017 Plan may be amended or terminated by the Board at any time, subject to certain limitations requiring stockholder consent or the consent of the applicable participant. In addition, the administrator may not, without the approval of the Company’s stockholders, authorize certain re-pricings of any outstanding stock options or stock appreciation rights granted under the 2017 Plan. The 2017 Plan will expire on June 20, 2027.
Farmer Bros. Co. 2020 Inducement Incentive Plan
In March 2020, the Company’s Board of Directors approved the Farmer Bros. Co. 2020 Inducement Incentive Plan (the “2020 Inducement Plan”). The 2020 Inducement Plan’s purpose is to enhance the Company’s ability to attract persons who make (or are expected to make) important contributions to the Company by providing these individuals with equity ownership opportunities. Awards under the 2020 Inducement Plan has the same terms and conditions as the 2017 Plan. The Board of Directors has reserved 300,000 shares of the Company’s common stock for issuance under the 2020 Inducement Plan. As of June 30, 2020, there were 211,505 shares remain available under the 2020 Inducement Plan for future issuance of which 40,134 were issued on July 1, 2020.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Non-qualified stock options with time-based vesting (“NQOs”)
One-third of the total number of NQO vest ratably on each of the first three anniversaries of the grant date, contingent on continued employment, and subject to accelerated vesting in certain circumstances.
Following are the assumptions used in the Black-Scholes valuation model for NQOs granted on the date of the grant during the fiscal years ended June 30, 2020, 2019 and 2018:
|
| | | | | | | | | | | | |
| | | Year Ended June 30, |
| | | 2020 | | 2019 | | 2018 |
| Weighted average fair value of NQOs | | $ | 4.24 |
| | $ | 7.78 |
| | $ | 10.41 |
|
| Risk-free interest rate | | 1.5 | % | | 3.0 | % | | 2.0 | % |
| Dividend yield | | 0 | % | | 0 | % | | 0 | % |
| Average expected term | | 4.6 years |
| | 4.6 years |
| | 4.6 years |
|
| Expected stock price volatility | | 35.4 | % | | 29.6 | % | | 35.4 | % |
The Company’s assumption regarding expected stock price volatility is based on the historical volatility of the Company’s stock price. The risk-free interest rate is based on U.S. Treasury zero-coupon issues at the date of grant with a remaining term equal to the expected life of the stock options. The average expected term is based on historical weighted time outstanding and the expected weighted time outstanding calculated by assuming the settlement of outstanding awards at the midpoint between the vesting date and the end of the contractual term of the award. Currently, management estimates an annual forfeiture rate of 10.0% based on actual forfeiture experience. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
The following table summarizes NQO activity for the year ended June 30, 2020: |
| | | | | | | | | | |
| Outstanding NQOs: | | Number of NQOs | | Weighted Average Exercise Price ($) | | Weighted Average Remaining Life (Years) | | Aggregate Intrinsic Value ($ in thousands) |
| Outstanding at June 30, 2019 | | 198,049 |
| | 27.35 | | 5.25 | | 40 |
|
| Granted | | 536,468 |
| | 13.16 | | — | | — |
|
| Exercised | | (10,360 | ) | | 12.48 | | — | | 28 |
|
| Forfeited | | (157,172 | ) | | 24.14 | | — | | — |
|
| Expired | | (38,027 | ) | | 31.31 | | — | | — |
|
| Outstanding at June 30, 2020 | | 528,958 |
| | 13.92 | | 6.21 | | 55 |
|
| Exercisable at June 30, 2020 | | 20,017 |
| | 28.27 | | 3.23 | | 0 |
|
The weighted-average grant-date fair value of options granted during the year ended June 30, 2020 was $4.24.
The aggregate intrinsic values outstanding at the end of each fiscal period in the table above represent the total pretax intrinsic value, based on the Company’s closing stock price of $7.34 at June 30, 2020 and $16.37 at June 28, 2019, representing the last trading day of the respective fiscal years, which would have been received by NQO holders had all award holders exercised their NQOs that were in-the-money as of those dates. The aggregate intrinsic value of NQO exercises in each fiscal period above represents the difference between the exercise price and the value of the Company’s common stock at the time of exercise. NQOs outstanding that are expected to vest are net of estimated forfeitures.
The Company received $0.1 million, $0.3 million and $1.1 million in proceeds from exercises of vested NQOs in fiscal 2020, 2019 and 2018, respectively.
As of June 30, 2020 and 2019, respectively, there was $1.7 million and $1.1 million of unrecognized compensation cost related to NQOs. The unrecognized compensation cost related to NQOs at June 30, 2020 is expected to be recognized over the weighted average period of 2.28 years. Total compensation expense for NQOs was $0.7 million, $0.5 million and $0.3 million in fiscal 2020, 2019 and 2018, respectively.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Non-qualified stock options with performance-based and time-based vesting (“PNQs”)
PNQ shares granted for each fiscal year are subject to forfeiture if a target modified net income goal is not attained. For this purpose, “Modified Net Income” is defined as net income (GAAP) before taxes and excluding any gains or losses from sales of assets, and excluding the effect of restructuring and other transition expenses. These PNQs have an exercise price equal the closing price of the Company’s common stock on the date of grant. One-third of the total number of shares subject to each such stock option vest ratably on each of the first three anniversaries of the grant date, contingent on continued employment, and subject to accelerated vesting in certain circumstances.
PNQ shares were not granted during the fiscal years ended June 30, 2020, 2019 and 2018.
