CAUTIONARYEXPLANATORY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Farmer Bros. Co. (“Farmer Bros.” or the “Company”) is filing this Amendment No. 1 on Form 10-K/A (this “Amendment”) to its Form 10-K for the fiscal year ended June 30, 2023, which was filed with the Securities and Exchange Commission (the “SEC”) on September 12, 2023 (the “Original Filing”).
This Amendment is being filed for the purpose of providing the information required by Items 10 through 14 of Part III of Form 10-K. This information was previously omitted from the Original Filing in reliance on General Instruction G(3) to Form 10-K, which permits the above-referenced Items to be incorporated in the Annual Report on Form 10-K ("Form 10-K"by reference from a definitive proxy statement, if such definitive proxy statement is filed no later than 120 days after the last day of the Company’s fiscal year on June 30, 2023.
In accordance with Rule 12b-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the cover page to the Original Filing and Items 10 through 14 of Part III of the Original Filing are hereby amended and restated in their entirety. In addition, pursuant to Rule 12b-15 under the Exchange Act, the Company is including Item 15 of Part IV, solely to file the certifications required under Section 302 of the Sarbanes-Oxley Act of 2002 with this Amendment.
Except as described above, no other changes have been made to the Original Filing. This Amendment does not affect any other section of the Original Filing not otherwise discussed herein and continues to speak as of the date of the Original Filing. The Company has not updated the disclosures contained in the Original Filing to reflect any events that occurred subsequent to the date of the Original Filing. Accordingly, this Amendment should be read in conjunction with the Company’s other filings made with the SEC subsequent to the filing of the Original Filing.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Amendment and other documents we file with the SEC contain "forward-looking statements"“forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act, of 1934, as amended (the “Exchange Act”), 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 1.A.,
Risk Factors as well as Part II, Item 7,
Management’s Discussion and Analysis of Financial Condition and Results of Operations, of
this Form 10-K,the Original Filing, as well as those discussed elsewhere in
this Form 10-Kthe Original Filing and other factors described from time to time in our filings with the SEC.
Factors that could cause actual results to differ materially from those in forward-looking statements include, but are not limited to, disruption to our business and customers from the COVID-19 pandemic (including the effects of emerging and novel variants of the virus and any virus containment measures such as stay-at-home orders or government mandates) and severe winter weather, levels of consumer confidence in national and local economic business conditions, the duration and magnitudeimpact of labor shortages, the pandemic’s impact on labor conditions, the successincrease of our strategycosts due to recover from the effects of theinflation, an economic downturn caused by any pandemic, epidemic or other disease outbreak, comparable or similar to COVID-19, the success of our turnaround strategy, the impact of capital improvement projects, the adequacy and availability of capital resources to fund our existing and planned business operations and our capital expenditure requirements, our ability to meet financial covenant requirements in our Credit Facility, which could impact, among other things, our liquidity, the relative effectiveness of compensation-based employee incentives in causing improvements in our performance, the capacity to meet the demands of our large national account customers, the extent of execution of plans for the growth of our business and achievement of financial metrics related to those plans, our success in retaining and/or attracting qualified employees, our success in adapting to technology and new commerce channels, the effect of the capital markets as well as other external factors on stockholder value, fluctuations in availability and cost of green coffee, competition, organizational changes, the effectiveness of our hedging strategies in reducing price and interest rate risk, changes in consumer preferences, our ability to achieveprovide sustainability goals in ways that do not materially impair profitability, changes in the strength of the economy, including any effects from inflation, business conditions in the coffee industry and food industry in general, our continued success in attracting new customers, variances from budgeted sales mix and growth rates, weather and special or unusual events, as well as other risks described in this Form 10-KAmendment and other factors described from time to time in our filings with the SEC.
Given these risks and uncertainties, you should not rely on forward-looking statements as a prediction of actual results. Any or all of the forward-looking statements contained in this Form 10-KAmendment and any other public statement made by us, including by our management, may turn out to be incorrect. We are including this cautionary note to make applicable and take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 for forward-looking statements. We expressly disclaim any obligation to update or revise any 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
III | ITEM 10. | | | | |
Item 1. | BusinessDirectors, Executive Officers and Corporate Governance |
Overview
Directors
Each director of the Company is to be elected annually and serve until his or her successor has been elected and qualified, or until his or her death, resignation, retirement, disqualification or removal from office.
The authorized number of directors is set forth in the Company’s Second Amended and Restated Certificate of Incorporation (“Certificate of Incorporation”) and shall consist of not less than five nor more than nine members, the exact number of which shall be fixed from time to time by resolution of the Board. The authorized number of directors is currently eight. Any vacancy on the Board that results from an increase in the number of directors may be filled by a majority of the directors then in office, provided that a quorum is present, and any other vacancy occurring on the Board may be filled by a majority of the directors then in office, even if less than a quorum, or by the sole remaining director. Any director elected to fill a vacancy not resulting from an increase in the number of directors will have the same remaining term as that of his or her predecessor. Subject to the rights, if any, of the holders of shares of Preferred Stock then outstanding, any or all of the directors of the Company may be removed from office at any time, with or without cause, in accordance with the DGCL.
All of the present directors were elected to their current terms by the stockholders. There are no family relationships among any directors or executive officers of the Company. Except as disclosed below, none of the directors is a director of any other publicly held company. Except as otherwise disclosed herein, there are no arrangements or understandings between any of our directors and any other person pursuant to which any person was selected as a director.
Set forth below are the biographies of each director, including their ages and positions and offices held with the Company as of the date hereof.
Farmer Bros. Co.Allison M. Boersma, age 58, has served on our Board since 2017 and is currently the Chief Financial Officer and Chief Operating Officer of BRG Sports Inc., a Delaware corporation (including its consolidated subsidiaries unlesscorporate holding company of leading brands that design, develop and market innovative sports equipment, protective products, apparel and related accessories. The company’s core football brand, Riddell, is the context otherwise requires,industry leader in football helmet technology and innovation. Ms. Boersma has served as the “Company,” “we,” “us,” “our” or “Farmer Bros.”), is a leading coffee roaster, wholesaler, equipment servicerfinance and distributoroperations leader for BRG Sports since April 2016, responsible for financial oversight, including planning, treasury and risk management; leadership of coffee, teaglobal sourcing, manufacturing and other allied 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, and foodservice distributors. With a robust product line, including organic, Direct Trade, Project 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 not only a breadth of high-quality products to our customers but also a comprehensive approach by providing value added services such as market insight, beveragedistribution; strategic planning and equipment placementacquisitions; and service. Our principal officemanufacturing strategy. Ms. Boersma has also served as Chief Financial Officer and product development lab is located in Northlake, Texas ("Northlake facility"). We operate in one business segment.
ProductsChief Operating Officer of Riddell Inc., since May 2014, and Services
Our productSenior Vice President Finance and service categories consistChief Financial Officer of the following:
•Riddell, from February 2009 to May 2014. Previously, Ms. Boersma was a robust linefinance executive with Kraft Foods, a multinational confectionery, food and beverage conglomerate, for over 17 years, with various positions of roastincreasing responsibility, including serving as Senior Director Finance, Global Procurement, from May 2007 to February 2009, with leadership and ground coffee,oversight of commodity hedging and risk management, including organic, Direct Trade, Project D.I.R.E.C.T.®, Fair Trade CertifiedTM® and other sustainably-produced offerings;
•frozen liquidfor coffee;
•flavored and unflavored iced and hot teas, including organic and Rainforest Alliance Certified™;
•culinary products including premium spices, pancake and biscuit mixes, gravy and sauce mixes, soup bases, dressings, syrups and sauces, and coffee-related products such as coffee filters, cups, sugar and creamers;
•other beverages including cappuccino, cocoa, granitas and other blender-based beverages and concentrated and ready-to-drink cold brew and iced coffee; and
•installation, repair & refurbishment services for a wide array execution of coffee, tea and juice equipment using state of the art restoration techniques, managing full equipment lifecycle and providing enhanced service capabilities, maintenance and value addition.
Our owned brand products are sold primarily into the foodservice channel. Our primary brands include Farmer Brothers®, Artisan Collection by Farmer Brothers™, Superior®,Metropolitan™, 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®, Cain's™, McGarvey® and Boyds® 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 tea products are sold in traditional tea bags and sachets, as well as single-serve tea pods and capsules. Our fiscal year ends on June 30, and our discussion is as of and for the fiscal years ended June 30, 2022 ("fiscal 2022") and June 30, 2021 ("fiscal 2021"). See Management's Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations included in Part II, Item 7 of this Form 10-K.Business Strategy
Overview
We are a coffee company dedicated to delivering the coffee people want, the way they want it. We build partnerships with customers who value quality, a wide array of services and sustainable sourcing and are passionate about delivering great coffee, tea, and culinary experiences to their communities.
In order to achieve our mission, we have grown existing capabilities and continue to develop new capabilities to deliver value to our customers. More recently, we have undertaken initiatives such as, but not limited to, the following:
•Executing Manufacturing and Network Optimization. We continue to develop and execute manufacturing network optimization. We utilize our Northlake, Texas, facilityglobal strategies to improve production efficienciessupplier performance; commodity tracking and balance volume acrossderivative accounting. Other positions with Kraft included Controller, Grocery Sector; Controller, Meals Division; Director, Sales Finance, Kraft Food Services Division; and Senior Manager, Corporate Financial Business Analysis. Ms. Boersma began her career as a Senior Auditor with Coopers & Lybrand. Ms. Boersma received her undergraduate degree in Accountancy from the University of Illinois Champaign-Urbana, and her Masters of Management, Marketing and Finance, from JL Kellogg Graduate School of Management.Stacy Loretz-Congdon, age 64, has served on our manufacturing and distribution networks to facilitate sustainable long-term growth. In fiscal 2021, we substantially increasedBoard since 2018. She retired at the production and packaging capacityend of 2016 after 26 years of service at our Northlake, Texas production facility which allowed us to exit our aged Houston, Texas facility. We also utilize our distribution center in Rialto, California, opened in fiscal 2021, which is geographically closer to many of our customers in the Western United States, and which enabled more efficient service to our West Coast network as well as the consolidation of certain branches in Southern California. We
also continue to execute branch rationalization, which improves our cost structure without sacrificing service to our customers.
•Leveraging our Direct-Store-Delivery ("DSD") Network for growth. Our handheld technology helps drive productivity and customer service levels. This technology enhances our capabilities, including the ability to execute our pre-sell strategy. We have also recently expanded dedicated new business resources to capture market share. Additionally, we are focused on building partnerships that utilize our current distribution capabilities to expose us to industry and product innovation.
•Product Innovation Pipeline. We are continuing to enhance our premium coffee and tea program, developing strategic partnerships, and building an advantaged allied product portfolio that resonates with our customers. We will continue to provide leadership in sustainable product solutions for our customers.
•Driving Customer Satisfaction. Providing our customers the products they want, when they want them, is key to customer satisfaction and retention. We have invested in systems and processes to improve our ability to service our customers. We are driving continuous improvement on “On-Time and In-Full” and other key service metrics. In addition, we are focused on optimizing our product commercialization process and bringing innovation to our customers.
•Service Excellence in Revive Service & Restoration ("Revive"). We continue to haveCore-Mark Holding Company, Inc. (formerly NASDAQ: CORE), one of the largest coffee service networksmarketers of fresh and broad-line supply solutions to the convenience retail industry in North America, where she served in various capacities, including as Senior Vice President, Chief Financial Officer and Assistant Secretary from December 2006 to May 2016 and Executive Advisor from May 2016 through December 2016. From January 2003 to December 2006, Ms. Loretz-Congdon served as Core-Mark’s Vice President of Finance and Treasurer and from November 1999 to January 2003 served as Core-Mark’s Corporate Treasurer. Ms. Loretz-Congdon joined Core-Mark in 1990. Ms. Loretz-Congdon’s experience at Core-Mark included oversight of all finance functions, including all corporate finance disciplines, strategy execution, risk mitigation, investor relations, as well as involvement with benefits, executive compensation and technology initiatives. During her tenure as Senior Vice President and Chief Financial Officer, Ms. Loretz-Congdon served on the Information Technology Steering Committee and the Investment Committee at Core-Mark, as well as a board member of all Core-Mark subsidiaries. Core-Mark was a Fortune 500, publicly traded company listed on the Nasdaq Global Market until September 2021 when it merged with Performance Food Group Company (NYSE: PFGC). In 2015, Ms. Loretz-Congdon was named as one of the Top 50 female CFOs in the industryFortune 500 by Business Insider and are ableWoman of the Year by Convenience Store News. Prior to install, repair,joining Core-Mark, Ms. Loretz-Congdon was an auditor for Coopers & Lybrand. Ms. Loretz-Congdon received her Bachelor of Science degree in Accounting from California State University, San Francisco.
David A. Pace, age 64, has served on our Board since 2023 and refurbish commercial brewing equipment. With Revive, we are focused on continually improving time-to-installhas served as interim Chairman of our Board since October 11, 2023. Previously Mr. Pace served as Co-Chief Executive Officer of Tastemaker Acquisition Corp. (NASDAQ: TMKR), a special purpose acquisition company, where he also served as a director. Mr. Pace previously served as Chief Executive Officer and time-to-repairPresident of Jamba Inc. (formerly NASDAQ: JMBA), a leading restaurant retailer of better-for-you food and restorationbeverage offerings, from March 2016 to September 2018, where he also served as a director from 2012 until September 2018. Prior to that, Mr. Pace served in a variety of equipment. We have successfully built partnerships with leading equipment manufacturers and are invested in training our team onexecutive roles at Bloomin’ Brands, Inc. (NASDAQ: BLMN), one of the latest equipment offerings to enhance our service capabilities and value addition.
•Enhance Processes and Systems. We are implementing IT applications which we expect to enhance our e-commerce and supply chain optimization and flexibility. We are also continuing to invest in and enhance other IT capabilities to provide back-office support which will enable enhanced customer analytics, enable better product targeting, and create a more robust demand and supply process.
•OmniChannel Sales Capability. We are focused on increasing our presence with leading retailers, enhancing our e-commerce platform and developing distributor partnerships. We continue to refresh our current branded product websites to help build our on-line sales and enhance customer experience.
We differentiate ourselveslargest casual dining restaurant companies in the marketplace by providing coffee, tea,world, including most recently as President of Carrabba’s Italian Grill from 2014 to 2016 after previously serving as Executive Vice President and culinary expertise, service excellence,Chief Resource Officer from 2010 to 2014. Earlier in his career, Mr. Pace held various leadership roles at Starbucks Corporation (NASDAQ: SBUX), PepsiCo, Inc. (NASDAQ: PEP) and equipment program support. We tailor solutions to our customers' needs helping them deliver a great experience for their customers, which includes:
•Offering a wide variety of sustainably sourced coffee, tea, and culinary products, thereby helping our customers achieve their sustainability goals and objectives;
•Providing consumer, channel, and market insights; including ideation to support customer menu and product evaluation in line with consumer trends;
•Delivering comprehensive commercial brewing equipment program support from installation to preventative maintenance to timely repair;
•Providing DSD service where our trained Route Sales Representative ("RSR") orders product to keep our customers in-stock, merchandises the beverage station, rotates products, cleans and inspects equipment on-site, and performs “cup quality checks” all to ensure a great experience for the consumer. Our services provided to DSD customers are conducted primarily in person through our RSRs, who develop business relationships with chefs, restaurant owners and food buyers at their delivery locations; and
•Providing comprehensive coffee programs to our national account customers, including private brand development, green coffee procurement, hedging, category management, sustainable sourcing, limited time specialty products, packaging design and supply chain management.
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 allied product knowledge to grow our business:
•Coffee Industry LeadershipYUM! Brands, Inc. (NYSE: YUM). Through our dedication to the craft of sourcing, blending and roasting coffee, and our participation and/or leadership positions with the Specialty Coffee Association ("SCA"), National Coffee Association, Coalition for Coffee Communities, International Women's Coffee Alliance, Pacific Coast Coffee Association, and Roasters Guild, we work to help shape the futureMr. Pace currently serves as Chairman of the coffee industry. We believe that due to our commitment toboard of directors of Red Robin Gourmet Burgers, Inc. (NASDAQ: RRGB), a casual dining chain, after initially joining 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, which includes our product development labs at the Northlake, Texas and Portland, Oregon facilities.
•Market Insight and Consumer Research. We have developed a market insight capability internally that reinforces our business-to-business positioningboard as a thought leaderdirector in the coffee, tea and food service industries. We invest in proprietary consumer and customer segmentation studies and provide trend insights and product development support that help our customers create winning products and integrated marketing strategies. We are focused on understanding key demographic groups and their attitudes and behaviors to better position the CompanyAugust 2019. Mr. Pace has also served as a consumer brand at retaildirector of Authentic Restaurant Brands, a restaurant portfolio company of Garnett Station Partners, since May 2022, and e-commerce and expand these sales channels.
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 2022 we were part of the 2021 CDP Supplier Engagement Leaderboard. This means that we were among the top 8% of participants for supplier engagement on climate change, based on our 2021 CDP disclosure. Further, in fiscal 2022, we published our annual sustainability report based on the Global Reporting Initiative’s comprehensive compliance standard. In addition, China Mist isas a member of the Ethical Tea Partnership (the “ETP”)Ownership Advisory Board for the NHL’s Dallas Stars since 2017. Mr. Pace earned his B.S. in Industrial and Labor Relations from Cornell University.Alfred Poe, 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. Asage 74, has served as a member of our Board since 2020 and served as Chairman of the ETP, China Mist sources allBoard from June 30, 2023 to October 11, 2023. Mr. Poe is currently the Chief Executive Officer of AJA Restaurant Corp., serving as such since 1999. From 1997 to 2002, he was the Chief Executive Officer of Superior Nutrition Corporation, a provider of nutrition products. He was Chairman of the Board and Chief Executive Officer of MenuDirect Corporation from 1997 to 1999. Mr. Poe was a Corporate Vice President of Campbell Soup Company from 1991 through 1996. From 1993 through 1996, he was the President of the Campbell’s Meal Enhancement Group. From 1982 to 1991, Mr. Poe held various positions, including Vice President, Brands Director and Commercial Director with Mars, Inc. Mr. Poe currently serves on the board of directors of B&G, Foods, Inc., a manufacturer and distributor of shelf-stable food and household products across the United States, Canada and Puerto Rico and a publicly traded company listed on the New York Stock Exchange, since 1997. Mr. Poe has previously served on the boards of directors of Centerplate, Inc. and State Street Bank. Mr. Poe earned a B.S. in Electrical Engineering from Brooklyn Polytechnic and an MBA from Harvard University.
Bradley L. Radoff, age 50, has served on our Board since 2022 and currently serves as a private investor. Mr. Radoff served as Principal of Fondren Management LP, a private investment management company, from 2005 to December 2021. Mr. Radoff previously served as a Portfolio Manager at Third Point LLC, a registered investment advisory firm, from 2006 to 2009. He also served as Managing Director of Lonestar Capital Management LLC, a registered investment advisory firm, from 2003 to 2004. Mr. Radoff also previously served as a director of Citadel Investment Group LLC, a global financial institution, from 2000 to 2003. Mr. Radoff has served as a director of Enzo Biochem, Inc. (NYSE: ENZ), an integrated diagnostics, clinical lab and life sciences company, since January 2022, where he also serves as Chair of the Audit Committee. Mr. Radoff has served as a director of Harte Hanks, Inc. (NASDAQ: HHS), a leading global customer experience company, since May 2021. Mr. Radoff previously served as a director of VAALCO Energy, Inc. (NYSE: EGY), a Texas-based independent energy company, from June 2020 to January 2022, Support.com, Inc. (formerly NASDAQ: SPRT), a leading provider of cloud-based software and services, from June 2016 until its merger in September 2021, and Pogo Producing Company (formerly NYSE: PPP), an oil and gas exploration, development and production company, from March 2007 until the completion of its teasale to Plains Exploration & Production Company in November 2007. Mr. Radoff graduated summa cum laude with a B.S. in Economics from tea plantationsThe Wharton School at the University of Pennsylvania.
John D. Robinson, age 64, has served on our Board since 2021 and is currently an operating partner focusing on food and beverage opportunities at Sequel Holdings, a private equity firm, serving in such role since 2017. Currently, Mr. Robinson serves as Chairman of the Board of Chairmans Foods, a Sequel portfolio company. Prior to joining Sequel, from 2009 to 2015, Mr. Robinson was Managing Partner for Rutherford Wine Studios LLC, dba The Ranch Winery, a wine co-packing and processing facility in Napa Valley, CA, which was sold to E&J Gallo Winery in 2015. Prior to that, are certified, monitored,he held leadership roles at Morningstar Foods, Dean Foods Company and regularly audited byRobinson Dairy. Mr. Robinson received a Bachelor of Science in Business Administration from the ETP.University of Arizona.
Waheed Zaman
•Science-Based Carbon Reduction Targets. We believe combating climate, age 63, has served on our Board since September 2021 Since April 2017, Mr. Zaman has served the Chief Executive Officer of W&A Consulting, a consulting and advisory firm, where he advises senior executives on transformational change is criticaland consults with leaders and teams on personal success and leadership practices to ensure organizational effectiveness and strategy execution. Mr. Zaman’s prior experience includes his service in multiple roles with the Hershey Company, including his service as Senior Vice President, Chief Corporate Strategy and Administrative Officer and also as Chief Knowledge, Strategy and Technology Officer. While serving in such roles, Mr. Zaman was responsible for Hershey’s corporate strategy, knowledge and insights (including consumer, shopper, and category insights), information technology, and shared service functions. Prior to his service at the Hershey Company, Mr. Zaman served as Senior Vice President, Global Product Supply for Chiquita Brands International, reporting to the futureCEO. He was responsible for the largest integrated supply chain from farm to shelf in the Fresh Produce sector, with responsibility for banana production and sourcing in Central and Latin America, salads manufacturing in North America and logistics and shipping operations on the ground in North America and Europe. Prior to his service in a supply chain role, Mr. Zaman served as Chief Information Officer of our company,Chiquita. Prior to his service with Chiquita, Mr. Zaman held leadership roles at the Procter & Gamble Company. Mr. Zaman is a past recipient of the Supply Chain Leaders of America Lifetime Achievement Award, a Member of the World 50 Executive Forums in Strategy, Supply Chain, IT and Digital Transformation, and a past member of the Board of Visitors of the University of Maryland Baltimore County and the McKinsey Analytics Council. Mr. Zaman holds a bachelor’s degree with a double major in Computer Science and Policy Studies from Dartmouth College.Executive Officers
The following table sets forth the current executive officers of the Company as of the date hereof. At each annual meeting of the Board of Directors, the Board of Directors formally re-appoints the executive officers, and all executive officers serve at the pleasure of the Board of Directors. No executive officer has any family relationship with any director or nominee, or any other executive officer.
| Name | | Age | | Title | | Executive Officer Since |
| John E. Moore III | | 53 | | Interim Chief Executive Officer | | 2023 |
| Brad Bollner | | 51 | | Interim Chief Financial Officer | | 2023 |
| Amber D. Jefferson | | 52 | | Chief Human Resources Officer | | 2021 |
| Jared G. Vitemb | | 40 | | Vice President, General Counsel, Chief Compliance Officer and Secretary | | 2022 |
| Thomas E. Bauer | | 59 | | Vice President, Head of DSD | | 2023 |
John Moore was appointed interim Chief Executive Officer, effective October 1, 2023. Mr. Moore has served as the Company’s Head of Coffee since July 2023. Before joining the Company, Mr. Moore served as the chief executive officer for Vassilaros Coffee. Prior to Vassilaros, he was the New York senior trader and general manager at Volcafe Specialty Coffee, the chief executive officer and Managing Partner of FAL Coffee Inc. and the vice president of sales and marketing at Octavio Inc., dba Dallis Coffee. Mr. Moore has 30 years of experience in the coffee industry coffee growers and the world. In fiscal 2022 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.
•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 2022 we maintained our goal of 90% waste diversion for our primary production and distribution facilities. To accomplish this goal, we have focused on the circularity of our waste streams, making partnerships to reuse them, reintroducing them as inputs for new products, or recycling them and composting them when none of the previous options are possible. Currently 77% of the waste generated company-wide is diverted from the landfill, and our roasting facilities have achieved the Zero Waste goal since 2018.
•LEED®Certified Facilities. Our Portland production and distribution facility is the first in the Northwest to achieve LEED® Silver Certification. Our corporate office in Northlake, Texas has also achieved LEED® Silver Certification.
•Project D.I.R.E.C.T.® Program. In fiscal 2022, we continued to grow our direct trade sourcing model, Project D.I.R.E.C.T.®. This program involves direct long-term partnerships with coffee growing communities based on principles of sustainability, transparent pricing and consumer education. 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. Overall Project D.I.R.E.C.T.® builds community partnerships for decision making, training, and reporting that benefits all membersextensive experience in every stage of the coffee supply chain.
•Green Coffee Traceability. We are committedvalue chain, from farms and mills to barista and roasting working both in the inclusionUnited States and internationally. Mr. Moore has founded and led several businesses, including Jolly Roger Imports, ELIXIR Cocktail & Espresso Bar and the German expansion of New York Gourmet GmbH & Co. Mr. Moore is also a Certified Q grader and Cup of Excellence Head Judge. He received a Bachelor of Science degree from Earlham College.
Brad Bollner was appointed interim Chief Financial Officer, effective October 1, 2023. Mr. Bollner has served as the Company’s Vice President of Finance since October 2022. During his more sustainably-sourced coffeesthan 25-year finance career, Mr. Bollner has served as Director of Business Analytics at Dave and Busters, Senior Director of Finance at Vail Resorts, Inc. and Vice President – Inventory Planning and Allocation at GameStop Corp. He holds a Bachelor of Science degree in our supply chain. Regulatoryfinance and reputational risks can increase when customers, roasterseconomics from Trinity University and suppliers cannot see back intoa certification with distinction from Harvard Business Analytics Program.
Amber D. Jefferson joined the Company as Chief Human Resources Officer in October 2021. As Chief Human Resources Officer, Ms. Jefferson’s responsibilities include overseeing the Human Resources, Risk Management and Safety functions. Prior to joining the Company, Ms. Jefferson served as Head of Human Resources KNA Sales & e-Commerce at the Kellogg Company, a global consumer packaged goods company specializing in cereal, cookies, crackers, natural organic and salty snacks production from October 2012 to October 2021, where she was responsible for leading all facets of talent strategies, organizational effectiveness, leadership & capability development, and day-to-day HR operations across the North America region. From 2012 through 2018, Ms. Jefferson held HR leadership roles across various divisions within Kellogg including their supply chain. To address these concerns,Away From Home and Walmart business. Prior to 2012, she held leadership roles with Brinker International, Sabre, Texas Health Resources, The American Lung Association and The American Red Cross. Ms. Jefferson received a Bachelor of Science degree from Texas A&M University and a Master of Science in Healthcare Administration and a Master of Business Administration from Texas Woman’s University.
Jared Vitemb joined the Company as wellVice President, General Counsel, Chief Compliance Officer and Secretary in March 2022. Mr. Vitemb’s current responsibilities include overseeing the Company’s Legal and Compliance functions. Prior to joining the Company, Mr. Vitemb held various positions with FTS International Services, Inc., an oilfield services company, from September 2017 to March 2022, where he last served as Senior Vice President, General Counsel, Chief Compliance Officer and Secretary. From March 2014 to deepen our commitmentSeptember 2017, Mr. Vitemb worked as an in-house attorney for Dean Foods Company, a dairy processing and distribution company. Prior to the longevity of the coffee industry, we track traceability levels from all green coffee suppliers 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, and other suppliers, when offering sustainable coffees to our customers. It also helps us deepen our understanding of greenhouse gas emissions generated upstream of our supply chain.
•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, all existing suppliers and new suppliers must acknowledge and adhere to our Supplier Standards of Engagement. These Standards of Engagement are aligned2014, he was in private practice, primarily with the United Nations Global Compactlaw firm of Gardere Wynne Sewell LLP in Dallas, Texas. Mr. Vitemb received a B.A. in History and set minimum standards for suppliers that are designeda J.D. from The University of Texas.Tom Bauer joined Farmer Brothers in 2023 as the head of direct store delivery (DSD), where he oversees the Company’s DSD operations, sales, logistics, equipment services and product marketing teams. Prior to provide Farmer Bros. visibility into all aspectsjoining the Company, Mr. Bauer served as the vice president of its supply chainsales and meets these objectives. Our suppliers also execute a Supplier's
Certificate of Compliance, representing supplier's receiptnational accounts at Emerald Brand and acknowledgment of the Standards of Engagement and agreement to comply with the 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 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, which commit to grow, protect, and enhance supplies of quality coffee while improving the livelihoods of the families who produce it, and the Specialty Coffee Association (the “SCA”) Sustainability Council and the Coalition for Coffee Communities, which are focused on sustainability in coffee growing regions.
•We organize local charities and fund raisers, including support of Ronald McDonald House, riding in the Ride Against Hunger supported by Tarrant Area Food Bank, and hosting local food drives.
•Our 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 keep all edible food waste from going to landfills.
Human Capital
On June 30, 2022, we employed approximately 1,068 employees, 166 of whom are subject to collective bargaining agreements expiring on or before June 30, 2025.
Achieving our vision of building a leading specialty products distributor and service company starts with our people. We believe our human capital management philosophy and programs align with developing and sustaining a culture that embraces our team member values of family, service and quality, collaboration, simplicity and sustainability. We emphasize our value of family by striving for inclusive and equitable approaches in hiring practices, pay practices and team member engagement.
We continue to attract, develop and retain our team members with the following programs:
Diversity, Equity and Inclusion
We know our customers represent a wide range of backgrounds and experiences and we strive to build a team that is as diverse and inclusive as our customers and the communities in which we do business. Our Diversity, Equity and Inclusion ("DEI") committee is comprised of team members across all functions and levels of the organization, including members of the senior management team,director of national accounts and reaches team members acrosscentral U.S. operations for DS Services. From 1999 to 2013, he served in a number of leadership positions at Standard Coffee Service Company, Community Coffee, Anheuser Busch and PepsiCo. Mr. Bauer currently serves as the organization. Our commitments to DEI include:
•Creating courageousvice chair on National Automatic Merchandising Association’s (NAMA) Coffee Service Committee and psychologically safe spaces for all team members through continual learning and development and implementation of Business Employee Resource Groups (BERGs).
•Evaluation of all HR programs and processes through a DEI lens to identify and remove bias in our people practices.
•Increase in diversity supplier partnerships and spend.
•Actively recruiting from organizations that identify, prepare and develop diverse candidates for the workplace (e.g. Texas Workforce Commission, Hiring our Heroes, Mom’s Unfiltered, INROADS Inc., etc.).
•Engagement with community based organizations and local schools and universities to ensure equal access to employment opportunities through job search/interview training, apprenticeships, internships, and other programs.
•Commencement of a project with the National Organization on Disabilities to review our practices, train our leaders and help us increase our employment of people with disabilities.
Team Member Benefits
We value each team member and, as a result, we provide a Total Rewards Program that strives to deliver the features that our team members value. To accomplish this, we have conducted surveys of our team members over the last three years to make sure we are investing in areas that our people value. Based on team member feedback and in alignment with our values of family, we have emphasized:
•Stability of our team member benefits costs and expansion of the scope of our benefit programs and options. This has included company-paid short-term disability as well as paid parental leave for all non-union team members.
•Focused improvement of our overall team member experience, including investments in HR technology, well-being initiatives and a comprehensive Benefits Assistance Center to help employees understand their benefits better.
Health and Safety
The health and safety of our team members is crucial. In addition to tracking common indicators, such as injury rates, we have taken a proactive approach to work place safety, including regular company-wide safety training, fleet safety reviews, and measures to address the COVID-19 pandemic. We will continue to focus on all aspects of team member health and safety by creating a Safety First Culture. This includes, but is not limited to, tracking and analyzing injury rates and incident trends, safety training, and team member engagement in the safety process. In fiscal 2022, we rolled out an extensive driver safety curriculum to help keep our team members and others safer on the
road. NAMA Foundation Board of Trustees. He earned a bachelor’s degree from the University of Northern ColoradoCorporate Governance
Board Meeting and Attendance
The training will continue inBoard held 19 meetings during the year ended June 30, 2023 ("(“fiscal 2023"2023”).
We manufacture, including four regular meetings and distribute products deemed essential to critical infrastructure, and15 special meetings. During fiscal 2023, each director attended at least 75% of the total number of meetings of the Board (held during the period for which he or she served as a result, our production sites continued operating during the COVID-19 pandemic. As such, we implemented company safety guidelines improving the physical safety of work environments for our employees that continued to report to work sites. These measures have included increased sanitation procedures, limiting or prohibiting guests to work sites, hand washing, social distancing, mask wearingdirector) and temperature checks as well as encouraging individuals to stay home when ill. Further, we provided work from home flexibility for our team members whose jobs did not require them to report to a specific job site, further limiting potential exposure for our team members.
Raw Materials and Supplies
Our primary raw material is green coffee, an exchange-traded agricultural commodity that is subject to price fluctuations. Over the past five years, the coffee “C” market near month price per pound ranged from approximately $0.86 to $2.60. The coffee “C” market near month price as of June 30, 2022 and 2021 was $2.30 and $1.60 per pound, respectively. Our principal packaging materials include carton board, corrugate 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 2022 traded in a $1.12 range during the year, and averaged 60% above 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. Somecommittees of the Arabica coffee beans we purchase do not trade directlyBoard on which he or she served (during the periods that he or she served). The independent directors generally meet in executive session in connection with each regularly scheduled Board meeting. Under the Company’s Corporate Governance Guidelines, continuing directors are expected to attend the Company’s annual meeting of stockholders absent a valid reason. Seven of eight directors who were then serving were present at the 2022 Annual Meeting of Stockholders (the “2022 Annual Meeting”).
Charters; Code of Conduct and Ethics; Corporate Governance Guidelines
The Board maintains charters for its committees, including the Audit Committee, Compensation Committee, Nominating and Corporate Governance Committee, and the ad hoc Technology Committee and Strategy and Capital Allocation Committee. In addition, the Board has adopted a written Code of Conduct and Ethics for all employees, officers and directors. The Board maintains Corporate Governance Guidelines as a framework to promote the functioning of the Board and its committees and to set forth a common set of expectations as to how the Board should perform its functions. Current standing and ad hoc committee charters, the Code of Conduct and Ethics and the Corporate Governance Guidelines are available on the commodity markets. Rather, we purchase these coffee beansCompany’s website at www.farmerbros.com. Information contained on a negotiated basis from coffee brokers, exporters and growers, including Direct Trade 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 products provide similar assurance except that the arrangements are provided directly to individual coffee growers instead of to cooperatives, providing these farmers with price premiums and dedicated technical assistance to improve farm conditions and increase both quality and productivity of sustainable 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 4,Derivative Instruments, of the Notes to Consolidated Financial Statements included in this 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. Itwebsite is not
possible to assessincorporated by reference in, or considered part of, this Proxy Statement.Board Committees
The Board of Directors has three standing committees: the impactAudit Committee, Compensation Committee, and Nominating and Corporate Governance Committee. Summary information about each 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, and other proprietary rights that are not registered.
Seasonality
We experience some seasonal influences. The winter months historically have generally been 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 and Portland, Oregon. Distribution takes place out of the Northlake and Portland facilities, as well as separate distribution centers in Northlake, Illinois; Rialto, California; and Moonachie, New Jersey. Our products reach our customers primarily in the following ways: through our nationwide DSD network of 239 delivery routes and 103 branch warehouses as of June 30, 2022, 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 third-party logistics service providers ("3PL") 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 websites and sell certain products at retail and through foodservice distributors.
Customers
We serve a wide variety of customers, from small independent restaurants and foodservice operators to large institutional buyers and large national account customers like restaurant, department and convenience store chains, hotels, casinos, healthcare facilities, and gourmet coffee houses, as well as retail with private brand and consumer-branded coffee and tea products, foodservice distributors, and consumers through e-commerce. During fiscal 2022, our top five customers accounted for approximately 24% of our net sales. Although no single customer accounted for 10% or more of our net sales in any of the last three fiscal years, the loss of, or reduction in, sales to one or more of our top customers would likely have a material adverse effect on our results of operations.
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 a low-cost provider with less concern for 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.
In fiscal 2022 and fiscal 2021, the COVID-19 pandemic had a material impact on our financial condition and results of operations. The measures taken to contain the spread of the virus adversely affected our business and those of our customers. Our success will depend on our ability and effectiveness in identifying and addressing our customers’ future needs in light of the development of COVID-19, its variants and responsive measures. Although we have already experienced some negative effects from the COVID-19 pandemic, itthese committees is difficult to predict the extent and timing of the impact that a resurgence could have on our customer demand.
Competition and Trends
The coffee industry is highly competitive, including with respect to price, product quality, service, convenience, technology and innovation, and competition could become more intense due to the relatively low barriers to entry and industry consolidation. 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) and The Kraft Heinz Company (Maxwell House Coffee), wholesale foodservice distributors such as Sysco Corporation and US Foods Holding Corp., regional and national coffee roasters such as Riverview Acquisition Corp. (S&D Coffee & Tea), Massimo Zanetti Beverage USA, Trilliant Food and Nutrition LLC, Gaviña & Sons, Inc., Royal Cup, Inc., Ronnoco Coffee, LLC, and Community Coffee Company, L.L.C., specialty coffee suppliers such as Rogers Family Company (San Francisco Bay Coffee), Distant Lands Coffee Company, Mother Parkers Tea & Coffee Inc., Starbucks Corporation and JAB Holding Company (Peet’s Coffee & Tea), and retail brand beverage 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.
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 19, Commitments and Contingencies, of the Notes to Consolidated Financial Statements included in this Form 10‑K. For additional information, see "Risk Factors" under the sub-captions "Risks Related to Our Business and Industry" and "Risks Related to Governance, Regulatory, Legislative and Legal Matters"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, 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, proxy statements and annual reports to stockholders, andset forth below.Additionally, from time to time, the Board has established ad hoc or other documents,committees, on an interim basis, to assist the Board with its consideration of specific matters, and it expects to continue to do so as soon as reasonably practicable after filing such material electronically or otherwise furnishing it may determine to be prudent and advisable in the future. In December 2021, the Board established an ad hoc Technology Committee for the purpose of assisting with the review of the technological and cybersecurity needs of the Company. Further, in February 2023, the Board established the Strategy and Capital Allocation Committee to review, evaluate and make recommendations to the SEC.Board regarding strategic and financial initiatives and opportunities available to the Company, with the goal of strengthening the Company’s financial position and maximizing value provided to shareholders.
Audit Committee
The Audit Committee is a standing committee of the Board established in accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The Audit Committee’s principal purposes are to oversee, on behalf of the Board, the accounting and financial reporting processes of the Company and the audit of the Company’s financial statements. As described in its charter, available on the Company’s website under Corporate Governance - Committee Charters, the Audit Committee’s responsibilities include assisting the Board in overseeing: (i) the integrity of the Company’s financial statements; (ii) the independent auditor’s qualifications and independence; (iii) the performance of the Company’s independent auditor and internal audit function; (iv) the Company’s compliance with legal and regulatory requirements relating to accounting and financial reporting matters; (v) the Company’s system of disclosure controls and procedures, internal control over financial reporting that management has established, and compliance with ethical standards adopted by the Company; and (vi) the Company’s framework and guidelines with respect to risk assessment and risk management. The Audit Committee is directly and solely responsible for the appointment, dismissal, compensation, retention and oversight of the work of any independent auditor engaged by the Company for the purpose of preparing or issuing an audit report or performing other audit, review or attest services for the Company. The independent auditor reports directly to the Audit Committee.
During fiscal 2023, the Audit Committee held five regular meetings and one special meeting. Allison M. Boersma currently serves as Chair, and Stacy Loretz-Congdon, Bradley L. Radoff, and Waheed Zaman currently serve as members of the Audit Committee. All directors who currently serve on the Audit Committee meet the Nasdaq composition requirements, including the requirements regarding financial literacy and financial sophistication, and the Board has determined that all such directors are independent under Rule 5605 of the Nasdaq Stock Market, Inc. Marketplace Rules (“Nasdaq Listing Rules”), and the rules of the SEC regarding audit committee membership. The Board has determined that Ms. Boersma, Ms. Loretz-Congdon and Mr. Radoff are “audit committee financial experts” as defined in Item 407(d) of Regulation S-K under the Exchange Act.
Compensation Committee
The Compensation Committee is a standing committee of the Board. As described in its charter, available on the Company’s website under Governance—Governance Overview—Committee Charters, the Compensation Committee’s principal purposes are to discharge the Board’s responsibilities related to compensation of the Company’s executive officers and administer the Company’s incentive and equity compensation plans. The Compensation Committee’s objectives and philosophy with respect to the fiscal 2023 executive compensation program, and the actions taken by the Compensation Committee in fiscal 2023 with respect to the compensation of our Named Executive Officers, are described below under the heading “Compensation Discussion and Analysis.”
The Compensation Committee also is responsible for evaluating and making recommendations to the Board regarding director compensation. In addition, thesethe Compensation Committee is responsible for conducting an annual risk evaluation of the Company’s compensation practices, policies and programs.
During fiscal 2023, the Compensation Committee held three regular meetings and three special meetings. John D. Robinson currently serves as Chair and Allison M. Boersma, David A. Pace and Waheed Zaman currently serve as members of the Compensation Committee. The Board has determined that all current Compensation Committee members are independent under the Nasdaq Listing Rules.
Compensation Committee Interlocks and Insider Participation
Ms. Boersma and Messrs. Robinson, Pace, Poe and Zaman were members of the Compensation Committee during fiscal 2023. None of the members of the Compensation Committee is or has been an executive officer of the Company, nor did any of them have any relationships requiring disclosure by the Company under Item 404 of Regulation S-K. None of the Company’s executive officers served as a director or a member of a compensation committee (or other committee serving an equivalent function) of any other entity, an executive officer of which served as a director of the Company or member of the Compensation Committee during fiscal 2023.
Nominating and Corporate Governance Committee
The Nominating and Corporate Governance Committee is a standing committee of the Board. As described in its charter, available on the Company’s website under Corporate Governance—Committee Charters, the Nominating and Corporate Governance Committee’s principal purposes are (i) monitoring the Company’s corporate governance structure; (ii) assisting the Board in fulfilling its oversight responsibilities with respect to the management of risks associated with corporate governance; (iii) ensuring that the Board is appropriately constituted in order to meet its fiduciary obligations, including by identifying individuals qualified to become Board members and members of Board committees, recommending to the Board director nominees for the next annual meeting of stockholders or for appointment to vacancies on the Board, and recommending to the Board membership on Board committees (including committee chairs); (iv) leading the Board in its annual review of the Board’s performance; (v) conducting the annual performance review of the Chief Executive Officer and communicating the results to the Board; and (vi) overseeing succession planning for senior management.
