UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)



þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, ~~2016~~2017



¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number: 001-34249

FARMER BROS. CO.

(Exact Name of Registrant as Specified in Its Charter)



Delaware		95-0725980
(State of Incorporation)		(I.R.S. Employer Identification No.)
1912 Farmer Brothers Drive, Northlake, Texas 76262
(Address of Principal Executive Offices; Zip Code)

888-998-2468
(Registrant’s Telephone Number, Including Area Code)

13601 North Freeway, Suite 200, Fort Worth, Texas 76177
(Former Address, if Changed Since Last Report

~~13601 North Freeway, Suite 200, Fort Worth, Texas 76177~~

~~(Address of Principal Executive Offices; Zip Code)~~

~~888-998-2468~~

~~(Registrant’s Telephone Number, Including Area Code)~~

~~20333 South Normandie Avenue, Torrance, California 90502~~

~~(Former Address, if Changed Since Last Report)~~

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES ý NO ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES ý NO ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting ~~company”~~company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. ~~(Check one):~~



Large accelerated filer	¨	¨	Accelerated filer	ý
Non-accelerated filer	¨	¨ ~~(Do~~(Do not check if a smaller reporting company)	Smaller reporting company	¨
			Emerging growth company	¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the
Exchange Act.	¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES ¨ NO ý

As of May ~~5, 2016,~~9, 2017, the registrant had ~~16,769,029~~16,844,216 shares outstanding of its common stock, par value $1.00 per share, which is the registrant’s only class of common stock.

TABLE OF CONTENTS



	Page
PART I – FINANCIAL INFORMATION (UNAUDITED)

Item 1. Financial Statements	1

Condensed Consolidated Balance Sheets at March 31, ~~2016~~2017 and June 30, ~~2015~~2016	1

Condensed Consolidated Statements of Operations for the Three and Nine Months Ended March 31, ~~2016~~2017 and ~~2015~~2016	2

Condensed Consolidated Statements of Comprehensive Income ~~(Loss)~~ for the Three and Nine Months Ended March 31, ~~2016~~2017 and ~~2015~~2016	3

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended March 31, ~~2016~~2017 and ~~2015~~2016	4

Notes to Condensed Consolidated Financial Statements	6

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	3132

Item 3. Quantitative and Qualitative Disclosures About Market Risk	4448

Item 4. Controls and Procedures	4551

PART II – OTHER INFORMATION

Item 1. Legal Proceedings	4652

Item 1A. Risk Factors	52

Item 6. Exhibits	4752

SIGNATURES	4853

EXHIBIT INDEX	4954

PART I - FINANCIAL INFORMATION (UNAUDITED)

Item 1. Financial Statements

FARMER BROS. CO.

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(In thousands, except share and per share data)



	March 31, 2017			June 30, 2016
ASSETS
Current assets:
Cash and cash equivalents	$	5,727		$	21,095
Short-term investments	26,541			25,591
Accounts and notes receivable, net	50,426			44,364
Inventories	60,712			46,378
Income tax receivable	293			247
Short-term derivative assets	—			3,954
Prepaid expenses	4,789			4,557
Assets held for sale	—			7,179
Total current assets	148,488			153,365
Property, plant and equipment, net	171,977			118,416
Goodwill	9,940			272
Intangible assets, net	19,172			6,219
Other assets	7,311			9,933
Deferred income taxes	66,046			80,786
Total assets	$	422,934		$	368,991
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	45,216			23,919
Accrued payroll expenses	18,168			24,540
Short-term borrowings under revolving credit facility	44,175			109
Short-term obligations under capital leases	1,131			1,323
Short-term derivative liabilities	339			—
Other current liabilities	7,074			6,946
Total current liabilities	116,103			56,837
Accrued pension liabilities	67,331			68,047
Accrued postretirement benefits	20,183			20,808
Accrued workers’ compensation liabilities	10,248			11,459
Other long-term liabilities-capital leases	389			1,036
Other long-term liabilities	600			28,210
Total liabilities	$	214,854		$	186,397
Commitments and contingencies (Note 20)
Stockholders’ equity:
Preferred stock, $1.00 par value, 500,000 shares authorized and none issued	—			—
Common stock, $1.00 par value, 25,000,000 shares authorized; 16,841,650 and 16,781,561 shares issued and outstanding at March 31, 2017 and June 30, 2016, respectively	16,842			16,782
Additional paid-in capital	40,704			39,096
Retained earnings	220,070			196,782
Unearned ESOP shares	(4,289		)	(6,434		)
Accumulated other comprehensive loss	(65,247		)	(63,632		)
Total stockholders’ equity	$	208,080		$	182,594
Total liabilities and stockholders’ equity	$	422,934		$	368,991