The following table summarizes PNQ activity for the year ended June 30, 2020:
|
| | | | | | | | | | |
| Outstanding PNQs: | | Number of PNQs | | Weighted Average Exercise Price ($) | | Weighted Average Remaining Life (Years) | | Aggregate Intrinsic Value ($ in thousands) |
| Outstanding at June 30, 2019 | | 229,961 |
| | 26.21 | | 1.23 | | 0 |
|
| Granted | | — |
| | — | | — | | — |
|
| Exercised | | 0 |
| | 0 | | — | | — |
|
| Forfeited | | (6,212 | ) | | 32.85 | | — | | — |
|
| Expired | | (210,119 | ) | | 25.86 | | — | | — |
|
| Outstanding at June 30, 2020 | | 13,630 |
| | 28.60 | | 2.36 | | 0 |
|
| Exercisable at June 30, 2020 | | 8,822 |
| | 26.89 | | 1.98 | | 0 |
|
The aggregate intrinsic values outstanding at the end of each fiscal period in the table above represent the total pretax intrinsic values, based on the Company’s closing stock price of $7.34 at June 30, 2020 and $16.37 at June 28, 2019, representing the last trading day of the respective fiscal years, which would have been received by PNQ holders had all award holders exercised their PNQs that were in-the-money as of those dates. The aggregate intrinsic value of PNQ exercises in each fiscal period represents the difference between the exercise price and the value of the Company’s common stock at the time of exercise. PNQs outstanding that are expected to vest are net of estimated forfeitures.
There were no options exercised during the fiscal year ended June 30, 2020. The Company received $0.1 million and $0.3 million in proceeds from exercises of vested PNQs in fiscal 2019 and 2018, respectively.
As of June 30, 2020 and 2019, there were zero and $39.7 thousand, respectively, of unrecognized compensation cost related to PNQs. Total compensation expense related to PNQs in fiscal 2020, 2019 and 2018 was $18.3 thousand, $0.3 million and $0.8 million, respectively.
Restricted Stock
Restricted stock awards cliff vest on the earlier of the one year anniversary of the grant date or the date of the first annual meeting of the Company’s stockholders immediately following the grant date, in the case of non-employee directors, and the third anniversary of the grant date, in the case of eligible employees, in each case subject to continued service to the Company through the vesting date and the acceleration provisions of the award plan and restricted stock agreement. Restricted stock is expected to vest net of estimated forfeitures.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
The following table summarizes restricted stock activity for the year ended June 30, 2020: |
| | | | | |
| Outstanding and Nonvested Restricted Stock Awards: | | Shares Awarded | | Weighted Average Grant Date Fair Value ($) |
| Outstanding at June 30, 2019 | | 32,056 |
| | 21.10 |
| Granted | | 229,573 |
| | 13.0 |
| Exercised/Released | | (30,352 | ) | | 20.8 |
| Cancelled/Forfeited | | (12,673 | ) | | 17.7 |
| Outstanding and nonvested at June 30, 2020 | | 218,604 |
| | 13.0 |
The total grant-date fair value of restricted stock granted during the year ended June 30, 2020 was $2.5 million.
As of June 30, 2020 and 2019, there was $1.7 million and $0.4 million, respectively, of unrecognized compensation cost related to restricted stock. The unrecognized compensation cost related to restricted stock at June 30, 2020 is expected to be recognized over the weighted average period of 1.41 years. Total compensation expense for restricted stock was $1.1 million, $23.0 thousand and $0.3 million, for the fiscal years ended June 30, 2020, 2019 and 2018, respectively.
Performance-Based Restricted Stock Units (“PBRSUs”)
The PBRSU awards cliff vest on the third anniversary of the date of grant based on the Company’s achievement of certain financial performance goals during the performance periods, subject to certain continued employment conditions and subject to acceleration provisions of the award plan and restricted stock unit agreement. At the end of the three-year performance period, the number of PBRSUs that actually vest will be 0% to 200% of the target amount, depending on the extent to which the Company meets or exceeds the achievement of those financial performance goals measured over the full three-year performance period. PBRSUs are expected to vest net of estimated forfeitures.
The following table summarizes PBRSU activity for the year ended June 30, 2020: |
| | | | | |
| Outstanding and Nonvested PBRSUs: | | PBRSUs Awarded | | Weighted Average Grant Date Fair Value ($) |
| Outstanding and nonvested at June 30, 2019 | | 51,237 |
| | 27.69 |
| Granted | | 81,236 |
| | 14.46 |
| Vested/Released | | 0 |
| | 0 |
| Cancelled/Forfeited | | (51,136 | ) | | 25.63 |
| Outstanding and nonvested at June 30, 2020 | | 81,337 |
| | 15.78 |
The total grant-date fair value of PBRSUs granted during the year ended June 30, 2020 was $1.2 million.
As of June 30, 2020 and 2019, there was $0.5 million and $0.3 million, respectively, of unrecognized compensation cost related to PBRSUs. The unrecognized compensation cost related to PBRSUs at June 30, 2020 is expected to be recognized over the weighted average period of 2.17 years. Total compensation expense for PBRSUs was $0.2 million in each of the year ended June 30, 2020 and 2018. There was no compensation expense for PBRSUs for the fiscal year ended June 30, 2019.
Performance Cash Awards (“PCAs”)
In November 2019, the Company granted PCAs under the 2017 Plan to certain employees. The PCAs cliff vest on the third anniversary of the date of grant based on the Company’s achievement of certain financial performance goals for the performance period July 1, 2019 through June 30, 2022, subject to certain continued employment conditions and subject to acceleration provisions of the 2017 Plan. At the end of the three-year performance period, the amount of PCAs that actually vest will be 0% to 200% of the target amount, depending on the extent to which the Company meets or exceeds the achievement of those financial performance goals measured over the full three-year performance period.