During fiscal 2023, the Nominating and Corporate Governance Committee held four regular meetings. Ms. Loretz-Congdon currently serves as Chair, and David A. Pace, Bradley L. Radoff and John D. Robinson currently serve as members of the Nominating and Corporate Governance Committee. The Board has determined that all current Nominating and Corporate Governance Committee members are independent under the Nasdaq Listing Rules.
Other Committees
In December 2021, the Board established the Technology Committee for the purpose of assisting with the review of the technological and cybersecurity needs of the Company. As described in its charter, available on the Company’s website under Governance—Governance Overview—Committee Charters, the Technology Committee’s principal purposes include: (i) overseeing the quality and effectiveness of the Company’s cybersecurity strategy; and (ii) overseeing the Company’s technology strategy. Waheed Zaman currently serves as Chair, and Stacy Loretz-Congdon and Allison M. Boersma currently serve as members of the Technology Committee. The Technology Committee met four times in fiscal 2023 and will be dissolved following the Annual Meeting. The full Board will then absorb the Technology Committee’s responsibilities.
In February 2023, the Board established the Strategy and Capital Allocation Committee to review, evaluate and make recommendations to the Board regarding strategic and financial initiatives and opportunities available to the Company, with the goal of strengthening the Company’s financial position and maximizing value provided to shareholders. Further detail regarding the responsibilities, structure and operations of the Strategy and Capital Allocation Committee are described in its charter, which is available on the Company’s website under Governance—Governance Overview—Committee Charters. Alfred Poe currently serves as Chair, and John D. Robinson, Bradley L. Radoff and David A. Pace serve as members of the Strategy and Capital Allocation Committee. The Strategy and Capital Allocation Committee met four times in fiscal 2023.
Board Diversity
The below Board Diversity Matrix reports self-identified diversity statistics for the Board of Directors.
| Board Diversity Matrix |
| | | As of September 1, 2022 | | | As of October 1, 2023 | |
| Total Number of Directors | | 8 | | | 7 | |
| | | Female | | | Male | | | Non-
Binary | | | Did Not
Disclose
Gender | | | Female | | | Male | | | Non-
Binary | | | Did Not
Disclose
Gender | |
| Part I: Gender Identity | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Directors | | | 2 | | | | 6 | | | | 0 | | | | 0 | | | | 2 | | | | 5 | | | | 0 | | | | 0 | |
| Part II: Demographic Background |
| African American or Black | | | 0 | | | | 1 | | | | 0 | | | | 0 | | | | 0 | | | | 1 | | | | 0 | | | | 0 | |
| Alaskan Native or Native American | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | |
| Asian or South Asian | | | 0 | | | | 1 | | | | 0 | | | | 0 | | | | 0 | | | | 1 | | | | 0 | | | | 0 | |
| Hispanic or Latinx | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | |
| Native Hawaiian or Pacific Islander | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | |
| White | | | 2 | | | | 4 | | | | 0 | | | | 0 | | | | 2 | | | | 3 | | | | 0 | | | | 0 | |
| Two or More Races or Ethnicities | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | |
| LGBTQ+ | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | |
| Military Veterans | | | 0 | | | | 1 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | |
| Directors with disabilities | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | |
| Did Not Disclose Demographic Background | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | |
Board Leadership Structure
Under our Amended and Restated By-Laws (“By-Laws”), the Board, in its discretion, may choose a Chairman of the Board. If there is a Chairman of the Board, such person may exercise such powers as provided in the By-Laws or assigned by the Board. Christopher P. Mottern was appointed as Chairman of the Board in January 2020, and served as Chairman of the Board until his resignation, which became effective as of 5:00 p.m. (Central Time) on June 30, 2023. Effective immediately following Mr. Mottern’s resignation, on June 30, 2023, the Board appointed Alfred Poe as Chairman of the Board. Mr. Poe ceased serving as Chairman of the Board on October 11, 2023 and Mr. Pace assumed the role on an interim basis and continues to serve as the interim Chairman of the Board as of the date of this Proxy Statement.
Notwithstanding the current separation of Chairman of the Board and Chief Executive Officer, our Chairman of the Board is generally responsible for soliciting and collecting agenda items from other members of the Board and the other documents we file withChief Executive Officer, and the SEC are available atChief Executive Officer is generally responsible for leading discussions during Board meetings. This structure allows for effective and efficient Board meetings and information flow on important matters affecting the Company. As required under the Nasdaq Listing Rules, a website maintainedmajority of the members of a listed company’s board of directors must qualify as “independent,” as affirmatively determined by the SEC at http://www.sec.gov. Copiesboard of our Corporate Governance Guidelines,directors. The Board has determined that, other than Mr. Maserang, all members of the ChartersBoard are independent and each of the Audit, Compensation, Technology,and Nominating and Corporate Governance Committees of the Board are composed solely of Directors, and our Code of Conduct and Ethics can also be found on our website. Printed copies of these posted materials are also available free of chargeindependent directors. Due principally to stockholders who request them in writing from Investor Relations, 1912 Farmer Brothers Drive, Northlake, Texas 76262. Information on our website or linked to our website is not incorporated by reference into this Form 10-K.
You should carefully consider eachthe size of the
following factors,Board, the Board has not formally designated a lead independent director and believes that as
well as the other information in this report, in evaluating our businessa result thereof, non-employee director 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, reputation, financial condition, results of operations or the trading price of our common stock. If anyexecutive sessions of the
followingBoard, which are attended solely by non-employee directors or independent directors, as applicable, result in an open and free flow of discussion of any and all matters that any director may believe relevant to the Company and/or its management.
Although the roles of Chairman and Chief Executive Officer are currently filled by different individuals, no single leadership model is right for all companies at all times, and the Company has no bylaw or policy in place that mandates this leadership structure. The Nominating and Corporate Governance Committee will evaluate and recommend to the Board any changes in the Board’s leadership structure.
Board’s Role in Risk Oversight
The Board recognizes that although management is responsible for identifying risk and risk controls related to business activities and developing programs and recommendations to determine the sufficiency of risk identification and the appropriate manner in which to control risk, the Board plays a critical role in the oversight of risk. The Board implements its risk oversight responsibilities by having management provide periodic briefing and informational sessions on the significant risks actually occurs, our business,that the Company faces and how the Company is seeking to control risk if and when appropriate. In some cases, a Board committee is responsible for oversight of specific risk topics. For example, the Audit Committee has oversight responsibility of risks associated with financial conditionaccounting and results of operations could be harmed. In that case,audits, internal control over financial reporting, and the trading price of our common stock could decline.
Risks RelatedCompany’s major financial risk exposures, including commodity risk and risks relating to our Business and Industry
Pandemics or disease outbreaks, such ashedging programs. Regarding cybersecurity, the COVID-19 pandemic, may disrupt our business, including among other things, our supply chain, our manufacturing operations and customer and consumer demand for our products, and could have a material adverse impact on our business.
In fiscal years 2022 and 2021,Board temporarily assigned primary oversight responsibility to the
COVID-19 pandemic had a material impact on our financial condition and results of operations. The measures taken to containTechnology Committee, but placed the
spreadChairwoman of the
virus adversely affected our businessAudit Committee on the Technology Committee and
those of our customers. The outbreak resulted in federal, state and local government authorities implementing numerous restrictive measures to attempt to contain COVID-19, including travel bans and restrictions, quarantines, shelter-in-place orders, and shutdowns. These measures impacted our workforce and operations, the operations of our customers, and those of our respective vendors and suppliers. The resurgences of COVID-19 or new variantsmade a second member of the
virus may resultAudit Committee the Chairman of the Technology Committee to ensure that the Audit Committee remained well informed of the Company’s cybersecurity risks. The Board decided to end this temporary assignment and dissolve the Technology Committee following the Annual Meeting and reassign those responsibilities to the full Board. The Compensation Committee has oversight responsibility of risks relating to the Company’s compensation policies and practices. At each regular meeting, or more frequently as needed, the Board considers reports from the Audit Committee and Compensation Committee which provide detail on risk management issues and management’s response. The Board, as a whole, examines specific business risks in its periodic reviews of the individual business units, and also of the Company as a whole as part of its regular reviews, including as part of the strategic planning process, annual budget review and approval, and data and cyber security review. Beyond formal meetings, the Board and its committees have regular access to senior executives, including the Company’s Chief Executive Officer and Chief Financial Officer. The Company believes that its leadership structure promotes effective Board oversight of risk management because the Board directly, and through its various committees, is regularly provided by management with the information necessary to appropriately monitor, evaluate and assess the Company’s overall risk management, and all directors are involved in the
reinstitutionrisk oversight function.Compensation-Related Risk
As part of certain of the restrictionsits risk oversight role, our Compensation Committee annually considers whether our compensation policies and increased economic uncertainty, which couldpractices for all employees, including our executive officers, create risks that are reasonably likely to have a material adverse effect on our financial condition and resultsCompany. In fiscal 2023, the Compensation Committee noted several design features of operations. our compensation programs that reduce the likelihood of excessive risk-taking, including, but not limited to, the following:
| · | A good balance of fixed and at-risk compensation, as well as an appropriate balance of cash and equity-based compensation. |
| · | Management incentive programs are based on multiple metrics, including strategic, individual and operational measures. |
| · | The Compensation Committee is directly involved in setting short- and long-term incentive performance targets and payout intervals, assessing performance against targets, and reviewing/approving the performance goals for the CEO and other executives. |
| · | The Compensation Committee revises the short- and long-term incentive programs annually based on feedback received from shareholders in connection with the Company’s stockholder engagement campaigns, so as to ensure the Company’s compensation practices align with shareholder expectations. |
| · | Executive annual short-term incentive awards are generally capped at 200% of the target opportunity and the performance-based restricted stock units in the long-term incentive plan are capped at 225% of target opportunity. |
| · | Long-term equity awards are generally made on an annual basis which creates overlapping vesting periods and ensures that management remains exposed to the risks of their decision-making through their unvested equity-based awards for the period during which the business risks are likely to materialize. |
| · | Long-term compensation for senior executives is comprised of restricted stock units that vest ratably over three years and performance-based restricted stock units that are earned based on three-year performance goals. Company shares are inherently subject to the risks of the business, and the combination of options and performance-based restricted stock units ensure that management participates in these risks. |
| · | The number of performance-based restricted stock units ultimately earned by the Company’s executives and employees are determined at the end of a three-year performance period based on adjusted EBITDA performance and total shareholder return (“TSR”) metrics that are tracked during the performance period. |
| · | The Company has significant share ownership requirements for executives and non-employee directors. Executive officers are required to hold share-based compensation awards until meeting their ownership requirements. Company shares held by management are inherently subject to the risks of the business. |
| · | Executive compensation is benchmarked annually relative to pay levels and practices at peer companies. |
| · | The Company has a clawback policy in place that provides for the mandatory recovery of both cash- and equity-based compensation paid on the basis of the achievement of financial performance measures in the event of an accounting restatement. |
| · | The Company prohibits employees and directors from hedging or pledging its securities. |
| · | The Compensation Committee is composed solely of independent directors and retains an independent compensation consultant to provide a balanced perspective on compensation programs and practices. The Compensation Committee approves all pay decisions for executive officers. |
Stockholder Engagement
The ultimate impactCompany has a history of actively engaging with our stockholders. We believe that the COVID-19 pandemic or any future pandemic or disease outbreak willstrong corporate governance should include regular engagement with our stockholders. We have a long-standing, robust stockholder outreach program through which we solicit feedback on our businesscorporate governance, executive compensation program, disclosure practices, and environmental and social impact programs and goals. Investor feedback is shared with our consolidated resultsBoard as received.
Delinquent Section 16(a) Reports
Section 16(a) of operations is uncertain.
The spread of pandemics or disease outbreaks such as COVID-19 may also disruptthe Exchange Act requires our
third-party business partners’ ability to meet their obligations to us, which may negatively affect our operations. These third parties include those who supply our ingredients, packaging, and other necessary operating materials, and logistics and transportation providers. In addition, we rely on customers to be able to receive shipments and stock store shelves. If a significant percentagedirectors, certain of our
workforceofficers, and persons who beneficially own more than 10% of the Company’s Common Stock to file reports of stock ownership and changes in ownership (Forms 3, 4 and 5) in shares with the SEC. To our knowledge, based solely on our records and certain written representations received from our executive officers and directors, during the fiscal year ended June 30, 2023, all persons related to the Company that are required to file these insider trading reports have filed them in a timely manner, except for a Form 4 filed on October 19, 2023 for D. Deverl Maserang II (i) to disclose reportable transactions which occurred on September 13, 2023, September 15, 2023 and October 1, 2023 and (ii) to correct the number of securities beneficially owned by him, whether directly or
indirectly, through the
workforcedate of filing. Copies of the insider trading reports can be found on the Company’s website at www.farmerbros.com. | ITEM 11. | Executive Compensation |
Compensation Discussion and Analysis
This Compensation Discussion and Analysis describes our executive compensation philosophy, objectives, and programs, the decisions made under those programs and factors considered by our Compensation Committee in fiscal 2023 with respect to the compensation of our third-party business partners or customers is unableNamed Executive Officers.
Fiscal 2023 Named Executive Officers
| Name | | Title (as of June 30, 2023) |
| D. Deverl Maserang II | | Former President and Chief Executive Officer |
| Scott R. Drake | | Former Chief Financial Officer |
| Amber D. Jefferson | | Chief Human Resources Officer |
| Jared G. Vitemb | | Vice President, General Counsel, Chief Compliance Officer and Secretary |
| Ruben E. Inofuentes | | Former Chief Supply Chain Officer |
| Maurice S. J. Moragne | | Former Chief Sales Officer |
Recent Changes in Management
The Company experienced turnover of certain senior management during and after the 2023 fiscal year. Effective February 17, 2023, the Company terminated Ruben E. Inofuentes, its former Chief Supply Chain Officer, and Maurice S.J. Moragne, its former Chief Sales Officer, as part of an effort to work, including because of illness or travel or government restrictionsstreamline the Company’s leadership team in connection with the COVID-19 pandemic or any future pandemic or disease outbreak, our operations may be negatively impacted. In addition, the unprecedented demand for foodCompany’s strategic priority to reduce overhead costs and drive profitability. Their respective duties were assumed by various other consumer packaged goods products as a resultemployees of the COVID-19 pandemic or any future pandemic may limit the availability of ingredients, packaging and other raw
materials necessary to produce our products, and our operations may be negatively impacted. For example, we have experienced supply chain constraints for certain of our products, which have negatively impacted our ability to fully satisfy customer and consumer demand for certain of our products. Additionally, pandemics or disease outbreaks could result in a widespread health crisis that could adversely affect economies and financial markets, consumer spending and confidence levels resulting in an economic downturn that could affect customer and consumer demand for our products.
Our efforts to manage and mitigate these factors may be unsuccessful, and the effectiveness of these efforts depends on factors beyond our control, including the duration and severity of any pandemic or disease outbreak, as well as third-party actions taken to contain its spread and mitigate public health effects.
The ultimate impact of the COVID-19 pandemic on our business will depend on many factors, including, among others, the implementation and duration of social distancing and stay-at-home and work-from-home mandates, policies and recommendations and whether, and the extent to which, additional waves or variants of COVID-19 will affect the United States and the rest of North America, our ability and the ability of our suppliers to continue to operate our and their manufacturing facilities and maintain the supply chain without material disruption and procure ingredients, packaging and other raw materials when needed despite disruptions in the supply chain and labor shortages, our customers’ ability to adequately staff their distribution centers and stores, and the extent to which macroeconomic conditions resulting from the pandemic impact consumer eating and shopping habits. We cannot predict the duration or scope of the disruption. Therefore, the financial impact cannot be reasonably estimated at this time.
We depend on the expertise of key personnel to operate our business. 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 depends on the efforts and abilities of key personnel and a consistent workforce, including frontline workers, support staff and executive team members. The competition for talent is extremely high and candidates’ preferences and expectations are evolving. 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 us to adapt to evolving labor conditions and make 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. In this competitive environment, our business has been and may continue to be adversely impacted by increases in labor costs, including wages and benefits, including those increases triggered by regulatory actions regarding wages, scheduling and benefits; increased health care and workers’ compensation insurance costs; increased wages and costs of other benefits necessary to attract and retain high quality employees with the right skill sets and increased wages, benefits and costs related to the effects of COVID-19 pandemic.
We may also need to invest significant amounts of cash and equity to attract talented new employees and to invest in our employee experience and culture, and we may never realize returns on these investments. We do not maintain key person life insurance policies on any of our executive officers. If we are not able 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. Company.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, financial condition and results of operations.
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 more intense due to the relatively low barriers to entry and industry consolidation. We face competition from many sources, including the institutional foodservice divisions of multi-national manufacturers of retail products, wholesale foodservice distributors, regional and national coffee roasters, specialty coffee suppliers, and retail brand beverage manufacturers, many of which have greater financial and other resources than we do and may have lower fixed costs and/or are substantially less leveraged than us. As many of our customers are small foodservice operators, we also compete with cash and carry and club stores and on-line retailers. Companies smaller than ours may be more innovative, better able to bring new products to market and better able to quickly exploit and serve niche markets.
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. 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 coffee or other beverage channels may have an adverse impact on sales of our products. If we do not succeed in differentiating ourselves through, among other things, our product and service offerings, or if we are not
effective in setting proper pricing, then our competitive position may be weakened, we could fail to retain our existing customer base and our sales and profitability may be materially adversely affected.
Increases in the cost of green coffee could reduce our gross margin and profit and may increase volatility in our results.
Our primary raw material is green coffee, an exchange-traded agricultural commodity that is subject to price fluctuations. Our ability to acquire a consistent supply of green coffee at prices sufficient to meet our needs, similar 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, speculative trading in coffee commodities, political and economic conditions or uncertainty, labor actions and shortages, foreign currency fluctuations, inflation, armed conflict in coffee producing nations, acts of terrorism, pandemics or other disease outbreaks (including the COVID-19 pandemic), government actions and trade barriers or tariffs, 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.
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. We purchase over-the-counter coffee-related derivative instruments to enable us to lock in the 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 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 atfollowing the end of each reporting period. Depending on contractual restrictions, we may be unable to pass these costs to our customers by increasing the price of 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 adversely affected.
Recently, there has been increased volatility in the “C” market price, with prices at times increasing to five-year highs. The uncertainty of several factors, including the impact of weather patterns in coffee producing regions, global supply chain constraints and shipping shortages, and speculative trading, has caused greater uncertainty in the markets. Specifically, severe frosts and drought in Brazil currently threaten to negatively impact crop yields for multiple harvests, which could reduce supply and increase cost. Although we hedge the "C" market price volatility for a portion of our green coffee volumes by using derivative instruments, our hedging strategy and use of these instruments does not completely mitigate our exposure to commodity price risk. As a result, increases in the cost of green coffee could have a material adverse impact on our profitability, financial condition or results of 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 a number of large national account customers, the loss of or reduction in sales to one or more of which would likely have a material adverse effect on our results of operations. During2023 fiscal 2022, our top five customers accounted for approximately 24% 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.
Our accounts receivable represents a significant portion of our current assets and a substantial portion of our trade accounts receivables relate principally to a limited number of customers, increasing our exposure to bad debts and counter-party risk which could have a material adverse effect on our results of operations.
A significant portion of our accounts receivable are from five customers, which represents approximately 35% of our accounts receivable at June 30, 2022. The concentration of our accounts receivable across a limited number of parties subjects us to individual counter-party and credit risk as these parties may breach our agreement, claim that we have 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 network of affiliate entities which can make collection efforts more challenging and, at times, collections may be economically unfeasible. Adverse changes in general economic conditions and/or contraction in global credit markets could precipitate liquidity problems among our debtors. This could increase our exposure to losses from bad debts and have a material adverse effect on our business, financial condition and results of operations.
Climate change, water scarcity or legal, regulatory, or market measures to address such could have a material adverse effect our business and operations.
Increasing concentrations of carbon dioxide and other greenhouse gases in the atmosphere may have an adverse effect on global temperatures, weather patterns, and the frequency and severity of extreme weather events and natural disasters. In the event that climate change has a negative effect on agricultural productivity in the regions from which we procure coffee, we could be subject to decreased availability and increased prices, which could have a material adverse effect on our business, financial condition, or results of operations. Water is used throughout the production of coffee from growing and pulping at the farm, cooling the beans after roasting in production and brewing products for consumption. Scarcity of appropriate and sufficient water sources in our supply chain could limit supply and increase our costs. Loss of readily available access to water could have a material adverse effect on our business and operating results.
The increasing concern over climate change also may result in more regional, federal, foreign and/or global legal and regulatory requirements to reduce or mitigate the effects of greenhouse gases. In the event that such regulation is enacted and is more aggressive than the sustainability measures that we are currently undertaking to monitor our emissions and improve our energy and resource efficiency, we may experience significant increases in our manufacturing and distribution costs. In particular, increasing regulation of fuel emissions could substantially increase the supply chain and distribution costs associated with our products. As a result, climate change or increased concern over climate change could negatively affect our business and operations.
Increased severe weather conditions, including those resulting from climate change, 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. Severe weather conditions 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. 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, 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 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.
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 significant risks and uncertainties. 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. Additionally, any such acquisitions may result in potentially dilutive issuances of our equity securities, the incurrence of additional debt, restructuring charges, impairment charges, contingent liabilities, amortization expenses related to intangible assets, and increased operating expenses, which could adversely affect our results of operations and financial condition. 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 the synergies from any such acquisitions will be achieved. If any such acquisitions are not successful, our business and results of operations could be adversely affected.
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, inflation, supply chain disruptions, 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, including due to the effects of climate change, 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 maintain gross margin, and other factors described elsewhere in this risk factors section. Fluctuations in our operating results due to these factors or for any other reason could cause the market price of our common stock 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, a diversion of management’s attention and resources, and require us to make substantial payments to satisfy judgments or to settle litigation. Accordingly, we believe that period-to-period comparisons of our operating results should not be relied upon as indicators of future performance.
We may be unable to anticipate changes in consumer preferences and consumer demographics, which may result in decreased demand for our products.
Our success depends in part on our ability to anticipate and offer products that appeal to the changing tastes, dietary habits and product packaging preferences of consumers in the market categories in which we compete. If we are not able to anticipate, identify or develop and market products that respond to these changes in consumer preferences, whether resulting from changing consumer demographics or otherwise, demand for our products may decline and our operating results may be adversely affected. In addition, we may incur significant costs related to developing and marketing new products or expanding our existing product lines in reaction to what we perceive to be increased consumer preference or demand. Such development or marketing may not result in the volume of sales or profitability anticipated.
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 carton board, corrugate and plastic. We are also exposed to fluctuations 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, raw materials and fuel depend on various factors beyond our control, including economic and political conditions, foreign currency fluctuations, inflation, weather conditions, natural disasters (including floods, droughts, frosts, earthquakes and hurricanes) and changing global climate 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 reliable 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-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 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. Any material interruption in our supply chain, such as material interruption of roasted coffee supply due to the casualty loss at any of our roasting plants or suppliers, interruptions in service by our third-party logistic service providers or common carriers that ship goods within our distribution channels, trade restrictions, such as increased tariffs or quotas, embargoes or customs restrictions, pandemics, social or labor unrest, natural disasters or political disputes and military conflicts that cause a material disruption in our supply chain could have a negative impact on our business and our profitability. Product shortages could result in disruptions in our ability to deliver products to our customers, a deterioration of our relationship with our customers, decreased revenues or an inability to expand our business.
Interruption or increased costs of our supply chain and sales network or labor force, 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.
Our sales and distribution network requires a large investment to maintain and operate, and we rely on a limited number of production and 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), both domestic and foreign, of our raw materials or other products. We have union contracts relating to a portion of our workforce. Although we believe union relations have been amicable in 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. 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.
In addition, we use a significant amount of electricity, gasoline, diesel and oil, 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 increased demand, inflation or by events such as climate change, natural disasters, power outages, cyberattacks 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, financial condition or results of operations.
A disruption in operations at any of these facilities or any other disruption in our supply chain or increase in prices relating to service by our 3PL service providers, common carriers or distributors, service technicians or vendor-managed inventory arrangements, or otherwise, whether as a result of 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. If our vendors fail to meet our standards, provide products in a timely and efficient manner, or comply with applicable laws, these issues could have a material negative impact on our business and profitability.
We rely on co-packers to provide our supply of tea, spice, culinary and other 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 primarily 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.
Customer quality control problems or food safety issues may adversely affect our brands thereby negatively impacting our sales or leading to potential 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 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.
Consumers have been increasingly focused on food safety and health and wellness with respect to the food products they buy. Particularly in the U.S., there is increasing consumer awareness of health risks, including obesity, as well as increased consumer litigation based on alleged adverse health impacts of consumption of various food and beverage products. While we have a variety of such products, an unfavorable report on the health effects of caffeine or other compounds present in our products, whether accurate or not, imposition of additional taxes on certain types of food and beverage components, or negative publicity or litigation arising from certain health risks could significantly reduce the demand for our products and could materially harm our business and results of operations.
Our ability to use our net operating loss carryforwards to offset future taxable net income may be subject to certain limitations.
At June 30, 2022,year, the Company had approximately $185.9 million in federal and $160.1 million in state net operating loss carryforwards that will begin to expire in the years ending June 30, 2038 and June 30, 2023, respectively. Net operating losses of $51.8 million in federal and $6.9 million of state are indefinite lived and will not expire. 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 net operating losses ("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 and limit our ability to use NOLs to offset taxable income.
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.
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 adversely affect our operating results. There were no intangible asset impairments during fiscal 2022 and fiscal 2021.
Our business could be negatively impacted by corporate citizenship and sustainability matters.
There is an increased focus from certain investors, customers, consumers, employees, and other stakeholders concerning corporate citizenship and sustainability matters. From time to time, we announce certain initiatives regarding our focus areas, which include environmental matters, sustainability in our supply chain, responsible sourcing, social investments and inclusion and diversity. We could fail, or be perceived to fail, in our achievement of such initiatives or goals, or we could fail in accurately reporting our progress on such initiatives and goals. Such failures could be due to changes in our business (e.g., shifts in business among distribution channels or acquisitions). Moreover, the standards by which citizenship and sustainability efforts and related matters are measured are developing and evolving, and certain areas are subject to assumptions and standards that could change over time. Any such matters, or related corporate citizenship and sustainability matters, could have a material adverse effect on our business.
Risks Related to Governance, Regulatory, Legislative and Legal Matters
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 regulations relating to climate change and sustainability, 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 or our business partners fail to comply with applicable laws and regulations, we may be subject to litigation, civil and criminal liability, damages, fines and penalties, increased cost of regulatory compliance and restatements of our financial statements, 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 one multiemployer defined benefit pension plan and nine multiemployer defined contribution plans other than pension plans 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 we are not able to contribute an amount sufficient to fund the unfunded liabilities associated withtransitioned 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. The amount of any potential withdrawal liability could be material to our results 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 future. SeeNote 18, Commitments and Contingencies, of the Notes to Consolidated Financial Statements included in this 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 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, results of operations and liquidity.We are partially self-insured and our current coverage and reserves may not be sufficient to cover future claims.
We use a combination of insurance and self-insurance mechanisms to provide for the potential liability of certain 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 significant potential liabilities. While we accrue for these potential liabilities 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. A successful claim against us that is not covered by insurance or is in excess of our reserves or available insurance limits could negatively affect our business, financial condition and results of operations.
We maintain finished goods product coverage in amounts we believe to be adequate. However, we cannot assure you that we will not incur claims or liabilities for which we are not insured or that exceed the amount of our insurance coverage. Moreover, claims or liabilities of this sort might not be covered by our insurance or by any rights of indemnity or contribution that we may have against others. A product liability judgment against us or a product recall or the damage to our reputation resulting therefrom could have a material adverse effect on our business, consolidated financial condition, results of operations or liquidity.
Risks Related to our Capital Structure
An increase in our debt leverage could adversely affect our liquidity and results of operations.
In April 2021, we entered into a new senior secured credit facility composed of a revolver credit facility and a term credit facility agreement (together, the “Credit Facilities”) (See Liquidity for details). At June 30, 2022, we had outstanding borrowings of $98.8 million and utilized $4.1 million of the letters of credit sublimit under the Credit Facilities, and had $12.9 million of availability under our Credit Facilities. We may incur significant indebtedness in the future, including through additional borrowings under the credit facility, through the issuance of 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;
•limiting our ability to refinance our indebtedness on terms acceptable to us or at all;
•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.
The Credit Facilities contain certain customary affirmative and negative covenants and restrictions that, among other things, require the Company to satisfy certain financial covenants and restricts the Company's and its subsidiaries' ability to incur additional debt, pay dividends and make distributions, make certain investments and acquisitions, repurchase its stock and prepay certain indebtedness, create liens, enter into agreements with affiliates, modify the nature of its business, transfer and sell material assets and merge or consolidate. Non-compliance with one or more of the covenants and restrictions could result in the full or partial principal balance of the Credit Facilities becoming immediately due and payable and termination of the commitments.
If we are unable to make payments as they come due or comply with the restrictions and covenants under the Credit Facilities 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 Facilities 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. If our liquidity materially declines, we may experience springing covenants and an increase in our cost of borrowing. Furthermore, our lenders under the Credit Facilities 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.
Our 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, and 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 decrease in funds from operating activities, which has weakened our liquidity position. During fiscal years 2022 and 2021, 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, which has materially impacted our liquidity.
Should our operating performance deteriorate further or the COVID-19 pandemic recurs in the 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 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 ability to obtain additional financing or refinance our indebtedness would depend upon, among other things, our financial condition at the time, and the liquidity of the overall capital markets and the state of the economy. Furthermore, any refinancing of our 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 lenders experience difficulties that render them unable to fund future draws on the credit facility, we may not be able to access all or a portion of these funds, which could adversely affect our ability to operate our business and pursue our business strategies. In addition, covenants in our debt agreements could restrict or delay our ability to respond to business opportunities, or in the event of a failure to comply with such covenants, could result in an event of default, which if not cured or waived, could have a material adverse effect on us.
Rising inflation may adversely affect us by increasing costs of raw materials, labor, and other costs beyond what we can recover through price increases.
Inflation can adversely affect us by increasing the costs of raw materials, labor, and other costs required to operate and grow our business. Many of the markets in which we sell our products are experiencing high levels of inflation, which may depress consumer demand for our products and reduce our profitability if we are unable to raise prices enough to keep up with increases in our costs. Inflationary pressures have resulted in increases in the cost of certain raw materials, and other supplies necessary for the production of our products, and such increases may continue to impact us in the future and expose us to risks associated with significant levels of cost inflation. If we are unable to increase our prices to offset the effects of inflation, our business, operating results, and financial condition could be materially and adversely affected.
Our outstanding Series A Preferred Stock or future equity offerings could adversely affect the holders of our common stock in some circumstances.
As of June 30, 2022, 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 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, at our election and if certain conditions are met, mandate the conversion of all the Series A Preferred Stock. The holder, if certain conditions are met, may voluntarily convert. 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 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 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 organizational documents, including a classified board of directors which will phase out following our annual meeting of stockholders in 2022, 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 organizational 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.
As of June 30, 2022, the projected benefit obligation under our two 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.
Risks Related to Cybersecurity and Data Privacy
Failure to maintain satisfactory compliance with certain privacy and data protections laws and regulations may subject us to substantial negative financial consequences and civil or criminal penalties.
Complex local, state, national, foreign and international laws and regulations apply to the collection, use, retention, protection, disclosure, transfer and other processing of personal data. These privacy and data protection laws and regulations are quickly evolving, with new or modified laws and regulations proposed and implemented frequently and existing laws and regulations subject to new or different interpretations and enforcement. In addition, our legal and regulatory obligations in jurisdictions outside the U.S. are subject to unexpected changes, including the potential for regulatory or other governmental entities to enact new or additional laws or regulations, to issue rulings that invalidate prior laws or regulations or to increase penalties significantly. Complying with these laws and regulations can be costly and can impede the development and offering of new products and services.
Our failure to comply with applicable laws and regulations or other obligations to which we may be subject relating to personal data, or to protect personal data from unauthorized access, use or other processing, could result in enforcement actions and regulatory investigations against us, claims for damages by customers and other affected individuals, fines, damage to our brand reputation, any of which could have a material adverse effect on our operations, financial performance and business.
We rely on information technology and 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. While we have implemented training and information security policies for our team members and bolstered cybersecurity experience on our board, these measures may be insufficient to prevent against the constantly evolving threats. These threats increase 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.
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Item 1B. | Unresolved Staff Comments |
None.
Our production and distribution facilities as of June 30, 2022 are as follows: | | | | | | | | | | | | | | | | | | | | |
Location | | Approximate Area
(Square Feet) | | Purpose | | Status |
Northlake, TX | | 535,585 | | Corporate headquarters, manufacturing, distribution, warehouse, product development lab | | Owned |
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, NJ | | 41,404 | | Distribution and warehouse | | Leased |
Hillsboro, OR (1) | | 20,400 | | Manufacturing, distribution and warehouse | | Leased |
Rialto, CA | | 156,000 | | Distribution and warehouse | | Leased |
| | | | | | |
____________(1)Consolidated into the Portland facility in July 2022.
As of June 30, 2022, we stage our products in 103 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 34,000 square feet.
Approximately 65% of our facilities are leased with a variety of expiration dates within the range of 2022 through 2027.
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 75%, 63%, and 66% during fiscal 2022, 2021 and 2020, respectively.
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 18, Commitments and Contingencies, of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K, which is incorporated herein by reference. | | | | | |
Item 4. | Mine Safety Disclosures |
Not applicable.
PART II
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Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
Market Information
The principal market on which our common stock is listed for trading is the Nasdaq Global Select Market under the symbol “FARM.”
Holders
As of August 22, 2022, there were approximately 199 shareholders of record of common stock. This does not include persons whose common stock is in nominee or “street name” accounts through brokers.
Dividends
We have not recently declared or paid any cash dividend on our common stock. We intend to retain any future earnings to finance the operation and expansion of our business, and we do not expect to pay cash dividends in the foreseeable future.
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 and a peer group index. Companies in the Russell 2000 and peer group index are weighted by market capitalization. The graph assumes an initial investment of $100.00 at the close of trading on June 30, 2017 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 that operate in a similar line of business: B&G Foods, Inc., Coffee Holding Co. Inc., Lancaster Colony Corporation, National Beverage Corp., SpartanNash Company, Seneca Foods Corp. and TreeHouse Foods, Inc.
Our performance graph has previously included 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 Value Line Food Processing Index (the “Value Line Index”). However, the Value Line Index is not available from our service provider and has been omitted from this performance graph.
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 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 5 Year Cumulative Total Return
(Fiscal Years Ended June 30)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fiscal Years Ended June 30, |
| | 2017 | | 2018 | | 2019 | | 2020 | | 2021 | | 2022 |
| Farmer Bros. Co. | | 100.00 | | | 101.57 | | | 101.97 | | | 93.57 | | | 110.67 | | | 106.59 | |
| Russell 2000 Index | | 100.00 | | | 117.50 | | | 113.61 | | | 106.08 | | | 171.88 | | | 128.67 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| Peer Group Index | | 100.00 | | | 94.92 | | | 72.28 | | | 79.27 | | | 102.66 | | | 91.85 | |
Issuer Purchases of Equity Securities
Neither we, nor any affiliated purchaser, purchased any of our equity securities during the quarter ended June 30, 2022.
Sale of Unregistered Securities
We did not sell unregistered securities during fiscal 2022.
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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 fiscal 2022 and fiscal 2021 are not necessarily indicative of the results that may be expected for any future period. This discussion, which presents our results for fiscal 2022 and fiscal 2021 should be read in conjunction with our Consolidated Financial Statements and the accompanying notes and Part II, Item 7"Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K for fiscal 2021, filed with the SEC on September 10, 2021, which provides additional information on comparisons of fiscal 2021 and the year ended June 30, 2020 ("fiscal 2020").Our Business
We are a leading coffee roaster, wholesaler, equipment servicer and distributor of coffee, tea and other allied products manufactured 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 retailers, 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. 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, Project D.I.R.E.C.T.®, Fair Trade Certified™ ® and other sustainably-produced offerings; frozen liquid coffee; flavored and unflavored iced and hot teas; including organic and Rainforest Alliance Certified™; culinary products including premium spices, pancake and biscuit mixes, gravy and sauce mixes, soup bases, dressings, syrups and sauces, and coffee-related products such as coffee filters, cups, sugar and creamers; and other beverages including cappuccino, cocoa, granitas, and other blender-based beverages 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 added services such as market insight, beverage planning, and equipment placement and service.
We operate production facilities in Northlake, Texas and Portland, Oregon. We stopped production in our Houston, Texas facility and exited the facility in the fourth quarter of fiscal 2021. We distribute our products from our Northlake, Texas; and Portland, Oregon production facilities, as well as separate distribution centers in Portland, Oregon; Northlake, Illinois; Moonachie, New Jersey; and Rialto, California. We opened and started operating the distribution center in Rialto, California in the third quarter of fiscal 2021. Our products reach our customers primarily through our nationwide DSD network of 239 delivery routes and 103 branch warehouses as of June 30, 2022, 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.
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 consist of small independent restaurants, foodservice operators, large institutional buyers, and convenience store chains, hotels, casinos, healthcare facilities, and foodservice distributors. This has had a material impact on our revenues during fiscal 2022 and fiscal 2021.
As local governments across the country eased COVID-19 restrictions, and vaccines have become more widely available, we have continued to see improved sales trends. Although we have experienced improvements in several markets during fiscal 2022, our recovery has been slower in certain regions caused by general COVID-19 related restrictions as well as other indirect issues that some customers face from the impacts of the COVID-19 pandemic including labor and supply shortages as well as other issues.
Although our Direct Ship sales channel was also affected by the COVID-19 pandemic, the impact was significantly less due to the types of customers we serve through this channel. These customers include our retail business and products sold by key grocery stores under their private labels, as well as third party e-commerce platforms, which have seen moderate increases in demand that have helped mitigate the impact of the pandemic. Compared to fiscal 2021, our Direct Ship revenues increased
in fiscal 2022 which was mainly driven by price changes to customers utilizing commodity-based pricing arrangements, recently optimized customer base and recovery of several larger accounts.
Due to the impact of the COVID-19 pandemic on our revenues, we instituted several initiatives during fiscal 2020 and 2021 to reduce operating expenses and capital expenditures to help mitigate the significant negative impact of our revenue decline. In addition to the costs saving initiatives, in fiscal 2021 we repaid our existing senior secured revolving credit facility, and entered into our new Credit Facilities, as further described below in the Liquidity,Capital Resources and Financial Condition section of Part II, Item 7 of this Form 10-K. We believe that the Credit Facilities provide us with increased flexibility to proactively manage our working capital and execute our long term strategy, maintain compliance with our debt financial covenants, lower our cost of borrowing, and preserve financial liquidity to mitigate the impact of the uncertain business environment resulting from the COVID-19 pandemic, while continuing to execute on our strategic initiatives.The impact of the COVID-19 pandemic, including its effects on general economic conditions, the extent of the weaker demand for our products, our financial position, results of operations and liquidity, which could be material, remains uncertain. The ultimate impact of the COVID-19 pandemic on our business will depend on future developments, including the availability and cost of labor, global supply chain disruptions, variants of the virus, and the availability and use of vaccines and other treatments for COVID-19, which are highly uncertain and cannot be predicted. While we anticipate that our revenue will continue to recover slowly as local, state and national governments ease COVID-19 related restrictions, and vaccines become more widely accepted, there can be no assurance that we will be successful in returning to the pre-COVID-19 pandemic levels of revenue or profitability for fiscal 2023.
For other impacts of the COVID-19 pandemic, please see Liquidity described in Part II, Item 7 and Risk Factorsdescribed in Part I, Item 1A of this Form 10-K.Summary Overview of Fiscal 2022 Results
In fiscal 2022, although both our DSD and Direct Ship sales channels continued to be impacted by the COVID-19 pandemic, there was significant recovery in these channels throughout fiscal 2021 and fiscal 2022. Net sales in fiscal 2022 increased $71.3 million, or 18%, to $469.2 million from $397.9 million in fiscal 2021. The increase in net sales was primarily due to the continued recovery from the impact of the COVID-19 pandemic on both our DSD and Direct Ship sales channels, along with price increases and delivery surcharges implemented during fiscal 2022.
During fiscal 2022, we delivered higher gross margins compared to the prior year primarily due to the pandemic's impact on sales volume, which had a larger impact on our higher margin customers in fiscal 2021. Overall, gross margins increased by 3.8% to 29.2% in fiscal 2022 from 25.4% compared to fiscal 2021 due to the continued recovery from the COVID-19 pandemic on our DSD channel sales since our DSD channel has higher margins. The increase was also attributable to a decline in our unfavorable production variances and inventory scrap write-downs due to the closure of our aged Houston, Texas plant during fiscal 2021. These improvements were partially offset by higher freight costs due to global supply chain challenges. The price increases and delivery surcharges implemented across our DSD network beginning in the three months ended December 31, 2021 helped mitigate the impact of higher supply chain and product costs.
Operating expenses increased by $12.4 million in fiscal 2022 over the prior year period due to an $11.8 million increase in selling expenses and a $4.2 million increase in general and administrative expenses, partially offset by a $2.3 million gain on sale of assets. The increase in expenses was primarily due to variable costs, including payroll, associated with the higher sales volumes, as well as operating costs associated with our distribution center in Rialto, California which was opened in fiscal 2021.
Our capital expenditures for fiscal 2022 were $15.2 million as compared to $15.1 million in fiscal 2021, an increase of $0.1 million. This was driven by lower expansionary capital spend of $5.8 million in fiscal 2022 compared to fiscal 2021, offset by a $5.8 million increase in maintenance capital spend in fiscal 2022. Also included in the $15.2 million of capital expenditures in fiscal 2022 was $1.6 million for expansion projects and $10.1 million of coffee brewing equipment spend to execute several key strategic initiatives pertaining to fiscal 2022. The expansionary capital spending reductions were driven by several key initiatives put in place, including a focus on refurbished coffee brewing 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, 2022, the outstanding debt on our Revolver and Term Loan Credit Facilities were $63.0 million and $45.6 million, respectively, an increase of $17.6 million since June 30, 2021. Our cash decreased by $0.4 million to $10.0 million as of June 30, 2022, compared to $10.4 million as of June 30, 2021. These changes were primarily due to our higher investment in inventory as our sales volumes continue to recover from the pandemic, and payments under our 2021 employee incentive program, partially offset by cash proceeds from the sale of three branch properties and realized hedging gains.