March 31, 2016 June 30, 2015
ASSETS
Current assets:
Cash and cash equivalents $ 13,330
$ 15,160
Restricted cash —
1,002
Short-term investments 24,814
23,665
Accounts and notes receivable, net 46,568
40,161
Inventories 54,550
50,522
Income tax receivable 605
535
Short-term derivative assets 1,039
—
Prepaid expenses 4,091
4,640
Assets held for sale 9,326
—
Total current assets 154,323
135,685
Property, plant and equipment, net 100,871
90,201
Goodwill and intangible assets, net 6,541
6,691
Other assets 7,815
7,615
Deferred income taxes 751
751
Total assets $ 270,301
$ 240,943
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable $ 27,186
$ 27,023
Accrued payroll expenses 22,863
23,005
Short-term borrowings under revolving credit facility 307
78
Short-term obligations under capital leases 1,871
3,249
Short-term derivative liabilities —
3,977
Deferred income taxes 1,390
1,390
Other current liabilities 6,941
6,152
Total current liabilities 60,558
64,874
Accrued pension liabilities 47,215
47,871
Accrued postretirement benefits 23,087
23,471
Accrued workers’ compensation liabilities 11,383
10,964
Other long-term liabilities—capital leases 1,247
2,599
Other long-term liabilities 19,254
225
Deferred income taxes 1,000
928
Total liabilities $ 163,744
$ 150,932
Commitments and contingencies (Note 17)

Stockholders’ equity:
Preferred stock, $1.00 par value, 500,000 shares authorized and none issued $ —
$ —
Common stock, $1.00 par value, 25,000,000 shares authorized; 16,769,029 and 16,658,148 issued and outstanding at March 31, 2016 and June 30, 2015, respectively 16,769
16,658
Additional paid-in capital 38,171
38,143
Retained earnings 112,543
106,864
Unearned ESOP shares (6,434 ) (11,234 )
Accumulated other comprehensive loss (54,492 ) (60,420 )
Total stockholders’ equity $ 106,557
$ 90,011
Total liabilities and stockholders’ equity $ 270,301
$ 240,943

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

FARMER BROS. CO.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(In thousands, except share and per share data)


	Three Months Ended March 31,						Nine Months Ended March 31,						Three Months Ended March 31,						Nine Months Ended March 31,
	2016			2015			2016			2015			2017			2016			2017			2016
Net sales	$	134,468		$	132,507		$	410,220		$	413,300		$	138,187		$	134,468		$	407,700		$	410,220
Cost of goods sold	81,908			85,938			254,173			265,468			84,367			81,908			247,586			254,173
Gross profit	52,560			46,569			156,047			147,832			53,820			52,560			160,114			156,047
Selling expenses	38,447			37,653			112,741			115,702			40,377			38,447			117,912			112,741
General and administrative expenses	10,977			6,618			29,951			22,513			9,196			10,977			31,925			29,951
Restructuring and other transition expenses	3,169			3,596			13,855			4,570			2,547			3,169			9,542			13,855
Net gain from sale of spice assets	(335		)	—			(5,441		)	—
Net (gains) losses from sales of assets	(4		)	107			(163		)	346
Net gain from sale of Torrance Facility													—			—			(37,449		)	—
Net gains from sale of Spice Assets													(272		)	(335		)	(764		)	(5,441		)
Net gains from sales of other assets													(86		)	(4		)	(1,525		)	(163		)
Operating expenses	52,254			47,974			150,943			143,131			51,762			52,254			119,641			150,943
Income (loss) from operations	306			(1,405		)	5,104			4,701
Income from operations													2,058			306			40,473			5,104
Other income (expense):
Dividend income	288			294			840			879			273			288			808			840
Interest income	139			364			359			543			147			139			435			359
Interest expense	(111		)	(474		)	(341		)	(889		)	(517		)	(111		)	(1,430		)	(341		)
Other, net	613			(1,569		)	35			(2,163		)	1,044			613			(1,088		)	35
Total other income (expense)	929			(1,385		)	893			(1,630		)	947			929			(1,275		)	893
Income (loss) before taxes	1,235			(2,790		)	5,997			3,071
Income tax expense (benefit)	43			(218		)	318			232
Net income (loss)	$	1,192		$	(2,572	)	$	5,679		$	2,839
Net income (loss) per common share—basic	$	0.07		$	(0.16	)	$	0.34		$	0.18
Net income (loss) per common share—diluted	$	0.07		$	(0.16	)	$	0.34		$	0.17
Income before taxes													3,005			1,235			39,198			5,997
Income tax expense													1,411			43			15,910			318
Net income													$	1,594		$	1,192		$	23,288		$	5,679
Net income per common share—basic													$	0.10		$	0.07		$	1.40		$	0.34
Net income per common share—diluted													$	0.10		$	0.07		$	1.39		$	0.34
Weighted average common shares outstanding—basic	16,539,479			16,223,981			16,486,469			16,200,747			16,605,754			16,539,479			16,584,125			16,486,469
Weighted average common shares outstanding—diluted	16,647,415			16,223,981			16,614,275			16,343,138			16,721,774			16,647,415			16,704,200			16,614,275