| |
(3) | The 2017 Plan succeeded the Prior Plans. On the Effective Date of the 2017 Plan, the Company ceased granting awards under the Prior Plans; however, awards outstanding under the Prior Plans will remain subject to the terms of the applicable Prior Plan. The 2017 Plan authorizes the issuance of (i) 900,000 shares of common stock plus (ii) the number of shares of common stock subject to awards under the Company’s Prior Plans that are outstanding as of the Effective Date and that expire or are forfeited, cancelled or similarly lapse following the Effective Date. Subject to certain limitations, shares of common stock covered by awards granted under the 2017 Plan that are forfeited, expire or lapse, or are repurchased for or paid in cash, may be used again for new grants under the 2017 Plan. Shares of common stock granted under the 2017 Plan may be authorized but unissued shares, shares purchased on the open market or treasury shares. In no event will more than 900,000 shares of common stock be issuable pursuant to the exercise of incentive stock options under the 2017 Plan. The 2017 Plan provides for the grant of stock options (including incentive stock options and non-qualified stock options), stock appreciation rights, restricted stock, restricted stock units, dividend equivalents, performance shares and other stock- or cash-based awards to eligible participants. The 2017 Plan also authorizes the grant of awards that are intended to qualify as “qualified performance-based compensation” within the meaning of Section 162(m) of the Internal Revenue Code (the “Code”). Non-employee directors of the Company and employees of the Company or any of its subsidiaries are eligible to receive awards under the 2017 Plan. |
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
The PCAs are measured initially based on a fixed amount of the awards at the date of grant and are required to be re-measured based on the probability of achieving the performance conditions at each reporting date until settlement. Compensation expense for PCAs is recognized over the applicable performance periods. The Company records a liability equal to the cost of PCAs for which achievement of the performance condition is deemed probable. As of June 30, 2020, the Company had recognized accrued liabilities of $72.3 thousand.
At June 30, 2020, there was $0.3 million of unrecognized PCA compensation cost. The unrecognized PCA compensation cost at June 30, 2020 is expected to be recognized over the weighted average period of 2.37 years. Total compensation expense for PCAs was $72.3 thousand for the fiscal year ended June 30, 2020.
Note 17. Other Current Liabilities |
| |
Item 13. | Certain Relationships and Related Transactions, and Director Independence |
Other current liabilities consist of the following:The information required by this item will be set forth |
| | | | | | | | |
| | | As of June 30, |
| (In thousands) | | 2020 | | 2019 |
| Accrued postretirement benefits | | $ | 744 |
| | $ | 1,068 |
|
| Accrued workers’ compensation liabilities | | 1,466 |
| | 1,495 |
|
| Cumulative preferred dividends, undeclared and unpaid (1) | | 1,477 |
| | 305 |
|
| Earnout payable(2) | | 0 |
| | 1,000 |
|
| Working capital dispute payable(3) | | 551 |
| | 354 |
|
| Other(4) | | 2,564 |
| | 3,087 |
|
| Other current liabilities | | $ | 6,802 |
| | $ | 7,309 |
|
___________
(1) Represents the cumulative preferred dividends, undeclared and unpaid. Previously accrued long-term portion has been reclassified to current liabilities.
(2) Represents the estimated fair value of earnout paid in connection with the Proxy StatementCompany’s acquisition of substantially all of the assets of West Coast Coffee completed on February 7, 2017.
(3) Represents accrued expenses related to working capital disputes in connection with the Company's acquisition of Boyd Coffee on October 2, 2017.
(4) Includes accrued property taxes, sales and is incorporated in this report by reference.use taxes and insurance liabilities.
|
| |
Item 14. | Principal Accountant Fees and Services |
Note 18. Other Long-Term Liabilities
Other long-term liabilities include the following: |
| | | | | | | | |
| | | As of June 30, |
| (In thousands) | | 2020 | | 2019 |
| Finance leases liabilities | | $ | 9 |
| | $ | 32 |
|
| Derivative liabilities—noncurrent | | 2,859 |
| | 1,612 |
|
| Deferred compensation (1) | | 1,170 |
| | 0 |
|
| Cumulative preferred dividends, undeclared and unpaid—noncurrent | | 0 |
| | 618 |
|
| Deferred income taxes (2) | | 1,494 |
| | 1,795 |
|
| Other long-term liabilities | | $ | 5,532 |
| | $ | 4,057 |
|
___________
(1) Includes payroll taxes and performance cash awards liability.
(2) Includes deferred tax liabilities that have an indefinite reversal pattern.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Note 19. Income Taxes
The information required by this itemcurrent and deferred components of the provision for income taxes consist of the following:
|
| | | | | | | | | | | | |
| | | For the Years Ended June 30, |
| (In thousands) | | 2020 | | 2019 | | 2018 |
| Current: | | | | | | |
| Federal | | $ | 0 |
| | $ | (1,774 | ) | | $ | 101 |
|
| State | | 105 |
| | 231 |
| | 56 |
|
| Total current income tax (benefit) expense | | 105 |
| | (1,543 | ) | | 157 |
|
| Deferred: | | | | | | |
| Federal | | (458 | ) | | 30,618 |
| | 17,090 |
|
| State | | 158 |
| | 11,036 |
| | 65 |
|
| Total deferred income tax expense | | (300 | ) | | 41,654 |
| | 17,155 |
|
| Income tax expense | | $ | (195 | ) | | $ | 40,111 |
| | $ | 17,312 |
|
A reconciliation of income tax expense to the federal statutory tax rate is as follows:
|
| | | | | | | | | | | | |
| | | For the Years Ended June 30, |
| (In thousands) | | 2020 | | 2019 | | 2018 |
| Statutory tax rate | | 21 | % | | 21 | % | | 28 | % |
| Income tax (benefit) expense at statutory rate | | $ | (7,829 | ) | | $ | (7,032 | ) | | $ | (272 | ) |
| State income tax (benefit) expense, net of federal tax benefit | | (1,523 | ) | | (1,295 | ) | | 12 |
|
| Valuation allowance | | 9,153 |
| | 50,123 |
| | 283 |
|
| Change in tax rate | | 233 |
| | 124 |
| | 18,022 |
|
| Retiree life insurance | | 0 |
| | 0 |
| | 19 |
|
| Other (net) | | (229 | ) | | (1,809 | ) | | (752 | ) |
| Income tax expense | | $ | (195 | ) | | $ | 40,111 |
| | $ | 17,312 |
|
| | | | | | | |
Pursuant to the Tax Cuts and Jobs Act enacted on December 22, 2017 (the "Tax Act"), the federal corporate tax rate was reduced to 21.0%, effective for the tax years beginning on or after January 1, 2018. Deferred tax amounts are calculated based on the rates at which they are expected to reverse in the future.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
The primary components of the temporary differences which give rise to the Company’s net deferred tax assets (liabilities) are as follows:
|
| | | | | | | | | |
| | | As of June 30, |
| (In thousands) | | 2020 | | 2019 | |
| Deferred tax assets: | | | | | |
| Postretirement benefits | | $ | 20,232 |
| | $ | 20,775 |
| |
| Accrued liabilities | | 3,970 |
| | 5,042 |
| |
| Net operating loss carryforwards | | 38,754 |
| | 37,768 |
| |
| Intangible assets | | 9,482 |
| | 0 |
| |
| Operating lease liabilities | | 5,419 |
| | — |
| |
| Other | | 6,893 |
| | 5,950 |
| |
| Total deferred tax assets | | 84,750 |
| | 69,535 |
| |
| Deferred tax liabilities: | | | | | |
| Fixed assets | | (13,427 | ) | | (15,562 | ) | |
| Right-of-use operating lease assets | | (5,513 | ) | | — |
| |
| Other | | (2,950 | ) | | (3,749 | ) | |
| Total deferred tax liabilities | | (21,890 | ) | | (19,311 | ) | |
| Valuation allowance | | (64,354 | ) | | (52,019 | ) | |
| Net deferred tax liabilities | | $ | (1,494 | ) | | $ | (1,795 | ) | |
At June 30, 2020, the Company had approximately $150.6 million in federal and $115.0 million in state net operating loss carryforwards that will expire from June 30, 2021 to June 30, 2030. Additionally, at June 30, 2020, the Company had $0.8 million of federal business tax credits that will expire from June 30, 2025 to June 30, 2038.
At June 30, 2020, the Company had net deferred tax assets of $62.9 million before valuation allowance of $64.4 million. In assessing if the deferred tax assets will be set forthrealized, the Company considers whether it is probable that some or all of the deferred tax assets will not be realized. In determining whether the deferred taxes are realizable, the Company considers the period of expiration of the tax asset, historical and projected taxable income, and tax liabilities for the tax jurisdiction in which the tax asset is located. Valuation allowances are provided to reduce the amounts of deferred tax assets to an amount that is more likely than not to be realized based on an assessment of positive and negative evidence, including estimates of future taxable income necessary to realize future deductible amounts.
For the years ended June 30, 2020, 2019 and 2018, due to recent cumulative losses, the Company concluded that certain federal and state net operating loss carry forwards and tax credit carryovers will not be utilized before expiration. The amounts of valuation allowance recorded in the Proxy StatementConsolidated Balance Sheets were $64.4 million, $52.0 million and $1.9 million to reduce deferred tax assets in fiscal 2020, 2019 and 2018, respectively. The Company's valuation allowance increased in fiscal 2020, 2019 and 2018 by $12.3 million, $50.1 million and $0.3 million, respectively.
As of, and for the three years ended June 30, 2020, 2019 and 2018, the Company had no significant uncertain tax positions.
The Company files income tax returns in the U.S. and in various state jurisdictions with varying statutes of limitations. The Company is no longer subject to U.S. income tax examinations for the fiscal years prior to June 30, 2018. Although the outcome of tax audits is always uncertain, the Company does not believe the outcome of any future audit will have a material adverse effect on the Company’s consolidated financial statements.
The Company’s policy is to recognize interest expense and penalties related to income tax matters as a component of income tax expense. There were no amount of interest and penalties recognized in the Consolidated Balance Sheets in the fiscal years ended June 30, 2020 and 2019, associated with uncertain tax positions. Additionally, the Company did not record any income tax expense related to interest and penalties on uncertain tax positions in the fiscal years ended June 30, 2020, 2019 and 2018, respectively.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Note 20. Net (Loss) Income Per Common Share
Basic net income (loss) per common share is calculated by dividing net income (loss) attributable to the Company by the weighted average number of common shares outstanding during the periods presented. Diluted net income (loss) per common share is calculated by dividing diluted net income (loss) attributable to the Company by the weighted average number of common shares outstanding adjusted to include the effect, if dilutive, of the exercise of in-the-money stock options, unvested performance-based restricted stock units, and shares of Series A Preferred Stock, as converted, during the periods presented. The calculation of dilutive shares outstanding excludes out-of-the-money stock options (i.e., such option’s exercise prices were greater than the average market price of our common shares for the period) and unvested performance-based restricted stock units because their inclusion would be have been anti-dilutive.
The following table presents the computation of basic and diluted earnings per common share:
|
| | | | | | | | | | | | |
| | | For the Years Ended June 30, |
| (In thousands, except share and per share amounts) | | 2020 | | 2019 | | 2018 |
| Undistributed net (loss) income available to common stockholders | | $ | (37,462 | ) | | $ | (74,054 | ) | | $ | (18,652 | ) |
| Undistributed net (loss) income available to nonvested restricted stockholders and holders of convertible preferred stock | | (179 | ) | | (76 | ) | | (17 | ) |
| Net (loss) income available to common stockholders—basic | | $ | (37,641 | ) | | $ | (74,130 | ) | | $ | (18,669 | ) |
| | | | | | | |
| Weighted average common shares outstanding—basic | | 17,205,849 |
| | 16,996,354 |
| | 16,815,020 |
|
| Effect of dilutive securities: | | | | | | |
| Shares issuable under stock options | | 0 |
| | 0 |
| | 0 |
|
| Weighted average common shares outstanding—diluted | | 17,205,849 |
| | 16,996,354 |
| | 16,815,020 |
|
| Net (loss) income per common share available to common stockholders—basic | | $ | (2.19 | ) | | $ | (4.36 | ) | | $ | (1.11 | ) |
| Net (loss) income per common share available to common stockholders—diluted | | $ | (2.19 | ) | | $ | (4.36 | ) | | $ | (1.11 | ) |
The following table summarizes anti-dilutive securities excluded from the computation of diluted net income (loss) per common share for the periods indicated:
|
| | | | | | | | | |
| | | For the Years Ended June 30, |
| | | 2020 | | 2019 | | 2018 |
| Shares issuable under stock options | | 330,627 |
| | 157,850 |
| | 462,032 |
|
| Shares issuable under convertible preferred stock | | 422,193 |
| | 407,734 |
| | 393,769 |
|
| Shares issuable under PBRSUs | | 73,012 |
| | 65,971 |
| | 35,732 |
|
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Note 21. Preferred Stock
The Company is authorized to issue 500,000 shares of preferred stock at a par value of $1.00, including 21,000 authorized shares of Series A Preferred Stock.