Financial Data Highlights (in thousands, except per share data and percentages)
| | | | | | | | | | | | | | | | | | | | | | | |
| | For The Years Ended June 30, | | 2022 vs 2021 |
| 2022 | | 2021 | | Favorable (Unfavorable) |
| | | | | Change | | % Change |
| Income Statement Data: | | | | | | | |
| Net sales | $ | 469,193 | | | $ | 397,850 | | | $ | 71,343 | | | 17.9 | % |
| Gross margin | 29.2 | % | | 25.4 | % | | 3.8 | % | | NM |
| Operating expenses as a % of sales | 32.3 | % | | 35.0 | % | | 2.7 | % | | NM |
| Loss from operations | $ | (14,628) | | | $ | (38,173) | | | $ | 23,545 | | | 61.7 | % |
| Net loss | $ | (15,661) | | | $ | (41,651) | | | $ | 25,990 | | | 62.4 | % |
| Net loss available to common stockholders per common share—basic | $ | (0.89) | | | $ | (2.39) | | | $ | 1.50 | | | NM |
| Net loss available to common stockholders per common share—diluted | $ | (0.89) | | | $ | (2.39) | | | $ | 1.50 | | | NM |
| | | | | | | |
| Operating Data: | | | | | | | |
| Coffee pounds | 76,327 | | | 79,506 | | | (3,179) | | | (4.0) | % |
| EBITDA(1) | $ | 13,946 | | | $ | 11,480 | | | $ | 2,466 | | | 21.5 | % |
| EBITDA Margin(1) | 3.0 | % | | 2.9 | % | | 0.1 | % | | NM |
| Adjusted EBITDA(1) | $ | 19,059 | | | $ | 16,611 | | | $ | 2,448 | | | 14.7 | % |
| Adjusted EBITDA Margin(1) | 4.1 | % | | 4.2 | % | | (0.1) | % | | NM |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Percentage of Total Net Sales By Product Category | | | | | | | |
| Coffee (Roasted) | 64.4 | % | | 66.2 | % | | (1.8) | % | | (2.7) | % |
| | | | | | | |
| Tea & Other Beverages (2) | 18.0 | % | | 17.5 | % | | 0.5 | % | | 2.9 | % |
| Culinary | 12.0 | % | | 11.3 | % | | 0.7 | % | | 6.2 | % |
| Spices | 4.7 | % | | 4.7 | % | | — | % | | — | % |
| Net sales by product category | 99.1 | % | | 99.7 | % | | (0.6) | % | | (0.6) | % |
| Delivery Surcharge | 0.9 | % | | 0.3 | % | | 0.6 | % | | NM |
| Total | 100.0 | % | | 100.0 | % | | — | % | | — | % |
| | | | | | | |
| Other data: | | | | | | | |
| Capital expenditures related to maintenance | $ | 13,577 | | | $ | 7,758 | | | $ | (5,819) | | | (75.0) | % |
| Total capital expenditures | 15,163 | | | 15,117 | | | (46) | | | (0.3) | % |
| Depreciation & amortization expense | 23,810 | | | 27,625 | | | 3,815 | | | 13.8 | % |
________________
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.
Factors Affecting Our Business
We have identified factors that affect our industry and business which we expect will play an important role in our future growth and profitability. Some of these factors include:
•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 further increase the capacity at our Northlake facility, we will continue to experience higher manufacturing costs driven by downtime and inefficiencies.
•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, methods of procurement, logistics, inventory management, supporting technology, and real estate assets. The ability to attract and retain a skilled workforce, as well as mitigate current global supply chain challenges, will affect our future growth and profitability.
•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 and different formats. We continue to focus on accelerating our Roastery Direct and e-commerce initiatives via a new digital platform.
•Fluctuations in Green Coffee Prices. Our primary raw material is green coffee, an exchange-traded agricultural commodity that is subject to price fluctuations. Over the past five years, coffee “C” market near month price per pound ranged from approximately $0.86 to $2.60. The coffee “C” market near month price as of June 30, 2022 and 2021 was $2.30 and $1.60 per pound, respectively. The price and availability of green coffee directly impacts our results of operations. For additional details, see Risk Factorsin Part I, Item 1A of this Form 10-K.•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 4,Derivative Instruments, of the Notes to Consolidated Financial Statements included in this Form 10‑K.•Coffee Brewing Equipment Service & Restoration ("Revive"). With Revive, 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.
•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 and tea programs that can include sustainable supply chains, direct trade purchasing, training and technical assistance, recycling and composting networks, and packaging material reductions.
Results of Operations
The following table sets forth information regarding our consolidated results of operations for fiscal 2022 and fiscal 2021.
| | | | | | | | | | | | | | | | | | | | | | | |
| | For the Years Ended June 30, | 2022 vs 2021 |
| 2022 | | 2021 | | Favorable (Unfavorable) |
| | | | | Change | | % Change |
| Net sales | $ | 469,193 | | | $ | 397,850 | | | $ | 71,343 | | | 18 | % |
| Cost of goods sold | 332,277 | | | 296,925 | | | (35,352) | | | (12) | % |
| Gross profit | 136,916 | | | 100,925 | | | 35,991 | | | 36 | % |
| Selling expenses | 107,277 | | | 95,503 | | | (11,774) | | | (12) | % |
| General and administrative expenses | 47,172 | | | 42,945 | | | (4,227) | | | (10) | % |
| | | | | | | |
| | | | | | | |
| Net gains from sale of assets | (2,905) | | | (593) | | | 2,312 | | | NM |
| | | | | | | |
| Impairment of fixed assets | — | | | 1,243 | | | 1,243 | | | 100 | % |
| | | | | | | |
| Operating expenses | 151,544 | | | 139,098 | | | (12,446) | | | (9) | % |
| Loss from operations | (14,628) | | | (38,173) | | | 23,545 | | | 62 | % |
| Other (expense) income: | | | | | | | |
| | | | | | | |
| | | | | | | |
| Interest expense | (9,516) | | | (15,962) | | | 6,446 | | | 40 | % |
| Postretirement benefits curtailment and pension settlement charge | — | | | 6,359 | | | (6,359) | | | (100) | % |
| Other, net | 8,182 | | | 19,720 | | | (11,538) | | | (59) | % |
| Total other (expense) income | (1,334) | | | 10,117 | | | (11,451) | | | (113) | % |
| Loss before taxes | (15,962) | | | (28,056) | | | 12,094 | | | 43 | % |
| Income tax (benefit) expense | (301) | | | 13,595 | | | 13,896 | | | 102 | % |
| Net loss | $ | (15,661) | | | $ | (41,651) | | | $ | 25,990 | | | 62 | % |
| Less: Cumulative preferred dividends, undeclared and unpaid | 594 | | | 574 | | | (20) | | | (3) | % |
| Net loss available to common stock holders | $ | (16,255) | | | $ | (42,225) | | | $ | 25,970 | | | 62 | % |
_____________
NM - Not Meaningful
Fiscal 2022 and Fiscal 2021
Net Sales
Net sales in fiscal 2022 increased $71.3 million, or 18%, to $469.2 million from $397.9 million in fiscal 2021. The increase in net sales was primarily due to the continued recovery from the impact of the COVID-19 pandemic on both our DSD and Direct Ship sales channel, along with price increases and delivery surcharges implemented during fiscal 2022.
On our DSD sales channel, the increase was driven by improved volume of green coffee processed and sold, along with improved volume of other beverages, culinary, spice and tea products sold as we continue to experience higher weekly sales volumes compared to prior periods.
On the Direct Ship sales channel, increase was due to price changes to customers utilizing commodity-based pricing arrangements where the changes in the green coffee commodity costs are passed on to the customer. This was also due to the recently optimized customer base and recovery from the impact of the COVID-19 pandemic by some of our larger Direct Ship customers. Our Direct Ship net sales in fiscal 2022 included $23.3 million in price increases to these customers, as compared to $3.9 million in price decreases to these customers in fiscal 2021.
The following table presents the effect of changes in unit sales, unit pricing and product mix for fiscal 2022 compared to fiscal 2021 (in millions):
Units Sold and Pricing
| | | | | | | | | | | |
| For Year Ended June 30, 2022 vs 2021 | | % of Total Mix Change |
| Effect of change in unit sales | $ | (12.0) | | | (16.8) | % |
| Effect of pricing and product mix changes | 83.3 | | | 116.8 | % |
| Total increase in net sales | $ | 71.3 | | | 100.0 | % |
Unit sales decreased 2.5% and average unit price increased by 20.4% in fiscal 2022 as compared to the same prior year period, resulting in a net increase in net sales of 18%. Average unit price increased during fiscal 2022 due to a mix of products sold via DSD versus our Direct Ship sales channel, along with price increases and delivery surcharges implemented during fiscal 2022. There were no new product category introductions in fiscal 2022 and fiscal 2021, which had a material impact on our net sales.
Gross Profit
Gross profit in fiscal 2022 increased $36.0 million, or 36%, to $136.9 million from $100.9 million in fiscal 2021. Gross
margin increased 3.8% to 29.2% in fiscal 2022 from 25.4% in fiscal 2021. The increase in gross profit in fiscal 2022 was primarily driven by higher net sales on both the DSD and Direct Ship sales channel, partially offset by higher freight costs due to global supply chain challenges and higher product costs. Gross margin improved due to the effect of the continued recovery from COVID-19 on our DSD channel sales since our DSD channel has higher margins. The increase was also attributable to a decline in our unfavorable production variances and inventory scrap write-downs due to the closure of our aged Houston, Texas plant during fiscal 2021. The price increases and delivery surcharges implemented across our DSD network during fiscal 2022 helped mitigate the impact of higher supply chain and product costs.
Operating Expenses
In fiscal 2022, operating expenses increased by $12.4 million, or 9%, to $151.5 million from $139.1 million, in fiscal 2021. The increase was primarily due to $11.8 million increase in selling expenses and a $4.2 million increase in general and administrative expenses, partially offset by $1.2 million decrease in fixed assets impairment and $2.3 million increase in net gains from sale of assets due to sale of branch properties during fiscal 2022.
The increase in selling expenses in fiscal 2022 was primarily due to variable costs, including payroll, associated with the higher net sales, as well as operating costs associated with our distribution center in Rialto, California which was opened in fiscal 2021. The increase in general and administrative expenses in fiscal 2022 was primarily due to third party costs related to several supply chain optimization initiatives, partially offset by a decrease of severance costs in the prior year period. The increase in payroll in both selling and general and administrative expenses are predominately due to the expiration of the temporary 15% reduction in base salaries and the expiration of the 401(k) cash match suspension under the Farmer Bros. Co. 401(k) Plan, which were both cost saving actions implemented in fiscal 2020 in response to the COVID-19 pandemic.
Total Other Income (Expense)
Total other income (expense) in fiscal 2022 was $1.3 million of expense compared to $10.1 million of income in fiscal 2021.
The change in total other income (expense) in fiscal 2022 was primarily a result of an absence of the gains due to the post-retirement benefit curtailment in the prior year period associated with the medical plan termination in December 2020. In addition, in June 2021, we announced the amendment of our postretirement death benefit plan effective immediately. The announcement triggered a re-measurement, and resulted in settlement gains of $6.4 million in fiscal 2021. See Note 11,Employee Benefit Plans of the Notes to Consolidated Financial Statements included in this Form 10‑K for details.Interest expense in fiscal 2022 decreased $6.4 million to $9.5 million from $16.0 million in the prior year period. The decrease in interest expense in fiscal 2022 was principally due to lower interest rates on our new credit facility entered in April 2021, as well as the amortization of de-designated interest rate swap costs.
In fiscal 2022, Other, net decreased by $11.5 million to $8.2 million compared to $19.7 million in fiscal 2021. The decrease in Other, net, was primarily a result of lower amortized gains on our terminated post-retirement medical benefit plan and mark-to-market net losses on coffee-related derivative instruments not designated as accounting hedges.
Income Taxes
In fiscal 2022, we recorded income tax benefit of $0.3 million as compared to income tax expense of $13.6 million in fiscal 2021. The 2021 tax expense is primarily due to the $13.7 million of previously deferred non-cash tax expense in accumulated other comprehensive income associated with gains on the postretirement medical plan in prior years. Upon termination of this plan during fiscal 2021, the deferred non-cash tax expense was reversed out of other comprehensive income and recorded in continuing operations net income in the second quarter of fiscal 2021. See Note 16, Income Taxes, of the Notes to Consolidated Financial Statements included in this Form 10‑K.
Non-GAAP Financial Measures
In addition to net loss determined in accordance with U.S. generally accepted accounting principles (“GAAP”), we use the following non-GAAP financial measures in assessing our operating performance:
“EBITDA” is defined as net (loss) excluding the impact of:
•income tax (benefit) expense;
•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) excluding the impact of:
•income tax (benefit) expense;
•interest expense;
•depreciation and amortization expense;
•ESOP and share-based compensation expense;
•net gains from sales of assets;
•strategic initiatives;
•severance costs;
•impairment of fixed assets;
•non-recurring costs associated with the COVID-19 pandemic and severe winter weather; and
•postretirement benefits gains curtailment and pension settlement charge.
“Adjusted EBITDA Margin” is defined as Adjusted EBITDA expressed as a percentage of net sales.
For purposes of calculating EBITDA and EBITDA Margin and Adjusted EBITDA and Adjusted EBITDA Margin, we 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 certain Farmer Bros. pension and postretirement benefits plans and severance because these items are not reflective of our ongoing operating results.
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.
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.
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 to EBITDA (unaudited):
| | | | | | | | | | | | | | |
| | For the Year Ended June 30, |
| (In thousands) | | 2022 | | 2021 |
| Net loss, as reported | | $ | (15,661) | | | $ | (41,651) | |
| Income tax (benefit) expense | | (301) | | | 13,595 | |
| Interest expense (1) | | 6,098 | | | 11,911 | |
| Depreciation and amortization expense | | 23,810 | | | 27,625 | |
| EBITDA | | $ | 13,946 | | | $ | 11,480 | |
| EBITDA Margin | | 3.0% | | 2.9% |
____________(1)Excludes interest expense related to pension plans and postretirement benefits.
Set forth below is a reconciliation of reported net loss to Adjusted EBITDA (unaudited):
| | | | | | | | | | | | | | |
| | Year Ended June 30, |
| (In thousands) | | 2022 | | 2021 |
| Net loss, as reported | | $ | (15,661) | | | $ | (41,651) | |
| Income tax (benefit) expense | | (301) | | | 13,595 | |
| Interest expense (1) | | 6,098 | | | 11,911 | |
| Depreciation and amortization expense | | 23,810 | | | 27,625 | |
| ESOP and share-based compensation expense | | 6,989 | | | 4,580 | |
| Net gains from sale of assets | | (2,905) | | | (593) | |
| Strategic initiatives (2) | | 76 | | | 4,203 | |
| Severance costs | | 953 | | | 1,596 | |
| Impairment of fixed assets | | — | | | 1,243 | |
| Non-recurring costs associated with the COVID-19 pandemic | | — | | | 352 | |
| Weather-related event - 2021 severe winter weather | | — | | | 109 | |
| Postretirement benefits gains curtailment and pension settlement charge | | — | | | (6,359) | |
| Adjusted EBITDA | | $ | 19,059 | | | $ | 16,611 | |
| Adjusted EBITDA Margin | | 4.1% | | 4.2% |
________
(1)Excludes interest expense related to pension plans and postretirement benefits.
(2)Includes initiatives related to the consolidation of the Hillsboro and Portland facilities in fiscal 2022 and Houston facility exit and opening of the Rialto distribution center in fiscal 2021.
Liquidity, Capital Resources and Financial Condition
The following table summarizes the Company’s debt obligations, excluding unamortized deferred debt financing costs:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | June 30, 2022 | | June 30, 2021 |
| (In thousands) | | Debt Origination Date | | Maturity | | Principal Amount Borrowed | | Carrying Value | | Weighted Average Interest Rate | | Carrying Value | | Weighted Average Interest Rate |
| Revolver | | various | | 4/25/2025 | | N/A | | $ | 63,000 | | | 2.75 | % | | $ | 43,500 | | | 6.17 | % |
| Term Loan | | 4/26/2021 | | 4/25/2025 | | $ | 47,500 | | | $ | 45,600 | | | 7.50 | % | | $ | 47,500 | | | 7.50 | % |
| Total | | | | | | | | $ | 108,600 | | | | | $ | 91,000 | | | |
Credit Facility
On April 26, 2021, we repaid in full all of the outstanding loans and other amounts payable under a prior amended and restated credit agreement, using proceeds of loans received pursuant to a refinancing under a new senior secured facility composed of a Revolver Credit Facility Agreement and a Term Credit Facility Agreement (the "Credit Facilities") as described in more detail in Note 12, Debt Obligations, of the Notes to Consolidated Financial Statements included in this Form 10‑K.The revolver under the Credit Facilities has a commitment of up to $80.0 million and a maturity date of April 25, 2025. Availability under the revolver is calculated as the lesser of (a) $80.0 million or (b) the amount equal to the sum of (i) 85% of eligible accounts receivable (less a dilution reserve), plus (ii) the lesser of: (a) 80% of eligible raw material inventory, eligible in-transit inventory and eligible finished goods inventory (collectively, “Eligible Inventory”), and (b) 85% of the net orderly liquidation value of eligible inventory, minus (c) applicable reserve. The term loan under the Credit Facilities has a principal amount of $47.5 million and a maturity date of April 25, 2025.
The Credit Facilities contain customary affirmative and negative covenants and restrictions typical for a financing of this type. Non-compliance with one or more of the covenants and restrictions could result in the full or partial principal balance of the Credit Facilities becoming immediately due and payable and termination of the commitments. As of and through June 30, 2022, we were in compliance with all of the covenants under the Credit Facilities.
The Credit Facilities provide us with increased flexibility to proactively manage our liquidity and working capital, while maintaining compliance with our debt financial covenants, and preserving financial liquidity to mitigate the impact of the uncertain business environment resulting from the COVID-19 pandemic and continue to execute on key strategic initiatives.
Effective March 27, 2019, we entered into an interest rate swap to manage our interest rate risk on our floating-rate indebtedness. See Note 4, Derivative Instruments, of the Notes to Consolidated Financial Statements included in this Form 10‑K, for details. In connection with the Credit Facilities, we also executed an ISDA agreement to transfer our interest swap to Wells Fargo under substantially the same terms. See Note 12, Debt Obligations, of the Notes to Consolidated Financial Statements included in this Form 10-K for details.At June 30, 2022, we had outstanding borrowings of $98.8 million and utilized $4.1 million of the letters of credit sublimit under the Credit Facilities, and had $12.9 million of availability under our Credit Facilities.
Liquidity
We generally finance our operations through cash flows from operations and borrowings under our Credit Facilities. In light of our financial position, operating performance and 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. We believe that the Credit Facilities, to the extent available, in addition to our cash flows from operations, collectively, will be sufficient to fund our working capital and capital expenditure requirements for the next 12 months.
At June 30, 2022, we had $9.8 million of unrestricted cash and cash equivalents.
Impact of COVID-19 on Our Liquidity
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 consist of small independent restaurants, foodservice operators, large institutional buyers, and convenience store chains, hotels, casinos, healthcare facilities, and foodservice distributors. The COVID-19 pandemic had a material impact on our revenues during fiscal 2022 and fiscal 2021.
In response to the impact of the COVID-19 pandemic on our business, we instituted several initiatives during fiscal 2020 and 2021 to reduce operating expenses and capital expenditures to help mitigate the significant negative impact of our revenue decline. In addition to the costs saving initiatives, in fiscal 2021 we also repaid our existing senior secured revolving credit facility, and entered into the Credit Facilities. We believe that the Credit Facilities provide us with increased flexibility to
proactively manage our working capital and execute our long term strategy, maintain compliance with our debt financial covenants, lower our cost of borrowing, and preserve financial liquidity to mitigate the impact of the uncertain business environment resulting from the COVID-19 pandemic, while continuing to execute on our strategic initiatives.
The impact of the COVID-19 pandemic, including its effects on general economic conditions, the extent of the weaker demand for our products, our financial position, results of operations and liquidity, which could be material, remains uncertain. The ultimate impacts of the COVID-19 pandemic on our business will depend on future developments, including the availability and cost of labor, global supply chain disruptions, variants of the virus, and the availability and use of vaccines and other treatments for COVID-19, which are highly uncertain and cannot be predicted. While we anticipate that our revenue will continue to recover slowly as local, state and national governments ease COVID-19 related restrictions, and vaccines become more widely accepted, there can be no assurance that we will be successful in returning to the pre-COVID-19 pandemic levels of revenue or profitability for fiscal 2023.
Cash Flows
The significant captions and amounts from our consolidated statements of cash flows are summarized below:
| | | | | | | | | | | |
| For the Years Ended June 30, |
| 2022 | | 2021 |
| Consolidated Statements of cash flows data (in thousands) | | | |
| Net cash used in operating activities | $ | (11,454) | | | $ | (1,486) | |
| Net cash used in investing activities | (6,045) | | | (10,696) | |
| Net cash provided by (used in) financing activities | 17,055 | | | (37,393) | |
| Net decrease in cash and cash equivalents | $ | (444) | | | $ | (49,575) | |
Operating Activities
Cash used in operating activities in fiscal 2022 increased $10.0 million as compared to fiscal 2021 primarily attributable to changes in working capital related to inventory and accounts receivables, as well as employee compensation payments made in fiscal 2021 as part of our employee incentive program. These outflows were partially offset by realized gains from our coffee-related derivative instruments for fiscal year 2022.
Investing Activities
Net cash used in investing activities during fiscal 2022 was $6.0 million as compared to net cash used of $10.7 million during fiscal 2021. The $4.7 million change is primarily due to the sale of assets during fiscal 2022 resulting in net cash proceeds of $9.1 million and lower expansion capital expenditures, partially offset by higher maintenance capital expenditures and coffee brewing equipment purchases in fiscal 2022 as we continued to focus on refurbished coffee brewing equipment to drive cost savings and other spending reductions.
Financing Activities
Net cash provided by financing activities during fiscal 2022 was $17.1 million as compared to of $37.4 million of cash used in financing activities during fiscal 2021. Net cash provided by financing activities in fiscal 2022 included $17.6 million in net proceeds under our current credit facilities compared to $31.0 million in net payments in fiscal 2021. These changes primarily resulted from the drawdown and repayments on our Revolver in fiscal 2021.
Contractual Obligations, Commitments and Contingencies
Our principal sources of liquidity are our existing cash and cash equivalents, cash generated from our operations and borrowing capacity currently available under our Credit facilities. We generally finance our obligations through cash flows from operations and borrowings under our Credit Facilities. We believe that the Credit Facilities, to the extent available, in addition to our cash flows from operations, collectively, will be sufficient to fund our working capital and capital expenditure requirements for the next 12 months.
At June 30, 2022, we had $9.8 million of unrestricted cash and cash equivalents. At June 30, 2022, we had $12.9 million of availability under our Credit Facilities.
The following table contains information regarding total contractual obligations as of June 30, 2022, which we expect to fund primarily with operating cash flows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Payment due by period |
| (In thousands) | | Total | | Less Than
One Year | | 1-3
Years | | 3-5
Years | | More Than
5 Years |
| Contractual obligations: | | | | | | | | | | |
| Operating lease obligations(1) | | $ | 32,791 | | | $ | 7,721 | | | $ | 13,619 | | | $ | 8,452 | | | $ | 2,999 | |
| | | | | | | | | | |
| Finance lease obligations(1) | | 675 | | | 193 | | | 386 | | | 96 | | | — | |
| Pension plan obligations(2) | | 73,360 | | | 7,430 | | | 14,680 | | | 14,900 | | | 36,350 | |
| Postretirement benefits other than pension plans (2) | | 622 | | | 56 | | | 119 | | | 127 | | | 320 | |
| Revolving credit facility (4) | | 63,000 | | | — | | | 63,000 | | | — | | | — | |
| Term loan (4) | | 45,600 | | | 3,800 | | | 41,800 | | | — | | | — | |
| Purchase commitments(3) | | 122,137 | | | 122,137 | | | — | | | — | | | — | |
| Derivative liabilities | | 2,349 | | | 2,349 | | | — | | | — | | | — | |
| | | | | | | | | | |
| Total contractual obligations | | $ | 340,534 | | | $ | 143,686 | | | $ | 133,604 | | | $ | 23,575 | | | $ | 39,669 | |
______________
(1) See Note 5, Leases, of the Notes to Consolidated Financial Statements included in this Form 10‑K.(2) See Note 11, Employee Benefit Plans, of the Notes to Consolidated Financial Statements included in this Form 10‑K.(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, 2022. 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 18, Commitments and Contingencies, of the Notes to Consolidated Financial Statements included in this Form 10‑K.(4) See Note 12, Debt Obligations, of the Notes to Consolidated Financial Statements included in this Form 10‑K.Capital Expenditures
For fiscal 2022 and fiscal 2021, our capital expenditures paid were $15.2 million and $15.1 million respectively. In fiscal 2023, we anticipate capital expenditures will be between $18.0 million and $20.0 million. We expect to finance these expenditures through cash flows from operations and borrowings under our Revolving Facility.
Depreciation and amortization expense was $23.8 million and $27.6 million in fiscal 2022 and 2021, respectively.
Recent Accounting Pronouncements
Refer to Note 2, Summary of Significant Accounting Policies, of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K 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 did not have any off-balance sheet arrangements as of June 30, 2022.
Critical Accounting Estimates
We consider an accounting estimate to be critical if: (1) the accounting estimate requires us to make assumptions about matters that were highly uncertain at the time the accounting estimate was made, and (2) changes in the estimate that are reasonably likely to occur from period to period, or use of different estimates that we reasonably could have used in the current period, would have a material impact on our financial condition or results of operations.
Our significant accounting estimates are discussed in additional detail in Note 2, Summary of Significant Accounting Policies, to the consolidated financial statements included in this Form 10-K. We believe that our significant accounting estimates involve a higher degree of judgment and/or complexity for the reasons discussed below:Fair value of coffee-related 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.
We utilize derivative instruments to reduce 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, 2022 and 2021, we had 4.7 million and 21.5 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 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, 2022, approximately 89% of our outstanding coffee-related derivative instruments, representing 4.2 million pounds of forecasted green coffee purchases, were designated as cash flow hedges. At June 30, 2021, approximately 68% of our outstanding coffee-related derivative instruments, representing 14.6 million pounds of forecasted green coffee purchases, were designated as cash flow hedges. The portion of open hedging contracts 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.
Single Employer Pension Plan
The estimation of our single employer Farmer Bros. pension plan requires that we make use of 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. Plan obligations and expenses are based on existing retirement plan provisions.
The assumptions used in developing the required estimates include the following key factors:
•Discount rates. 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.
•Expected long-term rate of return on plan assets. 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.
The following table illustrates the sensitivity to a change in certain assumptions for the Farmer Bros. pension plan, holding all other assumptions constant:
| | | | | | | | | | | | | | |
| ($ in thousands) | | Effect on 2023 Net Periodic Benefit Cost | | Effect on June 30, 2022 PBO |
| 50 basis points decrease in discount rate | | $ | (75) | | | $ | 5,376 | |
| 50 basis points increase in discount rate | | $ | 60 | | | $ | (4,926) | |
| 50 basis points decrease in expected rate of return on assets | | $ | 357 | | | N/A |
| 50 basis points increase in expected rate of return on assets | | $ | (357) | | | N/A |
See Note 11, Employee Benefit Plans, of the Notes to Consolidated Financial Statements included in this Form 10‑K for further discussions of our various pension plans.
| | | | | |
Item 7A. | Quantitative and Qualitative Disclosures About Market Risk |
Interest Rate Risk
We historically have been exposed to market value risk arising from changes in interest rates on our securities portfolio for which we entered, from time to time, futures and options contracts, or invested in derivative instruments, to manage our interest rate risk. Effective March 27, 2019, the Company entered into an interest rate swap to manage the interest rate risk on its floating-rate indebtedness. In connection with the new Revolver Credit Facility Agreement and Term Credit Facility Agreement (collectively, the “Credit Facilities”), the Company also executed a new ISDA agreement to transfer its interest swap to Wells Fargo (“Amended Rate Swap”). Under the terms of the Amended Rate Swap, the Company receives 1-month LIBOR, subject to a 0% floor, and makes payments based on a fixed rate of 2.4725%, an increase of 0.275% from its original interest rate swap fixed rate of 2.1975%. The Amended Rate Swap utilizes the same notional amount of $65.0 million and maturity date of October 11, 2023 as the original interest rate swap. See Note 4, Derivative Instruments, of the Notes to Consolidated Financial Statements included in this Form 10‑K for further discussions of our derivative instruments.At June 30, 2022, we had outstanding borrowings on our Revolver of $63.0 million and had utilized $4.1 million of the letters of credit sublimit, as well as $45.6 million of debt outstanding under our term loan. As a result of the Amended Rate Swap, only $43.6 million is now subject to interest rate variability. The weighted average interest rate on our outstanding borrowings subject to interest rate variability under the Revolver at June 30, 2022 was 2.75%.
The following table demonstrates the impact of interest rate changes on our annual interest expense on outstanding borrowings subject to interest rate variability under the Revolver based on the weighted average interest rate on the outstanding borrowings as of June 30, 2022:
| | | | | | | | | | | | | | | | | | | | |
| ($ in thousands) | | Principal | | Interest Rate | | Annual Interest Expense |
| –150 basis points | | $ | 43,600 | | | 3.24 | % | | $ | 1,413 | |
| –100 basis points | | $ | 43,600 | | | 3.74 | % | | $ | 1,631 | |
| Unchanged | | $ | 43,600 | | | 4.74 | % | | $ | 2,067 | |
| +100 basis points | | $ | 43,600 | | | 5.74 | % | | $ | 2,503 | |
| +150 basis points | | $ | 43,600 | | | 6.24 | % | | $ | 2,721 | |
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 FIFO 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. See Note 4,Derivative Instruments, of the Notes to Consolidated Financial Statements included in this Form 10‑K for further discussions of our derivative instruments.The following table summarizes the potential impact as of June 30, 2022 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 |
| | 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) | | $ | 99 | | | $ | (99) | | | $ | 736 | | | $ | (736) | |
__________
(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, 2022. These contracts are not included in the sensitivity analysis above as the underlying price has been fixed.
| | | | | |
Item 8. | Financial Statements and Supplementary Data |
The information required by this item is incorporated by reference to the consolidated financial statements and accompanying notes set forth in the F pages of this Form 10-K.
| | | | | |
Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
None.
| | | | | |
Item 9A. | Controls and Procedures |
Evaluation of 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 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 positions. The Company (i) terminated without cause the employment of D. Deverl Maserang II, its former President and Chief Executive Officer, effective September 30, 2023 (the “Maserang Separation”) and (ii) terminated without cause the employment of Scott R. Drake, effective October 1, 2023 (the “Drake Separation”). Following the Maserang Separation and the Drake Separation, effective October 1, 2023, (i) the Company appointed John E. Moore III to serve as appropriateInterim Chief Executive Officer of the Company and (ii) the Company appointed Brad Bollner to allow timely decisions regarding required disclosures.
Asserve as Interim Chief Financial Officer of June 30, 2022, our management,the Company. Prior to their appointments, Messrs. Moore and Bollner were serving with the participationCompany as Head of Coffee and Vice President of Finance, respectively.Executive Summary
Our executive compensation programs are designed to:
| · | attract, retain, and motivate talented executives with competitive pay and incentives; |
| · | reward positive results by aligning the economic interests of our executive officers with those of our stockholders; |
| · | motivate executive officers to achieve our short-term and long-term goals by providing “at risk” compensation, the value of which is ultimately based on our future performance, without creating undue risk-taking behavior nor unduly emphasizing short-term performance over long-term value creation; and |
| · | maintain total compensation and relative amounts of base salary, annual, and long-term incentive compensation competitive with those amounts paid by peer companies to remain competitive in the market for talent. |
We believe that this design appropriately focuses our executive officers on the creation of long-term value without creating undue risk-taking behavior. We continued to focus on these key design elements in addressing the impact of and our response to the COVID-19 pandemic and its related impact on our compensation programs.
Compensation Policies and Practices—Good Governance
Consistent with our commitment to strong corporate governance, in fiscal 2023, our Board followed the compensation policies and practices described below to drive performance and serve our stockholders’ long-term interests:
What We Do
| · | Our Compensation Committee is composed solely of independent directors, and regularly meets in executive session without members of management present. |
| · | Our Compensation Committee retains an independent compensation consultant to provide it with advice on matters related to executive compensation. |
| · | Our Compensation Committee regularly reviews and assesses the potential risks of our compensation policies and practices. |
| · | The structure of our executive compensation program includes a mix of cash and equity-based compensation, with an emphasis on performance-based compensation. |
| · | The competitiveness of our executive compensation program is assessed by comparison to the compensation programs of peer group companies that are similar to us in terms of industry, annual revenue, and/or other business characteristics. |
| · | Our clawback policy, which was amended and restated in fiscal 2024 for purposes of compliance with Section 10D of the Exchange Act and the Nasdaq listing standards, provides for the mandatory recovery of both cash- and equity-based compensation paid on the basis of the achievement of financial performance measures in the event of an accounting restatement. |
| · | We maintain meaningful stock ownership guidelines for directors and executive officers that promote a long-term stockholder perspective. |
What We Do Not Do
| · | We do not provide for excise tax gross-ups in connection with severance or other payments or benefits arising in connection with a change in control. |
| · | We do not provide for “single trigger” change in control payments or benefits. |
| · | We do not provide guaranteed base salary increases or guaranteed bonuses. |
| · | We do not provide supplemental pension benefits to our Named Executive Officers. |
| · | We do not provide excessive perquisites. |
| · | We do not permit (absent stockholder approval in the case of repricing/exchanging), and have not engaged in, the practice of backdating or re-pricing/exchanging stock options. |
| · | We do not allow directors or executive officers to hedge or short sell Company stock. |
| · | We do not allow directors or executive officers to pledge shares as collateral for a loan or in a margin account. |
Results of Recent Advisory Votes, Stockholder Outreach and Changes for 2023
Every year, the Company provides stockholders with the opportunity for an annual vote to approve its executive compensation program on an advisory basis.
At our 2021 Annual Meeting, approximately 46.13% of our stockholders supported our advisory vote on executive compensation and at our 2022 Annual Meeting, approximately 58.41% of our stockholders supported our advisory vote on executive compensation.
In connection with and following our 2021 and 2022 say-on-pay vote, we conducted an extensive engagement campaign to better understand our investors’ views on our executive compensation program:
| · | We reached out to investors representing approximately 47% of our common shares outstanding, as of our 2021 Annual Meeting, with invitations to discuss our officer compensation program and provide direct feedback to members of our Compensation Committee. |
| · | We held discussions with investors representing approximately 15% of our common shares outstanding as of our 2021 Annual Meeting. |
| · | Following our 2022 say-on-pay vote, we held additional outreach this fiscal year with many of our larger holders and discussed our 2022 compensation during these outreach efforts. |
Based on our discussions with stockholders following our 2021 and 2022 Annual Meetings, we found that stockholders tended to be focused on the following categories:
| · | Compensation Amounts: Stockholders did not express concern about the amount of compensation paid to the officers, nor did they express concern about any misalignment between pay and performance. |
| · | Mix of Compensation: Stockholders generally expressed a preference that the officer team have a uniform mix of long-term incentives. |
| · | Benchmarking Peer Group: Stockholders were supportive of the set of companies selected by the Compensation Committee to benchmark officer compensation. Certain stockholders expressed a view that peer companies should be similar in size and industry to Farmer Bros. |
| · | Incentives Plan Metrics: Stockholders were generally supportive of using EBITDA as the featured annual incentive plan metric, and understood the unique approach to goal-setting given the Company’s challenging situation. Several suggested that the Compensation Committee consider return on capital, revenue growth, cash flow, working capital and measuring performance on a per-share basis going forward. Several stockholders expressed a desire for TSR to have a greater weighting for future PBRSU awards. As discussed below, for fiscal 2023 we increased the influence of the TSR modifier and for fiscal 2024 we have added return on invested capital to our metrics, among other changes. |
| · | Incentive Plan Design: Shareholders generally understood and supported the unique annual and long-term incentive design adopted by the Committee as a response to the challenging operating environment caused by the COVID-19 pandemic, as described in our prior year proxy disclosure. Shareholders did express a preference for measuring PBRSU performance over a full three-year period. |
We believe stockholders’ concern was primarily with respect to our LTI program. In response to the stockholder feedback we received and to better align our executive compensation program with our corporate strategy, the Compensation Committee made several material changes to our executive compensation program that took effect during fiscal 2023, as described in detail below:
| · | The Compensation Committee removed several companies from the compensation peer group that were relatively larger than the Company in terms of revenue, and added several that are closer in revenues to the Company. These changes are described in greater detail the section below titled “Benchmarking and Peer Group Companies.” |
| · | For fiscal 2023 PBRSU awards, the TSR modifier was changed to have greater influence on the award outcome. For fiscal 2023 awards, TSR goals have been set based on the Company’s absolute cumulative TSR over a full three-year period (fiscal 2023 through 2025). The Company’s absolute TSR over this three year period can modify amounts earned by adjusted EBITDA performance by a factor of 0.80x to 1.5x (an increase from the 1.2x factor from prior awards). Adjusted EBITDA will be measured over three one-year measurement periods and generate a payout factor at the end of the three years based on the average achievement over the three years. This payout factor will then be subject to modification based on the Company’s absolute cumulative three-year as follows: |
| Absolute 3-year Cumulative TSR | | Modification Factor |
| ≤ 25.0% | | 0.8x |
| -25.0% to +24.9% | | 1.0x |
| +25.0% to +49.9% | | 1.20x |
| +50.0% to +99.9% | | 1.33x |
| ≥ 100% | | 1.50x |
The purpose of the absolute TSR modifier above is to incentivize achievement of superior shareholder returns over a three-year period.
| · | In addition to placing greater weighting on TSR, shareholders generally expressed a preference that all officers have the same mix of long-term incentive award vehicles with at least 50% of the awards granted in PBRSUs. As such, 50% of LTI granted to officers for the fiscal 2023 was granted in PBRSUs (an increase from 40% from prior year for NEOs other than our CEO which has been awarded 50% of LTI in PBRSUs in prior years). |
Although our 2022 say-on-pay proposal received increased support from stockholders relative to the 2021 say-on-pay proposal, we continued our outreach to stockholders as discussed above and in response to those conversations, we began taking steps to implement a new LTI program for fiscal 2024 to further align with the feedback we have received from stockholders in reference to our LTI program. We made significant changes to our executive compensation program for fiscal year 2024 based largely on the metrics and design that our stockholders told us they prefer to see. We intend to continue to seek and respond to stockholder concerns regarding our executive compensation in future years. Our new LTI program for fiscal year 2024 for NEOs consists of the following design features:
| · | A mix of 50% time-based RSUs and 50% PBRSUs |
| · | The PBRSUs will measure return on invested capital (“ROIC”), which are based on the achievement of certain thresholds over a three-year period. |
| · | The ROIC thresholds over the fiscal 2024 to fiscal 2026 performance period are as follows: (1) an annualized average ROIC of 4.3% for a minimum threshold and a 50% payout; (2) an annualized average ROIC of 6.1% for a target threshold and a 100% payout; and (3) an annualized average ROIC of 7.9% for a maximum threshold and a 200% payout. |
| · | The move to ROIC as the principal measure in our LTI program differentiates from the Adjusted EBITDA metric that we use in our STI program. |
| · | The switch to a cumulative 3 year performance metric based on ROIC was based on feedback from our stockholder outreach program. |
| · | A new peer group that includes smaller companies to orient the Compensation Committee towards a total group that more closely reflects the size of the Company following the TreeHouse transaction. |
Oversight of the Executive Compensation Program
Compensation Committee
Under its charter, the Compensation Committee has the duty, among other things, to assess the overall executive compensation structure of the Company, including the compensation for our President and Chief Executive Officer and each of our other Named Executive Officers. In exercising this authority, the Compensation Committee determines the forms and amount of executive compensation appropriate to achieve the Compensation Committee’s strategic objectives, including base salary, bonus, incentive or performance-based compensation, equity awards and other benefits.
Compensation Consultant
The Compensation Committee has the authority to retain the services of outside consultants to assist it in performing its responsibilities. In fiscal 2023, the Compensation Committee engaged Meridian Compensation Partners, LLC, an independent compensation consultant (“Meridian”) to provide advisory and consulting services relating to the Company’s executive officer and director compensation programs, consultation regarding short-term and long-term incentive plan design, consultation regarding CEO pay ratio disclosure, and consultation regarding corporate governance practices and general Compensation Committee matters and processes. In fiscal 2023, the Compensation Committee also engaged Meridian to help determine the compensation of our President and Chief FinancialExecutive Officer, carried out an evaluationas well as our other Named Executive Officers.
Meridian provided no other services to the Company or its affiliates during fiscal 2023 other than as described above. The Compensation Committee has determined that Meridian is “independent” according to the criteria required by the SEC in Rule 10C-1 of the effectivenessExchange Act.
Management’s Role in Establishing Compensation
The compensation of the Named Executive Officers is determined by the Compensation Committee, taking into account the input and recommendations of our disclosure controlsPresident and procedures pursuantChief Executive Officer regarding compensation for those executive officers, and taking into account the input of the Nominating and Corporate Governance Committee and Chairman regarding performance of our President and Chief Executive Officer. The Compensation Committee has sole authority for all final compensation determinations regarding our President and Chief Executive Officer. In fiscal 2023, our President and Chief Executive Officer, Chief Human Resources Officer and General Counsel routinely attended the meetings of the Compensation Committee to Rule 13a-15(e) promulgated underprovide input, as requested by the Exchange Act. Based uponCompensation Committee and, in the case of the General Counsel, to act as secretary for the meeting; however, no executive officer has any role in approving his or her own compensation, and neither our President and Chief Executive Officer nor any other Named Executive Officer is present during the portion of the meeting at which the Compensation Committee considers their compensation. The Compensation Committee regularly meets in executive session, without members of the management team present, when discussing and approving executive compensation.