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

FARMER BROS. CO.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(In thousands)



	Three Months Ended March 31,						Nine Months Ended March 31,
	2017			2016			2017			2016
Net income	$	1,594		$	1,192		$	23,288		$	5,679
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on derivative instruments designated as cash flow hedges	104			(1,245		)	(1,249		)	(5,575		)
(Gains) losses on derivative instruments designated as cash flow hedges reclassified to cost of goods sold	(516		)	2,677			(366		)	11,504
Total comprehensive income, net of tax	$	1,182		$	2,624		$	21,673		$	11,608

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.



FARMER BROS. CO.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
	Nine Months Ended March 31,
	2017			2016
Cash flows from operating activities:
Net income	$	23,288		$	5,679
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	16,613			15,721
(Recovery of) provision for doubtful accounts	(44		)	432
Interest on sale-leaseback financing obligation	681			—
Restructuring and other transition expenses, net of payments	2,191			(1,939		)
Deferred income taxes	15,766			72
Net gain from sale of Torrance Facility	(37,449		)	—
Net gains from sales of Spice Assets and other assets	(2,289		)	(5,604		)
ESOP and share-based compensation expense	2,996			3,488
Net losses on derivative instruments and investments	793			11,839
Change in operating assets and liabilities:
Restricted cash	—			1,002
Purchases of trading securities held for investment	(4,216		)	(5,938		)
Proceeds from sales of trading securities held for investment	2,911			4,909
Accounts and notes receivable	(3,994		)	(6,503		)
Inventories	(13,242		)	(4,452		)
Income tax receivable	(46		)	(70		)
Derivative assets (liabilities), net	3,845			(11,580		)
Prepaid expenses and other assets	(203		)	865
Accounts payable	11,293			(997		)
Accrued payroll expenses and other current liabilities	(5,712		)	3,209
Accrued postretirement benefits	(624		)	(384		)
Other long-term liabilities	(2,028		)	(337		)
Net cash provided by operating activities	$	10,530		$	9,412
Cash flows from investing activities:
Acquisition of businesses, net of cash acquired	$	(25,853	)	$	—
Purchases of property, plant and equipment	(35,497		)	(16,193		)
Purchases of construction-in-progress assets for New Facility	(26,653		)	(13,492		)
Proceeds from sales of property, plant and equipment	3,984			5,990
Net cash used in investing activities	$	(84,019	)	$	(23,695	)
(continued on next page)



FARMER BROS. CO.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
	Nine Months Ended March 31,
	2017			2016
Cash flows from financing activities:
Proceeds from revolving credit facility	$	67,583		$	314
Repayments on revolving credit facility	(23,517		)	(86		)
Proceeds from sale-leaseback financing obligation	42,455			—
Proceeds from New Facility lease financing	7,662			13,492
Repayments of New Facility lease financing	(35,772		)	—
Payments of capital lease obligations	(1,107		)	(2,710		)
Payment of financing costs	—			(8		)
Proceeds from stock option exercises	823			1,610
Tax withholding payment - net share settlement of equity awards	(6		)	(159		)
Net cash provided by financing activities	$	58,121		$	12,453
Net decrease in cash and cash equivalents	$	(15,368	)	$	(1,830	)
Cash and cash equivalents at beginning of period	21,095			15,160
Cash and cash equivalents at end of period	$	5,727		$	13,330