Series A Convertible Participating Cumulative Perpetual Preferred Stock
The Series A Preferred Stock (a) pays a dividend, when, as and if declared by the Company’s Board of Directors, of 3.5% APR of the stated value per share, payable quarterly in arrears, (b) has an initial stated value of $1,000 per share, adjustable up or down by the amount of undeclared and unpaid dividends or subsequent payment of accumulated dividends thereon, respectively, and (c) has a conversion price of $38.32. Dividends may be paid in cash. The Company accrues for undeclared and unpaid dividends as they are payable in accordance with the terms of the Certificate of Designations filed with the Secretary of State of the State of Delaware. At June 30, 2020, the Company had undeclared and unpaid preferred dividends of $1,478,429 on 14,700 issued and outstanding shares of Series A Preferred Stock. Series A Preferred Stock is a participating security and has rights to earnings that otherwise would have been available to holders of the Company's common stock. On an as converted basis, holders of Series A Preferred Stock are entitled to vote together with the holders of the Company’s common stock and are entitled to share in the dividends on the Company's common stock, when declared. Each share of Series A Preferred Stock is convertible into the number of shares of the Company’s common stock (rounded down to the nearest whole share and subject to adjustment in accordance with the terms of the Certificate of Designations) equal to the stated value per share of Series A Preferred Stock divided by the conversion price of $38.32. Series A Preferred Stock is a perpetual stock and is incorporatednot redeemable at the election of the Company or any holder. Based on its characteristics, the Company classified Series A Preferred Stock as permanent equity.
At June 30, 2020, Series A Preferred Stock consisted of the following:
|
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | |
| (In thousands, except share and per share amounts) | | | | | | |
| Shares Authorized | | Shares Issued and Outstanding | | Stated Value per Share | | Carrying Value | | Cumulative Preferred Dividends, Undeclared and Unpaid | | Liquidation Preference |
| 21,000 |
| | 14,700 |
| | $ | 1,101 |
| | $ | 16,178 |
| | $ | 1,478 |
| | $ | 16,178 |
|
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Note 22. Commitments and Contingencies
Purchase Commitments
As of June 30, 2020, the Company had committed to purchase green coffee inventory totaling $50.5 million under fixed-price contracts, $7.0 million in other inventory under non-cancelable purchase orders and $8.2 million in other purchases under non-cancelable purchase orders.
Legal Proceedings
Council for Education and Research on Toxics (“CERT”) v. Brad Berry Company Ltd., et al., Superior Court of the State of California, County of Los Angeles
On August 31, 2012, CERT filed an amendment to a private enforcement action adding a number of companies as defendants, including the Company’s subsidiary, Coffee Bean International, Inc., which sell coffee in California under the State of California's Safe Drinking Water and Toxic Enforcement Act of 1986 (“Prop 65”). The suit alleges that the defendants have failed to issue clear and reasonable warnings in accordance with Prop 65 that the coffee they produce, distribute, and sell contains acrylamide. This lawsuit was filed in Los Angeles Superior Court (the “Court”). CERT alleges that the Company and the other defendants failed to provide warnings for their coffee products of exposure to the chemical acrylamide as required under Prop 65. Plaintiff seeks equitable relief, including providing warnings to consumers of coffee products, as well as civil penalties in the amount of the statutory maximum of $2,500.00 per day per violation of Prop 65. The Plaintiff asserts that every consumed cup of coffee, absent a compliant warning, is equivalent to a violation under Prop 65.
The Company, as part of a joint defense group (“JDG”) organized to defend against the lawsuit, disputes the claims of CERT. Acrylamide is not added to coffee but is present in all coffee in small amounts (parts per billion) as a byproduct of the coffee bean roasting process. Acrylamide is produced naturally in connection with the heating of many foods, especially starchy foods, and is believed to be caused by the Maillard reaction, though it has also been found in unheated foods such as olives. With respect to coffee, acrylamide is produced when coffee beans are heated during the roasting process-it is the roasting itself that produces the acrylamide. While there has been a significant amount of research concerning proposals for treatments and other processes aimed at reducing acrylamide content of different types of foods, to our knowledge there is currently no known strategy for reducing acrylamide in coffee without negatively impacting the sensorial properties of the product.
The Company has asserted multiple affirmative defenses. Trial of the first phase of the case commenced on September 8, 2014, and was limited to three affirmative defenses shared by all defendants. On September 1, 2015, the trial court issued a final ruling adverse to defendants on all Phase 1 defenses. Trial of the second phase of the case commenced in the fall of 2017. On May 7, 2018, the trial court issued a ruling adverse to defendants on the Phase 2 defense, the Company's last remaining defense to liability. On June 22, 2018, the California Office of Environmental Health Hazard Assessment (OEHHA) proposed a new regulation clarifying that cancer warnings are not required for coffee under Proposition 65. The case was set to proceed to a third phase trial on damages, remedies and attorneys' fees on October 15, 2018. However, on October 12, 2018, the California Court of Appeal granted the “defendants” request for a stay of the Phase 3 trial.