Benchmarking and Peer Group Companies
The Compensation Committee compares the pay levels and programs for the Company’s executive officers to compensation information from a relevant peer group as well as information from published survey sources. The Compensation Committee uses this comparative data as a reference point in its review and determination of executive compensation but also considers competitive compensation practices and other relevant factors based on the members’ collective experience in setting pay. Accordingly, the Compensation Committee does not generally establish compensation at specific benchmark percentiles.
When setting compensation, the Compensation Committee considers other factors in addition to market data, including:
| · | impact on long-term stockholder value creation; |
| · | impact on development and execution of Company strategy; |
| · | experience and tenure in role; |
| · | trends and competitive factors impacting the labor market; |
| · | the impact of macroeconomic conditions, inflationary pressures on the business and management’s actions to respond to the uncertain market in fiscal 2023; and |
| · | scope of responsibility. |
The Compensation Committee, with the assistance of Meridian, developed and approved the following peer group for purposes of benchmarking the compensation levels of our Named Executive Officers relative to our peers and informing fiscal 2023 pay levels for our Named Executive Officers:
| Beyond Meat, Inc. | | Bridgford Foods Corporation |
| Calavo Growers, Inc. | | Freshpet, Inc. |
| Hostess Brands, Inc. | | J&J Snack Foods Corp. |
| John B Sanfilippo & Son, Inc. | | MGP Ingredients, Inc. |
| NewAge, Inc. | | SunOpta, Inc. |
| The Duckhorn Portfolio, Inc. | | The Simply Good Foods Company |
| Utz Brands, Inc. | | Vital Farms, Inc. |
| Whole Earth Brands, Inc. | | |
The Compensation Committee evaluates our peer group annually and makes adjustments to this peer group when appropriate to reflect changes in relative size or operations of the Company or its peers, or to address changes resulting from mergers, acquisitions or other structural changes. As such, during fiscal 2023, the Compensation Committee made additional changes to the peer group set to remove larger companies and add smaller companies so that evaluation,the group on the whole is closer in revenue size to Farmer Bros. Specifically, the Committee removed J&J Snack Foods Corp., Utz Brands, Inc., Hostess Brands, Inc., The Simply Good Foods Company, Calavo Growers, Inc. and John B. Sanfilippo & Son, Inc. as each of these had reported revenues greater than $1 billion at the time of the Committee’s review. The Compensation Committee then added The Vita Coco Company, Inc., BRC Inc., Vintage Wine Estates, Inc. and Village Farms International, Inc. as each had reported revenues closer to Farmer Bros. revenues at the time of the Committee’s review. These companies were used for benchmarking officer compensation for fiscal 2023 to inform fiscal 2024 pay decisions.
Fiscal 2023 Named Executive Officer Compensation Mix
In fiscal 2023, the Compensation Committee’s compensation decisions with respect to our Named Executive Officers, including the revisions to the LTI program for fiscal 2024, reflected strong alignment between pay and performance. We believe that our compensation programs were therefore also strongly aligned with the long-term interests of our stockholders.
The following charts illustrate, with respect to our President and Chief Executive Officer and Chief Financialour other Named Executive Officers as a group, the base salary, target short-term cash incentive compensation, and target long-term equity incentive compensation as a percentage of target total direct compensation for fiscal 2023. As shown below, a significant portion of Named Executive Officer concludedtarget direct compensation is “at risk” variable compensation rather than fixed compensation, reflecting our philosophy of aligning Named Executive Officer compensation with performance generally and stockholder value creation specifically.
Key Elements of Fiscal 2023 Executive Compensation Program
Below are the key elements of the Company’s fiscal 2023 executive compensation program applicable to our Named Executive Officers.
| What We Pay | Why and How We Pay It |
| Base Salary | · Base salary comprises fixed cash compensation that is designed to provide a reasonable level of Company-wide and individual performance. · Base salaries are reviewed annually and adjusted when appropriate (increases are neither fixed nor guaranteed). · Competitive base salaries are a key component of attracting and retaining executive talent. |
| Short-Term Cash Incentives | · Annual cash incentives constitute variable “at risk” compensation, payable in cash based on Company-wide and individual performance. These awards are designed to reward achievement of annual financial objectives as well as near term strategic objectives that create momentum that is expected to foster the long-term success of the Company’s business. · Company-wide metrics and targets are derived from, and intended to promote, our near-term business strategy. · Individual targets are consistent with our focus on both quantitative and qualitative priorities and thereby reward both attainment of objective metrics and individual contributions. |
| Long-Term Incentives | · Stock options, Restricted Stock Units (“RSUs”) and Performance-based Restricted Stock Units (“PBRSUs”) subject to both performance- and time-based vesting conditions are designed to create direct alignment with stockholder objectives, provide a focus on long-term value creation, retain critical talent over extended timeframes and enable key employees to share in value creation. · Performance-based award metrics and targets align with long-term business strategy as well as stock price appreciation creating shareholder value. |
| Severance Benefits | · Severance benefits provide income and health insurance protection to our Named Executive Officers in connection with certain involuntary terminations of employment. These severance benefits are designed to enable the Named Executive Officers to focus on the best interests of the Company and its stockholders, including in circumstances that may jeopardize the individual’s job security. · Enhanced severance benefits are available if the termination of employment occurs in connection with a change in control to ensure continued focus on the best alternatives for the Company and its stockholders, free from distractions caused by personal uncertainties associated with the heightened risk to job security that arises for senior executives in the transactional context. · Severance benefits are also key to attracting and retaining key talent. |
| Retirement and Welfare Benefits | · A standard complement of retirement, health, welfare and insurance benefits, offered to our Named Executive Officers on terms generally similar to those available to other employees, provides important protections and stability for our Named Executive Officers and their families that help enable our Named Executive Officers to remain focused on their work responsibilities. · These are generally low-cost benefits with a higher perceived value that are intended to help keep our overall compensation package competitive. |
| Perquisites | · We provide limited perquisites as well as relocation assistance, each intended to facilitate the operation of the Company’s business and to assist the Company in recruiting and retaining key executives. · These are also low-cost benefits with a higher perceived value that are intended to help keep our overall compensation package competitive. |
Base Salary
Consistent with the established executive compensation philosophy and objectives described above, and utilizing the peer comparisons provided by Meridian, the Compensation Committee approved fiscal 2023 annual base salaries for the Named Executive Officers as shown in the table below.
| Named Executive Officers | | Fiscal 2023
Annual Base
Salary(1) | | | Fiscal 2022
Annual Base
Salary(1) | | | Annual Base
Salary
Percentage
Change | |
| D. Deverl Maserang II | | | 714,000 | | | | 680,000 | | | | 5 | % |
| Scott R. Drake | | | 463,500 | | | | 450,000 | | | | 3 | % |
| Amber D. Jefferson | | | 336,000 | | | | 320,000 | | | | 5 | % |
| Jared G. Vitemb | | | 315,000 | | | | 300,000 | | | | 5 | % |
| Ruben E. Inofuentes | | | 360,500 | | | | 350,000 | | | | 3 | % |
| Maurice S. J. Moragne | | | 372,725 | | | | 355,000 | | | | 5 | % |
(1) Annual base salary as of the end of the applicable fiscal year.
Short-Term Cash Incentives for Fiscal 2023
Fiscal 2023 awards were designed to place a significant portion of each Named Executive Officer’s annual cash compensation “at risk” and were designed to align the near-term focus of our Named Executive Officers with our business goals for the relevant period. Due to the longer term impacts of the COVID-19 pandemic on the restaurant industry specifically impacting our base business, the Company’s 2023 short-term incentive plan focused on achieving a minimum performance threshold for Company-wide financial results.
For the fiscal 2023 Short-Term Cash Incentive Program, the Compensation Committee used adjusted EBITDA as the relevant performance metric and set a minimum threshold for achievement (described below) which, if achieved, the Compensation Committee believed would reflect a meaningful level of Company profitability and would be aligned with our strategic plan to deliver long-term value to our stockholders. Generating EBITDA is critically important during this unprecedented time in the Company’s history which is why adjusted EBITDA was the primary performance metric for the fiscal 2023 annual cash incentive program and an important factor in the fiscal 2023 PBRSU awards.
The Company must remain in compliance with the financial covenants under the Company’s credit facility, and as such, the Compensation Committee believes it is important to incentivize management to drive adjusted EBITDA in excess of what is required under the Company’s credit facility, while ensuring that any payouts generated from adjusted EBITDA achievement are affordable and do not put the Company in a compromising cash situation. As such, the Compensation Committee determined that (i) any payouts above threshold adjusted EBITDA achievement levels would be discretionary and (ii) no Short-Term Incentive payments would be made to the extent that such payments would reduce the Company’s adjusted EBITDA below the level required by the financial covenants applicable to the Company at the time. The Committee has since changed the design as described above.
For this purpose, “adjusted EBITDA” was defined as net (loss) income excluding the impact of: (i) income taxes; (ii) interest expense; (iii) income from short-term investments; (iv) depreciation and amortization expense; (v) ESOP and share-based compensation expense; (vi) non-cash impairment losses; (vii) non-cash pension withdrawal expense; (viii) other similar non-cash expenses; (ix) restructuring and other transition expenses; (x) non-recurring stockholder-related expenses; (xi) acquisition costs (and related revenues only during the same fiscal year); (xii) capital issuance expenses; (xiii) out of period external legal expenses; (xiv) business segment disposition expenses (and exclusion of related gain on sales); (xv) net gain or loss on sale of assets other than M&A or business segment disposition; and (xvi) non-recurring and/or extraordinary expenses.
In fiscal 2023, our Named Executive Officers received no short term incentive awards as the Company did not achieve its threshold adjusted EBTIDA goal.
The following table shows such achievement compared to Company-wide performance threshold for fiscal 2023.
| Metric | | Adjusted
EBITDA
Target | | | Threshold
Goal | | | Actual
Achievement | | | Actual
Achievement
Compared to
Target
Performance | | | Payout for Fiscal
2023 Company-
wide
Performance | |
| Adjusted EBITDA | | $ | 22 | M | | $ | 16.5 | M | | $ | (14.2 | )M | | | 0 | % | | | 0 | % |
The following table shows such target achievement compared to actual earned short-term cash incentive for fiscal 2023.
| Named Executive Officers | | Fiscal 2023 Target Short
Term Cash Incentive | | | Fiscal 2023 Target Short
Term Earned Cash
Incentive | |
| D. Deverl Maserang II | | $ | 714,000 | | | $ | 0 | |
| Scott R. Drake | | $ | 347,625 | | | $ | 0 | |
| Amber D. Jefferson | | $ | 201,600 | | | $ | 0 | |
| Jared G. Vitemb | | $ | 189,000 | | | $ | 0 | |
| Ruben E. Inofuentes | | $ | 216,300 | | | $ | 0 | |
| Maurice S. J. Moragne | | $ | 223,650 | | | $ | 0 | |
Long-Term Incentive Compensation
Awards
The fiscal 2023 long-term incentives were designed to be competitive with market and directly align our incentives with our long-term business priorities and compensation outcomes to Company performance and shareholder interests. The Compensation Committee believes that the fiscal 2023 long-term incentive program facilitates strong pay for performance alignment in that the RSUs only appreciate in value to the extent that the stock price appreciates, and the PBRSUs only vest to the extent that the performance goals are achieved, placing the emphasis on stock price and stockholder alignment on internal Company performance and business strategy. The Compensation Committee also believes that long-term incentives serve as a retention tool for key executives, which is particularly important in this competitive market for talent. In addition, the Compensation Committee has continued to revise the LTI program for fiscal 2024, including revising the PBRSU measure to include ROIC based on a cumulative three year performance. These changes have been made to improve the structure of the program moving forward to better align with shareholder interests.
Our practice historically has been to grant annual normal-cycle long-term incentive awards generally in the second quarter of the fiscal year, with interim grants for new hires and promotions after the annual grant date being made on the first day of the calendar month following the hire or promotion, as applicable.
Fiscal 2023 Awards
Restricted Stock Units
In fiscal 2023, the RSUs granted to each of our Named Executive Officers under the 2017 Plan, other than Mr. Vitemb, vest ratably over three years, with one-third of the total number of shares subject to each such RSUs vesting on each of the first three anniversaries of the grant date, contingent on continued employment. Mr. Vitemb was not a Named Executive Officer at the time the 2023 LTI grants were made; consequently, his grants consisted of 50% time-based RSUs and 50% performance-based RSUs.
Performance-Based Restricted Stock Units
In fiscal 2023, the PBRSUs granted to our Named Executive Officers under the 2017 Plan cliff vest at the end of the three-year performance period based upon achievement of adjusted EBITDA (as defined above for purposes of fiscal 2023 cash incentive) performance goals for the performance period July 1, 2022 through June 30, 2022,2025. During this unprecedented period of uncertainty and challenging operating environment for Farmer Bros., generating EBITDA is critically important to our disclosure controls
success, including our ability to meet financing covenants, create shareholder value and proceduresafford incentive compensation to attract and retain key talent in a highly competitive labor market. As such, adjusted EBITDA is the featured performance metric for both our short- and long-term incentive plans. The Compensation Committee continuously evaluates alternative incentive plan performance metrics and expects that the use of the same metric in both short- and long-term plans was only a temporary practice. As described above, for fiscal 2024 the Company will use separate metrics for short- and long-term incentive goals and expects to continue this practice going forward. For the fiscal 2023 awards, adjusted EBITDA targets for each year of the performance period are effective.Management's Report on Internal Control Over Financial Reporting
There has been no change in our internal control over financial reporting pursuantset independently at the beginning of the year due to Rules 13a-15(d) or 15d-15(d) promulgated under the Exchange Act during our fiscal quarter ended June 30, 2022, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Internal control over financial reporting is a process to provide reasonable assurance regarding the reliabilityrapidly changing realities of our financial reporting for external purposes in accordance with accounting principles generally accepted inbusiness during the United Statespandemic and the inflationary environment that followed. This preserves the incentive of America. Internal control over financial reporting includes maintaining records that in reasonable detail accurately and fairly 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 prevented 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 ofpay-for-performance by making the
effectiveness of our internal control over financial reportingtargets challenging but achievable based on the
framework in Internal Control — Integrated Framework (2013) issuedbusiness environment for the applicable performance year. For fiscal 2024, the Company will use cumulative three year performance periods and expects to continue that practice going forward.For fiscal 2023, performance against adjusted EBITDA targets for each year will determine a payout factor for that year which can range from 0% to 150% of target. At the end of the 3-year performance period, the average payout factor for each of the three one-year adjusted EBITDA measurement periods will be calculated. This three-year average payout factor for adjusted EBITDA performance is then subject to modification based on Farmer Bros. three-year TSR (the “three-year TSR modifier”) which is applied to the preliminary payout factor determined by the CommitteeEBITDA target to determine a final payout factor between 0% and 225% of Sponsoring Organizationstarget for the full 3-year measurement period for PBRSUs. No PBRSUs can be earned or paid prior to the conclusion of the Treadway Commission. Basedfull three-year measurement period when the final full three-year achievement is determined.
Our performance goals for adjusted EBITDA are based on business forecasts and relevant expectations reflecting our strategic plans and aspirations to grow our business. The Compensation Committee has historically established aggressive, yet achievable performance goals intended to motivate the Company’s executive officers to achieve internal goals and results that will benefit the Company’s stockholders, while maintaining strong alignment between pay and performance. With the limited number of shares available for issuance under the 2017 Plan, this evaluation, management concludedannual as opposed to three-year target setting preserves the incentive of equity awards. Actual achievement of the three-year performance goals for the PBRSU awards granted in fiscal 2023 will be reflected in our proxy statement that reports the Company's internalpayouts at the end of the three-year performance period.
The PBRSUs that were granted to Messrs. Maserang and Drake for the performance period spanning July 1, 2020-June 30, 2023 were certified by the Compensation Committee in September 2023. The performance metrics yielded an award of approximately 0.533 shares of common stock for each PBRSU granted to Messrs. Maserang and Drake, or 123,453 and 11,207 shares of common stock, respectively. More specifically, 67% of the total EBITDA target for the PBRSUs was used, but this was reduced by 20% because of the TSR modifier.
Employment and Change in Control Severance Agreements
The Company is party to an Employment Agreement, dated September 6, 2019, with its former President and Chief Executive Officer, Deverl Maserang (the “Maserang Employment Agreement”), as well as severance agreements with each of the Named Executive Officers other than Messrs. Maserang, Moragne and Inofuentes. During fiscal 2023, but following the departure of Messrs. Moragne and Inofuentes, the Company adopted and approved certain revisions to the form of severance agreement for executive officers, and on June 30, 2023, entered into new severance agreements with each Named Executive Officer, other than Messrs. Maserang, Moragne and Inofuentes, on such form (each, a “Severance Agreement” and collectively, the “Severance Agreements”). The Severance Agreements superseded and replaced the prior change in control over financial reporting wasseverance agreement in place between the Company and the related Named Executive Officer, effective as of June 30, 2022.2023. A detailed description of the severance benefits each Named Executive Officer is due to receive based on their Employment Agreement and/or Severance Agreement is set forth below under the heading “Named Executive Officer Compensation-Potential Payments Upon Termination or Change in Control.”
These agreements were entered into, and continue in effect, to achieve the following objectives: (a) assure the Named Executive Officers’ full attention and dedication to the Company, free from distractions caused by personal uncertainties and risks related to a pending or threatened change in control; (b) assure the Named Executive Officers’ objectivity with respect to stockholders’ interests in a change in control scenario; (c) assure the fair treatment of the Named Executive Officers in the event of a termination without cause or resignation for good reason following a following a change in control; (d) formalize the Company’s historic severance practices in the event of a termination without cause or resignation with good reason outside of a change in control; and (e) attract and retain key talent during uncertain times. The Company's independent registered public accounting firm, Grant Thornton LLPagreements are structured so that payments and benefits are provided if there is a qualifying termination of employment (“Grant Thornton”single trigger”), (PCAOB ID Number 248)either by us (other than for “Cause,” disability or death), has issued an audit reportor by the Named Executive Officer in connection with a resignation for “Good Reason” (as each term is defined in the Severance Agreements or the Maserang Employment Agreement, as applicable).
Retirement and Welfare Benefits
The Named Executive Officers receive the same welfare benefits as those received by our employees generally, including medical, dental, life, disability and accident insurance.
The Named Executive Officers are eligible on the effectivenesssame basis as our employees generally to participate in the Company’s 401(k) plan. The value of the Company's internal control over financial reporting. Their reportNamed Executive Officers’ 401(k) balances depends solely on the performance of investment alternatives selected by the applicable Named Executive Officer from among the alternatives offered to all participants. All investment options in the 401(k) are market-based, meaning there are no “above-market” or guaranteed rates of return.
The Company match is includedcurrently made in Company stock to help the Company manage its cash position as it emerges from the impacts of COVID-19. Through our shareholder outreach program, we learned that many of our shareholders are concerned about dilution. So, effective January 1, 2023, we eliminated the 4% non-elective contribution and changed the Company match to 100% of the first 3% each eligible employee contributes plus 50% on the next 2% they contribute. This model will allow the Company to take advantage of the “safe harbor” provisions of the regulations applicable to its 401(k) and remain competitive in a challenging labor market, while reducing the dilutive effects of the match.
Perquisites
We believe that offering certain limited perquisites facilitates the operation of our business, allows our Named Executive Officers to better focus their time, attention and capabilities on our business, and assists the Company in recruiting and retaining key executives. We also believe that the perquisites offered to our Named Executive Officers are generally consistent with practices among companies in our peer group.
It is the Company’s and the Compensation Committee’s intention to continually assess business needs and evolving practices to ensure that perquisite offerings are competitive and reasonable.
Compensation Policies and Practices
Stock Ownership Guidelines
The Board has adopted Stock Ownership Guidelines to further align the interests of the Company’s executive officers with the consolidated financial statements.
interests of the Company’s stockholders. Under the stock ownership guidelines, an executive officer is not permitted to sell any shares of Common Stock received as a result of grants under the Company’s long-term incentive plans unless the executive officer achieves and maintains the applicable threshold share ownership level set forth in the table below. Further, under the stock ownership guidelines, a non-employee director is expected to own and hold during his or her service as a Board member a number of shares of Common Stock with a value of at least four times his or her annual cash retainer for service on the Board, and is not permitted to sell any shares of Common Stock received as grants under the Company’s long-term incentive plans unless and until the non-employee director achieves and maintains this threshold share ownership level.Shares of Common Stock that count toward satisfaction of these guidelines include: (i) shares of Common Stock owned outright by the executive officer or non-employee director and his or her immediate family members who share the same household, whether held individually or jointly; (ii) restricted stock or restricted stock units (whether or not the restrictions have lapsed); (iii) shares of Common Stock held in trust for the benefit of the executive officer or non-employee director or his or her family; and (iv) shares of Common Stock issuable under vested options held by the executive officer or non-employee director.
| Position | | | | | Value of Shares Owned |
Item 9B.Chief Executive Officer | | 3x base salary |
Other InformationExecutive Officers | | 1x base salary |
| Non-Employee Directors | | 4x Annual Cash Retainer |
On March 4, 2022, we filedInsider Trading Policy (Including Anti-Hedging and Anti-Pledging Policies)
Our insider trading policy prohibits all employees, officers, directors, consultants and other associates of the Company and certain of their family members from, among other things, purchasing or selling any type of security, whether the issuer of that security is the Company or any other company, while aware of material, non-public information relating to the issuer of the security or from providing such material, non-public information to any person who may trade while aware of such information. The insider trading policy also prohibits employees from engaging in short sales with the Secretary of State of Delaware a Certificate of Correction (the “Certificate of Correction”)respect to our securities, purchasing or pledging Company stock on margin and entering into derivative or similar transactions (i.e., puts, calls, options, forward contracts, collars, swaps or exchange agreements) with respect to our securities. We also have procedures that require trades by certain insiders, including our directors and executive officers, to be pre-cleared by appropriate Company personnel. Additionally, such insiders are generally prohibited from conducting transactions involving the purchase or sale of the Company’s securities from 12:01 a.m. New York City time on the fourteenth calendar day before the end of each of the Company’s four fiscal quarters (including fiscal year end) through 11:59 p.m. New York City time on the business day following the date of the public release containing the Company’s quarterly (including annual) results of operations.
Clawback Policy on Executive Compensation in Restatement Situations
In August 2023, for purposes of compliance with Section 10D of the Exchange Act and the Nasdaq listing standards, the Compensation Committee approved the Company’s Amended and Restated Policy on Executive Compensation in Restatement Situations (the “Clawback Policy”). The Clawback Policy provides that, in the event the Company is required to prepare an accounting restatement due to the material noncompliance of the Company with any financial reporting requirement under the federal securities laws, the Company will recover (on a pre-tax basis) the amount of incentive-based compensation received by its current and former executive officers in excess of the amount of incentive-based compensation that would have been received had it been determined based on the restated amount, subject to limited exceptions.
Accounting Standards
Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 718 requires us to recognize an expense for the fair value of share-based compensation awards. Grants of stock options, restricted stock and PBRSUs under the Company’s long-term incentive plans are accounted for under FASB ASC Topic 718. The Compensation Committee considers the accounting implications of significant compensation decisions, especially in connection with decisions that relate to our long-term incentive program. As accounting standards change, the Company may revise certain programs to appropriately align accounting expenses of our share-based compensation awards with our overall executive compensation philosophy and objectives.
Summary Compensation Table
The following table sets forth summary information concerning compensation awarded to, earned by, or paid to each of our Named Executive Officers for all services rendered in all capacities to the Company and its subsidiaries in the last three fiscal years. For a complete understanding of the table, please read the footnotes and narrative disclosures that follow the table.
Name and
Principal
Position | | Year | | | Salary
($) | | | Bonus
($) | | | Stock
Awards
($) | | | Option
Awards
($) | | | Non-Equity
Incentive Plan
Compensation
($) | | | All Other
Compensation
($) | | | Total
($) | |
| (a) | | (b) | | | (c) | | | (d) | | | (e) | | | (f) | | | (g) | | | (h) | | | (i) | |
| D. Deverl Maserang II(1) | | 2023 | | | | 704,846 | | | | - | | | | 1,499,994 | | | | - | | | | - | | | | 9,900 | | | | 2,214,740 | |
| Former Principal Executive Officer | | 2022 | | | | 676,154 | | | | - | | | | 2,006,755 | | | | - | | | | 598,400 | | | | 20,900 | | | | 3,292,209 | |
| | | 2021 | | | | 615,574 | | | | - | | | | 1,899,995 | | | | - | | | | 660,000 | | | | 11,114 | | | | 3,186,683 | |
| Scott R. Drake(2) | | 2023 | | | | 459,865 | | | | - | | | | 449,997 | | | | - | | | | - | | | | 13,908 | | | | 923,770 | |
| Former Principal Financial Officer | | 2022 | | | | 397,500 | | | | - | | | | 712,160 | | | | - | | | | 297,000 | | | | 19,119 | | | | 1,425,779 | |
| | | 2021 | | | | 349,758 | | | | - | | | | 344,989 | | | | - | | | | 281,250 | | | | 14,226 | | | | 990,223 | |
| Amber D. Jefferson(3) | | 2023 | | | | 331,692 | | | | - | | | | 224,998 | | | | - | | | | - | | | | 15,176 | | | | 571,866 | |
| Chief Human Resources Officer | | 2022 | | | | 221,538 | | | | - | | | | 249,996 | | | | - | | | | 168,960 | | | | 10,359 | | | | 650,853 | |
Jared G. Vitemb(4) Vice President, General Counsel, Secretary and Chief Compliance Officer | | 2023 | | | | 310,961 | | | | - | | | | 224,998 | | | | - | | | | - | | | | 16,759 | | | | 552,718 | |
| Maurice S.J. Moragne(5) | | 2023 | | | | 283,078 | | | | - | | | | 299,994 | | | | - | | | | - | | | | 204,074 | | | | 787,146 | |
| Former Chief Sales Officer | | 2022 | | | | 352,115 | | | | - | | | | 267,567 | | | | - | | | | 170,400 | | | | 20,606 | | | | 810,688 | |
| | | 2021 | | | | 340,000 | | | | - | | | | 289,986 | | | | 74,998 | | | | 204,000 | | | | 10,994 | | | | 844,980 | |
| Ruben E. Inofuentes(6) | | 2023 | | | | 281,795 | | | | - | | | | 274,995 | | | | - | | | | - | | | | 109,242 | | | | 666,032 | |
| Former Chief Supply Chain Officer | | 2022 | | | | 348,077 | | | | - | | | | 245,266 | | | | - | | | | 159,600 | | | | 20,675 | | | | 773,618 | |
| | | 2021 | | | | 317,114 | | | | - | | | | 359,992 | | | | - | | | | 204,000 | | | | 11,248 | | | | 892,354 | |
| (1) | Mr. Maserang joined as our President and Chief Executive Officer effective September 13, 2019. On September 30, 2023, Mr. Maserang was terminated without cause, and he ceased to serve as President and Chief Executive Officer of the Company. On October 1, 2023, the Company appointed John E. Moore III to serve as interim Chief Executive Officer of the Company. |
| | |
| (2) | Mr. Drake joined as our Chief Financial Officer effective March 23, 2020. On October 1, 2023, Mr. Drake was terminated without cause, and he ceased to serve as Chief Financial Officer of the Company. On October 1, 2023, the Company appointed Brad Bollner to serve as interim Chief Financial Officer of the Company. |
| | |
| (3) | Ms. Jefferson joined as our Chief Human Resources Officer effective October 11, 2021. |
| | |
| (4) | Mr. Vitemb joined as our Vice President, General Counsel, Secretary and Chief Compliance Officer effective March 2022. Mr. Vitemb was not an NEO in fiscal 2022. |
| | |
| (5) | Mr. Moragne joined as our Chief Sales Officer effective June 8, 2020, and served in such role until his separation from the Company effective February 17, 2023. Given Mr. Moragne’s departure from the Company during fiscal 2023, Mr. Moragne’s compensation amounts are reflective of partial year service. |
| | |
| (6) | Mr. Inofuentes joined as our Chief Supply Chain Officer effective November 15, 2019, and served in such role until his separation from the Company effective February 17, 2023. Given Mr. Inofuentes’ departure from the Company during fiscal 2023, Mr. Inofuentes’ compensation amounts are reflective of partial year service. |
Salary (Column C)
The amounts reported in column C represent base salaries earned by each of the Named Executive Officers for the fiscal year indicated, prorated based on applicable start dates during the fiscal year or the dates of resignation or termination. The amounts shown include amounts contributed by the employee to the Company’s 401(k) Plan.
Bonus (Column D)
This column reflects that no cash-based bonus payments outside of an incentive plan were made during the fiscal years set forth. All non-equity incentive plan compensation for services performed during the fiscal year by the Named Executive Officers under the 2017 Plan is shown in column G.
Stock Awards (Column E)
The amounts in column E for fiscal 2021 represent the aggregate grant date fair value of the PBRSU award received by each of Mr. Maserang and Mr. Inofuentes in connection with the commencement of their respective employment in fiscal 2021. The amounts in column E for fiscal 2022 include the aggregate grant date fair value of the annual PBRSU awards received by each of Messrs. Maserang, Drake, Inofuentes, and Moragne and the annual RSU awards received by each of Messrs. Maserang, Drake, Inofuentes and Moragne. The amounts in column E for fiscal 2023 include the aggregate grant date fair value of the annual PBRSU awards received by each of Messrs. Maserang, Drake, Inofuentes and Moragne and Ms. Jefferson, the annual RSU awards received by each of Messrs. Maserang, Drake, Vitemb, Inofuentes and Moragne and Ms. Jefferson and the annual CSRSU award received by Mr. Vitemb. A discussion of the assumptions used in calculating the amounts in this column may be found in Note 14 to our audited consolidated financial statements for the fiscal year ended June 30, 2023 included in our 2023 Form 10-K, except that, as required by applicable SEC rules, we did not reduce the amounts in this column for any forfeitures relating to service-based (time-based) vesting conditions.
For annual PBRSU awards in each of fiscal 2023, fiscal 2022 and fiscal 2021, we have reported the fair value of the award based upon the probable satisfaction of the performance conditions as of the grant date. The maximum aggregate grant date fair value that would have been received if the highest level of performance was achieved in fiscal 2021 would have been $1,709,998 for Mr. Maserang, $155,246 for Mr. Drake, $161,998 for Mr. Inofuentes, and $96,744 for Mr. Moragne. The maximum aggregate grant date fair value that would have been received if the highest level of performance was achieved in fiscal 2022 would have been $1,505,077 for Mr. Maserang, $187,297 for Mr. Drake, $147,166 for Mr. Inofuentes, and $160,540 for Mr. Moragne. The maximum aggregate grant date fair value that would have been received if the highest level of performance was achieved in fiscal 2023 would have been $1,687,492 for Mr. Maserang, $520,607 for Mr. Drake, $309,369 for Mr. Inofuentes, $337,493 for Mr. Moragne and $253,124 for Ms. Jefferson. These amounts do not reflect the Company’s expense for accounting purposes for these awards, and do not represent the actual value that may be realized by the Named Executive Officers. For further information on these awards, see the Grants of Plan-Based Awards Table and Outstanding Equity Awards at Fiscal Year-End Table in this Amendment.
Option Awards (Column F)
The amounts reported in column F represent the aggregate grant date fair value of stock option awards computed in accordance with FASB ASC Topic 718. The stock option awards granted in fiscal 2021 reflects awards received by Mr. Moragne in connection with commencement of his employment. A discussion of the assumptions used in calculating the amounts in this column may be found in Note 13 to our audited consolidated financial statements for the fiscal year ended June 30, 2023 included in our 2023 Form 10-K, except that, as required by applicable SEC rules, we did not reduce the amounts in this column for any risk of forfeiture relating to service-based (time-based) vesting conditions. For further information on these awards, see the Grants of Plan-Based Awards Table and Outstanding Equity Awards at Fiscal Year-End Table in this Amendment.
Non-Equity Incentive Plan Compensation (Column G)
The amounts reported in column G represent the aggregate dollar value of the annual incentives earned by the Named Executive Officers under the 2017 Plan for fiscal 2022 and 2021 under the short-term incentive plan for the relevant fiscal year. As a result of the Company’s failure to achieve threshold levels of performance in fiscal 2023, no payouts are reported for any of the Named Executive Officers during that period. In accordance with SEC rules, the actual annual incentive amounts earned by the Named Executive Officers are reflected in the Summary Compensation Table in the fiscal year earned, even though these annual incentive amounts are paid in the subsequent fiscal year.
As a result of the Company’s failure to achieve threshold levels of performance in fiscal 2021, no payouts are reported for any of the Named Executive Officers during that period.
All Other Compensation (Column H)
The amounts reported in column H include the following:
| All Other Compensation(1) |
| Name | | Year | | | Company Contributions
to 401(k) Plan ($)(2) | | | Relocation Expense
($)(3) | | | Payments Under
Severance Agreements | |
| D. Deverl Maserang IIr | | 2023 | | | | 9,900 | | | | - | | | | - | |
| Formerp Principal Executive Office | | 2022 | | | | 20,900 | | | | - | | | | - | |
| | | 2021 | | | | 11,114 | | | | - | | | | - | |
| Scott R. Drake | | 2023 | | | | 13,908 | | | | - | | | | - | |
| Former Principal Financial Officer | | 2022 | | | | 19,119 | | | | - | | | | - | |
| | | 2021 | | | | 14,226 | | | | - | | | | - | |
| Amber D. Jeffersonr | | 2023 | | | | 15,176 | | | | - | | | | - | |
| Chief Human Resources Office | | 2022 | | | | 10,359 | | | | - | | | | - | |
Jared G. Vitemb
Vice President, General Counsel, Secretary and Chief Compliance Officer | | 2023 | | | | 16,759 | | | | - | | | | - | |
| Maurice S.J. Moragne | | 2023 | | | | 11,922 | | | | 91,796 | | | | 100,356 | |
| Former Chief Sales Officer | | 2022 | | | | 20,606 | | | | - | | | | - | |
| | | 2021 | | | | 10,994 | | | | - | | | | - | |
| Ruben E. Inofuentes | | 2023 | | | | 12,184 | | | | - | | | | 97,058 | |
| Former Chief Supply Chain Officer | | 2022 | | | | 20,675 | | | | - | | | | - | |
| | | 2021 | | | | 11,248 | | | | - | | | | - | |
| (1) | Except as set forth in the table, the total value of all perquisites and other personal benefits received by each of our Named Executive Officers did not exceed $10,000 in fiscal 2023 and has been excluded from the table. |
| | |
| (2) | Represents the Company’s contribution under the 401(k) including the Company matching contribution and the Qualified Non-elective Contribution (QNEC). Company contributions (and any earnings thereon) are 100% vested. The QNEC contributions are given in Company Common Stock. |
| | |
| (3) | The figure presented in this column for Mr. Moragne reflects relocations expenses paid on behalf of the Company in connection with Mr. Moragne’s move from North Carolina to Texas. |
Total Compensation (Column I)
The amounts reported in column I are the sum of columns C through H for each of the Named Executive Officers.
Fiscal 2023 Grants of Plan-Based Awards
The following table sets forth, for each of our Named Executive Officers, the plan-based awards granted to each of our Named Executive Officers during fiscal 2023.
| | | | | Estimated Future Payouts Under
Non-Equity Incentive Plan
Awards | | | Estimated Future Payouts Under
Equity Incentive Plan Awards(1) | | | All Other
Stock
Awards
Number of
Shares of: | | | All Other
Option
Awards:
Number of
Securities | | | Exercise
or Base
Price of
Option | | | Grant Date
Fair Value of
Stock and | |
| Name | | Grant Date | | Threshold
($)(3) | | | Target
($)(3) | | | Maximum
($)(3) | | | Threshold
(#) | | | Target
(#) | | | Maximum
(#) | | | Stock or
Units (#) | | | Underlying
Options (#) | | | Awards
($/Sh) | | | Option
Awards(2) | |
| (a) | | (b) | | (c) | | | (d) | | | (e) | | | (f) | | | (g) | | | (h) | | | (i) | | | (j) | | | (k) | | | (l) | |
D. Deverl Maserang II
Former Principal Executive Officer | | 11/1/2022 | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 117,187 | | | | - | | | | - | | | | 749,997 | |
| | | 11/1/2022 | | | - | | | | - | | | | - | | | | 0 | | | | 117,187 | | | | 263,370 | | | | - | | | | - | | | | - | | | | 749,997 | |
Scott R. Drake
Former Principal Financial Officer | | 11/1/2022 | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 35,156 | | | | - | | | | - | | | | 224,998 | |
| | | 11/1/2022 | | | - | | | | - | | | | - | | | | 0 | | | | 35,156 | | | | 81,344 | | | | - | | | | - | | | | - | | | | 224,998 | |
Amber D. Jefferson
Chief Human Resources Officer | | 11/1/2022 | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 17,578 | | | | - | | | | - | | | | 112,499 | |
| | | 11/1/2022 | | | - | | | | - | | | | - | | | | 0 | | | | 17,578 | | | | 39,550 | | | | - | | | | - | | | | - | | | | 112,499 | |
Jared G. Vitemb
Vice President, General Counsel, Secretary and Chief Compliance Officer | | 11/1/2022 | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 17,578 | | | | - | | | | - | | | | 112,499 | |
| | | 11/1/2022 | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 17,578 | | | | - | | | | - | | | | 112,499 | |
Maurice S.J. Moragne
Former Chief Sales Officer | | 11/1/2022 | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 23,437 | | | | - | | | | - | | | | 149,997 | |
| | | 11/1/2022 | | | - | | | | - | | | | - | | | | 0 | | | | 23,437 | | | | 52,733 | | | | - | | | | - | | | | - | | | | 149,997 | |
Ruben E. Inofuentes
Former Chief Supply Chain Officer | | 11/1/2022 | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 21,484 | | | | - | | | | - | | | | 137,498 | |
| | | 11/1/2022 | | | - | | | | - | | | | - | | | | 0 | | | | 21,484 | | | | 48,338 | | | | - | | | | - | | | | - | | | | 137,498 | |
| (1) | Represents PBRSU awards granted to our Named Executive Officers in fiscal 2023 which cliff vest based upon achievement of adjusted EBITDA performance goals and TSR for the performance period of July 1, 2022 through June 30, 2025. Each year, performance targets for adjusted EBITDA will be established, performance in each of those years will create a bank of shares between 0% to 150% of the target amount, depending on the extent to which the Company meets or exceeds the achievement of the performance goals. At the end of the three-year performance period a TSR modifier is applied which can increase or decrease the cumulative number of shares earned based on adjusted EBITDA by as much as 50%. All shares, including banked shares will be forfeited if the executive voluntarily leaves the Company prior to the end of the performance period. With the exception of Ms. Jefferson, all of these grants have been forfeited as of the date of filing and no shares will vest for Messrs. Maserang, Drake, Moragne, and Inofuentes |
| | |
| (2) | Reflects the grant date fair value of restricted stock and PBRSU awards computed in accordance with FASB ASC Topic 718. A discussion of the assumptions used in calculating the amounts in this column may be found in Note 14 to our audited consolidated financial statements for the fiscal year ended June 30, 2023, included in our 2023 Form 10-K, except that, as required by applicable SEC rules, we did not reduce the amounts in this column for any risk of forfeiture relating to service-based (time-based) vesting conditions. The amount reported for PBRSU awards is based upon the probable satisfaction of the performance conditions as of the grant date. |
| | |
| (3) | Represents annual cash incentive opportunities under the Short-Term Cash Incentive Program based on the Company’s achievement of certain metrics, as determined by the Compensation Committee. Our Named Executive Officers received a cash payout at Target under the Short-Term Cash Incentive Program in fiscal 2023, based on the Compensation Committee’s discretion once threshold performance was achieved. Annual cash incentive awards earned by our Named Executive Officers for performance in respect of a fiscal year are paid during the subsequent fiscal year. Such earned awards are included in the “Non-Equity Incentive Plan Compensation” column of the Summary Compensation Table. |
Outstanding Equity Awards at Fiscal Year-End
The following table sets forth summary information regarding the outstanding equity awards at June 30, 2023 granted to each of our Named Executive Officers.
| | | Option Awards | | | Stock Awards | |
| Name | | Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable(1) | | | Number of
Securities
Underlying
Unexercised
Options (#)
Unexercisable(1) | | | Equity
Incentive
Plan Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options (#) | | | Option
Exercise
Price ($) | | | Option
Expiration
Date | | | Number of
Shares or
Units of
Stock That
Have Not
Vested
(#)(2) | | | Market
Value of
Shares
or Units
of Stock
That
Have Not
Vested
($)(3) | | | Equity
Incentive
Plan
Awards:
Number of
Unearned
Shares,
Units or
Other
Rights
That Have
Not Vested
(#)(4) | | | Equity Incentive
Plan Awards:
Market or Payout
Value of
Unearned Shares,
Units or Other
Rights That Have
Not Vested ($)(3) | |
| (a) | | (b) | | | (c) | | | (d) | | | (e) | | | (f) | | | (g) | | | (h) | | | (i) | | | (j) | |
D. Deverl Maserang II
Former Principal Executive Officer | | | 223,713 | | | | - | | | | - | | | $ | 13.13 | | | | 9/13/2026 | | | | - | | | | - | | | | - | | | | - | |
| | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 231,707 | | | | 641,828 | |
| | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 112,613 | | | | 311,938 | |
| | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 117,187 | | | | 324,608 | |
| | | | - | | | | - | | | | - | | | | - | | | | - | | | | 52,515 | | | | 145,467 | | | | - | | | | - | |
| | | | - | | | | - | | | | - | | | | - | | | | - | | | | 75,075 | | | | 207,958 | | | | - | | | | - | |
| | | | - | | | | - | | | | - | | | | - | | | | - | | | | 117,187 | | | | 324,608 | | | | - | | | | - | |
Scott R. Drake
Former Principal Financial Officer | | | 88,495 | | | | - | | | | - | | | $ | 6.72 | | | | 4/01/2027 | | | | - | | | | - | | | | - | | | | - | |
| | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 21,036 | | | | 58,270 | |
| | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 14,014 | | | | 38,819 | |
| | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 35,156 | | | | 97,382 | |
| | | | - | | | | - | | | | - | | | | - | | | | - | | | | 9,536 | | | | 26,415 | | | | - | | | | - | |
| | | | - | | | | - | | | | - | | | | - | | | | - | | | | 6,671 | | | | 18,479 | | | | - | | | | - | |
| | | | - | | | | - | | | | - | | | | - | | | | - | | | | 14,014 | | | | 38,819 | | | | - | | | | - | |
| | | | - | | | | - | | | | - | | | | - | | | | - | | | | 36,765 | | | | 101,590 | | | | - | | | | - | |
| | | | - | | | | - | | | | - | | | | - | | | | - | | | | 35,156 | | | | 97,382 | | | | - | | | | - | |
Amber D. Jefferson
Chief Human Resources Officer | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 17,578 | | | | 48,691 | |
| | | | - | | | | - | | | | - | | | | - | | | | - | | | | 32,581 | | | | 90,249 | | | | - | | | | - | |
| | | | - | | | | - | | | | - | | | | - | | | | - | | | | 17,578 | | | | 48,691 | | | | - | | | | - | |
Jared G. Vitemb
Vice President, General Counsel, Secretary and Chief Compliance Officer | | | - | | | | - | | | | - | | | | - | | | | - | | | | 31,034 | | | | 85,964 | | | | - | | | | - | |
| | | | - | | | | - | | | | - | | | | - | | | | - | | | | 17,578 | | | | 48,691 | | | | - | | | | - | |
| | | | - | | | | - | | | | - | | | | - | | | | - | | | | 17,578 | | | | 48,691 | | | | - | | | | - | |
Maurice S.J. Moragne(5)
Former Chief Sales Officer | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Ruben E. Inofuentes(6)
Former Chief Supply Chain Officer | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
| (1) | Stock options vest in equal ratable installments on each of the first three anniversaries of the date of grant, contingent on continued employment through the applicable vesting date, and subject to accelerated vesting in certain circumstances. |
| | |
| (2) | Restricted stock units vest in equal ratable installments on each of the first three anniversaries of the date of grant, contingent on continued employment through the applicable vesting date, and subject to accelerated vesting in certain circumstances. |
| | |
| (3) | The market value was calculated by multiplying the closing price of our Common Stock on June 30, 2023 ($2.77) by the number of shares of Common Stock underlying the unvested restricted stock or PBRSUs. |
| | |
| (4) | PBRSU awards cliff vest following the expiration of the three-year performance period upon the certification by the Compensation Committee of the Company’s achievement of performance goals for the three-year performance, subject to certain continued employment conditions and subject to the acceleration provisions of the 2017 Plan and restricted stock unit award agreement. At the end of the three-year performance period, the number of PBRSUs that actually vest will be 0% to 200% of the target amount, depending on the extent to which the Company meets or exceeds the achievement of those performance goals measured over the full three-year performance period, with payouts for performance between threshold and target, and between target and maximum determined by reference to a matrix established by the Compensation Committee. The target number of PBRSUs is presented in the table. |
| | |
| (5) | Mr. Inofuentes forfeited all then-unvested equity awards upon his separation from the Company in February 2023. |
| | |
| (6) | Mr. Moragne forfeited all then-unvested equity awards upon his separation from the Company in February 2023. |
Option Exercises and Stock Vested
| | | Option Awards | | | Stock Awards | |
| Name | | Number of Shares
Acquired on
Exercise (#) | | | Value Realized on
Exercise ($) | | | Number of Shares
Acquired on
Vesting (#) | | | Value Realized on
Vesting ($) | |
| (a) | | (b) | | | (c) | | | (d) | | | (e) | |
D. Deverl Maserang II
Former Principal Executive Officer | | | - | | | | - | | | | 213,505 | | | | 642,370 | |
Scott R. Drake
Former Principal Financial Officer | | | - | | | | - | | | | 71,183 | | | | 240,727 | |
Amber D. Jefferson
Chief Human Resources Officer | | | - | | | | - | | | | - | | | | - | |
Jared G. Vitemb
Vice President, General Counsel, Secretary and Chief Compliance Officer | | | - | | | | - | | | | - | | | | - | |
Maurice S.J. Moragne
Former Chief Sales Officer | | | - | | | | - | | | | 14,103 | | | | 71,069 | |
Ruben E. Inofuentes
Former Chief Supply Chain Officer | | | - | | | | - | | | | 30,793 | | | | 155,658 | |
Pension Benefits
None of our Named Executive Officers are entitled to payments or other benefits at, following, or in connection with retirement.