Supplemental disclosure of non-cash investing and financing activities:
Equipment acquired under capital leases	$	353		$	190
Net change in derivative assets and liabilities included in other comprehensive income, net of tax	$	(1,615	)	$	5,929
Construction-in-progress assets under New Facility lease	$	—		$	5,662
New Facility lease obligation	$	—		$	5,662
Non-cash additions to property, plant and equipment	$	8,515		$	1,576
Non-cash portion of earnout receivable recognized-Spice Assets sale	$	229		$	335
Non-cash portion of earnout payable recognized-China Mist acquisition	$	500		$	—
Non-cash portion of earnout payable recognized-West Coast Coffee acquisition	$	600		$	—
Option costs paid with exercised shares	$	174		$	—

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

FARMER BROS. CO.

~~CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)~~

~~(In thousands)~~

Three Months Ended March 31, Nine Months Ended March 31,
2016 2015 2016 2015
Net income (loss) $ 1,192
$ (2,572 ) $ 5,679
$ 2,839
Other comprehensive income (loss), net of tax:
Unrealized losses on derivative instruments designated as cash flow hedges (1,245 ) (9,117 ) (5,575 ) (11,700 )
Losses (gains) on derivative instruments designated as cash flow hedges reclassified to cost of goods sold 2,677
375
11,504
(9,467 )
Total comprehensive income (loss), net of tax $ 2,624
$ (11,314 ) $ 11,608
$ (18,328 )

~~The accompanying notes are an integral part of these unaudited consolidated financial statements.~~

~~FARMER BROS. CO.~~

~~CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (In thousands)~~

Nine Months Ended March 31,
2016 2015
Cash flows from operating activities:
Net income $ 5,679
$ 2,839
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 15,721
18,554
Provision for doubtful accounts 432
186
Restructuring and other transition expenses, net of payments (1,939 ) 2,679
Deferred income taxes 72
96
Net (gains) losses from sales of assets (5,604 ) 346
ESOP and share-based compensation expense 3,488
4,294
Net losses (gains) on derivative instruments and investments 11,839
(7,058 )
Change in operating assets and liabilities:
Restricted cash 1,002
(7,192 )
Purchases of trading securities held for investment (5,938 ) (3,209 )
Proceeds from sales of trading securities held for investment 4,909
2,151
Accounts and notes receivable (6,503 ) (2,255 )
Inventories (4,452 ) 13,659
Income tax receivable (70 ) (443 )
Derivative (assets) liabilities, net (11,580 ) 1,308
Prepaid expenses and other assets 865
1,287
Accounts payable (997 ) (15,166 )
Accrued payroll expenses and other current liabilities 3,209
(6,207 )
Accrued postretirement benefits (384 ) (691 )
Other long-term liabilities (337 ) (666 )
Net cash provided by operating activities $ 9,412
$ 4,512
Cash flows from investing activities:
Acquisition of business —
(1,200 )
Purchases of property, plant and equipment (16,193 ) (13,563 )
Purchases of construction-in-progress assets under Texas facility lease (13,492 ) —
Proceeds from sales of property, plant and equipment 5,990
214
Net cash used in investing activities $ (23,695 ) $ (14,549 )
Cash flows from financing activities:
Proceeds from revolving credit facility 314
59,748
Repayments on revolving credit facility (86 ) (50,200 )
Proceeds from Texas facility lease financing 13,492
—
Payment of financing costs (8 ) (244 )
Payments of capital lease obligations (2,710 ) (2,999 )
Proceeds from stock option exercises 1,610
1,267
Tax withholding payment related to net share settlement of equity awards (159 ) (116 )
Net cash provided by financing activities $ 12,453
$ 7,456
Net decrease in cash and cash equivalents $ (1,830 ) $ (2,581 )
Cash and cash equivalents at beginning of period $ 15,160
$ 11,993
Cash and cash equivalents at end of period $ 13,330
$ 9,412

~~(continued on next page)~~

~~FARMER BROS. CO.~~

~~CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (continued from previous page)~~