On June 3, 2019, the Office of Administrative Law (OAL) approved the coffee exemption regulation. The regulation became effective on October 1, 2019. On June 24, 2019, the Court of Appeal lifted the stay of the litigation. A status conference was held on July 11, 2019. The Court granted the JDG’s motion for leave to amend its answers to add the coffee exemption regulation as a defense. Concurrently, the Court denied CERT’s motion to add OEHHA as a party but granted CERT’s motions to complete the administrative record with respect to the exemption and to undertake certain third party discovery. A status conference was held November 12, 2019 to discuss discovery issues and dispositive motions. Plaintiff’s motion to compel OEHHA to add documents to the rulemaking file for the new coffee exemption regulation was denied. CERT continues to pursue third-party discovery with plans to file motions to compel appearances of proposed deponents. These motions, along with CERT’s eight summary judgment motions, were heard at a January 21, 2020 hearing where the Court denied several of CERT’s discovery requests. The JDG’s reply in support of its motion for summary judgment was due to the Court on the March 16, 2020 however, on March 17, 2020, notice was given that the Court was rescheduling the hearings set for March 23, 2020. Due to COVID 19 restrictions, the Court continued the hearing on the nine motions until July 16, 2020. At the hearing, the Court denied three of CERT’s motions for summary adjudication that challenged the OEHHA rulemaking, and rescheduled the balance of the pending motions for August 10, 2020. Subsequent to the hearing on January 21, 2020, Plaintiff made broad discovery requests against each of the defendants in hopes of opening up a third round of discovery. The discovery focuses on
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
“additives to” and “flavorings” in coffee. The JDG has responded to the discovery requests but Plaintiff has filed a motion to compel further answers to discovery and production of documents. The Court has continued a hearing on this reportmatter until August 21, 2020.
At the August 10, 2020 hearing, the Court denied multiple motions by reference.the Plaintiffs for summary adjudication. The hearing on the remaining motions was scheduled for August 21, 2020 and at that hearing, the Court denied CERT’s motion for summary judgment and granted the JDG’s motion for summary judgment, noting that the discovery and claims regarding additives were outside the scope of this case.
The JDG is preparing an order and a proposed form of judgment reflecting the Courts ruling to submit to the Court. At this time, the Company is unable to predict the timing of the final judgment or any procedural next steps by CERT. In addition, the Company is not able to predict the probability of the outcome or estimate of loss, if any, related to this matter.
The Company is a party to various other pending legal and administrative proceedings. It is management’s opinion that the outcome of such proceedings will not have a material impact on the Company’s financial position, results of operations, or cash flows.
Note 23. Revenue Recognition
The Company’s primary sources of revenue are sales of coffee, tea and culinary products. The Company recognizes revenue when control of the promised good or service is transferred to the customer and in amounts that the Company expects to collect. The timing of revenue recognition takes into consideration the various shipping terms applicable to the Company’s sales.
The Company delivers products to customers primarily through two methods, DSD to the Company’s customers at their place of business and direct ship from the Company’s warehouse to the customer’s warehouse or facility. Each delivery or shipment made to a third party customer is to satisfy a performance obligation. Performance obligations generally occur at a point in time and are satisfied when control of the goods passes to the customer. The Company is entitled to collection of the sales price under normal credit terms in the regions in which it operates.
PART IV
The Company disaggregates net sales from contracts with customers based on the characteristics of the products sold:
|
| |
Item 15. | Exhibits and Financial Statement Schedules |
|
| | | | | | | | | | | | | | | | | | | | | |
| | | For the Years Ended June 30, |
| | | 2020 | | 2019 | | 2018 |
| (In thousands) | | $ | | % of total | | $ | | % of total | | $ | | % of total |
| Net Sales by Product Category: | | | | | | | | | | | | |
| Coffee (Roasted) | | $ | 325,764 |
| | 64.9 | % | | $ | 378,583 |
| | 63.5 | % | | $ | 379,951 |
| | 62.6 | % |
| Coffee (Frozen Liquid) | | 28,619 |
| | 5.7 | % | | 34,541 |
| | 5.8 | % | | 34,794 |
| | 5.7 | % |
| Tea (Iced & Hot) | | 25,369 |
| | 5.1 | % | | 33,109 |
| | 5.6 | % | | 32,477 |
| | 5.4 | % |
| Culinary | | 50,135 |
| | 10.0 | % | | 64,100 |
| | 10.8 | % | | 64,432 |
| | 10.6 | % |
| Spice | | 21,473 |
| | 4.3 | % | | 24,101 |
| | 4.0 | % | | 25,150 |
| | 4.2 | % |
| Other beverages(1) | | 44,983 |
| | 9.0 | % | | 58,367 |
| | 9.8 | % | | 66,699 |
| | 11.0 | % |
| Other revenues(2) | | 2,701 |
| | 0.5 | % | | 0 |
| | 0 | % | | 0 |
| | 0 | % |
| Net sales by product category | | 499,044 |
| | 99.5 | % | | 592,801 |
| | 99.5 | % | | 603,503 |
| | 99.5 | % |
| Fuel surcharge | | 2,276 |
| | 0.5 | % | | 3,141 |
| | 0.5 | % | | 3,041 |
| | 0.5 | % |
| Net sales | | $ | 501,320 |
| | 100.0 | % | | $ | 595,942 |
| | 100.0 | % | | $ | 606,544 |
| | 100.0 | % |
____________
| |
(a)(1) | List of Financial StatementsIncludes all beverages other than roasted coffee, frozen liquid coffee, and Financial Statement Schedules:iced and hot tea, including cappuccino, cocoa, granitas, and concentrated and ready-to drink cold brew and iced coffee. |
1. Financial Statements included in Part II, Item 8 of this report:
| |
| (2) |
|
Consolidated Balance Sheets asRepresents revenues for certain transition services related to the sale of June 30, 2017 and 2016 |
|
Consolidated Statements of Operations for the Years Ended June 30, 2017, 2016 and 2015 |
|
Consolidated Statements of Comprehensive Income (Loss) for the Years Ended June 30, 2017, 2016 and 2015 |
|
Consolidated Statements of Cash Flows for the Years Ended June 30, 2017, 2016 and 2015 |
|
Consolidated Statements of Stockholders’ Equity for the Years Ended June 30, 2017, 2016 and 2015 |
|
Notes to Consolidated Financial StatementsCompany’s office coffee assets. |
The Company does not have any material contract assets and liabilities as of June 30, 2020. Receivables from contracts with customers are included in “Accounts receivable, net” on the Company’s condensed consolidated balance sheets. At June 30, 2020, 2019 and 2018, “Accounts receivable, net” included, $40.7 million, $53.6 million and $54.5 million, respectively, in receivables from contracts with customers.