Change in Control and Termination Arrangements
The Company previously entered into change in control severance agreements with each of the Named Executive Officers other than Mr. Maserang. On June 30, 2023, Mr. Drake, Mr. Vitemb, Ms. Jefferson and certain other key executives other than Mr. Maserang (each, an “Executive”) entered into Severance Agreements with the Company on the revised form approved by the Compensation Committee, each of which superseded and replaced the prior change in control severance agreement in place between the Company and the related Executive, effective as of June 30, 2023.
The severance obligations payable to Mr. Maserang are set forth in the Maserang Employment Agreement and that certain Change in Control Severance Agreement with the Company, dated September 6, 2019 (the “Maserang CIC Agreement”), each as further described below.
In connection with their separations from the Company, (i) on March 23, 2023, Mr. Inofuentes entered into a General Release and Separation Agreement with the Company (the “Inofuentes Separation Agreement”), which superseded and replaced his prior Change in Control Severance Agreement with the Company and (ii) on March 25, 2023, Mr. Moragne entered into a General Release and Separation Agreement with the Company (the “Moragne Separation Agreement”), which superseded and replaced his prior Change in Control Severance Agreement with the Company. The severance payments and benefits received by Messrs. Moragne and Inofuentes in connection with their respective terminations are set forth below.
Severance Agreements
Under the Severance Agreements, if an Executive is terminated other than for “Cause” (as defined below) or resigns for “Good Reason” (as defined below) (each, a “Qualifying Termination”), in each case during the period beginning on the effective date of a “Change in Control” (as defined below) and ending on the first anniversary of such date (such period, the “Change in Control Period”), then such Executive will be eligible to receive the following severance benefits (less applicable tax withholdings), as further described in and payable pursuant to the terms of the related Severance Agreement:
| ● | Accrued benefits, including earned but unpaid salary, bonus payment for the previous fiscal year (if any), vacation time and reimbursements, payable in a lump sum on the first regular pay date following the Executive’s separation from service; |
| ● | A payment of an amount equal to two (2) times the sum of base salary and the amount the executive would pay on an annual basis for COBRA, payable in a lump sum within the fifteen (15) day period following the Qualifying Termination; |
| ● | A lump sum payment equal to a pro-rated portion of target bonus, payable in a lump sum within the fifteen (15) day period following the Qualifying Termination; and |
| ● | Up to $20,000 in outplacement services. |
If an Executive experiences a Qualifying Termination outside of the Change in Control Period, then such Executive will be eligible to receive the following severance benefits (less applicable tax withholdings), as further described in and payable pursuant to the terms of the related Severance Agreement:
| ● | Accrued benefits, including earned but unpaid salary, bonus payment for the previous fiscal year (if any), vacation time and reimbursements, payable in a lump sum payment on the first regular pay date following the Executive’s separation from service, subject to the limitations described in the related Severance Agreement; |
| ● | An amount equal to the sum of base salary and the amount the executive would pay on an annual basis for COBRA, payable in regular bi-weekly installments on the Company’s regular pay dates, commencing on the first regular pay date following the Executive’s separation from service; and |
| ● | A payment equal to a pro-rated portion of annual bonus based on actual performance, payable on the date such payments are made to similarly situated employees, but in no event later than September 15 of the year following such Executive’s separation from service. |
To receive the severance benefits above upon a Qualifying Termination, the Executive must sign and not revoke a general release of claims in favor of the Company by the deadline set forth in the related Severance Agreement.
In addition, if an Executive experiences a separation from service on account of death or disability, then such Executive or such Executive’s estate, as applicable, will be eligible to receive the following severance benefits (less applicable tax withholdings), as further described in and payable pursuant to the terms of the related Severance Agreement:
| ● | Accrued benefits, including earned but unpaid salary, bonus payment for the previous fiscal year (if any), vacation time and reimbursements, payable in a lump sum payment on the sixtieth (60th) calendar day following the Executive’s separation from service; and |
| ● | A payment in an amount equal to twelve times the monthly cost for COBRA, payable in a lump sum payment on the sixtieth (60th) calendar day following the Executive’s separation from service. |
If any of the payments provided for under the Severance Agreements or otherwise payable to any Executive would constitute “parachute payments” within the meaning of Section 280G of the Internal Revenue Code and would be subject to the related excise tax under Section 4999 of the Internal Revenue Code, then such Executive will be entitled to receive either full payment of benefits or such lesser amount which would result in no portion of the benefits being subject to the excise tax, whichever results in the greater amount of after-tax benefits to such Executive.
The Severance Agreements each have a one-year term and provide for automatic renewal for additional one-year periods thereafter, unless the Company or the related Executive provides notice of non-renewal to the other party.
For purposes of the Severance Agreements:
| ● | A “Change in Control” generally will be deemed to have occurred at any of the following times: |
| o | Upon the acquisition by any person, entity or group of beneficial ownership of 50% or more of either the then-outstanding Common Stock or the combined voting power of the Company’s then-outstanding securities entitled to vote generally in the election of directors; |
| o | Upon the approval of the stockholders of the Company of a reorganization, merger, consolidation, complete liquidation, or dissolution of the Company, the sale or disposition of all or substantially all of the assets of the Company or any similar corporate transaction (other than any transaction with respect to which persons who were the stockholders of the Company immediately prior to such transaction continue to hold shares of Common Stock representing at least 50% of the outstanding Common Stock of the Company or such surviving entity or parent or affiliate thereof immediately after such transaction); or |
| o | At the time individuals who were members of the Board at the effective time of the Severance Agreement (or whose election, or nomination for election, was approved by a vote of at least a majority of the members of the Board at the effective time of the Severance Agreement, but excluding any such individual whose initial election or assumption of office occurs as a result of either an actual or threatened election contest) cease for any reason to constitute at least a majority of the Board. |
| ● | “Cause” means (a) the willful and continued failure of the executive to perform the executive’s material job duties with the Company and/or its subsidiaries (other than any such failure resulting from becoming disabled), after a written demand for substantial performance is delivered to the executive by the Company which specifically identifies the manner in which the Company believes that the executive has not substantially performed the executive’s duties and the executive has had an opportunity for thirty (30) days to cure such failure after receipt of such written demand; (b) engaging in an act (whether by act or omission) of willful misconduct, fraud, embezzlement, misappropriation or theft which results in damage to the Company and/or its subsidiaries; (c) conviction of the executive of, or the executive pleading guilty or nolo contendere to, a felony (other than a violation of a motor vehicle or moving violation law) or a misdemeanor if such misdemeanor (A) is reasonably expected to or actually causes material damage to the Company and/or its subsidiaries; or (B) involves the commission of a criminal act against the Company and/or its subsidiaries; or (d) the breach by the executive of any material provision of, or inaccuracy in any material respect of any representation made by the executive in, the Company’s policies or any agreement to which the executive is party with the Company or its affiliates, that is not cured within thirty (30) days of written notice from the Company setting forth with reasonable particularity such breach or inaccuracy, provided that, if such breach or inaccuracy is not capable of being cured within 30 days after receipt of such notice, the executive shall not be entitled to such cure period. |
| ● | “Good Reason” means, without the executive’s consent: (a) a material reduction in the executive’s base salary, other than pursuant to a reduction applicable to all executives or employees of the Company generally; (b) a move of the executive’s primary place of work more than fifty (50) miles from its current location; or (c) a material diminution in the executive’s normal duties and responsibilities, including, but not limited to, the assignment without the executive’s consent of any diminished duties and responsibilities which are inconsistent with the executive’s positions, duties and responsibilities with the Company and/or its subsidiaries on the date of the Severance Agreement, or a materially adverse change in the executive’s reporting responsibilities or titles as in effect on the date of the Severance Agreement, or any removal of the executive from or any failure to re-elect the executive to any of such positions, except in connection with the termination of the executive’s employment for Cause or upon death, the executive becoming disabled, voluntary resignation or other termination of employment by the executive without Good Reason; provided that, in each case, the executive must provide at least thirty (30) days’ prior written notice of termination for Good Reason within thirty (30) days after the occurrence of the event that the executive claims constitutes Good Reason, and the Company shall have the opportunity to cure such circumstances within thirty (30) days of receipt of such notice. For the avoidance of doubt, Good Reason shall not exist hereunder unless and until the 30-day cure period following receipt by the Company of the executive’s written notice expires and the Company shall not have cured such circumstances, and in such case the executive’s employment shall terminate for Good Reason on the day following expiration of such 30-day notice period. |
In the event of a Named Executive Officer’s termination of employment other than for “Cause” or due to death or “Disability”, or in the event of a Named Executive Officer’s “Resignation for Good Reason” (each, as defined in the Severance Agreements), in each case, in connection with a Change in Control or Threatened Change in Control, each of the Named Executive Officers will be entitled to the payments and benefits shown in the tables below.
Maserang Employment Agreement
Under the Maserang Employment Agreement, Mr. Maserang is eligible to receive severance payments in the event of his termination without Cause (as defined in the Maserang Employment Agreement) or resignation with Good Reason (as defined in the Maserang Employment Agreement), whether or not in connection with a change in control. Upon the occurrence of either of the aforementioned events, contingent upon the execution and non-revocation of a general release of claims in favor of the Company by Mr. Maserang by the deadline set forth in the Maserang Employment Agreement, Mr. Maserang would be eligible to receive the following severance benefits (less applicable tax withholdings), as further described in and payable pursuant to the terms of the Maserang Employment Agreement:
| ● | The sum of his base salary then in effect and his target annual bonus for the fiscal year in which his separation from service occurs, payable in equal installments for a period of twelve (12) months; |
| ● | Partially Company-paid COBRA coverage under the Company’s health plan for himself and his spouse for a period of twelve (12) months following his separation from service; |
| ● | An annual bonus for the fiscal year in which his separation from service occurs, based on actual achievement against the Performance Criteria (as defined in the Maserang Employment Agreement), prorated for the period that Mr. Maserang was employed during the relevant fiscal year; and |
| ● | If such termination occurs after the end of the fiscal year, but before any bonus for the fiscal year is paid, then the payment of any such earned bonus. |
Maserang Change in Control Severance Agreement
Pursuant to the Maserang CIC Agreement, in the event (i) a Change in Control occurs and Mr. Maserang’s employment is terminated for reasons other than for Cause (as defined in the Maserang CIC Agreement), disability or death, or Mr. Maserang resigns for Good Reason (as defined in the Maserang CIC Agreement) or (ii) a Threatened Change in Control (as defined below) occurs and Mr. Maserang’s employment is terminated for reasons other than for Cause (as defined in the Maserang CIC Agreement), disability or death, or Mr. Maserang resigns for Good Reason (as defined in the Maserang CIC Agreement) during the Threatened Change in Control Period (as defined below), Mr. Maserang would be eligible to receive the following severance benefits (less applicable tax withholdings), as further described in and payable pursuant to the terms of the Maserang Employment Agreement:
| ● | An amount equal to two (2) times the sum of his base salary and an amount equal to his target bonus for the fiscal year in which the date of termination occurs, payable in a lump sum within thirty (30) days after his separation from service; |
| ● | A payment equal to one hundred percent (100%) of his target bonus for the fiscal year in which the date of termination occurs, prorated for the period that he was employed during such fiscal year, such payment to be made in a lump sum within thirty (30) days after the end of the Company’s fiscal year in which the date of his termination occurs; |
| ● | Continuation, for the twenty-four (24) month period following his date of termination, of the health, dental, and life insurance benefits coverage provided to Mr. Maserang at his date of termination, unless Mr. Maserang commences employment prior to the end of the twenty four (24) month period and qualifies for substantially equivalent insurance benefits with his new employer, in which case, such insurance coverages shall end on the date of qualification; and |
| ● | Up to $25,000 in outplacement services. |
For purposes of the Maserang CIC Agreement, a “Threatened Change in Control” means any bona fide pending tender offer for any class of the Company’s outstanding shares, or any pending bona fide offer to acquire the Company by merger or consolidation, or any other pending action or plan to effect, or which would lead to, a Change in Control of the Company as determined by the Board as composed on the effective date of the Maserang CIC Agreement. The “Threatened Change in Control Period” means the period commencing on the first day the actions described in the preceding sentence become manifest and shall end when such actions are abandoned or the Change in Control occurs.
Inofuentes Separation Agreement
On February 17, 2023 (“Inofuentes Separation Date”), Mr. Inofuentes’ employment with the Company was terminated without cause. In connection with Mr. Inofuentes’ termination, the Company and Mr. Inofuentes entered into the Inofuentes Separation Agreement, pursuant to which the Company agreed to pay Mr. Inofuentes fifty-two (52) weeks of severance pay, equal to his base salary (an aggregate amount of $360,500, less applicable tax withholdings), paid in bi-weekly installments on the Company’s regular pay dates, commencing on the first regular pay date after the Inofuentes Separation Date that is at least eight (8) days after the date of the Inofuentes Separation Agreement. The Inofuentes Separation Agreement also contains a general release of claims from Mr. Inofuentes, as well as other customary provisions.
Moragne Separation Agreement
On February 17, 2023 (“Moragne Separation Date”), Mr. Moragne’s employment with the Company was terminated without cause. In connection with Mr. Moragne’s termination, the Company and Mr. Moragne entered into the Moragne Separation Agreement, pursuant to which the Company agreed to pay Mr. Moragne fifty-two (52) weeks of severance pay, equal to his base salary (an aggregate amount of $372,750, less applicable tax withholdings), paid in bi-weekly installments on the Company’s regular pay dates, commencing on the first regular pay date after the Moragne Separation Date that is at least eight (8) days after the date of the Moragne Separation Agreement. The Moragne Separation Agreement also contains a general release of claims from Mr. Moragne, as well as other customary provisions.
Potential Payments Upon Termination or Change in Control
The following table sets forth the estimated payments and benefits that would be provided to our Named Executive Officers upon termination or a change in control, assuming the trigger event took place on June 30, 2023, except for Messrs. Moragne and Inofuentes, for whom the table reports what Messrs. Inofuentes and Moragne received in connection with their respective departures from the Company on February 17, 2023. The estimated payments and benefits that may have been provided to Messrs. Drake and Maserang in the event a termination or change in control took place on June 30, 2023 are provided below because Messrs. Drake and Maserang were still employed by the Company on such date and until their separations from the Company October 1, 2023 and September 30, 2023, respectively. The actual amount of payments and benefits can only be determined at the time of such a termination or change in control, and therefore the actual amounts may vary from the estimated amounts in the tables below. Descriptions of how such payments and benefits are determined under the circumstances, material conditions and obligations applicable to the receipt of payments or benefits and other material factors regarding such agreements, as well as other material assumptions that we have made in calculating the estimated compensation, follow these tables.
| Name | | Termination
Without Cause or
Resignation for
Good Reason
Outside of Change
in Control Period(1) | | | Termination
Without Cause or
Resignation for
Good Reason Within
Change in Control
Period(2) | | | Termination
Without Cause or
Resignation for
Good Reason Within
Threatened Change
in Control Period(3) | | | Termination for
Cause or
Resignation Absent
Good Reason | |
D. Deverl Maserang II(4)
Former Principal Executive Officer | | | | | | | | | | | | | | | | |
| Base Salary Continuation(5) | | | 1,428,000 | | | | 2,856,000 | | | | 2,856,000 | | | | 714,000 | |
| Annual Incentive Payments(6) | | | 0 | | | | 0 | | | | 0 | | | | 0 | |
| Value of Accelerated Stock Options | | | 0 | | | | 0 | | | | 0 | | | | 0 | |
| Value of Accelerated Restricted Stock | | | 0 | | | | 678,033 | | | | 678,033 | | | | 0 | |
| Value of Accelerated PBRSUs | | | 0 | | | | 1,278,374 | | | | 1,278,374 | | | | 0 | |
| Health and Dental Insurance | | | 16,042 | | | | 32,084 | | | | 32,084 | | | | 0 | |
| Outplacement Services | | | 0 | | | | 25,000 | | | | 25,000 | | | | 0 | |
| Total Pre-Tax Benefit | | | 1,444,042 | | | | 4,869,491 | | | | 4,869,491 | | | | 714,000 | |
Scott R. Drake(7)
Former Principal Financial Officer |
| Base Salary Continuation(8) | | | 463,500 | | | | 927,000 | | | | - | | | | 0 | |
| Annual Incentive Payments(6) | | | 0 | | | | 0 | | | | - | | | | 0 | |
| Value of Accelerated Stock Options | | | 0 | | | | 0 | | | | - | | | | 0 | |
| Value of Accelerated Restricted Stock | | | 0 | | | | 282,685 | | | | - | | | | 0 | |
| Value of Accelerated PBRSUs | | | 0 | | | | 194,471 | | | | - | | | | 0 | |
| Health and Dental Insurance | | | 24,887 | | | | 49,754 | | | | - | | | | 0 | |
| Outplacement Services | | | 0 | | | | 20,000 | | | | - | | | | 0 | |
| Total Pre-Tax Benefit | | | 488,387 | | | | 1,424,156 | | | | - | | | | 0 | |
Amber D. Jefferson
Chief Human Resources Officer |
| Base Salary Continuation(8) | | | 336,000 | | | | 672,000 | | | | - | | | | 0 | |
| Annual Incentive Payments(6) | | | 0 | | | | 0 | | | | - | | | | 0 | |
| Value of Accelerated Stock Options | | | 0 | | | | 0 | | | | - | | | | 0 | |
| Value of Accelerated Restricted Stock | | | 0 | | | | 138,940 | | | | - | | | | 0 | |
| Value of Accelerated PBRSUs | | | 0 | | | | 48,691 | | | | - | | | | 0 | |
| Health and Dental Insurance | | | 8,319 | | | | 16,638 | | | | - | | | | 0 | |
| Outplacement Services | | | 0 | | | | 20,000 | | | | - | | | | 0 | |
| Total Pre-Tax Benefit | | | 344,319 | | | | 896,269 | | | | - | | | | 0 | |
Jared G. Vitemb
Vice President, General Counsel, Secretary and
Chief Compliance Officer |
| Base Salary Continuation(8) | | | 315,000 | | | | 630,000 | | | | - | | | | 0 | |
| Annual Incentive Payments(6) | | | 0 | | | | 0 | | | | - | | | | 0 | |
| Value of Accelerated Stock Options | | | 0 | | | | 0 | | | | - | | | | 0 | |
| Value of Accelerated Restricted Stock | | | 0 | | | | 183,346 | | | | - | | | | 0 | |
| Value of Accelerated PBRSUs | | | 0 | | | | 0 | | | | - | | | | 0 | |
| Health and Dental Insurance | | | 0 | | | | 0 | | | | - | | | | 0 | |
| Outplacement Services | | | 0 | | | | 20,000 | | | | - | | | | 0 | |
| Total Pre-Tax Benefit | | | 315,000 | | | | 833,346 | | | | - | | | | 0 | |
| (1) | “Change in Control Period” has the meaning set forth in the Severance Agreements, except with regard to Mr. Maserang. With regard to Mr. Maserang, “Change in Control” period refers to the twenty-four (24) month period following the effective date of a Change in Control (as defined in the Maserang Employment Agreement). The amounts reflected in this column for Mr. Maserang assume that his separation does not occur during a Threatened Change in Control Period (as defined above). |
| (2) | “Change in Control Period” has the meaning set forth in the Severance Agreements, except with regard to Mr. Maserang. With regard to Mr. Maserang, “Change in Control” period refers to the twenty-four (24) month period following the effective date of a Change in Control (as defined in the Maserang Employment Agreement). |
| (3) | Payments made in connection with a “Threatened Change in Control” are only applicable to Mr. Maserang. |
| (4) | As discussed above, Mr. Maserang’s employment with the Company was terminated without cause effective September 30, 2023. In connection with the Maserang Separation, the Company paid to Mr. Maserang $1,428,000, payable in accordance with the terms of the Maserang Employment Agreement. As previously disclosed, in connection with the Maserang Separation, the Company agreed to accelerate the vesting of 35,806 then-unvested restricted stock units, effective as of September 30, 2023. |
| (5) | Amounts include Mr. Maserang’s base salary as well as 100% of his target bonus. |
| (6) | Because the Company did not meet its fiscal 2023 Adjusted EBITDA target, no annual incentives are payable pursuant to the Severance Agreements, the Maserang CIC Agreement or the Maserang Employment Agreement. |
| (7) | As discussed above, Mr. Drake’s employment with the Company was terminated without cause effective October 1, 2023. In connection with the Drake Separation, the Company paid to Mr. Drake $463,500, payable in accordance with the Severance Agreement entered into between Mr. Drake and the Company on June 30, 2023. |
| (8) | Amounts include Named Executive Officer’s base salary as well as amounts such Named Executive Officer would pay on an annual basis for COBRA. |
Value of Accelerated Vesting of Equity Awards
Under the terms of the Named Executive Officers’ outstanding awards, in the event of death or “Disability” (as defined in the applicable plan):
| ● | a pro rata portion of any unvested restricted stock units will vest; and |
| ● | outstanding PBRSU awards will remain outstanding and the participant will be eligible to earn a pro-rata portion of the number of PBRSU awards that would have been earned based on actual performance through the end of the performance period (amounts shown in the tables above assume 100% of the target PBRSU awards were earned at the end of the performance period). |
Under the applicable award agreement, if a Change in Control (as defined in the applicable plan) occurs and a participant’s awards are not continued, converted, assumed or replaced by the Company or a parent or subsidiary of the Company, or a Successor Entity (as defined in the applicable plan), such awards will become fully exercisable and/or payable, and all forfeiture, repurchase and other restrictions on such awards will lapse immediately prior to such Change in Control. In the case of PBRSU awards, the vested shares will be a prorated number of the target PBRSU awards. The amounts in the tables above assume all awards were continued, converted, assumed, or replaced in connection with a Change in Control.
If there is a Change in Control and the Named Executive Officer’s employment is terminated by the Company without Cause or by the participant for Good Reason, in either case, within twenty-four months following the Change in Control:
| ● | 100% of any unvested restricted stock or restricted stock units will vest; and |
| ● | the target number of PBRSU awards will be deemed to have immediately vested as of the date of termination of service. |
The value of accelerated awards shown in the tables above was calculated using the closing price of our Common Stock on June 30, 2023 ($2.77).
Under the applicable plan, the Plan Administrator also has discretionary authority regarding accelerated vesting of awards in certain circumstances. The amounts in the tables above assume such discretionary authority was not exercised.
Company Benefit Plans
The tables and discussion above do not reflect the value of accrued and unused paid days off, disability benefits under the Company’s group health plan, the value of retiree medical, vision and dental insurance benefits, and group life insurance, if any, that would be paid and/or provided to each Named Executive Officer following termination of employment, because, in each case, these benefits are generally available to all regular Company employees similarly situated in age, years of service and date of hire and do not discriminate in favor of the Named Executive Officers.
CEO to Median Employee Pay Ratio
In accordance with applicable SEC rules, we are providing the ratio of the annual total compensation of our CEO to the median of the annual total compensation of our other employees, excluding our CEO. For fiscal 2023, as calculated in accordance with the requirements of Item 402(c)(2)(x) of Regulation S-K, the annual total compensation of our CEO was $2,214,740 as disclosed in the “Summary Compensation Table”, the median of the annual total compensation of our employees other than the CEO was $58,817, and the ratio of our CEO’s annual total compensation to the median of the annual total compensation of our other employees was 38 to 1.
We believe the ratio presented above is a reasonable estimate calculated in a manner consistent with Item 402(u) of Regulation S-K. We determined our median employee based on total direct compensation paid to all of our employees (consisting of approximately 1,172 individuals active as of June 30, 2023) for the fiscal year ended June 30, 2023. Total direct compensation was calculated using internal human resources records and included base salary (wages earned based on our payroll records), cash incentive awards earned for the period, and the annual grant date fair value of long-term incentive awards during fiscal 2023.
Because the SEC rules for identifying the median employee and calculating the pay ratio based on that employee’s annual total compensation allow companies to adopt a variety of methodologies, to apply certain exclusions, and to make reasonable estimates and assumptions that reflect their compensation practices, the pay ratio reported by other companies may not be comparable to the pay ratio reported above, as other companies may have different employment and compensation practices and may utilize different methodologies, exclusions, estimates and assumptions in calculating their own pay ratios.
Pay Versus Performance
As required by Item 402(v) of Regulation S-K, we are providing the following information regarding the relationship between our financial performance and the “compensation actually paid” to our principal executive officer (“PEO”) and our non-PEO NEOs (on average). Compensation actually paid, or “CAP,” is an amount calculated using methodology prescribed by SEC rules and differs from the compensation actually received by our named executive officers. The Compensation Committee does not utilize CAP as a basis for making compensation decisions. For further information concerning our compensation philosophy and how we align executive compensation with our performance, please refer to the Compensation Discussion & Analysis.
Pay Versus Performance Table
| | | | | | | | | Average
Summary | | | Average | | | Value of Initial Fixed
$100 Investment Based
on: | | | | | | Company | |
Year
(1) | | Summary
Compensation
Table Total
for PEO
($) | | | Compensation
Actually Paid
to PEO(2)(3)
($) | | | Compensation
Table Total for
Non-PEO
NEOs
($) | | | Compensation
Actually Paid
to Non-PEO
NEOs(2)(3)
($) | | | Total
Shareholder
Return
($) | | | Peer
Group
TSR(4)
($) | | | Net
Income
(GAAP)(5)
($) | | | Selected
Measure:
Adjusted
EBITDA(5)(6)
($) | |
| (a) | | (b) | | | (c) | | | (d) | | | (e) | | | (f) | | | (g) | | | (h) | | | (i) | |
| 2023 | | | 2,214,740 | | | | 201,865 | | | | 700,306 | | | | 307,900 | | | | 37.74 | | | | 115.92 | | | | (79,180 | ) | | | (16,380 | ) |
| 2022 | | | 3,292,209 | | | | (1,451,470 | ) | | | 915,235 | | | | 365,754 | | | | 63.90 | | | | 112.95 | | | | (16,255 | ) | | | 19,059 | |
| 2021 | | | 3,186,683 | | | | 6,428,881 | | | | 797,159 | | | | 1,156,355 | | | | 172.89 | | | | 146.03 | | | | (42,225 | ) | | | 16,611 | |
| (1) | The Principal Executive Officer (“PEO”) in all three reporting years is D. Deverl Maserang II. The non-PEO NEOs in the 2023 reporting year are Scott R. Drake, Amber D. Jefferson, Ruben E. Inofuentes, Maurice S.J. Moragne and Jared G. Vitemb. The non-PEO NEOs in the 2022 reporting year are Scott R. Drake, Ruben E. Inofuentes, Maurice S.J. Moragne and Amber D. Jefferson. The non-PEO NEOs in the 2021 reporting year are Scott R. Drake, Ruben E. Inofuentes, Maurice S.J. Moragne, Jennifer H. Brown and Ronald J. Friedman. |
| (2) | The following table details the applicable adjustments that were made to determine compensation actually paid to our PEO and non-PEO NEOs (on average), calculated in accordance with Item 402(v) of Regulation S-K. To determine CAP, the amounts reported in the “Total” column of the Summary Compensation Table (“SCT”) for the applicable year were adjusted as follows: |
| | | 2023 | | | 2022 | | | 2021 | |
| | | | | | Average | | | | | | Average | | | | | | Average | |
| | | PEO
($) | | | Non-
PEO
NEOs
($) | | | PEO
($) | | | Non-
PEO
NEOs
($) | | | PEO
($) | | | Non-
PEO
NEOs
($) | |
| Summary Compensation Table (SCT) Total | | | 2,214,740 | | | | 700,306 | | | | 3,292,209 | | | | 915,235 | | | | 3,186,683 | | | | 797,159 | |
| Less Stock Award Value Reported in SCT for the Covered Year | | | (1,499,994 | ) | | | (294,996 | ) | | | (2,006,755 | ) | | | (368,747 | ) | | | (1,899,995 | ) | | | (303,491 | ) |
| Plus Year End Fair Value of Equity Awards Granted During the Covered Year that Remain Outstanding and Unvested as of Last Day of the Covered Year | | | 649,216 | | | | 103,429 | | | | 1,056,305 | | | | 233,293 | | | | 4,939,608 | | | | 574,404 | |
| Plus Year over Year Change in Fair Value as of the Last Day of the Covered Year of Outstanding and Unvested Equity Awards Granted in Prior Years | | | (461,188 | ) | | | (37,495 | ) | | | (3,177,131 | ) | | | (305,802 | ) | | | 202,586 | | | | 75,339 | |
| Plus Fair Value as of Vesting Date of Equity Awards Granted and Vested in the Covered Year | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | |
| Plus Year over Year Change in Fair Value as of the Vesting Date of Equity Awards Granted in Prior Years that Vested During the Covered Year | | | (700,909 | ) | | | (52,201 | ) | | | (132,863 | ) | | | (81,645 | ) | | | 0 | | | | 24,021 | |
| Less Fair Value at the End of the Prior Year of Equity Awards that Failed to Meet Vesting Conditions in the Covered Year | | | 0 | | | | (111,143 | ) | | | (483,235 | ) | | | (26,579 | ) | | | 0 | | | | (11,076 | ) |
| Compensation Actually Paid | | | 201,865 | | | | 307,900 | | | | (1,451,470 | ) | | | 365,754 | | | | 6,428,881 | | | | 1,156,355 | |
| (3) | The assumptions we used to calculate the values for restricted stock performance and performance share awards included in the calculation of “compensation actually paid” did not differ materially from those used to calculate grant date fair value for such awards. |
| (4) | The peer group (“Peer Group”) selected by the Company for purposes of the total shareholder return (“TSR”) benchmarking for the pay versus performance disclosures is the same peer group the Company uses for its performance graph in the Annual Report on Form 10-K pursuant to Item 201(e) of Regulation S-K. The Peer Group consists of Beyond Meat, Inc., Bridgford Foods Corporation, Calavo Growers, Inc., Freshpet, Inc., Hostess Brands, Inc., J&J Snack Foods Corp., John B Sanfilippo & Son, Inc., MGP Ingredients, Inc., NewAge, Inc., SunOpta, Inc., The Duckhorn Portfolio, Inc., The Simply Good Foods Company, Utz Brands, Inc., Vital Farms, Inc. and Whole Earth Brands, Inc. |
| (5) | Values shown are in thousands. |
| (6) | We present Adjusted EBITDA in our quarterly earnings releases, which is a non-GAAP financial measurement. We use Adjusted EBITDA as a performance measure, which permits a comparative assessment of our operating performance relative to our performance based upon GAAP results while isolating the effects of some items that vary from period to period without any correlation to core operating performance or that vary widely among similar companies. For further information regarding the calculation of adjusted EBITDA for fiscal 2023, 2022 and 2021, refer to our Annual Report on Form 10-K and the Compensation Discussion and Analysis in the Definitive Proxy Statement for each fiscal year. |
Financial Performance Measures
The following is a list of financial performance measures, which in our assessment represent the most important measures used by the Company to link compensation actually paid to the Company’s PEO and non-PEO NEOs to Company performance for fiscal 2023:
Both adjusted EBITDA and TSR are used for purposes of determining payouts for the 2023 PBRSU Grants under our 2023 LTI plan. Our Company Selected Measure, Adjusted EBITDA, is also used as the sole metric in the 2023 STI Plan. Please refer to the Compensation Discussion and Analysis for a further description of these metrics and how they are used in the Company’s executive compensation programs.
Relationship Between Pay and Performance
The graph below reflects, for each fiscal year presented, the relationship between the compensation actually paid to our PEO and non-PEO NEOs (on average), the Company’s cumulative indexed TSR and our peer group TSR:
The graph below reflects, for each fiscal year presented, the relationship between the compensation actually paid to our PEO and our non-PEO NEOs (on average) and the Company’s net income (loss).
The graph below reflects, for each fiscal year presented, the relationship between the compensation actually paid to our PEO and our non-PEO NEOs (on average) and the Company-Selected Measure, Adjusted EBITDA.
Director Compensation
Non-Employee Director Compensation
The compensation program for our non-employee directors is intended to fairly compensate our non-employee directors for the time and effort required of a director given the size and complexity of the Company’s operations. Portions of the compensation program utilize our stock in order to further align the interests of the directors with all other stockholders of the Company and to motivate the directors to focus on the long-term financial interest of the Company. Directors who are Company employees are not paid any additional fees for serving on the Board or for attending Board meetings.
The Company’s non-employee director compensation program is as follows:
Form of Non-Employee
Director Compensation | Director Compensation Program |
| Annual Board Cash Retainer | $60,000 |
| Committee Chair Cash Retainer | $10,000 for Nominating and Corporate Governance Committee, Strategy and Capital Allocation Committee, and Technology Committee
$15,000 for Compensation Committee
$20,000 for Audit Committee |
| Non-Chair Committee Cash Retainer | $7,500 for Compensation Committee, Nominating and Corporate Governance Committee, Strategy and Capital Allocation Committee, and Technology Committee
$10,000 for Audit Committee |
| Chairman of the Board Cash Retainer | $50,000, with no additional fees for committee service |
| Meeting Fees | $2,000, only paid for Board or committee meetings in excess of seven in a fiscal year |
| Annual Equity Award Value | $95,000 |
| Expense Reimbursement | Payment or reimbursement of reasonable travel expenses from outside the greater Dallas-Fort Worth area, in accordance with Company policy, incurred in connection with attendance at Board and committee meetings, as well as payment or reimbursement of amounts incurred in connection with director continuing education |
| Other | Ad hoc committee fees are determined from time to time by the Board, as needed |
The annual grant of restricted stock is generally made on the date on which the Company holds its annual meeting of stockholders or such other date as the Board may determine, in each case, subject to any blackout period under the Company’s insider trading policy. In fiscal 2023, the annual grant of restricted stock units were made on February 10, 2023. Each of Waheed Zaman, Alfred Poe, Stacy Loretz-Congdon, Allison Boersma and John Robinson received a grant of 23,023 restricted stock units based on the $4.47 closing price per share of our Common Stock on February 10, 2023 (for an aggregate amount of $102,912.81). The 2022 Annual Meeting was moved such that it occurred 13 months following the 2021 Annual Meeting. Accordingly, these grants included an additional month of equity compensation to compensate those Board members who served for 13 months, rather than 12 months for the period ending at the 2022 Annual Meeting. Christopher Mottern received a grant of 12,397 restricted stock units based on the $4.47 closing price per share of our Common Stock on February 10, 2023 for an aggregate amount of $55,414.59. Mr. Mottern received a smaller grant, with a vesting date of June 30, 2023 because the Company had agreed that he would resign from the Board on June 30, 2023 pursuant to the October 30, 2022 Cooperation Agreement (the “Cooperation Agreement”) between the Company and the Stockholder Parties, as that term is defined in the Cooperation Agreement. David Pace received a grant of 21,252 restricted stock units based on the $4.47 closing price per share of our Common Stock on February 10, 2023 (for an aggregate amount of $94,966.14). Mr. Pace received a smaller grant because he joined the Board following the 2022 Annual Meeting and did not, therefore, need to be compensated for an additional month of service. Bradley Radoff received a grant of 24,794 restricted stock units based on the $4.47 closing price per share of our Common Stock on February 10, 2023 (for an aggregate amount of $110,129.18). Mr. Radoff received a larger grant because he joined the Board on November 1, 2022 pursuant to the Cooperation Agreement but did not receive an equity grant for his approximately 2.5 months of service prior to January 12, 2023. Except for Mr. Mottern’s grant, Such grants cliff vest on the earlier of the 2023 Annual Meeting or the one-year anniversary of the grant date, subject to continued service to the Company through the vesting date and the acceleration provisions of the Farmer Bros. Co. Amended and Restated 2017 Long-Term Incentive Plan (the “2017 Plan”) and the restricted stock unit award agreement.
Stock Ownership Guidelines
Under the Company’s stock ownership guidelines, a non-employee director is expected to own and hold during his or her service as a Board member a number of shares of Common Stock with a value of at least four times their annual retainer, and is not permitted to sell any shares of Common Stock received as grants under the Company’s long-term incentive plans unless and until the non-employee director achieves and maintains this threshold share ownership level.
Shares of Common Stock that count toward satisfaction of these guidelines include (to the extent applicable):
(i) shares of Common Stock owned outright by the non-employee director and his or her immediate family members who share the same household, whether held individually or jointly; (ii) restricted stock or restricted stock units (whether or not the restrictions have lapsed); (iii) shares of Common Stock held in trust for the benefit of the non-employee director or his or her family; and (iv) shares of Common Stock issuable under vested options held by the non-employee director.
Director Compensation Table
The following table sets forth non-employee director compensation for fiscal 2023:
| Director | | Fees
Earned or
Paid in
Cash ($) | | | Stock
Awards
($)(1) | | | Total ($) | |
| Allison M. Boersma | | | 105,375 | | | | 102,913 | | | | 208,288 | |
| Stacy Loretz-Congdon | | | 93,875 | | | | 102,913 | | | | 196,788 | |
| Christopher P. Mottern(2) | | | 128,500 | | | | 55,415 | | | | 183,915 | |
| Alfred Poe | | | 98,555 | | | | 102,913 | | | | 201,468 | |
| John D. Robinson | | | 104,125 | | | | 102,913 | | | | 207,038 | |
| Waheed Zaman | | | 93,875 | | | | 102,913 | | | | 196,788 | |
| Bradley L. Radoff | | | 37,500 | | | | 110,129 | | | | 147,629 | |
| David A. Pace | | | 31,250 | | | | 94,966 | | | | 126,216 | |
| Charles Marcy(3) | | | 70,042 | | | | N/A | | | | 70,042 | |
| (1) | Represents the full grant date fair value of restricted stock granted to each non-employee director in fiscal 2023, computed in accordance with FASB ASC Topic 718. A discussion of the assumptions used in calculating the amounts in this column may be found in Note 16 to our audited consolidated financial statements for the fiscal year ended June 30, 2023, included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2023, except that, as required by applicable SEC rules, we did not reduce the amounts in this column for any risk of forfeiture relating to service-based (time-based) vesting conditions. |
| (2) | Mr. Mottern was appointed as Chairman of the Board in January 2020, and served as Chairman of the Board until his resignation, which became effective on June 30, 2023. Effective immediately following Mr. Mottern’s resignation, on June 30, 2023, the Board appointed Alfred Poe as Chairman of the Board. |
| (3) | Mr. Marcy did not receive an equity grant following the 2022 Annual Meeting because he did not stand for re-election to the Board at the 2022 Annual Meeting. Mr. Marcy was appointed to the Board in 2013 and served as a director until the 2022 Annual Meeting. |
Director Indemnification
Under the Company’s Certificate of Incorporation as amendedand By-Laws, the current and former directors are entitled to indemnification and advancement of expenses from the Company to the fullest extent permitted by Delaware corporate law. The Board has approved a form of Indemnification Agreement (“Indemnification Agreement”) to be entered into between the Company and its directors and officers. The Board may from time to time (the “Charter”). The Certificate of Correction was filedauthorize the Company to correct paragraph (d) of Article FOURTHenter into additional indemnification agreements with future directors and officers of the CharterCompany.