~~(In thousands)~~

Nine Months Ended March 31,
2016 2015
Supplemental disclosure of non-cash investing and financing activities:
    Equipment acquired under capital leases $ 190
$ 55
        Net change in derivative assets and liabilities
           included in other comprehensive income (loss)
$ 5,929
$ (21,167 )
Construction-in-progress assets under Texas facility lease $ 5,662
$ —
Texas facility lease obligation $ 5,662
$ —
    Non-cash additions to equipment $ 1,576
$ 148
    Non-cash portion of earnout recognized $ 335
$ —

~~The accompanying notes are an integral part of these unaudited consolidated financial statements.~~

~~FARMER BROS. CO.~~

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

~~(UNAUDITED)~~

Note 1. Introduction and Basis of Presentation

Overview

Farmer Bros. Co., a Delaware corporation (including its consolidated subsidiaries unless the context otherwise requires, the “Company,” or “Farmer Bros.”), is a national coffee roaster, wholesaler and distributor of coffee, tea and culinary products. The Company serves a wide variety of customers, from small independent restaurants and foodservice operators to large institutional buyers like restaurant and convenience store chains, hotels, casinos, hospitals, and gourmet coffee houses, as well as grocery chains with private brand coffee and consumer-facing branded coffee and tea products. The Company’s product categories consist of roast and ground coffee; frozen liquid coffee; flavored and unflavored iced and hot teas; culinary products; spices; and other beverages including cappuccino, cocoa, granitas, and ready-to-drink iced coffee. The Company was founded in 1912, incorporated in California in 1923, and reincorporated in Delaware in 2004. The Company operates in one business segment.

The Company operates production facilities in Northlake, Texas (the "New Facility"); Houston, Texas; Portland, Oregon; Hillsboro, Oregon; and Scottsdale, Arizona. Distribution takes place out of the New Facility, the Portland, Hillsboro and Scottsdale facilities, as well as separate distribution centers in Northlake, Illinois; and Moonachie, New Jersey. On July 15, 2016, the Company completed the sale of certain property, including the Company’s former headquarters in Torrance, California (the “Torrance Facility”) and leased it back. The Company vacated the Torrance Facility after transitioning the Company’s remaining Torrance operations to its other facilities and concluded the leaseback arrangement as of December 31, 2016. The Company commenced distribution activities at the New Facility during the second quarter of fiscal 2017 and initial production activities late in the third quarter of fiscal 2017.

The Company’s products reach its customers primarily in two ways: through the Company’s nationwide direct-store-delivery, or DSD, network of 646 delivery routes and 114 branch warehouses as of March 31, 2017, or direct-shipped via common carriers or third-party distributors. The Company operates a large fleet of trucks and other vehicles to distribute and deliver its products, and relies on third-party logistic (“3PL”) service providers for its long-haul distribution. DSD sales are made “off-truck” by the Company to its customers at their places of business.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States (“GAAP”) for complete consolidated financial statements. In the opinion of management, all adjustments (consisting only of normal recurring accruals, unless otherwise indicated) considered necessary for a fair presentation of the interim financial data have been included. Operating results for the three and nine months ended March 31, 2017 are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2017. Events occurring subsequent to March 31, 2017 have been evaluated for potential recognition or disclosure in the unaudited condensed consolidated financial statements for the three and nine months ended March 31, 2017.

The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2016, filed with the Securities and Exchange Commission (the “SEC”) on September 14, 2016 (the "2016 Form 10-K").

Principles of Consolidation

The condensed consolidated financial statements include the accounts of the Company and its direct and indirect wholly owned subsidiaries FBC Finance Company, a California corporation, Coffee Bean Holding Co., Inc., a Delaware corporation, the parent company of Coffee Bean International, Inc., an Oregon corporation (“CBI”), CBI and China Mist Brands, Inc., a Delaware corporation. All inter-company balances and transactions have been eliminated.

Farmer Bros. Co.

Notes to Unaudited Consolidated Financial Statements (continued)

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 condensed consolidated financial statements and 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.

Note 1.2. Summary of Significant Accounting Policies

~~Organization~~

~~Farmer Bros. Co.,~~For a ~~Delaware corporation (including its consolidated subsidiaries unless~~detailed discussion about the ~~context otherwise requires,~~Company's significant accounting policies, see Note 1, "Summary of Significant Accounting Policies" to the “Company,” or “Farmer Bros.”), is a manufacturer, wholesaler and distributor of coffee and distributor of tea and culinary products. The Company's customers include restaurants, hotels, casinos, offices, quick service restaurants (“QSRs”), convenience stores, healthcare facilities and other foodservice providers, as well as private brand retailers in the QSR, grocery, drugstore, restaurant, convenience store and independent coffeehouse channels. The Company was founded in 1912, was incorporated in California in 1923, and reincorporated in Delaware in ~~2004. The Company operates in one business segment.~~

~~Basis of Presentation~~

~~The accompanying unaudited~~ consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S‑X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the ~~United States (“GAAP”) for complete consolidated financial statements. In~~2016 Form 10-K.