2.
Farmer Bros. Co.
Notes to Consolidated Financial Statement Schedules:Statements (continued)
Note 24. Selected Quarterly Financial Statement Schedules are omitted as they are not applicable, orData (Unaudited)
The following tables set forth certain unaudited quarterly information for each of the required information is giveneight fiscal quarters in the two year period ended June 30, 2020. This quarterly information has been prepared on a consistent basis with the audited consolidated financial statements and, notes thereto.
3. The exhibits to this Annual Report on Form 10-Kin the opinion of management, includes all adjustments which management believes are listed on the accompanying index to exhibits and are incorporated herein by reference or are filed as partnecessary for a fair presentation of the Annual Report on Form 10-K. Each management contractinformation for the periods presented. All prior period amounts have been retrospectively adjusted to reflect the impact of the certain changes in accounting principles and corrections to previously issued financial statements.
The Company's quarterly operating results may fluctuate significantly as a result of a variety of factors, and operating results for any fiscal quarter are not necessarily indicative of results for a full fiscal year or compensation plan required to be filed as an exhibit is identified by an asterisk (*).future fiscal quarters.
|
| | | | | | | | | | | | | | | | |
| | | For The Three Months Ended |
| | | September 30,
2019 | | December 31,
2019 | | March 31,
2020 | | June 30,
2020 |
| (In thousands, except per share data) | | | | | | | | |
| Net sales | | $ | 138,600 |
| | $ | 152,498 |
| | $ | 129,139 |
| | $ | 81,083 |
|
| Cost of goods sold | | $ | 97,959 |
| | $ | 108,513 |
| | $ | 91,190 |
| | $ | 65,536 |
|
| Gross profit | | $ | 40,641 |
| | $ | 43,985 |
| | $ | 37,949 |
| | $ | 15,547 |
|
| Selling expenses | | $ | 33,614 |
| | $ | 34,906 |
| | $ | 31,968 |
| | $ | 21,274 |
|
| Income (loss) from operations | | $ | 6,892 |
| | $ | 8,870 |
| | $ | (45,169 | ) | | $ | (13,595 | ) |
| Net income (loss) | | $ | 4,654 |
| | $ | 7,754 |
| | $ | (39,777 | ) | | $ | (9,718 | ) |
| Net income (loss) available to common stockholders per common share—basic | | $ | 0.26 |
| | $ | 0.44 |
| | $ | (2.32 | ) | | $ | (0.57 | ) |
| Net income (loss) available to common stockholders per common share—diluted | | $ | 0.26 |
| | $ | 0.43 |
| | $ | (2.32 | ) | | $ | (0.57 | ) |
|
| | | | | | | | | | | | | | | | |
| | | For The Three Months Ended |
| | | September 30,
2018 | | December 31,
2018 | | March 31,
2019 | | June 30,
2019 |
| (In thousands, except per share data) | | | | | | | | |
| Net sales | | $ | 147,440 |
| | $ | 159,773 |
| | $ | 146,679 |
| | $ | 142,050 |
|
| Cost of goods sold | | $ | 99,205 |
| | $ | 106,529 |
| | $ | 106,779 |
| | $ | 104,327 |
|
| Gross profit | | $ | 48,235 |
| | $ | 53,244 |
| | $ | 39,900 |
| | $ | 37,723 |
|
| Selling expenses | | $ | 37,310 |
| | $ | 39,591 |
| | $ | 34,422 |
| | $ | 28,324 |
|
| (Loss) income from operations | | $ | (2,078 | ) | | $ | 502 |
| | $ | (6,102 | ) | | $ | (7,024 | ) |
| Net loss | | $ | (2,986 | ) | | $ | (10,100 | ) | | $ | (51,749 | ) | | $ | (8,760 | ) |
| Net loss available to common stockholders per common share—basic | | $ | (0.18 | ) | | $ | (0.60 | ) | | $ | (3.05 | ) | | $ | (0.52 | ) |
| Net loss available to common stockholders per common share—diluted | | $ | (0.18 | ) | | $ | (0.60 | ) | | $ | (3.05 | ) | | $ | (0.52 | ) |
| |
(b) | Exhibits: See Exhibit Index. |
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
|
| |
Item 16. | Form 10-K Summary |
Note 25. Subsequent Events
None.The Company evaluated all events or transactions that occurred after June 30, 2019 through the date the consolidated financial statements were issued. During this period the Company had the following material subsequent events that require disclosure:
SIGNATURES
PursuantOn July 23, 2020, pursuant to Amendment No. 3 to Amended and Restated Credit Agreement, the requirements of Section 13 or 15(d)Company amended its existing senior secured revolving credit facility with certain financial institutions. See Note 14 for summary description of the Securities Exchange Actkey items of 1934, the registrantAmendment No. 3. The full text of Amendment No. 3 has duly causedbeen included as Exhibit 10.12 in this report to be signedAnnual Report on its behalf by the undersigned, thereunto duly authorized.Form 10‑K.