The Indemnification Agreements provide, among other things, that the Company will, to the extent permitted by applicable law, indemnify and hold harmless each indemnitee if, by reason of his or her corporate status as a director, officer, trustee, general partner, managing member, fiduciary, employee or agent of the Company or of any other enterprise which such person is or was serving at the request of the Company, such indemnitee was, is or is threatened to be made, a party to or a participant (as a witness or otherwise) in orderany threatened, pending or completed proceeding, whether formal or informal, whether brought in the right of the Company or otherwise and whether of a civil, criminal, administrative or investigative nature, against all expenses, judgments, fines, penalties and amounts paid in settlement actually and reasonably incurred by him or her or on his or her behalf in connection with such proceeding. In addition, the Indemnification Agreements provide for the payment, advancement or reimbursement of expenses incurred by the indemnitee in connection with any such proceeding to referthe fullest extent permitted by applicable law. The Indemnification Agreements also provide that, in the event of a Potential Change in Control (as defined in the Indemnification Agreements), the Company will, upon request by the indemnitee, create a trust for the benefit of the indemnitee and fund such trust in an amount sufficient to our Certificatesatisfy expenses reasonably anticipated to be incurred in connection with investigating, preparing for, participating in or defending any proceedings, and any judgments, fines, penalties and amounts paid in settlement in connection with any proceedings. The Indemnification Agreements do not exclude any other rights to indemnification or advancement of Designations of Series A Convertible Participating Cumulative Perpetual Preferred Stock that was previously filed withexpenses to which the Delaware Secretary of State on October 2, 2017 (the “Certificate of Designation”) and to attachindemnitee may be entitled, including any rights arising under the Certificate of DesignationIncorporation or By-Laws of the Company, or the General Corporation Law of the State of Delaware. The Company is also obligated to maintain directors’ and officers’ liability insurance coverage, including tail coverage under certain circumstances.
Compensation Committee Report
The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis with management and, based on the review and discussions, recommended to the Charter.
The foregoing summaryBoard of Directors that the Certificate of Correction does not purport toCompensation Discussion and Analysis be completeincluded in this Amendment and is qualified in its entiretyincorporated by reference toin the full text of the Certificate of Correction, a copy of which is filed as Exhibit 3.5 with thisCompany’s Annual Report on Form 10-K and is incorporated herein by reference.
for the fiscal year ended June 30, 2023.| Compensation Committee |
| of the Board of Directors |
|
| John D. Robinson, Chair |
Allison M. Boersma David A. Pace Alfred Poe |
| Waheed Zaman |
| ITEM 12. | | | | |
Item 9C. | Disclosure Regarding Foreign Jurisdictions that Prevent Inspections |
Not applicable.
PART III
| | | | | |
Item 10. | 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 Form 10-K by reference.
| | | | | |
Item 11. | Executive Compensation |
The information required by this item will be set forth in the Proxy Statement and is incorporated in this Form 10-K by reference.
| | | | | |
Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
Securities Authorized for Issuance under Equity Compensation Plans
The following table sets forth information as of June 30, 2023 with respect to the shares of Common Stock that may be issued upon the exercise of options and other rights under our existing equity compensation plans and arrangements in effect as of June 30, 2023. The information requiredincludes the number of shares covered by, this item willand the weighted average exercise price of, outstanding options and the number of shares remaining available for future grant, excluding the shares to be set forth in the Proxy Statementissued upon exercise of outstanding options, warrants and is incorporated in this Form 10-K by reference.
rights.| 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) | | | 1,945,285 | | | | 11.69 | | | | 1,604,715 | |
| Equity compensation plans not approved by stockholders(5) | | | 220,216 | | | | 11.69 | | | | 79,784 | |
| Total | | | 2,165,501 | | | | | | | | 1,684,499 | |
| (1) | Includes shares issued under the Amended and Restated 2007 Long-Term Incentive Plan, and its predecessor plan, the Farmer Bros. Co. 2007 Omnibus Incentive Plan (together, the “Prior Plans”) and the 2017 Plan. 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. |
| (2) | | Includes shares that may be issued upon the achievement of certain financial and other performance criteria as a condition to vesting in addition to time-based vesting pursuant to PBRSUs granted under the 2017 Plan. The PBRSUs included in the table include the maximum number of shares that may be issued under the awards. Under the terms of the awards, the recipient may earn between 0% and 225% 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. |
| | |
| Item 13.(3) | Does not include outstanding PBRSUs. |
| | |
| (4) | The 2017 Plan authorizes the issuance of (i) 3,550,000 shares of Common Stock plus (ii) the number of shares of Common Stock subject to awards under the 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 3,550,000 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. 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. If the Plan Amendment is adopted, the Company’s consultants would also be eligible to receive awards under the 2017 Plan. |
| | |
| (5) | Consists of grants made under the Farmer Bros. Co. 2020 Inducement Incentive Award Plan (the “Inducement Award Plan”), which in accordance with Rule 5635(c)(4) of the Nasdaq Listing Rules (“Rule 5635(c)(4)”) permits grants of up to 300,000 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 a bona fide period of non-employment by the Company or a subsidiary, as a material inducement to the employee’s entering into employment with the Company or its subsidiary. Subject to certain limitations, shares of Common Stock covered by awards granted under the Inducement 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 Amended and Restated 2017 Plan. The Inducement Award Plan allows for the grant of non-qualified stock options, stock appreciation rights, restricted stock, restricted stock units, and dividend equivalents. |
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information regarding the beneficial ownership of the Company’s voting securities as of October 19, 2022 by (i) each of our current directors, (ii) each of our executive officers required to be listed pursuant to Item 402 of Regulation S-K, (iii) all of our current directors and executive officers as a group, and (iv) each person, or group of affiliated persons, known to us to be the beneficial owner of more than five percent (5%) of our outstanding Common Stock, based on 20,748,269 shares of Common Stock outstanding as of October 19, 2022.
The amounts and percentages of shares beneficially owned are reported on the basis of SEC regulations governing the determination of beneficial ownership of securities. Under SEC rules, a person is deemed to be a “beneficial” owner of a security if that person has or shares voting power or investment power, which includes the power to dispose of or to direct the disposition of such security. A person is also deemed to be a beneficial owner of any securities of which that person has a right to acquire beneficial ownership within 60 days. Securities that can be so acquired are not deemed to be outstanding for purposes of computing any other person’s percentage. Under these rules, more than one person may be deemed to be a beneficial owner of securities as to which such person has no economic interest.
Except as otherwise indicated in these footnotes, each of the individuals or entities listed below has, to our knowledge, sole voting and investment power with respect to the shares of Common Stock. Unless otherwise indicated below, the address for each natural person listed below is c/o Farmer Bros. Co., 1912 Farmer Brothers Drive, Northlake, Texas 76262.
| Name of Beneficial Owner | | Amount and Nature of Beneficial Ownership | | | Percent of
Class(1) | |
| Non-Employee Directors: | | | | | | | | |
| Allison M. Boersma | | | 45,913 | | | | * | |
| Stacy Loretz-Congdon | | | 45,641 | | | | * | |
| David A. Pace | | | 0 | | | | * | |
| Alfred Poe | | | 33,764 | | | | * | |
| Bradley L. Radoff(2) | | | 405,000 | | | | 2.0 | % |
| John Robinson | | | 14,683 | | | | * | |
| Waheed Zaman | | | 17,613 | | | | * | |
| Named Executive Officers: | | | | | | | | |
| D. Deverl Maserang II(3) | | | 618,472 | | | | 3.0 | % |
| Scott R. Drake(4) | | | 197,320 | | | | 1.0 | % |
| Jared G. Vitemb(5) | | | 42,665 | | | | * | |
| Ruben E. Inofuentes(6) | | | 79,804 | | | | * | |
| Maurice S.J. Moragne(7) | | | 44,983 | | | | * | |
| Amber D. Jefferson(8) | | | 45,886 | | | | * | |
| All directors and executive officers as a group (13 individuals) | | | 1,550,756 | | | | 7.5 | % |
| Greater than 5% Stockholders: | | | | | | | | |
| Mario J. Gabelli, GAMCO Investors, Inc. and Affiliated Parties (9) | | | 1,523,457 | | | | 7.3 | % |
| James C. Pappas, Aron R. English, and Affiliated Parties(10) | | | 2,958,623 | | | | 14.3 | % |
| Farmer Bros. Co. 401(k) Plan(11) | | | 2,487,867 | | | | 12.0 | % |
* Less than 1%
| (1) | Percent of class is calculated based on 20,748,269 outstanding shares of Common Stock, plus securities deemed outstanding pursuant to Rule 13d-3(d)(1) under the Exchange Act, as of October 19, 2022 and may differ from the percent of class reported in statements of beneficial ownership filed with the SEC. |
| | |
| (2) | Includes 280,000 shares of common stock held directly by Mr. Radoff and 125,000 shares of Common Stock held indirectly by Mr. Radoff through The Radoff Family Foundation. The principal address of The Radoff Family Foundation is 2727 Kirby Drive, Unit 29L, Houston, Texas 77098. |
| | |
| (3) | Includes 223,713 options vested but unexercised as of October 19, 2023, 330,953 shares of Common Stock owned indirectly by Mr. Maserang through the Maserang Living Trust and 9,209 shares of Common Stock held indirectly by Mr. Maserang through the Company’s 401(k), rounded to the nearest whole share. Also includes 35,806 restricted stock units which vested on an accelerated basis on October 1, 2023 in connection with Mr. Maserang’s separation from the Company. Does not include 118,919 unvested restricted stock units which Mr. Maserang forfeited in connection with his separation from the Company on October 1, 2023. |
| | |
| (4) | Includes 88,495 options vested but unexercised as of October 19, 2023 and 10,696 shares of Common Stock held indirectly by Mr. Drake through the Company’s 401(k). Does not include 85,599 unvested restricted stock units, which Mr. Drake forfeited in connection with his separation from the Company on September 30, 2023. |
| | |
| (5) | Includes 5,859 restricted stock units which will vest within 60 days of October 19, 2023 and 7,572 shares of Common Stock held indirectly by Mr. Vitemb through the Company’s 401(k). |
| | |
| (6) | Includes 27,333 options vested but unexercised as of October 19, 2023 and 7,538 shares of Common Stock held indirectly by Mr. Inofuentes through the Company’s 401(k). Does not include 16,911 unvested shares of restricted stock and 32,495 unvested restricted stock units, which Mr. Inofuentes forfeited in connection with his separation from the Company on February 17, 2023. |
| | |
| (7) | Includes 19,780 options vested but unexercised as of October 19, 2023 and 8,142 shares of Common Stock held indirectly by Mr. Moragne through the Company’s 401(k). Does not include 20,473 unvested shares of restricted stock and 23,437 unvested restricted stock units, which Mr. Moragne forfeited in connection with his separation from the Company on February 17, 2023. |
| | |
| (8) | Includes 5,859 restricted stock units which will vest within 60 days of October 19, 2023 and 7,176 shares of Common Stock held indirectly by Ms. Jefferson through the Company’s 401(k). |
| | |
| (9) | Based solely on an amendment to Schedule 13D filed March 31, 2022, according to which (i) Mario J. Gabelli may be deemed to beneficially own 1,523,457 of these shares, (ii) Gabelli Funds, LLC may be deemed to beneficially own 297,167 of these shares, (iii) GAMCO Asset Management, Inc. may be deemed to beneficially own 767,000 of these shares, (iv) Teton Advisors, Inc. may be deemed to beneficially own 459,000 of these shares, (v) and GAMCO Investors, Inc. may be deemed to beneficially own 290 of these shares. The principal address of each of the aforementioned parties is One Corporate Center, Rye, New York 10580. |
| | |
| (10) | Based solely on (1) an amendment to Schedule 13D filed October 16, 2023, according to which (i) Aron R. English may be deemed to beneficially own 1,964,536 of these shares, (ii) 22NW Fund, LP, 22NW, LP, 22NW Fund GP, LLC, and 22NW GP, Inc. may each be deemed to beneficially own 1,955,526 of these shares, and (iii) Bryson O. Hirai-Hadley may be deemed to beneficially own 1,261 of these shares, and (2) an amendment to Schedule 13D filed on October 16, 2023, according to which (i) James C. Pappas and JCP Investment Management, LLC may each be deemed to beneficially own 992,826 of these shares, (ii) JCP Investment Partnership, LP, JCP Investment Partners, LP and JCP Investment Holdings, LLC may each be deemed to beneficially own 671,955 of these shares, and (iii) Troy A. Ellis, Emily K. Keeton and David R. Tresko may each be deemed to beneficially own 0 shares. The principal address of each of Aron R. English, 22NW Fund, LP, 22NW, LP, 22NW Fund GP, LLC, 22NW GP, Inc. and Bryson O. Hirai-Hadley is 590 1st Ave. S, Unit C1, Seattle, Washington 98104. The principal address of James C. Pappas, JCP Investment Management, LLC, JCP Investment Partnership, LP, JCP Investment Partners, LP, and JCP Investment Holdings, LLC is 1177 West Loop South, Suite 1320, Houston, Texas 77027. The principal business address of Troy A. Ellis is 14 Camelback Court, Brentwood, Tennessee 37027. The principal business address of Emily K. Keeton is 2701 Westheimer Road, #6D, Houston, Texas 77098. The principal business address of Daniel R. Tresko is 348 East Winchester Street, Murray, Utah 84107. |
| | |
| (11) | This information is based on the Company’s records and includes 2,487,867 shares of Common Stock that are held in the 401(k) and allocated to a participant’s account (“allocated shares”) as of October 19, 2023, and includes the 50,333 shares of Common Stock beneficially owned by the executive officers described above. The 401(k) Trustee votes allocated shares as directed by such participant or beneficiary of the 401(k). The present member of the Administrative Committee of the Farmer Bros. Co. Qualified Employee Retirement Plans (the “Management Administrative Committee”), which administers the 401(k), is Ms. Jefferson. Each member of the Management Administrative Committee disclaims beneficial ownership of the securities held by the 401(k) except for those, if any, that have been allocated to the member as a participant in the 401(k). The principal address of the 401(k) is c/o Farmer Bros. Co., 1912 Farmer Brothers Drive, Northlake, Texas 76262. |
| ITEM 13. | Certain Relationships and Related Transactions, and Director Independence |
The information required by this item willReview and Approval of Related Person Transactions
Under the Company’s written Policies and Procedures for the Review, Approval or Ratification of Related Person Transactions, a related person transaction may be consummated or may continue only if the Audit Committee approves or ratifies the transaction in accordance with the guidelines set forth in the Proxy Statementpolicy. The policy applies to:
(i) any person who is, or at any time since the beginning of the Company’s last fiscal year was, a director, nominee for director or executive officer of the Company; (ii) any person who is known to be the beneficial owner of more than 5% of any class of the Company’s voting securities; and (iii) any immediate family member, as defined in the policy, of, or sharing a household with, any of the foregoing persons. For purposes of the policy, a related person transaction includes, but is incorporatednot limited to, any financial transaction, arrangement or relationship or any series of similar transactions, arrangements or relationships, specifically including indebtedness and guarantees of indebtedness and transactions involving employment, consulting or similar arrangements, between the Company and any of the foregoing persons since the beginning of the Company’s last fiscal year, or any currently proposed transaction in this Form 10-Kwhich the Company was or is to be a participant or a party, in which the amount involved exceeds $120,000, and in which any of the foregoing persons had or will have a direct or indirect material interest.
The Company will maintain a related person master list to assist in identifying related person transactions, which will be distributed by reference.
the Company’s General Counsel to the Company’s executive officers; the function or department managers responsible for purchasing goods or services for the Company and its subsidiaries; the director of accounts payable and the director of accounts receivable for the Company and its subsidiaries; and any other persons whom the Audit Committee, the Chief Compliance Officer or the General Counsel may designate.Upon referral by the Chief Compliance Officer, General Counsel or Secretary of the Company, any proposed related person transaction will be reviewed by the Audit Committee for approval or disapproval based on the following:
| ● | The materiality of the related person’s interest, including the relationship of the related person to the Company, the nature and importance of the interest to the related person, the amount involved in the transaction, whether the transaction has the potential to present a conflict of interest, whether there are business reasons for the Company to enter the transaction, and whether the transaction would impair the independence of any independent director; |
| ● | Whether the terms of the transaction, in the aggregate, are comparable to those that would have been reached by unrelated parties in an arm’s length transaction; |
| ● | The availability of alternative transactions, including whether there is another person or entity that could accomplish the same purposes as the transaction and, if alternative transactions are available, there must be a clear and articulable reason for the transaction with the related person; |
| ● | Whether the transaction is proposed to be undertaken in the ordinary course of the Company’s business, on the same terms that the Company offers generally in transactions with persons who are not related persons; and |
| ● | Such additional factors as the Audit Committee determines relevant. |
Following review, the Audit Committee will approve or ratify in writing any related person transaction determined by the Audit Committee to be in, or not inconsistent with, the best interests of the Company and its stockholders.
The Audit Committee may impose conditions or guidelines on any related person transaction, including, but not limited to: (i) conditions relating to on-going reporting to the Audit Committee and other internal reporting; (ii) limitations on the amount involved in the transaction; (iii) limitations on the duration of the transaction or the Audit Committee’s approval of the transaction; and (iv) other conditions for the protection of the Company and to avoid conferring an improper benefit, or creating the appearance of a conflict of interest. Any member of the Audit Committee who has or whose immediate family member has an interest in the transaction under discussion will abstain from voting on the approval of the related person transaction, but may, if so requested by the Chair of the Audit Committee, participate in some or all of the Audit Committee’s discussions of the related person transaction.
The Audit Committee will direct the Company’s executive officers to disclose all related person transactions approved by the Audit Committee to the extent required under applicable accounting rules, Federal securities laws, SEC rules and regulations, and Nasdaq Listing Rules.
Related Person Transactions
The Company did not have any related person transactions in fiscal 2023.
Director Independence
At least annually and in connection with any individuals being nominated to serve on the Board, the Board reviews the independence of each director or nominee, including pursuant to Rule 5605 of the Nasdaq Listing Rules, and affirmatively determines whether each director or nominee qualifies as independent. This review includes the submission of responses to a thorough questionnaire by each of our directors or director nominees.
The Board believes that stockholder interests are best served by having a number of objective, independent representatives on the Board. For this purpose, a director or nominee will be considered to be “independent” only if the Board affirmatively determines that the director or nominee has no relationship with respect to the Company that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. Additionally, pursuant to Rule 5605 of the Nasdaq Listing Rules, our Board must determine that an independent director has no material relationship with us other than as a director. The standards specify the criteria by which the independence of our directors will be determined, including strict guidelines for directors and their immediate families with respect to past employment or affiliation with us or our independent registered public accounting firm. The standards also prohibit Audit Committee members from having any direct or indirect financial relationship with us and restrict both commercial and not-for-profit relationships between us and each director. We may not give personal loans or extensions of credit to our directors, and all directors are required to deal at arm’s length with us and our subsidiaries, and to disclose any circumstance that might be perceived as a conflict of interest.
In making its independence determinations, the Board reviewed transactions, relationships, behavior and arrangements between each director and nominee, or any member of his or her immediate family, and us or our subsidiaries based on information provided by the director or nominee, our records and publicly available information. The Board made the following independence determinations (the transactions, relationships and arrangements reviewed by the Board in making such determinations are set forth in the footnotes below):
| Director | Status |
Item 14.Allison M. Boersma | Independent |
| Stacy Loretz-Congdon | Independent(1) |
| D. Deverl Maserang II | Not Independent(2) |
| Christopher P. Mottern | Independent |
| David A. Pace | Independent |
| Alfred Poe | Independent |
| Bradley L. Radoff | Independent |
| John D. Robinson | Independent |
| Waheed Zaman | Independent |
| Charles Marcy | Independent |
| (1) | CoreMark Holding Company, Inc. (“Core-Mark”) was a customer of the Company in fiscal 2023 and continues to be a customer of the Company in fiscal 2024. Ms. Loretz-Congdon retired from Core-Mark at the end of 2016 after 26 years of service, including as Senior Vice President, Chief Financial Officer and Assistant Secretary from December 2006 to May 2016 and Executive Advisor from May 2016 to December 2016. Ms. Loretz-Congdon also serves as a Director of the Core-Mark Families Foundation, an independent non-profit foundation that provides scholarships to children of Core-Mark employees, since 2015. Ms. Loretz-Congdon owns less than 1% of the outstanding publicly traded stock of Performance Food Group Company which Core-Mark merged with in September 2021. The Board has determined that these relationships do not create a conflict of interest under the Company’s Code of Conduct and Ethics, do not require disclosure under Item 404(a) of Regulation S-K, and do not interfere with Ms. Loretz-Congdon’s exercise of independent judgment in carrying out the responsibilities of a director of the Company. |
| (2) | Mr. Maserang served as the Company’s President and Chief Executive Officer until his termination without cause, effective September 30, 2023. |
| ITEM 14. | Principal Accountant Fees and Services |
Audit Committee Report
The informationAudit Committee has reviewed and discussed with management the Company’s audited consolidated financial statements as of and for the fiscal year ended June 30, 2023.
The Audit Committee has discussed with the Company’s independent registered public accounting firm, Grant Thornton LLP (“Grant Thornton”) (Dallas, Texas, PCAOB ID Number 248), the matters required to be discussed by the Statement on Auditing Standards No. 16, “Communications with Audit Committees,” as adopted by the Public Company Accounting Oversight Board.
The Audit Committee has received the written disclosures and the letter from Grant Thornton required by this item willapplicable requirements of the Public Company Accounting Oversight Board regarding Grant Thornton’s communications with the Audit Committee concerning independence, and has discussed with Grant Thornton that firm’s independence.
Based on the reviews and discussions referred to above, the Audit Committee recommended to the Board of Directors that the audited consolidated financial statements referred to above be set forthincluded in the Proxy Statement and is incorporated in thisCompany’s 2023 Form 10-K for filing with the SEC.
Audit Committee of the Board of Directors
Allison M. Boersma, Chair
Stacy Loretz-Congdon
Bradley L. Radoff
Waheed Zaman
Change of Independent Public Accounting Firm
As previously reported on the Company’s Current Report on Form 8-K, filed with the SEC on December 22, 2021, on December 16, 2021, the Company, upon the approval of the Audit Committee, dismissed Deloitte & Touche LLP (“Deloitte”) as its independent registered public accounting firm effective as of December 16, 2021, and engaged Grant Thornton as of such date. Deloitte served as the Company’s independent registered public accounting firm since fiscal 2014.
The reports of Deloitte on the audited consolidated financial statements of the Company for fiscal 2021 and fiscal 2020 did not contain an adverse opinion or a disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope, or accounting principles. During the fiscal 2021 and fiscal 2020, and in the subsequent interim period through December 16, 2021, there were (a) no disagreements (as that term is described in Item 304(a)(1)(iv) of Regulation S-K) with Deloitte on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedures, which disagreements, if not resolved to the satisfaction of Deloitte, would have caused Deloitte to make reference to the subject matter of the disagreements in its reports on the consolidated financial statements for such years, and (b) no “reportable events” (as defined in Item 304(a)(1)(v) of Regulation S-K).
Pursuant to Item 304(a)(3) of Regulation S-K, the Company provided Deloitte with a copy of the foregoing disclosures and requested that Deloitte furnish the Company with a letter addressed to the SEC stating whether or not it agrees with the statements made herein. A copy of Deloitte’s letter to the SEC, dated December 22, 2021, is filed as Exhibit 16.1 to the Current Report on Form 8-K filed by reference.
the Company regarding the foregoing.
PART IV
Independent Registered Public Accounting Firm Fees
The following table sets forth the aggregate fees billed by Grant Thornton for fiscal 2022 and 2023, respectively, for audit and non-audit services (as well as all “out-of-pocket” costs incurred in connection with these services) and are categorized as Audit Fees, Audit-Related Fees, Tax Fees and All Other Fees. The nature of the services provided in each such category is described following the table. The Audit Committee approved all audit and permissible non-audit services provided by Grant Thornton in accordance with the pre-approval policies and procedures described below.
| | | Fiscal 2023
Grant
Thornton | | | Fiscal 2022
Grant
Thornton | |
| Audit fees(1) | | $ | 783,836 | | | $ | 626,031 | |
| Audit-related fees(2) | | $ | 0 | | | $ | 0 | |
| Tax fees(3) | | $ | 0 | | | $ | 0 | |
| All other fees(4) | | $ | 0 | | | $ | 0 | |
| Total fees | | $ | 783,836 | | | $ | 626,031 | |
| | | | | |
Item 15.(1) | “Audit Fees” are fees paid for the audit of the Company’s annual consolidated financial statements included in its Form 10-K and review of financial statements included in the Form 10-Q’s, for the audit of the Company’s internal control over financial reporting, and for services that are normally provided by the auditor in connection with statutory and regulatory filings or engagements. Audit fees for fiscal 2022 and fiscal 2023 consisted of fees associated with the audit of the Company’s annual financial statements, the audit of internal control over financial reporting, the review of the Company’s quarterly reports on Form 10-Q, services associated with SEC registration statements, and accounting advisory services in connection with the impact of new accounting standards. |
| (2) | “Audit-Related Fees” represent fees for assurance and related services that are traditionally performed by Grant Thornton. No audit-related fees were paid to Grant Thornton for fiscal 2022 or fiscal 2023. |
| (3) | “Tax Fees” are fees for tax compliance, planning, advice and consultation services, including state tax representation and miscellaneous consulting on federal and state taxation matters. No tax fees were paid to Grant Thornton for fiscal 2022 or fiscal 2023. |
| (4) | No other fees were paid to Grant Thornton for fiscal 2022 or fiscal 2023. |
Pre-Approval of Audit and Non-Audit Services
Under the Farmer Bros. Co. Audit and Non-Audit Services Pre-Approval Policy, the Audit Committee must pre-approve all audit and non-audit services provided by the independent auditor. The policy, as described below, sets forth the procedures and conditions for such pre-approval of services to be performed by the independent auditor. The policy utilizes both a framework of general pre-approval for certain specified services and specific pre-approval for all other services. Unless a type of service has received general pre-approval, it will require specific pre-approval by the Audit Committee if it is to be provided by the independent auditor. Any proposed services exceeding pre-approved cost levels or budgeted amounts will also require specific pre-approval by the Audit Committee.
In the first quarter of each year, the Audit Committee is asked to pre-approve the engagement of the independent auditor and the projected fees for audit services for the current fiscal year. The Audit Committee is also asked to provide general pre-approval for certain audit-related services (assurance and related services that are reasonably related to the performance of the auditor’s review of the financial statements or that are traditionally performed by the independent auditor) and tax services (such as tax compliance, tax planning and tax advice) for the current fiscal year consistent with the SEC’s rules on auditor independence. If the Company wishes to engage the independent auditor for additional services that have not been generally pre-approved as described above, then such engagement will be presented to the Audit Committee for pre-approval at its next regularly scheduled meeting. Pre-approval of any engagement by the Audit Committee is required before the independent auditor may commence any engagement.
In fiscal 2023, there were no fees paid to Grant Thornton under a de minimis exception to the rules that waive pre-approval for certain non-audit services.
PART IV
| ITEM 15. | Exhibits and Financial Statement Schedules |
(a)List of Financial Statements and Financial Statement Schedules:
1. Financial Statements included in Part II, Item 8 of this Form 10-K:
| (a) | | |
| |
Consolidated Balance Sheets asList of June 30, 2022Financial Statements and 2021. | |
| |
Consolidated Statements of Operations for the Years Ended June 30, 2022, 2021 and 2020. | |
| |
Consolidated Statements of Comprehensive Loss for the Years Ended June 30, 2022, 2021 and 2020. | |
| |
Consolidated Statements of Cash Flows for the Years Ended June 30, 2022, 2021 and 2020. | |
| |
Consolidated Statements of Stockholders’ Equity for the Years Ended June 30, 2022, 2021 and 2020. | |
| |
Notes to Consolidated Financial Statements. | Statement Schedules: |
2. Financial Statement Schedules: Financial Statement Schedules are omitted as they are not applicable, or the required information is given in theThe consolidated financial statements and notes thereto.
3. The exhibits to this Form 10-K are listed on the accompanying index to exhibits and are incorporated herein by reference or are filed as part of
this report are indexed in the
Annual Report on Form 10-K.table of contents of the Original Filing and incorporated by reference to the Original Filing. Financial Statement Schedules have been omitted, since they are either not applicable, not required or the information is included elsewhere herein.
(b)Exhibits:
________________
| | | | | |
| |
** | Management contract or compensatory plan or arrangement. |
| |
| | | | | |
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. |
FARMER BROS. CO.
| | |
| | |
| By: | | /s/ Deverl MaserangJohn E. Moore III |
| | John E. Moore III |
| | Deverl Maserang
President andInterim Chief Executive Officer |
| | | September 1, 2022October 27, 2023 |
| | | |
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/ John E. Moore III | | Interim Chief Executive Officer | | | | | | | | | | | | October 27, 2023 |
| John E. Moore III | | (principal executive officer) | | |
| | | | |
/s/ Deverl MaserangBrad Bollner | | President, Chief Executive Officer and Director (principal executive officer) | | September 1, 2022 |
Deverl Maserang | | | | |
| | | | |
/s/ Scott R. Drake | | Interim Chief Financial Officer (principal financial officer) | | September 1, 2022October 27, 2023 |
Scott R. DrakeBrad Bollner | | (principal financial officer) | | |
| | | | |
| /s/ Matthew Coffman | | Vice President and Controller (principal accounting officer) | | September 1, 2022October 27, 2023 |
| Matthew Coffman | | (principal accounting officer) | | |
| | | | |
/s/ Christopher P. MotternDavid A. Pace | | Interim Chairman of the Board and Director | | September 1, 2022October 27, 2023 |
Christopher P. MotternDavid A. Pace | | | | |
| | | | |
| /s/ Allison M. Boersma | | Director | | September 1, 2022October 27, 2023 |
| Allison M. Boersma | | | | |
| | | | |
| /s/ Stacy Loretz-Congdon | | Director | | September 1, 2022October 27, 2023 |
| Stacy Loretz-Congdon | | | | |
| | | | |
/s/ Charles F. Marcy | | Director | | September 1, 2022 |
Charles F. Marcy | | | | |
| | | | |
| /s/ Alfred Poe | | Director | | September 1, 2022October 27, 2023 |
| Alfred Poe | | | | |
| | | | |
| /s/ Bradley L. Radoff | | Director | | October 27, 2023 |
| Bradley L. Radoff | | | | |
| | | | |
| /s/ John D. Robinson | | Director | | September 1, 2022October 27, 2023 |
| John D. Robinson | | | | |
| | | | |
| /s/ Waheed Zaman | | Director | | September 1, 2022October 27, 2023 |
| Waheed Zaman | | | | |
| | |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Farmer Bros. Co.
Opinion on internal control over financial reporting
We have audited the internal control over financial reporting of Farmer Bros. Co. (a Delaware corporation) and subsidiaries (the “Company”) as of June 30, 2022, based on criteria established in the 2013 Internal Control—Integrated Framework 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, 2022, based on criteria established in the 2013 Internal Control—Integrated Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements of the Company as of and for the year ended June 30, 2022, and our report dated September 1, 2022 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 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 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 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.
Definition and limitations of internal control over financial reporting
A company’s internal control over financial reporting is a process designed 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 its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ GRANT THORNTON LLP
Dallas, Texas
September 1, 2022
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Farmer Bros. Co.
Opinion on the financial statements
We have audited the accompanying consolidated balance sheet of Farmer Bros. Co. (a Delaware corporation) and subsidiaries (the “Company”) as of June 30, 2022, the related consolidated statements of operations, comprehensive loss, stockholders’ equity, and cash flows for the year then ended, 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, 2022, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.
We also have 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, 2022, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated September 1, 2022 expressed an unqualified opinion.
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 audit. 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 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 the financial statements are free of material misstatement, whether due to error or fraud. Our audit 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 audit 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 audit provides a reasonable basis for our opinion.
Critical audit matters
Critical audit matters are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. We determined that there are no critical audit matters.
/s/ GRANT THORNTON LLP
We have served as the Company’s auditor since 2021.
Dallas, Texas
September 1, 2022
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 sheet of Farmer Bros. Co. and subsidiaries (the "Company") as of June 30, 2021, the related consolidated statements of operations, comprehensive loss, stockholders' equity, and cash flows for each of the two years in the period ended June 30, 2021, 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, 2021, and the results of its operations and its cash flows for each of the two years in the period ended June 30, 2021, in conformity with accounting principles generally accepted in the United States of America.
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 Public Company Accounting Oversight Board (United States) (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 9, 2021
We have served as the Company’s auditor since 2014. In December 2021, we became the predecessor auditor.
FARMER BROS. CO.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data) | | | | | | | | | | | |
| As of June 30, |
| 2022 | | 2021 |
| ASSETS | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 9,819 | | | $ | 10,263 | |
| Restricted cash | 175 | | | 175 | |
| | | |
| Accounts and notes receivable, net of allowance for credit losses of $195 and $325, respectively | 46,935 | | | 40,321 | |
| Inventories | 99,618 | | | 76,791 | |
| | | |
| | | |
| Short-term derivative assets | 3,022 | | | 4,351 | |
| Prepaid expenses | 4,491 | | | 5,594 | |
| Assets held for sale | 1,032 | | | 1,591 | |
| Total current assets | 165,092 | | | 139,086 | |
| Property, plant and equipment, net | 138,150 | | | 150,091 | |
| | | |
| Intangible assets, net | 15,863 | | | 18,252 | |
| Right-of-use operating lease assets | 27,957 | | | 26,254 | |
| | | |
| | | |
| Other assets | 3,009 | | | 4,323 | |
| Total assets | $ | 350,071 | | | $ | 338,006 | |
| LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
| Current liabilities: | | | |
| Accounts payable | 52,877 | | | 45,703 | |
| Accrued payroll expenses | 14,761 | | | 15,345 | |
| Right-of-use operating lease liabilities - current | 7,721 | | | 6,262 | |
| Term loan - current | 3,800 | | | 950 | |
| Short-term derivative liability | 2,349 | | | 1,555 | |
| | | |
| Other current liabilities | 6,095 | | | 6,425 | |
| Total current liabilities | 87,603 | | | 76,240 | |
| Long-term borrowings under revolving credit facility | 63,000 | | | 43,500 | |
| Term loan - noncurrent | 40,123 | | | 44,328 | |
| Accrued pension liabilities | 28,540 | | | 39,229 | |
| Accrued postretirement benefits | 787 | | | 960 | |
| Accrued workers’ compensation liabilities | 3,169 | | | 3,649 | |
| Right-of-use operating lease liabilities | 20,762 | | | 20,049 | |
| Other long-term liabilities | 1,339 | | | 5,092 | |
| | | |
| Total liabilities | $ | 245,323 | | | $ | 233,047 | |
| Commitments and contingencies (Note 18) | | | |
| | | |
| 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, 2022 and 2021, respectively; liquidation preference of $17,346 and $16,752 as of June 30, 2022 and 2021, respectively | 15 | | | 15 | |
| Common stock, $1.00 par value, 50,000,000 and 25,000,000 shares authorized; 18,464,966 and 17,852,793 shares issued and outstanding at June 30, 2022 and 2021, respectively | 18,466 | | | 17,853 | |
| Additional paid-in capital | 71,997 | | | 66,109 | |
| Retained earnings | 52,701 | | | 66,311 | |
| | | |
| Accumulated other comprehensive loss | (38,431) | | | (45,329) | |
| Total stockholders’ equity | $ | 104,748 | | | $ | 104,959 | |
| Total liabilities and stockholders’ equity | $ | 350,071 | | | $ | 338,006 | |
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)
| | | | | | | | | | | | | | | | | |
| | For the Years Ended June 30, |
| | 2022 | | 2021 | | 2020 |
| Net sales | $ | 469,193 | | | $ | 397,850 | | | $ | 501,320 | |
| Cost of goods sold | 332,277 | | | 296,925 | | | 363,198 | |
| Gross profit | 136,916 | | | 100,925 | | | 138,122 | |
| Selling expenses | 107,277 | | | 95,503 | | | 121,762 | |
| General and administrative expenses | 47,172 | | | 42,945 | | | 42,569 | |
| | | | | |
| Net gains from sale of assets | (2,905) | | | (593) | | | (25,237) | |
| Impairment of goodwill and intangible assets | — | | | — | | | 42,030 | |
| Impairment of fixed assets | — | | | 1,243 | | | — | |
| | | | | |
| Operating expenses | 151,544 | | | 139,098 | | | 181,124 | |
| Loss from operations | (14,628) | | | (38,173) | | | (43,002) | |
| Other (expense) income: | | | | | |
| | | | | |
| | | | | |
| Interest expense | (9,516) | | | (15,962) | | | (10,483) | |
| Postretirement benefits curtailment and pension settlement charge | — | | | 6,359 | | | 5,760 | |
| Other, net | 8,182 | | | 19,720 | | | 10,443 | |
| Total other (expense) income | (1,334) | | | 10,117 | | | 5,720 | |
| Loss before taxes | (15,962) | | | (28,056) | | | (37,282) | |
| Income tax (benefit) expense | (301) | | | 13,595 | | | (195) | |
| Net loss | $ | (15,661) | | | $ | (41,651) | | | $ | (37,087) | |
| Less: Cumulative preferred dividends, undeclared and unpaid | 594 | | | 574 | | | 554 | |
| Net loss available to common stock holders | $ | (16,255) | | | $ | (42,225) | | | $ | (37,641) | |
| Basic net loss available to common stockholders per common share | $ | (0.89) | | | $ | (2.39) | | | $ | (2.19) | |
| Diluted net loss available to common stockholders per common share | $ | (0.89) | | | $ | (2.39) | | | $ | (2.19) | |
| Weighted average common shares outstanding—basic | 18,200,080 | | | 17,635,402 | | | 17,205,849 | |
| Weighted average common shares outstanding—diluted | 18,200,080 | | | 17,635,402 | | | 17,205,849 | |
| | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
FARMER BROS. CO.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
| | | | | | | | | | | | | | | | | |
| For the Years Ended June 30, |
| 2022 | | 2021 | | 2020 |
| Net loss | $ | (15,661) | | | $ | (41,651) | | | $ | (37,087) | |
| Other comprehensive loss: | | | | | |
| Unrealized gains (losses) on derivatives designated as cash flow hedges | 12,172 | | | 11,715 | | | (7,518) | |
| (Gains) losses on derivatives designated as cash flow hedges reclassified to cost of goods sold | (15,865) | | | (1,593) | | | 8,863 | |
| Losses on derivative instruments undesignated as cash flow hedges reclassified to interest expense | 1,208 | | | 1,284 | | | — | |
| Change in pension and retiree benefit obligations | 9,383 | | | 19,294 | | | (13,722) | |
| | | | | |
| Total comprehensive loss | $ | (8,763) | | | $ | (10,951) | | | $ | (49,464) | |
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 | | | | Accumulated
Other
Comprehensive
Income (Loss) | | Total |
| Balance at June 30, 2019 | 14,700 | | | $ | 15 | | | 17,042,132 | | | $ | 17,042 | | | $ | 57,912 | | | $ | 146,177 | | | | | $ | (63,652) | | | $ | 157,494 | |
| Net loss | — | | — | | — | | — | | — | | (37,087) | | | | | — | | (37,087) | |
| Cash flow hedges, net of taxes | — | | — | | — | | — | | — | | — | | | | | 1,345 | | | 1,345 | |
| | | | | | | | | | | | | | | | | |
| Change in the funded status of 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 | | | | | (76,029) | | | 111,913 | |
| Net loss | — | | — | | — | | — | | — | | (41,651) | | | | | — | | (41,651) | |
| Cash flow hedges, net of taxes | — | | — | | — | | — | | — | | — | | | | | 11,406 | | | 11,406 | |
| | | | | | | | | | | | | | | | | |
| Change in the funded status of retiree benefit obligations, net of taxes | — | | — | | — | | — | | — | | — | | | | 19,294 | | | 19,294 | |
| ESOP compensation expense, including reclassifications | — | | — | | 398,771 | | | 398 | | | 1,805 | | | — | | | | — | | | 2,203 | |
| Share-based compensation | — | | — | | — | | | — | | | 2,368 | | | — | | | | — | | 2,368 | |
| Issuance of common stock and stock option exercises | — | | — | | 106,248 | | | 107 | | | (107) | | | — | | | | — | | — | |
| Cumulative preferred dividends, undeclared and unpaid | — | | — | | — | | | — | | | — | | | (574) | | | | | — | | (574) | |
| Balance at June 30, 2021 | 14,700 | | | 15 | | | 17,852,793 | | | 17,853 | | | 66,109 | | | 66,311 | | | | | (45,329) | | | 104,959 | |
| Net loss | — | | — | | — | | — | | — | | (15,661) | | | | | — | | (15,661) | |
| Cash flow hedges, net of taxes | — | | — | | — | | — | | — | | — | | | | | (2,485) | | | (2,485) | |
| | | | | | | | | | | | | | | | | |
| Change in the funded status of retiree benefit obligations, net of taxes | — | | — | | — | | — | | — | | — | | | | 9,383 | | | 9,383 | |
| ESOP and 401 (k) compensation expense, including reclassifications | — | | — | | 371,566 | | | 373 | | | 3,271 | | | — | | | | — | | | 3,644 | |
| Share-based compensation | — | | — | | — | | | — | | | 3,347 | | | — | | | | — | | 3,347 | |
| Issuance of common stock and stock option exercises, net of shares withheld for taxes | — | | — | | 240,607 | | | 240 | | | (730) | | | — | | | | — | | (490) | |
| Cumulative preferred dividends, undeclared and unpaid | — | | — | | — | | | — | | | — | | | 2,051 | | | | | — | | 2,051 | |
| Balance at June 30, 2022 | 14,700 | | | $ | 15 | | | 18,464,966 | | | $ | 18,466 | | | $ | 71,997 | | | $ | 52,701 | | | | | $ | (38,431) | | | $ | 104,748 | |
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, |
| 2022 | | 2021 | | 2020 |
| Cash flows from operating activities: | | | | | |
| Net loss | $ | (15,661) | | | $ | (41,651) | | | $ | (37,087) | |
| Adjustments to reconcile net loss to net cash (used in) provided by operating activities | | | | | |
| Depreciation and amortization | 23,810 | | | 27,625 | | | 29,896 | |
| Impairment of goodwill and intangible assets | — | | | — | | | 42,030 | |
| Impairment of fixed assets | — | | | 1,243 | | | — | |
| Postretirement benefits and pension settlement cost | — | | | (21,077) | | | (5,760) | |
| Deferred income taxes | (425) | | | 13,404 | | | (300) | |
| Net gains from sale of assets | (2,905) | | | (593) | | | (25,237) | |
| Net (gains) losses on derivative instruments | (21,620) | | | (3,250) | | | 9,818 | |
| ESOP and share-based compensation expense | 6,501 | | | 4,580 | | | 4,309 | |
| Provision for credit losses | (353) | | | (877) | | | 1,379 | |
| Change in operating assets and liabilities: | | | | | |
| Accounts receivable, net | (6,260) | | | 1,438 | | | 12,893 | |
| Inventories | (22,828) | | | (9,383) | | | 19,530 | |
| Derivative assets, net | 19,554 | | | 5,016 | | | (1,082) | |
| Other assets | 2,652 | | | 11,249 | | | 990 | |
| Accounts payable | 7,111 | | | 7,790 | | | (35,784) | |
| Accrued expenses and other | (1,030) | | | 3,000 | | | (14,140) | |
| Net cash (used in) provided by operating activities | $ | (11,454) | | | $ | (1,486) | | | $ | 1,455 | |
| Cash flows from investing activities: | | | | | |
| Purchases of property, plant and equipment | (15,163) | | | (15,117) | | | (17,560) | |
| Proceeds from sales of property, plant and equipment | 9,118 | | | 4,421 | | | 39,477 | |
| Net cash (used in) provided by investing activities | $ | (6,045) | | | $ | (10,696) | | | $ | 21,917 | |
| Cash flows from financing activities: | | | | | |
| Proceeds from Credit Facilities | 23,500 | | | 80,742 | | | 90,000 | |
| Repayments on Credit Facilities | (5,900) | | | (159,242) | | | (60,000) | |
| Proceeds from issuance of term loan | — | | | 47,500 | | | — | |
| Payment of financing costs | (352) | | | (6,288) | | | (418) | |
| | | | | |
| Proceeds from stock option exercises | — | | | — | | | 129 | |
| | | | | |
| Payments of finance lease obligations | (193) | | | (105) | | | (53) | |
| Net cash provided by (used in) financing activities | $ | 17,055 | | | $ | (37,393) | | | $ | 29,658 | |
| Net (decrease) increase in cash and cash equivalents and restricted cash | $ | (444) | | | $ | (49,575) | | | $ | 53,030 | |
| Cash and cash equivalents and restricted cash at beginning of period | $ | 10,438 | | | $ | 60,013 | | | $ | 6,983 | |
| Cash and cash equivalents and restricted cash at end of period | $ | 9,994 | | | $ | 10,438 | | | $ | 60,013 | |
| | | | | |
| Supplemental disclosure of cash flow information: | | | | | |
| Cash paid for interest | $ | 7,503 | | | $ | 5,703 | | | $ | 4,426 | |
| Cash paid for income taxes | 142 | | | 355 | | | 21 | |
| Supplemental disclosure of non-cash investing and financing activities: | | | | | |
| Non-cash additions to property, plant and equipment | 63 | | | 95 | | | 446 | |
| Right-of-use assets obtained in exchange for new operating lease liabilities | 7,684 | | | 9,610 | | | 8,503 | |
| Non-cash issuance of ESOP and 401(K) common stock | 373 | | | 398 | | | 266 | |
| Cumulative preferred dividends, undeclared and unpaid | — | | | 574 | | | 554 | |
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
Description of Business
Farmer Bros. Co., a Delaware corporation (including its consolidated subsidiaries unless the context otherwise requires, the “Company,” or “Farmer Bros.”), is a leading coffee roaster, wholesaler, equipment servicer and distributor of coffee, tea and other allied 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 retailers, 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 and other beverages including cappuccino, cocoa, granitas, and concentrated and ready-to-drink cold brew and iced coffee; culinary products and spices. 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 one business segment.