During the opinion of management, all adjustments (consisting only of normal recurring accruals, unless otherwise indicated) considered necessary for a fair presentation of the interim financial data have been included. Operating results for the three ~~and nine~~ months ended March 31, ~~2016 are not necessarily indicative of~~2017, other than the ~~results that may be expected for the fiscal year ending June 30, 2016. Events occurring subsequent~~following, there were no significant updates made to ~~March 31, 2016 have been evaluated for potential recognition or disclosure in the unaudited consolidated financial statements for the three and nine months ended March 31, 2016.~~

~~The accompanying unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in~~ the Company's ~~Annual Report on Form 10-K for the fiscal year ended June 30, 2015, filed with the Securities and Exchange Commission (the "SEC") on September 14, 2015.~~significant accounting policies.

~~Use of Estimates~~Business Combinations

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 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.~~

~~Corporate Relocation Plan~~

~~On February 5, 2015,~~accounts for business combinations under the ~~Company announced a plan approved by the Board~~acquisition method of ~~Directors~~accounting. The purchase price of the Company on February 3, 2015, pursuant to which the Company will close its Torrance, California facility and relocate these operations to a new facility (the "New Facility") housing the Company's manufacturing, distribution, coffee lab and corporate headquarters (the “Corporate Relocation Plan”). The New Facility will be located in Northlake, Texas in the Dallas/Fort Worth area.

Expenses related to the Corporate Relocation Plan included in “Restructuring and other transition expenses” in the Company's consolidated statements of operations include employee retention and separation benefits, facility-related costs, and other related costs such as travel, legal, consulting and other professional services. In order to receive the retention and/or separation benefits, impacted employees are required to provide service through their retention dates which vary from May 2015 through December 2016 or separation dates which vary from May 2015 through December 2016. A liability for such retention and separation benefits was recorded at the communication date in “Accrued payroll expenses” on the Company's consolidated balance sheets. Facility-related costs and other related costs are recognized in the period when the liability is incurred (see Note 2).

~~Facility Lease Obligation~~

On July 17, 2015, the Company entered into a lease agreement, as amended (the “Lease Agreement”) with WF-FB NLTX, LLC, a Delaware limited liability company (the “Lessor”), to lease a 538,000 square foot facility to be constructed on

~~Farmer Bros. Co.~~

~~Notes to Unaudited Consolidated Financial Statements (continued)______________________________________________________________________________________________~~

28.2 acres of land located in Northlake, Texas, which will include corporate offices, areas dedicated to manufacturing and distribution, as well as a lab. Principal design work for the New Facility was substantially completed in March 2016. The construction of the New Facility is estimated to be completed by the end of the second quarter of fiscal 2017 (see Note 3).

The New Facility will be constructed by Lessor, at its expense, in accordance with agreed upon specifications and plans determined as set forth in the Lease Agreement. Due to the Company’s involvement in the construction of the New Facility, as the deemed general contractor, pursuant to Accounting Standards Codification (“ASC”) 840, “Leases” (“ASC 840”), the Company is required to capitalize during the construction period the cash and non-cash assets (with the exception of the land which is not capitalized) contributed by Lessor for the construction as property, plant and equipment on the Company’s consolidated balance sheets, with an offsetting liability for the same amount payable to Lessor included in "Other long-term liabilities."