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| | | | | |
| | | | | |
| FARMER BROS. CO.
|
| | |
| By: | | /s/Michael H. Keown |
| | | Michael H. Keown
President and Chief Executive Officer
(chief executive officer)
|
| | | September 28, 2017 |
| | | |
| By: | | /s/ David G. Robson |
| | | David G. Robson
Treasurer and Chief Financial Officer
(principal financial and accounting officer) |
| | | September 28, 2017 |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
|
| | | | |
| | | | |
| | | | |
/s/ Randy E. Clark | | Chairman of the Board and Director | | September 28, 2017 |
Randy E. Clark | | | | |
| | | | |
/s/ Guenter W. Berger | | Chairman Emeritus and Director | | September 28, 2017 |
Guenter W. Berger | | | | |
| | | | |
/s/ Hamideh Assadi | | Director | | September 28, 2017 |
Hamideh Assadi | | | | |
| | | | |
| | Director | | |
Jeanne Farmer Grossman | | | | |
| | | | |
/s/ Michael H. Keown | | Director | | September 28, 2017 |
Michael H. Keown | | | | |
| | | | |
/s/ Charles F. Marcy | | Director | | September 28, 2017 |
Charles F. Marcy | | | | |
| | | | |
/s/ Christopher P. Mottern | | Director | | September 28, 2017 |
Christopher P. Mottern | | | | |
EXHIBIT INDEX
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| | |
2.1 | | |
| | |
2.2 | | Purchase Agreement, dated as of September 9, 2016, among Tea Leaf Acquisition Corp., China Mist Brands, Inc., certain stockholders of China Mist Brands, Inc., for certain limited purposes, Daniel W. Schweiker and John S. Martinson, and Daniel W. Schweiker, in his capacity as the sellers’ representative (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on September 14, 2016 and incorporated herein by reference).* |
| | |
2.3 | | |
3.1 | | |
3.2 | |
|
| | |
3.3 | | |
| |
3.4 | |
|
| | |
3.5 | | |
| | |
4.1 | | |
| | |
4.2 | |
|
| | |
10.1 | | Credit Agreement, dated as of March 2, 2015, by and among Farmer Bros. Co., Coffee Bean International, Inc., FBC Finance Company, Coffee Bean Holding Co., Inc., the Lenders party thereto and JPMorgan Chase Bank, N.A., as Administrative Agent (filed as Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the SEC on March 6, 2015 and incorporated herein by reference).
|
| | |
10.2 | | Pledge and Security Agreement, dated as of March 2, 2015, by and among Farmer Bros. Co., Coffee Bean International, Inc., FBC Finance Company, Coffee Bean Holding Co., Inc. and JPMorgan Chase Bank, N.A., as Administrative Agent (filed as Exhibit 10.2 to the Company's Current Report on Form 8-K filed with the SEC on March 6, 2015 and incorporated herein by reference).
|
| | |
10.3 | | Joinder Agreement, dated as of October 11, 2016, by and among China Mist Brands, Inc., Farmer Bros. Co., as the Borrower’s Representative, and JPMorgan Chase Bank, N.A., as Administrative Agent, under that certain Credit Agreement dated as of March 2, 2015 (filed as Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 2016 filed with the SEC on February 9, 2017 and incorporated herein by reference). |
| | |
|
| | |
10.4 | | Joinder to Pledge and Security Agreement, dated as of October 11, 2016, by and among Farmer Bros. Co., Coffee Bean International, Inc., FBC Finance Company, Coffee Bean Holding Co., Inc., China Mist Brands, Inc. and JPMorgan Chase Bank, N.A., as Administrative Agent (filed as Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2016 filed with the SEC on February 9, 2017 and incorporated herein by reference). |
| | |
10.5 | | First Amendment to Credit Agreement and First Amendment to Pledge and Security Agreement, dated as of August 25, 2017, by and among Farmer Bros. Co., China Mist Brands, Inc., Coffee Bean International, Inc., FBC Finance Company, Coffee Bean Holding Company, Inc., the Lenders party thereto and JPMorgan Chase Bank, N.A., as Administrative Agent (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on August 30, 2017 and incorporated herein by reference). |
| | |
10.6 | | |
| | |
10.7 | | |
| | |
10.8 | | |
| | |
10.9 | | |
| | |
10.10 | | |
| | |
10.11 | | |
| | |
10.12 | | |
| | |
10.13 | | |
| | |
10.14 | | |
| |
10.15 | | |
| | |
|
| | |
10.16 | | |
| |
10.17 | | |
| |
10.18 | | |
| |
10.19 | |
|
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10.20 | | |
| | |
10.21 | | |
| | |
10.22 | | |
| | |
10.23 | | |
| | |
10.24 | | |
| | |
10.25 | | |
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10.26 | | |
| | |
10.27 | | |
| | |
10.28 | | |
| | |
|
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10.29 | | |
| | |
10.30 | | |
| | |
10.31 | | |
| | |
10.32 | | |
| | |
10.33 | | |
| | |
10.34 | | |
| | |
10.35 | | |
| | |
10.36 | | |
| | |
10.37 | | |
| | |
10.38 | | |
| |
10.39 | | |
| | |
10.40 | | |
| | |
10.41 | | |
| | |
|
| | |
10.42 | | |
| | |
10.43 | | |
| | |
10.44 | | |
| | |
10.45 | | |
| | |
10.46 | |
|
| | |
10.47 | | |
| | |
10.48 | | |
| | |
10.49 | | |
| | |
10.50 | | |
| | |
14.1 | | |
| | |
21.1 | | |
| | |
23.1 | | |
| | |
31.1 | | |
| |
31.2 | | |
| | |
|
| | |
32.1 | | |
| |
32.2 | | |
101 | | The following financial statements from the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2017, formatted in eXtensible Business Reporting Language: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Comprehensive Income (Loss), (iv) Consolidated Statements of Cash Flows, (v) Consolidated Statements of Stockholders' Equity, and (vi) Notes to Consolidated Financial Statements (furnished herewith). |
| | |
________________
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| |
* | Pursuant to Item 601(b)(2) of Regulation S-K, the schedules and/or exhibits to this agreement have been omitted. The Registrant undertakes to supplementally furnish copies of the omitted schedules and/or exhibits to the Securities and Exchange Commission upon request. |
** | Management contract or compensatory plan or arrangement. |