The Company operates production facilities in Northlake, Texas; and Portland, Oregon. We stopped production in our Houston facility and exited the facility in the fourth quarter of fiscal 2021. Distribution takes place out of the Northlake and Portland facilities, as well as separate distribution centers in Portland, Oregon; Northlake, Illinois; Rialto, California; and Moonachie, New Jersey.
The Company’s products reach its customers primarily in the following ways: through the Company’s nationwide direct-store-delivery or DSD network of 239 delivery routes and 103 branch warehouses as of June 30, 2022, 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 Company to its customers at their places of business.
Note 2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”).
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its direct and indirect wholly owned subsidiaries. All intercompany balances and transactions have been eliminated.
Use of Estimates
The preparation of financial statements in accordance with 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 credit losses
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 credit losses requires us to reserve an amount based on the evaluation of the aging 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 accounts are determined to be uncollectible.
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.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)•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.
Derivative Instruments
The Company 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 Company'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 coffee “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” in the consolidated statements of operations.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)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 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” in the consolidated statements of operations 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” in the consolidated statements of operations. See Note 4,Derivative Instruments.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. For interest rate swap derivative instruments that are not designated in a hedging relationship, the changes in fair value are reported in interest expense.
Concentration of Credit Risk
At June 30, 2022, 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), derivative instruments and trade receivables.
The Company does not have any credit-risk related contingent features that would require it to post additional collateral in support of its net derivative liability positions. At June 30, 2022 and 2021, none of the cash in the Company’s coffee-related derivative margin accounts was restricted. Further changes in commodity prices and 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 35% and 31% of the Company’s accounts receivable balance was with five customers at June 30, 2022 and 2021, respectively. There were two customers that accounted for more than 10% of the Company’s accounts receivable balance as of June 30, 2022. The Company estimates its maximum credit risk for accounts receivable at the amount recorded on the balance sheet. The accounts receivables are generally short-term and all probable bad debt losses have been appropriately considered in establishing the allowance for credit losses.
Inventories
Inventories are valued at the lower of cost or net realizable value. The Company uses the first in, first out ("FIFO") basis for accounting for coffee, tea and culinary products and coffee brewing equipment parts. 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 |
Office furniture and equipment | 5 to 7 years |
Capitalized software | 3 to 5 years |
Equipment under finance leases | Shorter of term of lease or estimated useful life |
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 9, Property, Plant and Equipment 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 Consolidated Balance Sheets. Finance leases are included in property, plant and equipment, net and other liabilities in the Consolidated Balance Sheets. Leases with an initial term of 12 months or less are not recorded on the 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, 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, 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.
Revenue Recognition
The Company recognizes 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. We recognize revenue at a point in time upon delivery of the ordered goods to our customers. Revenues are recognized net of any discounts, returns, allowances, rebates and incentives. 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 contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when (or as) the performance obligations are satisfied.
Net Loss Per Common Share
Net loss per share (“EPS”) represents net loss available to common stockholders divided by the weighted-average number of common shares outstanding for the period. 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 or income available to common stockholders.
Under the two-class method, net loss available to nonvested restricted stockholders and holders of Series A Preferred Stock is excluded from net loss available to common stockholders for purposes of calculating basic and diluted EPS.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)Diluted EPS represents net loss or 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
On December 31, 2018, the Company froze the Employee Stock Ownership Plan (“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.
Effective January 1, 2019, the Company amended and restated its 401(k) Plan to, among other things, provide for annual contribution of shares of the Company’s common stock equal to 4% of each eligible participant’s annual plan compensation.
Effective January 1, 2022, the Company merged the ESOP plan into the 401(k) Plan and transferred all of the assets and shares in the ESOP to the 401(k) Plan.
As of June 30, 2021, there were 1,067,687 allocated shares under the ESOP plan with a fair value of $13.5 million.
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 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.
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.
The Company's 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. The Company recognizes the estimated fair value of performance-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 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 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, additional compensation expense is recorded in the period when that determination is certified by the Compensation Committee of the Board of Directors.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)Impairment of Goodwill and Indefinite-lived Intangible Assets
The Company accounts for its goodwill and indefinite-lived intangible assets in accordance with “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.
The Company tests 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.
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 fair values may be below the carrying amounts of the 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 recorded $36.2 million and $5.8 million, respectively, of impairments to goodwill and indefinite-lived intangibles during the year ended June 30, 2020. Our goodwill was fully impaired with this adjustment.
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.
Collective Bargaining Agreements
Certain Company employees are subject to collective bargaining agreements which expire on or before June 30, 2025. At June 30, 2022 approximately 16% 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 $3.5 million and $3.9 million, as of June 30, 2022 and 2021, respectively. The estimated recovery from reinsurance was $0.7 million and $0.6 million, as of June 30, 2022 and 2021, respectively. 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.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)At June 30, 2022 the Company had posted no cash deposit and $4.1 million letter of credit, as a security deposit for self-insuring workers’ compensation, general liability and auto insurance coverages. At June 30, 2021 the Company had posted $0.8 million in cash and a $4.3 million letter of credit.
The estimated liability related to the Company's self-insured group medical insurance was $0.5 million and $0.9 million for the years ended June 30, 2022 and 2021, 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 accrues the cost for general liability, product liability and commercial auto liability 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 $2.3 million and $1.4 million at June 30, 2022 and 2021, respectively. 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 defined benefit 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. The Company’s defined benefit pension 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 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 11, Employee Benefit Plans.Exit costs
The Company accounts for exit or disposal of activities in accordance with ASC 420, “Exit or Disposal Cost Obligations.“ The Company defines an exit or disposal activity as one 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 exit costs 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.
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 consolidated financial statements.
The following table provides a brief description of the applicable recent ASUs issued by the FASB:
| | | | | | | | | | | | | | | | | | | | |
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 being discontinued between December 2021 and June 2023. The Company has not entered into any new contracts after December 31, 2021. With the overnight, 1-month, 3-month, 6-month and 12-month USD LIBOR rates being published through June 30, 2023, we will continue to leverage these for 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 does not anticipate any material impacts on its consolidated financial statements. |
In March 2022, the FASB issued ASU No. 2022-01—Derivatives and Hedging (Topic 815): Fair Value Hedging—Portfolio Layer
Method | | The amendments in this Update clarify the accounting for and promote consistency in the reporting of hedge basis adjustments applicable to both a single hedged layer and multiple hedged layers | | Effective for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. | | The Company does not anticipate any material impacts on its consolidated financial statements. |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)Note 3. Sales of Assets
Sale of Branch Properties
During the fiscal year ended June 30, 2022, the Company completed the sale of the following branch properties:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (In thousands) | | | | | | | | | | | | | | |
| Name of Branch Property | | Date Sold | | Sales Price | | Net Proceeds | | Gain | | | | | | |
| Santa Ana, California | | 7/2/2021 | | $ | 4,299 | | | $ | 4,072 | | | $ | 3,571 | | | | | | | |
| Santa Fe Springs, California | | 7/7/2021 | | 2,650 | | | 2,507 | | | 1,509 | | | | | | | |
| San Antonio, Texas | | 11/2/2021 | | 898 | | | 820 | | | 729 | | | | | | | |
Assets Held for Sale
The Company sometimes pursues options to divest corporate assets, primarily related to land and buildings. As of June 30, 2022, certain branch properties met the accounting guidance criteria to be classified as held for sale, and it is the Company's intention to complete the sales of these assets within the twelve months following June 30, 2022. As such, the Company evaluated the assets to determine whether the carrying value exceeded the fair value less any costs to sell. No loss was recorded as of June 30, 2022 and the aggregate assets held for sale are presented as a separate line item in the consolidated balance sheet.
The following table presents net carrying value related to the major classes of assets that were classified as held for sale at June 30, 2022 and June 30, 2021 :
| | | | | | | | | | | | | | |
| (In thousands) | | June 30, 2022 | | June 30, 2021 |
| Building and facilities | | $ | 67 | | | $ | 1,035 | |
| Land | | 965 | | | 556 | |
| Assets held for sale | | $ | 1,032 | | | $ | 1,591 | |
| | | | |
| | | | |
Note 4. 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 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, 2022 and 2021:
| | | | | | | | | | | | | | |
| | As of June 30, |
| (In thousands) | | 2022 | | 2021 |
| Derivative instruments designated as cash flow hedges: | | | | |
| Long coffee pounds | | 4,200 | | | 14,625 | |
| Derivative instruments not designated as cash flow hedges: | | | | |
| Long coffee pounds | | 516 | | | 6,886 | |
| | | | |
| Total | | 4,716 | | | 21,511 | |
Coffee-related derivative instruments designated as cash flow hedges outstanding as of June 30, 2022 will expire within 18 months. At June 30, 2022 and 2021 approximately 89% and 68%, respectively, 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 (“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 effective date of April 11, 2019 and a maturity date of October 11, 2023 (the “Original Rate Swap”). In December 2019, the Company amended the notional amount to $65.0 million. The Original Rate Swap was intended to manage the Company’s interest rate risk on its floating-rate indebtedness under the Company's prior revolving credit facility. Under the terms of the Original Rate Swap, the Company received 1-month LIBOR, subject to a 0% floor, and made payments based on a fixed rate of 2.1975%.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)The Company’s obligations under the ISDA were secured by the collateral which secures the loans under the prior revolving credit facility on a pari passu and pro rata basis with the principal of such loans.
The Company had designated the Original Rate Swap derivative instrument as a cash flow hedge; however, during the quarter ended September 30, 2020, the Company de-designated the Original Rate Swap derivative instruments. As a result, the balance in AOCI was frozen at the time of de-designation. The Company recognized $1.2 million, in interest expense for the fiscal year ended June 30, 2022. The remaining balance of $1.4 million frozen in AOCI will be amortized over the life of the Rate Swap through October 11, 2023.
In connection with the revolver credit facility agreement entered in April 2021 (see Note 12for details), the Company also executed a new ISDA agreement to transfer its interest swap to Wells Fargo (“Amended Rate Swap”). Under the terms of the Amended Rate Swap, the Company receives 1-month LIBOR, subject to a 0% floor, and makes payments based on a fixed rate of 2.4725%, an increase of 0.275% from its original interest rate swap fixed rate of 2.1975%. The Amended Rate Swap utilizes the same notional amount of $65.0 million and maturity date of October 11, 2023 as the Rate Swap. The Company did not designate the Amended Rate Swap as a cash flow hedge.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 |
| | As of June 30, | | As of June 30, |
| (In thousands) | | 2022 | | 2021 | | 2022 | | 2021 |
| Financial Statement Location: | | | | | | | | |
| Short-term derivative assets: | | | | | | | | |
| Coffee-related derivative instruments(1) | | $ | 2,144 | | | $ | 3,823 | | | $ | 555 | | | $ | 528 | |
| Interest rate swap derivative instruments(1) | | — | | | — | | | 323 | | | — | |
| Long-term derivative assets: | | | | | | | | |
| Coffee-related derivative instruments(2) | | 37 | | | 292 | | | 140 | | | — | |
| Interest rate swap derivative instruments(2) | | — | | | — | | | 166 | | | — | |
| Short-term derivative liabilities: | | | | | | | | |
| Coffee-related derivative instruments(3) | | 3 | | | 20 | | | 2,346 | | | 3 | |
| Interest rate swap derivative instruments(3) | | — | | | — | | | — | | | 1,532 | |
| Long-term derivative liabilities: | | | | | | | | |
| | | | | | | | |
| Interest rate swap derivative instruments(4) | | — | | | — | | | — | | | 1,653 | |
________________
(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 derivative liabilities” on the Company's consolidated balance sheets.
(4) Included in “Other long-term liabilities” on the Company's consolidated balance sheets.
Statements of Operations
The following table presents pretax net gains and losses for the Company's 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) | | 2022 | | 2021 | | 2020 | | | |
| Net losses recognized in AOCI - Interest rate swap | | $ | — | | | $ | (304) | | | $ | (2,863) | | | | | AOCI |
| Net losses recognized from AOCI to earnings - Interest rate swap | | (7) | | | (347) | | | (383) | | | | | Interest Expense |
| Net losses reclassified from AOCI to earnings for partial unwind of interest swap - Interest rate swap | | (1,201) | | | (1,284) | | | (407) | | | | | Interest Expense |
| Net gains (losses) recognized in AOCI - Coffee-related | | 12,172 | | | 11,753 | | | (4,655) | | | | | AOCI |
| Net gains (losses) recognized in earnings - Coffee-related | | 15,865 | | | 1,940 | | | (8,073) | | | | | Costs of goods sold |
For the fiscal years ended June 30, 2022, 2021 and 2020, there were no gains or losses recognized in earnings as a result of excluding amounts from the assessment of hedge effectiveness.
Net (gains) losses on derivative instruments in the Company's consolidated statements of cash flows also includes net (gains) losses 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, 2022, 2021 and 2020. 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 (gains)
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)losses 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) | | 2022 | | 2021 | | 2020 |
| Net gains (losses) on coffee-related derivative instruments (1) | | $ | 4,498 | | | $ | 2,941 | | | $ | (1,362) | |
| | | | | | |
| Non-operating pension and other postretirement benefit plans credits (2) | | 3,598 | | | 16,398 | | | 11,651 | |
| Other gains, net | | 86 | | | 381 | | | 154 | |
| Other, net | | $ | 8,182 | | | $ | 19,720 | | | $ | 10,443 | |
___________(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, 2022, 2021 and 2020.
(2) Presented in accordance with implementation of ASU 2017-07. Includes amortized gains on postretirement medical benefit plan due to the curtailment announced in March 2020.
Statement of Comprehensive Income (Loss)
The following table provides the balances and changes in accumulated other comprehensive income (loss) related to derivative instruments for the indicated periods:
| | | | | | | | | | | | | | | | | | | | |
| | June 30, |
| (In thousands) | | 2022 | | 2021 | | 2020 |
| Accumulated other comprehensive (income) loss beginning balance | | $ | (4,176) | | | $ | 6,964 | | | $ | 8,308 | |
| | | | | | |
| Net losses recognized in AOCI - Interest rate swap | | — | | | (304) | | | (2,863) | |
| Net losses recognized from AOCI to earnings - Interest rate swap | | (7) | | | (347) | | | (383) | |
| | | | | | |
| Net losses reclassified from AOCI to earnings for partial unwind of interest swap - Interest rate swap | | (1,201) | | | (1,284) | | | (407) | |
| Net gains (losses) recognized in AOCI - Coffee-related | | 12,172 | | | 11,753 | | | (4,655) | |
| Net gains (losses) recognized in earnings - Coffee-related | | 15,865 | | | 1,940 | | | (8,073) | |
| Net change to other comprehensive (loss) income | | (24,345) | | | (22,898) | | | 15,037 | |
| Accumulated other comprehensive (income) loss ending balance | | $ | (1,692) | | | $ | (4,176) | | | $ | 6,964 | |
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, under certain coffee derivative agreements, the Company 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 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 |
| As of June 30, 2022 | | Derivative Assets | | $ | 3,365 | | | $ | (2,349) | | | $ | — | | | $ | 1,016 | |
| | Derivative Liabilities | | 2,349 | | | (2,349) | | | — | | | — | |
| As of June 30, 2021 | | Derivative Assets | | 4,643 | | | (23) | | | — | | | 4,620 | |
| | Derivative Liabilities | | 3,185 | | | — | | | — | | | 3,185 | |
Cash Flow Hedges
Changes in the fair value of the Company’s coffee-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, 2022, $3.0 million of net gains 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, 2022.
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, 2022, $1.1 million of net losses on the interest rate swap derivative instrument de-designated as a cash flow hedge are expected to be reclassified into interest expense within the next twelve months.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)Note 5. Leases
Supplemental consolidated balance sheet information related to leases is as follows:
| | | | | | | | | | | | | | | | | | | | |
| | | | As of June 30, |
| (In thousands) | | Classification | | 2022 | | 2021 |
| Operating lease assets | | Right-of-use operating lease assets | | $ | 27,957 | | | $ | 26,254 | |
| Finance lease assets | | Property, plant and equipment, net | | 574 | | | 739 | |
| Total lease assets | | | | $ | 28,531 | | | $ | 26,993 | |
| | | | | | |
| Operating lease liabilities - current | | Operating lease liabilities - current | | 7,721 | | | 6,262 | |
| Finance lease liabilities - current | | Other current liabilities | | 193 | | | 192 |
| Operating lease liabilities - noncurrent | | Operating lease liabilities - noncurrent | | 20,762 | | | 20,049 | |
| Finance lease liabilities -noncurrent | | Other long-term liabilities | | 409 | | | 563 |
| Total lease liabilities | | | | $ | 29,085 | | | $ | 27,066 | |
The components of lease expense are as follows:
| | | | | | | | | | | | | | | | | | | | |
| | | | | | |
| | For the Years Ended June 30, |
| (In thousands) | | 2022 | | 2021 | | 2020 |
| Operating lease expense | | $ | 7,526 | | | $ | 7,195 | | | $ | 5,354 | |
| Finance lease expense: | | | | | | |
| Amortization of finance lease assets | | 164 | | | 82 | | | 52 | |
| Interest on finance lease liabilities | | 44 | | | 26 | | | 2 | |
| Total lease expense | | $ | 7,734 | | | $ | 7,303 | | | $ | 5,408 | |
The maturities of the lease liabilities are as follows:
| | | | | | | | | | | | | | |
| | For the Years Ended June 30, |
| (In thousands) | | Operating Leases | | Finance Leases |
| 2023 | | $ | 7,721 | | | $ | 193 | |
| 2024 | | 7,444 | | | 193 | |
| 2025 | | 6,175 | | | 193 | |
| 2026 | | 4,957 | | | 96 | |
| 2027 | | 3,495 | | | — | |
| Thereafter | | 2,999 | | | — | |
| Total lease payments | | 32,791 | | | 675 | |
| Less: interest | | (4,308) | | | (73) | |
| Total lease obligations | | $ | 28,483 | | | $ | 602 | |
Lease term and discount rate:
| | | | | | | | | | | | | | |
| | For the Years Ended June 30, |
| | 2022 | | 2021 |
| Weighted-average remaining lease terms (in years): | | | | |
| Operating lease | | 6.3 | | 7.3 |
| Finance lease | | 3.5 | | 4.5 |
| | | | |
| Weighted-average discount rate: | | | | |
| Operating lease | | 5.69 | % | | 5.23 | % |
| Finance lease | | 6.50 | % | | 6.50 | % |
Other Information:
| | | | | | | | | | | | | | |
| | For the Years Ended June 30, |
| | 2022 | | 2021 |
| Cash paid for amounts included in the measurement of lease liabilities: | | | | |
| Operating cash flows from operating leases | | $ | 7,049 | | | $ | 7,529 | |
| Operating cash flows from finance leases | | 44 | | | 70 | |
| Financing cash flows from finance leases | | 193 | | | 26 | |
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)Note 6. 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, 2022 | | | | | | | | |
| Derivative instruments designated as cash flow hedges: | | | | | | | | |
| | | | | | | | |
| Coffee-related derivative assets - (1) | | $ | 2,181 | | | $ | — | | | $ | 2,181 | | | $ | — | |
| Coffee-related derivative liabilities (1) | | 3 | | | — | | | 3 | | | — | |
| | | | | | | | |
| Derivatives not designated as accounting hedges: | | | | | | | | |
| Coffee-related derivative assets - (1) | | 695 | | | — | | | 695 | | | — | |
| Coffee-related derivative liabilities (1) | | 2,346 | | | — | | | 2,346 | | | — | |
| Interest rate swap derivative asset (2) | | 489 | | | — | | | 489 | | | — | |
| | | | | | | | |
| | Total | | Level 1 | | Level 2 | | Level 3 |
| As of June 30, 2021 | | | | | | | | |
| | | | | | | | |
| Derivative instruments designated as cash flow hedges: | | | | | | | | |
| | | | | | | | |
| Coffee-related derivative assets - (1) | | $ | 4,115 | | | $ | — | | | $ | 4,115 | | | $ | — | |
| Coffee-related derivative liabilities (1) | | 20 | | | — | | | 20 | | | — | |
| Derivatives not designated as accounting hedges: | | | | | | | | |
| Coffee-related derivative assets - (1) | | 528 | | | — | | | 528 | | | — | |
| Coffee-related derivative liabilities (1) | | 3 | | | — | | | 3 | | | — | |
| Interest rate swap derivative liabilities (2) | | 3,185 | | | — | | | 3,185 | | | — | |
____________________
(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, 2022 and 2021, there were no transfers between the levels.Due to the highly liquid nature, the amount of the Company's other financial instruments represent the approximate fair value.
Note 7. Accounts Receivable, Net
| | | | | | | | | | | | | | |
| | | As of June 30, |
| (In thousands) | | 2022 | | 2021 |
| Trade receivables | | $ | 44,219 | | | $ | 37,208 | |
| Other receivables (1) | | 2,911 | | | 3,438 | |
| Allowance for credit losses | | (195) | | | (325) | |
| Accounts receivable, net | | $ | 46,935 | | | $ | 40,321 | |
____________________ (1)Includes vendor rebates and other non-trade receivables.
Allowance for credit losses:
| | | | | |
(In thousands) | |
| |
| |
| |
| |
Balance at June 30, 2019 | $ | (1,324) | |
Provision | (1,872) | |
Write-offs | 1,196 | |
Recovery | 204 | |
Balance at June 30, 2020 | (1,796) | |
Provision | 619 | |
Write-offs | 704 | |
Recovery | 148 | |
Balance at June 30, 2021 | (325) | |
Provision | (767) | |
Write-offs | 699 | |
Recovery | 198 | |
Balance at June 30, 2022 | $ | (195) | |
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)Note 8. Inventories | | | | | | | | | | | | | | |
| | As of June 30, |
| (In thousands) | | 2022 | | 2021 |
| Coffee | | | | |
| Processed | | $ | 32,486 | | | $ | 20,917 | |
| Unprocessed | | 39,326 | | | 34,762 | |
| Total | | 71,812 | | | 55,679 | |
| Tea and culinary products | | | | |
| Processed | | 24,034 | | | 15,228 | |
| Unprocessed | | 58 | | | 60 | |
| Total | | 24,092 | | | 15,288 | |
| Coffee brewing equipment parts | | 3,714 | | | 5,824 | |
| Total inventories | | $ | 99,618 | | | $ | 76,791 | |
In addition to product cost, inventory costs include expenditures such as direct labor and certain supply, freight, warehousing, overhead variances, purchase price variances 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.
Note 9. Property, Plant and Equipment
| | | | | | | | | | | | | | |
| | | As of June 30, |
| (In thousands) | | 2022 | | 2021 |
| Buildings and facilities | | $ | 92,948 | | | $ | 94,846 | |
| Machinery and equipment | | 219,095 | | | 223,579 | |
| | | | |
| Capitalized software | | 25,467 | | | 24,218 | |
| Office furniture and equipment | | 14,347 | | | 13,834 | |
| | 351,857 | | | 356,477 | |
| Accumulated depreciation | | (224,760) | | | (218,341) | |
| Land | | 11,053 | | | 11,955 | |
| Property, plant and equipment, net | | $ | 138,150 | | | $ | 150,091 | |
Depreciation and amortization expense was $23.8 million, $27.6 million, and $29.9 million, for the years ended June 30, 2022, 2021, and 2020, respectively.
Maintenance and repairs to property, plant and equipment charged to expense for the years ended June 30, 2022, 2021, and 2020 were $9.5 million, $7.9 million and $8.6 million, respectively.
Coffee Brewing Equipment (“CBE”) and Service
Capitalized CBE included in machinery and equipment above are:
| | | | | | | | | | | | | | |
| | As of June 30, |
| (In thousands) | | 2022 | | 2021 |
| Coffee Brewing Equipment (1) | | $ | 93,549 | | | $ | 97,105 | |
| Accumulated depreciation | | (68,938) | | | (70,705) | |
| Coffee Brewing Equipment, net | | $ | 24,611 | | | $ | 26,400 | |
__________(1) Decrease as of June 30, 2022 is due to retirement of assets and lower investment on new equipment since we have focused on refurbished equipment which has a lower cost per unit.
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) | | 2022 | | 2021 | | 2020 |
| Depreciation expense | | $ | 7,492 | | | $ | 8,988 | | | $ | 9,572 | |
| Other CBE expenses | | 25,773 | | | 23,363 | | | 27,906 | |
Other expenses related to CBE 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. Therefore, these costs are included in cost of goods sold.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)Note 10. Intangible Assets
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, 2022 | | 2022 | | 2021 |
| (In thousands) | | | Gross
Carrying
Amount | | Accumulated
Amortization | | Net | | Gross
Carrying
Amount | | Accumulated
Amortization | | | | Net |
| Amortized intangible assets: | | | | | | | | | | | | | | | | |
| Customer relationships | | 4.7 | | $ | 33,003 | | | $ | (21,893) | | | $ | 11,110 | | | $ | 33,003 | | | $ | (19,692) | | | | | $ | 13,311 | |
| Recipes | | 1.3 | | 930 | | | (752) | | | 178 | | | 930 | | | (619) | | | | | 311 | |
| Trade name/brand name | | 1.4 | | 510 | | | (457) | | | 53 | | | 510 | | | (420) | | | | | 90 | |
| Non-compete agreements | | 0.0 | | 220 | | | (220) | | | — | | | 220 | | | (202) | | | | | 18 | |
| Total amortized intangible assets | | | | 34,663 | | | (23,322) | | | 11,341 | | | 34,663 | | | (20,933) | | | | | 13,730 | |
| Unamortized intangible assets: | | | | | | | | | | | | | | | | |
| Trademarks, trade names and brand name with indefinite lives | | | | 4,522 | | | — | | | 4,522 | | | 4,522 | | | — | | | | | 4,522 | |
| Total unamortized intangible assets | | | | 4,522 | | | — | | | 4,522 | | | 4,522 | | | — | | | | | 4,522 | |
| Total intangible assets | | | | $ | 39,185 | | | $ | (23,322) | | | $ | 15,863 | | | $ | 39,185 | | | $ | (20,933) | | | | | $ | 18,252 | |
The Company recorded $5.8 million of indefinite-lived asset impairment for the fiscal year ended June 30, 2020 due to the impact the COVID-19 pandemic had on our business during the second half of the Company's fiscal year ended June 30, 2020. There were no indefinite-lived intangible asset impairment charges recorded in the fiscal years ended June 30, 2022 and 2021.
The Company also assesses the recoverability of certain finite-lived intangible assets. No impairment was recorded for the finite-lived intangibles for the years ended June 30, 2022, 2021, and 2020. Amortization expense for the years ended June 30, 2022, 2021, and 2020 were $2.4 million each year, for these assets.
At June 30, 2022, future annual amortization of finite-lived intangible assets for the years 2023 through 2027 and thereafter is estimated to be (in thousands):
| | | | | | | | |
For the fiscal year ending: | | |
June 30, 2023 | | $ | 2,370 | |
June 30, 2024 | | 2,261 | |
June 30, 2025 | | 2,200 | |
June 30, 2026 | | 2,200 | |
June 30, 2027 | | 1,910 | |
Thereafter | | 400 | |
Total | | $ | 11,341 | |
Note 11. Employee Benefit Plans
The Company 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, 2022, the Company has two defined benefit pension plans for certain employees (the "Farmer Bros. 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 plan freeze, participants are eligible to receive the Company's matching contributions to their 401(k).
Prior to the termination of the Farmer Bros. Co. Pension Plan for Salaried Employees (the "Salaried Plan") effective December 1, 2018, the Company 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 $25,000, retirees and beneficiaries currently receiving benefit payments under the Salaried Plan, and former employees who have deferred vested benefits under the Salaried Plan,
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)were transferred to the Farmer Bros. Plan. Upon termination of the Salaried Plan, all remaining plan participants elected to receive a distribution of his/her entire accrued benefit under the Salaried Plan in a single cash lump sum or an individual insurance company annuity contract, in either case, funded directly by Salaried Plan assets.
Obligations and Funded Status
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Farmer Bros. Plan
As of June 30, | | Hourly Employees’ Plan
As of June 30, | | Total |
| ($ in thousands) | | 2022 | | 2021 | | 2022 | | 2021 | | 2022 | | 2021 |
| Change in projected benefit obligation | | | | | | | | | | | | |
| Benefit obligation at the beginning of the year | | $ | 129,091 | | | $ | 133,326 | | | $ | 5,070 | | | $ | 5,086 | | | $ | 134,161 | | | $ | 138,412 | |
| | | | | | | | | | | | |
| Interest cost | | 3,262 | | | 3,309 | | | 129 | | | 128 | | | 3,391 | | | 3,437 | |
| | | | | | | | | | | | |
| Actuarial gain | | (23,646) | | | (1,437) | | | (1,067) | | | (6) | | | (24,713) | | | (1,443) | |
| Benefits paid | | (6,199) | | | (6,107) | | | (181) | | | (138) | | | (6,380) | | | (6,245) | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| Projected benefit obligation at the end of the year | | $ | 102,508 | | | $ | 129,091 | | | $ | 3,951 | | | $ | 5,070 | | | $ | 106,459 | | | $ | 134,161 | |
| Change in plan assets | | | | | | | | | | | | |
| Fair value of plan assets at the beginning of the year | | $ | 90,508 | | | $ | 75,904 | | | $ | 4,603 | | | $ | 3,915 | | | $ | 95,111 | | | $ | 79,819 | |
| Actual return on plan assets | | (11,371) | | | 17,648 | | | (574) | | | 826 | | | (11,945) | | | 18,474 | |
| Employer contributions | | 1,312 | | | 3,063 | | | — | | | — | | | 1,312 | | | 3,063 | |
| | | | | | | | | | | | |
| Benefits paid | | (6,199) | | | (6,107) | | | (181) | | | (138) | | | (6,380) | | | (6,245) | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| Fair value of plan assets at the end of the year | | $ | 74,250 | | | $ | 90,508 | | | $ | 3,848 | | | $ | 4,603 | | | $ | 78,098 | | | $ | 95,111 | |
| Funded status at end of year (underfunded) | | $ | (28,258) | | | $ | (38,583) | | | $ | (103) | | | $ | (467) | | | $ | (28,361) | | | $ | (39,050) | |
| Amounts recognized in consolidated balance sheets | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| Noncurrent liabilities | | (28,258) | | | (38,583) | | | (103) | | | (467) | | | (28,361) | | | (39,050) | |
| Total | | $ | (28,258) | | | $ | (38,583) | | | $ | (103) | | | $ | (467) | | | $ | (28,361) | | | $ | (39,050) | |
| Amounts recognized in AOCI | | | | | | | | | | | | |
| Net loss | | 36,818 | | | 45,716 | | | 173 | | | 453 | | | 36,991 | | | 46,169 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| Total accumulated OCI (not adjusted for applicable tax) | | $ | 36,818 | | | $ | 45,716 | | | $ | 173 | | | $ | 453 | | | $ | 36,991 | | | $ | 46,169 | |
| Weighted average assumptions used to determine benefit obligations | | | | | | |
| Discount rate | | 4.50 | % | | 2.60 | % | | 4.50 | % | | 2.60 | % | | 4.50 | % | | 2.60 | % |
| Rate of compensation increase | | N/A | | N/A | | N/A | | N/A | | N/A | | N/A |
Components of Net Periodic Benefit Cost and
Other Changes Recognized in Other Comprehensive Income (Loss) (OCI)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Farmer Bros. Plan
June 30, | | Hourly Employees’ Plan June 30, | | Total |
| ($ in thousands) | | 2022 | | 2021 | | 2020 | | 2022 | | 2021 | | 2020 | | 2022 | | 2021 | | 2020 |
| Components of net periodic benefit cost | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| Interest cost | | 3,262 | | | 3,309 | | | 4,084 | | | 129 | | | 128 | | | 152 | | | 3,391 | | | 3,437 | | | 4,236 | |
| Expected return on plan assets | | (4,734) | | | (3,959) | | | (4,174) | | | (214) | | | (192) | | | (232) | | | (4,948) | | | (4,151) | | | (4,406) | |
| Amortization of net loss | | 1,356 | | | 1,987 | | | 1,475 | | | — | | | 23 | | | 4 | | | 1,356 | | | 2,010 | | | 1,479 | |
| | | | | | | | | | | | | | | | | | |
| Net periodic benefit cost | | $ | (116) | | | $ | 1,337 | | | $ | 1,385 | | | $ | (85) | | | $ | (41) | | | $ | (76) | | | $ | (201) | | | $ | 1,296 | | | $ | 1,309 | |
| Other changes recognized in OCI | | | | | | | | | | | | | | | | |
| Net (gain) loss (1) | | $ | (7,542) | | | $ | (15,127) | | | 14,225 | | | (279) | | | (640) | | | 554 | | | (7,821) | | | (15,767) | | | 14,779 | |
| | | | | | | | | | | | | | | | | | |
| Amortization of net loss | | (1,356) | | | (1,987) | | | (1,475) | | | — | | | (23) | | | (4) | | | (1,356) | | | (2,010) | | | (1,479) | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| Total recognized in other comprehensive income | | $ | (8,898) | | | $ | (17,114) | | | $ | 12,750 | | | $ | (279) | | | $ | (663) | | | $ | 550 | | | $ | (9,177) | | | $ | (17,777) | | | $ | 13,300 | |
| Total recognized in net periodic benefit cost and OCI | | $ | (9,014) | | | $ | (15,777) | | | $ | 14,135 | | | $ | (364) | | | $ | (704) | | | $ | 474 | | | (9,378) | | | (16,481) | | | 14,609 | |
| Weighted-average assumptions used to determine net periodic benefit cost | | | | | | | | | | |
| Discount rate | | 2.60 | % | | 2.55 | % | | 3.45 | % | | 2.60 | % | | 2.55 | % | | 3.45 | % | | 2.60 | % | | 2.55 | % | | 3.45 | % |
| Expected long-term return on plan assets | | 6.25 | % | | 6.25 | % | | 6.75 | % | | 6.50 | % | | 6.25 | % | | 6.75 | % | | 6.38 | % | | 6.25 | % | | 6.75 | % |
| Rate of compensation increase | | N/A | | N/A | | N/A | | N/A | | N/A | | N/A | | N/A | | N/A | | N/A |
(1) Net gain for fiscal year ended June 30, 2022 and 2021 was primarily due to plan assets returns. Net loss for fiscal year ended June 30, 2020 was primarily due to decline in interest rate, and to 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 target asset allocation of the plan 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 the pension obligations, the investment horizon for the CMA 2020 is 20 to 30 years. In addition to forward-looking models,
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)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 build 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.
Additional Disclosures | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Farmer Bros. Plan
June 30, | | Hourly Employees’ Plan
June 30, | | Total |
| ($ in thousands) | | 2022 | | 2021 | | 2022 | | 2021 | | 2022 | | 2021 |
| Comparison of obligations to plan assets | | | | | | | | | | | | |
| Projected benefit obligation | | $ | 102,508 | | | $ | 129,091 | | | $ | 3,951 | | | $ | 5,070 | | | $ | 106,459 | | | $ | 134,161 | |
| Accumulated benefit obligation | | 102,508 | | | 129,091 | | | 3,951 | | | 5,070 | | | 106,459 | | | 134,161 | |
| Fair value of plan assets at measurement date | | 74,250 | | | 90,508 | | | 3,848 | | | 4,603 | | | 78,098 | | | 95,111 | |
| Plan assets by category | | | | | | | | | | | | |
| Equity securities | | 46,121 | | | 58,089 | | | 755 | | | 2,958 | | | 46,876 | | 61,047 | |
| Debt securities | | 21,891 | | | 27,311 | | | 3,093 | | | 1,394 | | | 24,984 | | 28,705 | |
| Real estate | | 6,238 | | | 5,108 | | | — | | | 251 | | | 6,238 | | 5,359 | |
| Total | | $ | 74,250 | | | $ | 90,508 | | | $ | 3,848 | | | $ | 4,603 | | | $ | 78,098 | | | $ | 95,111 | |
| Plan assets by category | | | | | | | | | | | | |
| Equity securities | | 62.1 | % | | 64.2 | % | | 19.6 | % | | 64.2 | % | | 60.0 | % | | 64.2 | % |
| Debt securities | | 29.5 | % | | 30.2 | % | | 80.4 | % | | 30.3 | % | | 32.0 | % | | 30.2 | % |
| Real estate | | 8.4 | % | | 5.6 | % | | — | % | | 5.6 | % | | 8.0 | % | | 5.6 | % |
| Total | | 100 | % | | 100 | % | | 100 | % | | 100 | % | | 100 | % | | 100 | % |
Fair values of plan assets were as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of June 30, 2022 |
| (In thousands) | | Total | | Level 1 | | Level 2 | | Level 3 | | Investments measured at NAV |
| Farmer Bros. Plan | | $ | 74,250 | | | $ | — | | | $ | — | | | $ | — | | | $ | 74,250 | |
| Hourly Employees’ Plan | | 3,848 | | | — | | | — | | | — | | | 3,848 | |
| | As of June 30, 2021 |
| (In thousands) | | Total | | Level 1 | | Level 2 | | Level 3 | | Investments measured at NAV |
| Farmer Bros. Plan | | $ | 90,508 | | | $ | — | | | $ | — | | | $ | — | | | $ | 90,508 | |
| Hourly Employees’ Plan | | 4,603 | | | — | | | — | | | — | | | 4,603 | |
The following is the target asset allocation for the Company's single employer pension plans— Farmer Bros. Plan and Hourly Employees' Plan—for fiscal 2023:
| | | | | |
| Fiscal 2023 |
U.S. large cap equity securities | 38.9 | % |
U.S. small cap equity securities | 3.3 | % |
International equity securities | 17.8 | % |
Debt securities | 32.0 | % |
Real Asset | 8.0 | % |
Total | 100.0 | % |
Estimated Amounts in OCI Expected To Be Recognized
In fiscal 2023, the Company expects to recognize net periodic benefit of $1.7 million for the Farmer Bros. Plan and $44.3 thousand for the Hourly Employees’ Plan.
Estimated Future Contributions and Refunds
In fiscal 2023, the Company expects to contribute $2.1 million to the Farmer Bros. Plan and does not expect to contribute to the Hourly Employees’ Plan.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)Estimated Future Benefit Payments
The following benefit payments are expected to be paid over the next 10 fiscal years:
| | | | | | | | | | | | | | |
| (In thousands) | | Farmer Bros. Plan | | Hourly Employees’ Plan |
| Year Ending: | |
| June 30, 2023 | | $ | 7,210 | | | $ | 220 | |
| June 30, 2024 | | 7,060 | | | 210 | |
| June 30, 2025 | | 7,190 | | | 220 | |
| June 30, 2026 | | 7,200 | | | 220 | |
| June 30, 2027 | | 7,250 | | | 230 | |
| June 30, 2028 to June 30, 2032 | | 35,130 | | | 1,220 | |
These amounts are based on current data and assumptions and reflect expected future service, as appropriate.
Multiemployer Pension Plans
The Company participates in one multiemployer defined benefit pension plan that is union sponsored and collectively bargained for the benefit of certain employees subject to collective bargaining agreements, called the Western Conference of Teamsters Pension Plan ("WCTPP"). The Company makes contributions to this plan generally based on the number of hours worked by the participants in accordance with the provisions of negotiated labor contracts.
| | | | | | | | | | | | | | |
| | | | Pension Protection Act Zone Status |
Pension Fund | | EIN-PN | | As of 1/1/2022 |
Western Conference of Teamsters Pension Plan | | 91-6145047-001 | | Green |
The company also contributes to two defined contribution pension plans ("All Other Plans") that are union sponsored and collectively bargained for the benefit of certain employees subject to collective bargaining agreements. The Company’s minimum contributions to these plans are defined within the collective bargaining agreements.
Contributions made by the Company to the multiemployer pension plans were as follows:
| | | | | | | | | | | | | | |
| (In thousands) | | WCTPP(1)(2)(3) | | All Other Plans |
| Year Ended: | | | | |
| June 30, 2022 | | $ | 961 | | | $ | 29 | |
| June 30, 2021 | | 1,049 | | | 33 | |
| June 30, 2020 | | 1,685 | | | 34 | |
____________
(1)Individually significant plan.
(2)Less than 5% of total contribution to WCTPP based on WCTPP's FASB Disclosure Statement
(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.
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.
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 nine 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 June 30, 2025. The Company's aggregate contributions to multiemployer plans other than pension plans in the fiscal years ended June 30, 2022, 2021 and 2020 were $3.0 million, $2.8 million and $4.2 million, respectively. The Company
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)expects to contribute an aggregate of approximately $3.0 million towards multiemployer plans other than pension plans in fiscal 2023.
401(k) Plan
The Farmer Bros. Co. 401(k) Plan (the "401(k) Plan") is available to all eligible employees. The 401(k) Plan 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.
In March 2020, due to the impact the COVID-19 pandemic had on the Company's business and financial results, the Company elected to suspend the 401(k) Plan matching contribution for non-union employees. Beginning in July 2021, the Company re-instated a 401(k) Plan matching program (the "401(k) Match") for non-union employees, matching 50% of an non-union employee's annual contribution to the 401(k) Plan, up to 6% of such employee's eligible income, similar to the program prior to suspension in March 2020.
Beginning in January 2022, the Company amended the 401(k) Match, whereby the Company, on a quarterly basis, will contribute, instead of cash, shares of the Company’s common stock., par value $1.00 per share (the “Common Stock”) with a value equal to 50% of any non-union employee's annual contribution to the 401(k) Plan, up to 6% of such employee's eligible income. The terms of the match are substantially the same as the safe-harbor non-elective contribution. The Company recorded matching contributions of $2.0 million, $0.1 million and $1.8 million in operating expenses for the fiscal years ended June 30, 2022, 2021 and 2020, respectively.
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 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, 2022, 2021 and 2020 the Company contributed a total of 371,566 shares, 373,697 shares and 290,567 shares of the Company’s common stock with a value of $3.6 million, $2.4 million and $2.9 million, respectively, to eligible participants’ annual plan compensation.
Effective January 1, 2022, the Company amended the 401(k) Plan to, among other things, increase the number of shares of Common Stock, available for issuance under the 401(k) Plan by 2,000,000 additional shares and permit participants in the 401(k) Plan to invest a portion of their 401(k) Plan accounts into Common Stock.
Effective January 1, 2022, the Company merged the ESOP into the 401(k) Plan and transferred all of the assets and shares in the ESOP to the 401(k) Plan.
Postretirement Benefits
The Company sponsored a postretirement defined benefit plan that covered 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 provided 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 were 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 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 through January 1, 2021, and a revised net periodic postretirement benefit credit recognized in fiscal year 2021 of $14.6 million. Also, the Company recognized a one-time non-cash curtailment gain of $5.8 million for the year ended June 30, 2020.
The Company provides a postretirement death benefit (“Death Benefit”) to certain 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 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.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)In June 2021, the Company amended the Death Benefit Plan effective immediately, which triggered re-measurement of the plan. The Company surrendered the purchased life insurance policies that funded these death benefits, and received cash proceeds from the insurance carriers. In conjunction with the amendment, the Company created a new Executive Death Benefit Plan (the “Executive Death Benefit Plan”) for a small group of participants in the Death Benefit Plan. Under the Executive Death Benefit Plan, the participants receive the same benefits they would have received under the Death Benefit Plan. The Company also retained the life insurance policies to fund the postretirement death benefit of these participants, and have a long-term receivable in Other Assets of $0.5 million as of June 30, 2022 which equates to the cash surrender value of the policies.
As a result of the amendment and re-measurement of the Death Benefit Plan, the Company recognized a one-time non-cash net settlement gain of $6.4 million for the year ended June 30, 2021.
The following table shows the components of net periodic postretirement benefit cost for the Retiree Medical Plan and Death Benefit Plan for the fiscal years ended June 30, 2022, 2021 and 2020. Net periodic postretirement benefit cost for fiscal 2022 was based on employee census information as of June 30, 2022.
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended June 30, |
| (In thousands) | | 2022 | | 2021 | | 2020 |
| Components of Net Periodic Postretirement Benefit Cost (Credit): | | | | | | |
| Service cost | | $ | — | | | $ | 19 | | | $ | 446 | |
| Interest cost | | 27 | | | 293 | | | 725 | |
| | | | | | |
| Amortization of net gain | | 11 | | | (5,296) | | | (3,067) | |
| Curtailment credit - Retiree Medical | | — | | | — | | | (5,750) | |
| Amortization of prior service credit | | — | | | (8,961) | | | (5,666) | |
| Settlement credit - Retiree Medical | | — | | | (6,669) | | | — | |
| Net periodic postretirement benefit (credit) cost | | $ | 38 | | | $ | (20,614) | | | $ | (13,312) | |
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 for the Death Benefit Plan.
| | | | | | | | | | | | | | | |
| | | Year Ended June 30, |
| ($ in thousands) | | | 2022 | | 2021 |
| Amortization of Net (Gain) Loss: | | | | | |
| Net loss as of July 1 | | | $ | 74 | | | $ | 280 | |
| | | | | |
| Net loss subject to amortization | | | 74 | | | 280 | |
| Corridor (10% of greater of APBO or assets) | | | 84 | | | 101 | |
| Net loss in excess of corridor | | | $ | — | | | $ | 179 | |
| Amortization years | | | 16.0 | | 16.6 |
The following tables provide a reconciliation of the benefit obligation and plan assets for the Retiree Medical Plan, Death Benefit Plan and Executive Death Benefit Plan:
| | | | | | | | | | | | | | |
| | | As of June 30, |
| (In thousands) | | 2022 | | 2021 |
| Change in Benefit Obligation: | | | | |
| Projected postretirement benefit obligation at beginning of year | | $ | 1,012 | | | $ | 10,739 | |
| Service cost | | — | | | 19 | |
| Interest cost | | 27 | | | 293 | |
| Participant contributions | | — | | | 233 | |
| | | | |
| Actuarial (gains) losses | | (195) | | | 151 | |
| Termination of benefits | | — | | | (9,290) | |
| Benefits paid | | — | | | (1,133) | |
| Projected postretirement benefit obligation at end of year | | $ | 844 | | | $ | 1,012 | |
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued) | | | | | | | | | | | | | | |
| | | Year Ended June 30, |
| (In thousands) | | 2022 | | 2021 |
| Change in Plan Assets: | | | | |
| Fair value of plan assets at beginning of year | | $ | — | | | $ | — | |
| | | | |
| Employer contributions | | — | | | 1,068 | |
| Participant contributions | | — | | | 232 | |
| Settlements | | — | | | (167) | |
| Benefits paid | | — | | | (1,133) | |
| Fair value of plan assets at end of year | | $ | — | | | $ | — | |
| Projected postretirement benefit obligation at end of year | | 844 | | | 1,012 | |
| Funded status of plan | | $ | (844) | | | $ | (1,012) | |
| | | | | | | | | | | | | | |
| | | June 30, |
| (In thousands) | | 2022 | | 2021 |
| Amounts Recognized in the Consolidated Balance Sheets Consist of: | | | | |
| | | | |
| Current liabilities | | $ | (57) | | | $ | (52) | |
| Noncurrent liabilities | | (787) | | | (960) | |
| Total | | $ | (844) | | | $ | (1,012) | |
| | | | | |
(In thousands) | |
Estimated Future Benefit Payments: | |
Year Ending: | |
June 30, 2023 | $ | 56 | |
June 30, 2024 | 58 | |
June 30, 2025 | 61 | |
June 30, 2026 | 63 | |
June 30, 2027 | 64 | |
June 30, 2028 to June 30, 2031 | 320 | |
| |
Expected Contributions: | |
June 30, 2023 | $ | 56 | |
Note 12. Debt Obligations
The following table summarizes the Company’s debt obligations:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | June 30, 2022 | | June 30, 2021 |
| (In thousands) | | Debt Origination Date | | Maturity | | Principal Amount Borrowed | | Carrying Value | | Weighted Average Interest Rate (1) | | Carrying Value | | Weighted Average Interest Rate |
| Revolver | | various | | 4/25/2025 | | N/A | | $ | 63,000 | | | 2.75 | % | | $ | 43,500 | | | 6.21 | % |
| Term Loan | | 4/26/2021 | | 4/25/2025 | | $ | 47,500 | | | 45,600 | | | 7.50 | % | | 47,500 | | | 7.50 | % |
| | | | | | | | 108,600 | | | | | 91,000 | | | |
| Unamortized deferred debt financing costs | | | | | | | | (1,677) | | | | | (2,222) | | | |
| Total | | | | | | | | $ | 106,923 | | | | | $ | 88,778 | | | |
__________
(1) The weighted average interest rate excludes the fixed rate on the de-designated Amended Rate Swap
On April 26, 2021, the Company repaid in full all of the outstanding loans and other amounts payable under the Amended and Restated Credit Agreement dated as of November 6, 2018, using proceeds of loans received pursuant to a refinancing under a new senior secured facility composed of (a) a Credit Agreement, dated as of April 26, 2021 (the “Revolver Credit Facility Agreement”) by and among the Company, Boyd Assets Co., FBC Finance Company, Coffee Bean Holding Co., Inc., Coffee Bean International, Inc. and China Mist Brands, Inc., as borrowers (collectively, the “Borrowers”), Wells Fargo Bank, N.A. (“Wells Fargo”), as administrative agent and lender, and the other lenders party thereto, and various loan documents relating thereto including the Guaranty and Security Agreement, dated as of April 26, 2021 (the “Revolver Security Agreement”), by and among the Borrowers, as grantors, and Wells Fargo, as administrative agent, and (b) a Credit Agreement, dated as of April 26, 2021 (the “Term Credit Facility Agreement”) by and among the Borrowers, MGG Investment Group LP. (“MGG”),
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)as administrative agent, and the lenders party thereto, and various loan documents relating thereto including the Guaranty and Security Agreement, dated as of April 26, 2021 (the “Term Security Agreement”), by and among the Borrowers, as grantors, and MGG, as administrative agent.
The following is a summary description of the Revolver Credit Facility Agreement and the Revolver Security Agreement key items.
The Revolver Credit Facility Agreement, among other things include:
1.a commitment of up to $80.0 million (“Revolver”) calculated as the lesser of (a) $80.0 million or (b) the amount equal to the sum of (i) 85% of eligible accounts receivable (less a dilution reserve), plus (ii) the lesser of: (a) 80% of eligible raw material inventory, eligible in-transit inventory and eligible finished goods inventory (collectively, “Eligible Inventory”), and (b) 85% of the net orderly liquidation value of eligible inventory, minus (c) applicable reserve;
2.sublimit on letters of credit of $10.0 million;
3.maturity date of April 25, 2025 and has no scheduled payback required on the principal prior to the maturity date;
4.fully collateralized by all existing and future capital stock of the Borrowers (other than the Company) and all of the Borrowers' personal and real property;
5.interest under the Revolver is either LIBOR + 2.25% per annum, with LIBOR floor 0.50%, or base rate + 1.25% per annum; and
6.in the event that Borrowers’ availability to borrow under the Revolver falls below $10.0 million, financial covenant requires the Company to have a fixed charge coverage ratio of at least 1.00:1.00 at all such times.
The Revolver Credit Facility Agreement and the Revolver Security Agreement contain customary affirmative and negative covenants and restrictions typical for a financing of this type that, among other things, require the Company to satisfy certain financial covenants and restrict the Company's and its subsidiaries' ability to incur additional debt, pay dividends and make distributions, make certain investments and acquisitions, repurchase its stock and prepay certain indebtedness, create liens, enter into agreements with affiliates, modify the nature of its business, transfer and sell material assets and merge or consolidate. Non-compliance with one or more of the covenants and restrictions could result in the full or partial principal balance of the Revolver Credit Facility Agreement becoming immediately due and payable and termination of the commitments.
The following is a summary description of the Term Credit Facility Agreement and the Term Security Agreement key items.
1.total commitment of $47.5 million in the form of a term loan (“Term Loan”);
2.maturity date of April 25, 2025 and has scheduled payback required on the principal prior to the maturity date;
3.fully collateralized by all existing and future capital stock of the Borrowers (other than the Company) and all of the Borrowers' personal and real property;
4.interest under the Term Loan is either LIBOR + 6.5% per annum, with LIBOR floor 1.00%, or base rate + 5.50% per annum, with a 3% floor on base rate; and
5.commencing on the fiscal quarter ending on March 31, 2022, quarterly minimum EBITDA and fixed charge coverage ratio requirements specified therein.
Principal payments on the Revolver and Term Loan debt obligations are due as follows:
| | | | | | | | |
| (In thousands) | | For the Years Ended June 30, |
| 2023 | | $ | 3,800 | |
| 2024 | | 3,800 | |
| 2025 | | 101,000 | |
| | |
| | |
| Total Revolver and Term Loan liabilities | | $ | 108,600 | |
The Term Credit Facility Agreement and the Term Security Agreement contain customary affirmative and negative covenants and restrictions typical for a financing of this type that, among other things, require the Company to satisfy certain financial covenants and restrict the Company's and its subsidiaries' ability to incur additional debt, pay dividends and make distributions, make certain investments and acquisitions, repurchase its stock and prepay certain indebtedness, create liens, enter into agreements with affiliates, modify the nature of its business, transfer and sell material assets and merge or consolidate. Non-compliance with one or more of the covenants and restrictions could result in the full or partial principal balance of the Term Credit Facility Agreement becoming immediately due and payable and termination of the commitments.
At June 30, 2022, the Company had outstanding borrowings on the Revolver Credit Facility of $63.0 million and had utilized $4.1 million of the letters of credit sublimit. Beginning the quarter ended March 31, 2022, the Company commenced quarterly principal payments due on the Term Loan debt obligation in the amount of $950 thousand.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)As of June 30, 2022, the Company was in compliance with all of the financial covenants under the Revolver Credit Facility Agreement and the Term Credit Facility Agreement. Furthermore, the Company believes it will be in compliance with the related financial covenants under these agreements for the next twelve months.
On August 8, 2022, the Company and certain of its subsidiaries entered into the Increase Joinder and Amendment No. 2 to Credit Agreement (the “Amendment”), with Wells Fargo Bank, N.A. See further discussion in Note 21, Subsequent Events.Note 13. Share-based Compensation
Farmer Bros. Co. Amended and Restated 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 “Original 2017 Plan”) which (i) replaced the Company's prior long-term incentive plans (the “Prior Plans”), and (ii) authorized the issuance of 900,000 shares of Common Stock plus 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 (“Outstanding Prior Plan Awards”). On December 9, 2020, the Company’s stockholders approved an amendment increasing the number of shares of Common Stock available for grant under the 2017 Plan to 2,050,000 plus the number of shares of Common Stock subject Outstanding Prior Plan Awards. On December 15, 2021, the Company’s stockholders approved an amendment (the “Plan Amendment”) to the 2017 Plan (as amended, the “Amended 2017 Plan”), which (i) increased the number of shares of Common Stock available for grant to 3,550,000 shares of Common Stock plus the number of shares of Common Stock subject to Outstanding Prior Plan Awards and (ii) allows the Company to utilize awards to attract and incentivize non-employee consultants.
The Amended 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 Amended 2017 Plan. Subject to certain limitations, shares of Common Stock covered by awards granted under the Amended 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 Amended 2017 Plan. As of June 30, 2022, there were 1,581,299 shares that remain available under the Amended 2017 Plan including shares that were forfeited under the Prior Plans for future issuance. Shares of Common Stock granted under the Amended 2017 Plan may be authorized but unissued shares, shares purchased on the open market or treasury shares. In no event will more than 3,550,000 shares of Common Stock be issuable pursuant to the exercise of incentive stock options under the Amended 2017 Plan.
The Amended 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 Amended 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 Amended 2017 Plan and the aggregate grant date fair value of all equity-based awards granted under the Amended 2017 Plan to any non-employee director during any calendar year for services as a member of the Board.
The Amended 2017 Plan contains a minimum vesting requirement, subject to limited exceptions, that awards made under the Amended 2017 Plan may not vest earlier than the date that is one year following the grant date of the award. The Amended 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 Amended 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 Amended 2017 Plan. The Amended 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, 2022, there were 99,537 shares that remain available under the 2020 Inducement Plan for future issuance.
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.
There were no options granted during fiscal year ended June 30, 2022. 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, 2021 and 2020:
| | | | | | | | | | | | | | | | |
| | | | | Year Ended June 30, |
| | | | | 2021 | | 2020 |
| Weighted average fair value of NQOs | | | | $ | 2.36 | | | $ | 4.24 | |
| Risk-free interest rate | | | | 0.3 | % | | 1.5 | % |
| Dividend yield | | | | — | % | | — | % |
| Average expected term | | | | 4.6 years | | 4.6 years |
| Expected stock price volatility | | | | 35.4 | % | | 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 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 year ended June 30, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Outstanding NQOs: | | Number of NQOs | | Weighted Average Exercise Price ($) | | Weighted Average Remaining Life (Years) | | Aggregate Intrinsic Value ($ in thousands) |
| Outstanding at June 30, 2021 | | 513,325 | | | 13.06 | | 5.17 | | 706 | |
| Granted | | — | | | — | | — | | — | |
| Exercised | | — | | | — | | — | | — | |
| Cancelled/Forfeited | | (21,535) | | | 16.21 | | — | | — | |
| Expired | | (41,103) | | | 19.05 | | — | | — | |
| Outstanding at June 30, 2022 | | 450,687 | | | 12.39 | | 4.34 | | — | |
| Exercisable, June 30, 2022 | | 292,890 | | | 12.80 | | 4.28 | | — | |
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 $4.69 at June 30, 2022 and $12.69 at June 30, 2021, 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 Common Stock at the time of exercise. NQOs outstanding that are expected to vest are net of estimated forfeitures.
There were no options exercised during fiscal year ended June 30, 2022. The company received no proceeds from exercises of vested NQOs in fiscal 2022 and 2021, respectively and $0.1 million in fiscal 2020.
As of June 30, 2022 and 2021, respectively, there was $0.2 million and $0.9 million of unrecognized compensation cost related to NQOs. The unrecognized compensation cost related to NQOs at June 30, 2022 is expected to be recognized over the weighted average period of 0.46 years. Total compensation expense for NQOs was $0.6 million, $0.7 million and $0.7 million in fiscal 2022, 2021 and 2020, respectively.
Non-qualified stock options with performance-based and time-based vesting (“PNQs”)
PNQ shares granted for each fiscal year are subject to forfeiture if a target modified net income goal is not attained. For this purpose, “Modified Net Income” is defined as net income (GAAP) before taxes and excluding any gains or losses from sales of assets, and excluding the effect of restructuring and other transition expenses. These PNQs have an exercise price equal the closing price of the Common Stock on the date of grant. One-third of the total number of shares subject to each such stock option vest ratably on each of the first three anniversaries of the grant date, contingent on continued employment, and subject to accelerated vesting in certain circumstances.
PNQ shares were not granted during the fiscal years ended June 30, 2022, 2021 and 2020.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)The following table summarizes PNQ activity for the year ended June 30, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Outstanding PNQs: | | Number of PNQs | | Weighted Average Exercise Price ($) | | Weighted AverageRemaining Life (Years) | | Aggregate Intrinsic Value ($ in thousands) |
| Outstanding at June 30, 2021 | | 11,750 | | | 29.76 | | 0.71 | | — | |
| Granted | | — | | | — | | — | | — | |
| Exercised | | — | | | — | | — | | — | |
| Cancelled/Forfeited | | — | | | — | | — | | — | |
| Expired | | (9,538) | | | 29.51 | | — | | — | |
| Outstanding at June 30, 2022 | | 2,212 | | | 30.91 | | 0.83 | | — | |
| Exercisable, June 30, 2022 | | 2,211 | | | 30.91 | | 0.83 | | — | |
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 closing price of Common Stock $4.69 at June 30, 2022 and $12.69 at June 30, 2021, representing the last trading day of the respective fiscal years, which would have been received by PNQ holders had all award holders exercised their PNQs that were in-the-money as of those dates. The aggregate intrinsic value of PNQ exercises in each fiscal period represents the difference between the exercise price and the value of the Common Stock at the time of exercise. PNQs outstanding that are expected to vest are net of estimated forfeitures.
There were no options exercised during the fiscal years ended June 30, 2022, 2021 and 2020.
As of June 30, 2022 and 2021, there was no unrecognized compensation cost related to PNQs. There was no compensation expense related to PNQs in fiscal years ended June 30, 2022, 2021 and 2020.
Restricted Stock
Restricted stock awards cliff vest on the earlier of the one year anniversary of the grant date or the date of the first annual meeting of the Company’s stockholders immediately following the grant date, in the case of non-employee directors, and the third anniversary of the grant date, in the case of eligible employees, in each case subject to continued service to the Company through the vesting date and the acceleration provisions of the award plan and restricted stock agreement. Restricted stock is expected to vest net of estimated forfeitures.
The following table summarizes restricted stock activity for the year ended June 30, 2022: | | | | | | | | | | | | | | |
| Outstanding and Nonvested Restricted Stock Awards: | | Shares Awarded | | Weighted Average Grant Date Fair Value ($) |
| Outstanding at June 30, 2021 | | 681,570 | | | 10.47 |
| Granted | | 551,967 | | | 7.20 |
| Vested | | (283,016) | | | 5.21 |
| Cancelled/Forfeited | | (133,710) | | | 6.94 |
| Outstanding and nonvested June 30, 2022 | | 816,811 | | | 6.67 |
The weighted average grant date fair value of RSUs granted during the years ended June 30, 2022, 2021 and 2020 were $7.20, $10.10, and $13.00, respectively. The total grant-date fair value of restricted stock granted during the year ended June 30, 2022 was $4.2 million. The total fair value of awards vested during the years ended June 30, 2022, 2021 and 2020 were $2.3 million, $0.7 million, and $0.4 million, respectively.
As of June 30, 2022 and 2021, there was $3.9 million and $2.8 million, respectively, of unrecognized compensation cost related to restricted stock. The unrecognized compensation cost related to restricted stock at June 30, 2022 is expected to be recognized over the weighted average period of 1.22 years. Total compensation expense for restricted stock was $2.1 million, $2.0 million and $1.1 million, for the fiscal years ended June 30, 2022, 2021 and 2020, respectively.
Performance-Based Restricted Stock Units (“PBRSUs”)
The PBRSU awards cliff vest on the third anniversary of the date of grant based on the Company’s achievement of certain financial performance goals during the performance periods, subject to certain continued employment conditions and subject to acceleration provisions of the award plan and restricted stock unit agreement. At the end of the three-year performance period, the number of PBRSUs that actually vest will be 0% to 200% of the target amount, depending on the extent to which the Company meets or exceeds the achievement of those financial performance goals measured over the full three-year performance period. PBRSUs are expected to vest net of estimated forfeitures.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)The following table summarizes PBRSU activity for the year ended June 30, 2022:
| | | | | | | | | | | | | | |
| Outstanding and Nonvested PBRSUs: | | PBRSUs Awarded | | Weighted Average Grant Date Fair Value ($) |
| Outstanding at June 30, 2021 | | 354,466 | | | 6.06 |
| Granted | | 158,659 | | | 8.91 |
| Vested | | (381) | | | 25.04 |
| Cancelled/Forfeited | | (55,751) | | | 13.27 |
| Outstanding and nonvested June 30, 2022 | | 456,993 | | | 6.16 |
The weighted average grant date fair value of PBRSUs granted during the years ended June 30, 2022, 2021 and 2020 were $8.91, $4.10, and $14.46, respectively. The total grant-date fair value of PBRSUs granted during the year ended June 30, 2022 was $1.4 million. The total fair value of awards vested during the years ended June 30, 2022 and 2021 were $3.2 thousand and $3.0 thousand, respectively. No PBRSUs vested during the year ended June 30, 2020.
As of June 30, 2022 and 2021, there was $1.7 million and $1.0 million, respectively, of unrecognized compensation cost related to PBRSUs. The unrecognized compensation cost related to PBRSUs at June 30, 2022 is expected to be recognized over the weighted average period of 1.92 years. Total compensation expense for PBRSUs was $0.6 million for the year ended June 30, 2022, $0.1 million for the year ended June 30, 2021 and $0.2 million for the year ended June 30, 2020.
Cash-Settled Restricted Stock Units (“CSRSUs”)
In December 2020, the Company granted CSRSUs under the 2017 Plan to certain employees. CSRSUs vest in equal installments over a three-year period from the grant date, and are cash-settled upon vesting based on the Common Stock's closing share price on the vesting date.
The CSRSUs are accounted for as liability awards, and compensation expense is measured at fair value on the date of grant and recognized on a straight-line basis over the vesting period net of forfeitures. Compensation expense is remeasured at each reporting date with a cumulative adjustment to compensation cost during the period based on changes in the Common Stock's closing share price.
The following table summarizes CSRSU activity during the year ended June 30, 2022:
| | | | | | | | | | | | | | |
| Outstanding and Nonvested CSRSUs: | | CSRSUs Awarded | | Weighted Average Grant Date Fair Value ($) |
| Outstanding at June 30, 2021 | | 185,602 | | | 4.31 |
| Granted | | 85,851 | | | 8.91 |
| Vested | | (52,583) | | | 4.31 |
| Cancelled/Forfeited | | (73,225) | | | 5.63 |
| Outstanding and nonvested June 30, 2022 | | 145,645 | | | 6.36 |
The weighted average grant date fair value of CSRSUs granted during the years ended June 30, 2022 and 2021 were $8.91 and $4.31, respectively. The total grant-date fair value of CSRSUs granted during the year ended June 30, 2022 was $0.8 million. The total fair value of awards vested during the years ended June 30, 2022 was $0.4 million. No CSRSUs vested during the year ended June 30, 2021 and 2020.
At June 30, 2022 and 2021, there was $0.6 million and $2.0 million, respectively, of unrecognized compensation cost related to CSRSU. The unrecognized compensation cost related to CSRSU at June 30, 2022 is expected to be recognized over the weighted average period of 1.76 years. Total compensation expense for CSRSUs was $0.1 million and $0.4 million for the years ended June 30, 2022 and 2021, respectively.
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 June 30, 2022 and 2021, there was no unrecognized PCA compensation cost. Total compensation expense for PCAs was $72.3 thousand for the fiscal year ended June 30, 2020.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)Note 14. Other Current Liabilities
Other current liabilities consist of the following:
| | | | | | | | | | | | | | |
| | | As of June 30, |
| (In thousands) | | 2022 | | 2021 |
| Other (1) | | $ | 4,955 | | | $ | 3,116 | |
| Accrued workers’ compensation liabilities | | 947 | | | 1,016 | |
| Finance lease liabilities | | 193 | | | 192 | |
| Cumulative preferred dividends, undeclared and unpaid | | — | | | 2,051 | |
| | | | |
| | | | |
| Accrued postretirement benefits | | — | | | 50 | |
| Other current liabilities | | $ | 6,095 | | | $ | 6,425 | |
___________
(1) Includes accrued property taxes, sales and use taxes and insurance liabilities.
Note 15. Other Long-Term Liabilities
Other long-term liabilities include the following: | | | | | | | | | | | |
| As of June 30, |
| (In thousands) | 2022 | | 2021 |
| Derivative liabilities—noncurrent | $ | — | | | $ | 1,653 | |
| Deferred compensation (1) | 195 | | | 1,716 | |
| Finance lease liabilities | 409 | | | 563 | |
| Deferred income taxes (2) | 735 | | | 1,160 | |
| Other long-term liabilities | $ | 1,339 | | | $ | 5,092 | |
___________
(1) Includes performance cash awards liability and payroll taxes.
(2) Includes deferred tax liabilities that have an indefinite reversal pattern.
Note 16. Income Taxes
The current and deferred components of the provision for income taxes consist of the following:
| | | | | | | | | | | | | | | | | | | | |
| | | For the Years Ended June 30, |
| (In thousands) | | 2022 | | 2021 | | 2020 |
| | | | | | |
| | | | | | |
| Current: | | | | | | |
| Federal | | $ | — | | | $ | (22) | | | $ | — | |
| State | | 124 | | | 213 | | | 105 | |
| Total current income tax expense | | 124 | | | 191 | | | 105 | |
| Deferred: | | | | | | |
| Federal | | (83) | | | 10,901 | | | (458) | |
| State | | (342) | | | 2,503 | | | 158 | |
| Total deferred income tax (benefit) expense | | (425) | | | 13,404 | | | (300) | |
| Income tax (benefit) expense | | $ | (301) | | | $ | 13,595 | | | $ | (195) | |
A reconciliation of income tax expense to the federal statutory tax rate is as follows:
| | | | | | | | | | | | | | | | | | | | |
| | For the Years Ended June 30, |
| (In thousands) | | 2022 | | 2021 | | 2020 |
| Statutory tax rate | | 21% | | 21% | | 21% |
| Income tax benefit at statutory rate | | $ | (3,352) | | | $ | (5,892) | | | $ | (7,829) | |
| State income tax (net of federal tax benefit) | | (754) | | | (736) | | | (1,523) | |
| | | | | | |
| Valuation allowance | | 4,305 | | | 4,504 | | | 9,153 | |
| | | | | | |
| Change in tax rate | | (210) | | | 1,055 | | | 233 | |
| | | | | | |
| Post-retirement medical plan and other offset in OCI | | — | | | 13,738 | | | — | |
| | | | | | |
| Other (net) | | (290) | | | 926 | | | (229) | |
| Income tax (benefit) expense | | $ | (301) | | | $ | 13,595 | | | $ | (195) | |
| | | | | | |
Our federal corporate tax rate is 21%, 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.
For the years ended June 30, 2022, 2021 and 2020, the Company’s income tax expense includes an increase in the valuation allowance related to the Company’s operating losses.
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) | | 2022 | | 2021 |
| Deferred tax assets: | | | | |
| Postretirement benefits | | $ | 7,284 | | | $ | 9,364 | |
| Accrued liabilities | | 4,759 | | | 4,245 | |
| 163(j) Interest Limitation | | 4,040 | | | 3,069 | |
| Net operating loss carryforward | | 51,413 | | | 48,195 | |
| Intangible assets | | 6,936 | | | 7,377 | |
| Right-of-use operating lease liabilities | | 7,041 | | | 6,592 | |
| Other | | 7,650 | | | 6,292 | |
| Total deferred tax assets | | 89,123 | | | 85,134 | |
| Deferred tax liabilities: | | | | |
| | | | |
| Property, plant and equipment | | (15,726) | | | (15,448) | |
| | | | |
| Right-of-use operating lease assets | | (7,174) | | | (6,606) | |
| Other | | (79) | | | 72 | |
| Total deferred tax liabilities | | (22,979) | | | (21,982) | |
| Valuation allowance | | (66,879) | | | (64,312) | |
| Net deferred tax liability | | $ | (735) | | | $ | (1,160) | |
At June 30, 2022, the Company had approximately $185.9 million of federal and $160.1 million of state net operating loss carryforwards that will begin to expire in the years ending June 30, 2038 and June 30, 2023, respectively. Net operating losses of $51.8 million in federal and $6.9 million of state are indefinite lived and will not expire. Additionally, at June 30, 2022, the Company had $3.2 million of federal and state tax credits.
In assessing if the deferred tax assets will be realized, 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, 2022, 2021 and 2020, 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 Consolidated Balance Sheets were $66.9 million and $64.3 million to reduce deferred tax assets as of June 30, 2022 and 2021, respectively.
As of, and for the three years ended June 30, 2022, 2021 and 2020, the Company had no significant uncertain tax positions.
On August 16, 2022 the Inflation Reduction Act of 2022 was signed into law. The Company does not anticipate any material impact to our consolidated financial statements.
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, 2019. 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, 2022 and 2021, 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, 2022, 2021 and 2020.
Note 17. Net (Loss) Per Common Share
Basic net (loss) per common share is calculated by dividing net (loss) attributable to the Company by the weighted average number of common shares outstanding during the periods presented. Diluted net (loss) per common share is calculated by dividing diluted net (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
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)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 loss per common share:
| | | | | | | | | | | | | | | | | | | | |
| | For the Years Ended June 30, |
| (In thousands, except share and per share amounts) | | 2022 | | 2021 | | 2020 |
| Undistributed net loss available to common stockholders | | $ | (15,626) | | | $ | (40,710) | | | $ | (37,462) | |
| Undistributed net loss available to nonvested restricted stockholders and holders of convertible preferred stock | | (629) | | | (1,515) | | | (179) | |
| Net loss available to common stockholders—basic | | $ | (16,255) | | | $ | (42,225) | | | $ | (37,641) | |
| | | | | | |
| Weighted average common shares outstanding—basic | | 18,200,080 | | | 17,635,402 | | | 17,205,849 | |
| Effect of dilutive securities: | | | | | | |
| Shares issuable under stock options | | — | | | — | | | — | |
| | | | | | |
| | | | | | |
| Weighted average common shares outstanding—diluted | | 18,200,080 | | | 17,635,402 | | | 17,205,849 | |
| Net loss per common share available to common stockholders—basic | | $ | (0.89) | | | $ | (2.39) | | | $ | (2.19) | |
| Net loss per common share available to common stockholders—diluted | | $ | (0.89) | | | $ | (2.39) | | | $ | (2.19) | |
The following table summarizes anti-dilutive securities excluded from the computation of diluted net loss per common share for the periods indicated:
| | | | | | | | | | | | | | | | | | | | |
| | For the Years Ended June 30, |
| | 2022 | | 2021 | | 2020 |
| Shares issuable under stock options | | 452,537 | | | 395,069 | | | 330,627 | |
| Shares issuable under convertible preferred stock | | 452,667 | | | 437,165 | | | 422,193 | |
| Shares issuable under PBRSUs | | 426,243 | | | 376,264 | | | 73,012 | |
Note 18. Commitments and Contingencies
Purchase Commitments
As of June 30, 2022, the Company had committed to purchase green coffee inventory totaling $102.1 million under fixed-price contracts and $20.0 million in inventory and other purchases under non-cancelable purchase orders.
Boyd Coffee Acquisition
In connection with the Company's acquisition of Boyd Coffee ("Seller") on October 2, 2017, the Company withheld 914 shares of Series A Preferred Stock pending satisfaction of certain indemnification claims against the Seller. The fair value of shares withheld is $103 thousand based on the stated value and deemed conversion price as defined in the asset purchase agreement, and our current share price as of June 30, 2022. As previously disclosed, all other obligations under asset purchase agreement have been satisfied.
On July 26, 2022, the Company and the seller have entered into a settlement agreement regarding the retention and cancellation of 914 Holdback Shares and the reacquisition on a cashless basis and cancellation of 1,736 shares of Series A Preferred Stock issued to Seller at the closing of the transactions contemplated by the Boyd Purchase Agreement.
Effective August 25, 2022, the Seller, converted the remaining Series A Preferred Stock into shares of the Company’s common stock. See Note 20, Preferred Stock for additional information regarding the terms of the Series A Preferred Stock and the conversion.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 and civil penalties in the amount of the statutory maximum of $2,500 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.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)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.
A series of procedural and legislative developments occurred in the ensuing years, and at hearings in August 2020, the Court denied CERT’s motion for summary judgment and granted the JDG’s motion for summary judgment. Notice of Judgment in favor of defendants was entered on October 6, 2020. CERT has appealed.
The Company believes that the likelihood that the Company will ultimately incur a loss in connection with this litigation is less than reasonably possible.
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 19. 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.
The Company disaggregates net sales from contracts with customers based on the characteristics of the products sold:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Years Ended June 30, |
| | 2022 | | 2021 | | 2020 |
| (In thousands) | | $ | | % of total | | $ | | % of total | | $ | | % of total |
| Net Sales by Product Category: | | | | | | | | | | | | |
| Coffee (Roasted) | | $ | 302,324 | | | 64.4 | % | | $ | 263,400 | | | 66.2 | % | | $ | 328,465 | | | 65.5 | % |
| | | | | | | | | | | | |
| Tea & Other Beverages (1) | | 84,397 | | | 18.0 | % | | 69,482 | | | 17.5 | % | | 98,971 | | | 19.7 | % |
| Culinary | | 56,160 | | | 12.0 | % | | 44,986 | | | 11.3 | % | | 50,135 | | | 10.0 | % |
| Spices | | 22,248 | | | 4.7 | % | | 18,680 | | | 4.7 | % | | 21,473 | | | 4.3 | % |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| Net sales by product category | | 465,129 | | | 99.1 | % | | 396,548 | | | 99.7 | % | | 499,044 | | | 99.5 | % |
| Delivery Surcharge | | 4,064 | | | 0.9 | % | | 1,302 | | | 0.3 | % | | 2,276 | | | 0.5 | % |
| Net sales | | $ | 469,193 | | | 100.0 | % | | $ | 397,850 | | | 100.0 | % | | $ | 501,320 | | | 100.0 | % |
____________
(1)Includes all beverages other than roasted coffee, including frozen liquid coffee, and iced and hot tea, including cappuccino, cocoa, granitas, and concentrated and ready-to drink cold brew and iced coffee.
The Company does not have any material contract assets and liabilities as of June 30, 2022. Receivables from contracts with customers are included in “Accounts receivable, net” on the Company’s consolidated balance sheets. At June 30, 2022, and 2021, “Accounts receivable, net” included, $44.2 million, and $37.2 million respectively, in receivables from contracts with customers.
Note 20. 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 and 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, 2022, the Company had 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 Common Stock. On an as converted basis, holders of Series A Preferred Stock are entitled to vote together with the holders of the Common Stock and are
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)entitled to share in the dividends on the Common Stock, when declared. Each share of Series A Preferred Stock is convertible into the number of shares of the 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. We may, at our election and if certain conditions are met, mandate the conversion of all the Series A Preferred Stock. Series A Preferred Stock is a perpetual stock and is not 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, 2022, 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 | | | $ | 1,180 | | | $ | 17,346 | | | $ | 2,646 | | | $ | 17,346 | |
Effective August 25, 2022, 12,964 shares of Series A Preferred Stock issued were converted into 399,208 shares of the Company’s common stock, par value $1.00 per share, at a conversion price of $38.32, in accordance with the terms of the Company’s Designation of Series A Preferred Stock. The shares of Series A Preferred Stock were originally issued to Boyd Coffee Company (now known as BCC Newco, Inc.) (“BCC”), on October 2, 2017, pursuant to that certain Asset Purchase Agreement, dated as of August 18, 2017, by and among the Company, Boyd Assets Co., a Delaware corporation and wholly owned subsidiary of the Company, BCC and each of the parties set forth on Exhibit A thereto. The shares of Series A Preferred Stock converted represented all of the issued and outstanding shares of Series A Preferred Stock.
Note 21. Subsequent Events
On August 8, 2022, the Company and certain of its subsidiaries entered into the Increase Joinder and Amendment No. 2 to Credit Agreement (the “2nd Amendment”), with Wells Fargo Bank, N.A., as administrative agent for each member of the lender group and as a lender. The 2nd Amendment amends that certain Revolver Credit Facility Agreement, originally entered into by the parties on April 26, 2021, which governs the Company’s revolving credit facility. The 2nd Amendment amends certain terms and conditions of the Revolver Credit Facility Agreement by, among other things: (i) increasing the maximum revolver amount by $10,000,000 to an aggregate maximum revolver commitment amount of $90,000,000; and (ii) replacing the London Interbank Offered Rate (LIBOR) interest rate benchmark (which had an applicable margin of 2.25% for LIBOR rate loans) with the secured overnight financing rate (SOFR) interest rate benchmark (which has an applicable margin of 1.75% for SOFR rate loans).
On August 31, 2022, the Company entered into Amendment No. 3 to Credit Agreement (the “3rd Amendment”), with the lenders party thereto, and Wells Fargo Bank, N.A., as administrative agent for each member of the lender group and as a lender. The 3rd Amendment amends certain terms and conditions of the Revolver Credit Facility Agreement by, among other things: (i) adding a new $47.0 million term loan (the “Term Loan”); (ii) extending the maturity date of the Company’s obligations under the Revolver Credit Facility Agreement from April 25, 2025 to April 26, 2027; provided, that if the maturity date of the Revolver Commitments is extended on or prior to April 1, 2027 to a date that is after April 26, 2027, then the maturity of the Term Loan shall be August 31, 2037; (iii) releasing liens securing the obligations under the Revolver Facility Credit Agreement on various real properties owned by the Company; (iv) commencing on or around June 30, 2023, obligating the Company to maintain a Fixed Charge Coverage Ratio, calculated for each 12-month period ending on the last day of each fiscal month, of at least 1:00 to 1:00; and (v) lowering the Letter of Credit Fee payable with respect to letters of credit issued under the Credit Agreement from 2.25% to 1.75% of the average amount of the Letter of Credit Usage during the immediately preceding month. The proceeds of the Term Loan were used to repay the outstanding term loans under the Term Credit Facility Agreement. With the repayment of the Company’s outstanding loans and other obligations under the Term Credit Facility Agreement, the Company is no longer subject to the minimum EBITDA covenants contained therein.