~~A portion of the lease arrangement~~each business acquired is allocated to the ~~land for which~~tangible and intangible assets acquired and the ~~Company will accrue rent expense during~~liabilities assumed based on information regarding their respective fair values on the ~~construction period. The amount~~date of ~~rent expense to be accrued is determined using~~acquisition. Any excess of the purchase price over the fair value of the ~~leased land at construction commencement~~separately identifiable assets acquired and the ~~Company’s incremental borrowing rate,~~liabilities assumed is allocated to goodwill. Management determines the fair values used in purchase price allocations for intangible assets based on historical data, estimated discounted future cash flows, and expected royalty rates for trademarks and trade names, as well as certain other information. The valuation of assets acquired and liabilities assumed requires a number of judgments and is ~~recognized on a straight-line basis. Once rent payments commence under the Lease Agreement, all amounts in excess of the accrued rent expense will be recorded~~subject to revision as ~~a debt-service payment and recognized as interest expense and a reduction of the financing obligation.~~

~~Sale of Spice Assets~~

On December 8, 2015, the Company completed the sale of certain assets associated with the Company’s manufacture, processing and distribution of raw, processed and blended spices and certain other culinary products (collectively, the “Spice Assets”) to Harris Spice Company Inc., a California corporation (“Harris Spice”) (see Note 4). The Company received $6.0 million in cash at closing, and is eligible to receive an earnout amount of up to $5.0 million over a three year period based upon a percentage of certain institutional spice sales by Harris Spice following the closing. Gain from the earnout is recognized when earned and when realization is assured beyond a reasonable doubt.

The Company has followed the guidance in ASC 205-20, "Presentation of Financial Statements—Discontinued Operations," as updated by Accounting Standards Update ("ASU") No. 2014-08, "Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity" and has not presented the sale of the Spice Assets as discontinued operations. The sale of the Spice Assets does not represent a strategic shift for the Company and is not expected to have a major effect on the Company's results of operations because the Company will continue to sell spice products to its direct store delivery customers ("DSD Customers").

~~Assets Held for Sale~~

The Company considers properties to be assets held for sale when (1) management commits to a plan to sell the property; (2) it is unlikely that the disposal plan will be significantly modified or discontinued; (3) the property is available for immediate sale in its present condition; (4) actions required to complete the sale of the property have been initiated; (5) sale of the property is probable and the Company expects the completed sale will occur within one year; and (6) the property is actively being marketed for sale at a price that is reasonable given the Company's estimate of current market value. Upon designation of a property as an asset held for sale, the Company records the property’s value at the lower of its carrying value or its estimated fair value less estimated costs to sell and ceases depreciation (see Note 5).

~~Derivative Instruments~~

The Company purchases various derivative instruments to create economic hedges of its commodity price risk and interest rate risk. These derivative instruments consist primarily of forward and option contracts. The Company reportsadditional information about the fair value of ~~derivative instruments on its consolidated balance sheets~~assets and liabilities becomes available. Additional information, which existed as of the acquisition date but unknown to the Company at that time, may become known during the remainder of the measurement period, a period not to exceed twelve months from the acquisition date. Adjustments in ~~“Short-term derivative assets,” “Other assets,” “Short-term derivative liabilities,” or “Other long-term liabilities.” The~~the purchase price allocation may require a recasting of the amounts allocated to goodwill and intangible assets. If such an adjustment is required, the Company will recognize a measurement-period adjustment during the period in which it determines the ~~current~~amount of the adjustment, including the effect on earnings of any amounts it would have recorded in previous periods if the accounting had been completed at the acquisition date. Transaction costs, including legal and ~~noncurrent classification~~accounting expenses, are expensed as incurred and are included in general and administrative expenses in the Company's condensed consolidated statements of operations. Contingent consideration, such as earnout, is deferred as a short-term or long-term liability based on an estimate of the timing of ~~expected~~the future cash flows of individual trades and reports these amounts on a gross basis. Additionally, the Company reports cash held on deposit in margin accounts for coffee-related derivative instruments on a gross basis on its consolidated balance sheets in “Restricted cash” if restricted from withdrawal due to a net loss position in such margin accounts.

~~Farmer Bros. Co.~~

~~Notes to Unaudited Consolidated Financial Statements (continued)______________________________________________________________________________________________~~

~~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~~payment. These contingent consideration liabilities 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.~~

acquisition date and are re-measured quarterly based on the then assessed fair value and adjusted if necessary. The ~~Company accounts for certain coffee-related derivative instruments as accounting hedges in order to minimize the volatility created~~results of operations of businesses acquired are included in the Company's ~~quarterly results~~condensed consolidated financial statements from utilizing these derivative contracts 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 probabletheir dates 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.”acquisition. See Note 3.

For coffee-related derivative instruments designated as cash flow hedges, the effective portion of 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. Any ineffective portion of the derivative instrument's change in fair value is recognized currently in “Other, net.” Gains or losses deferred in AOCI associated with terminated derivative instruments, derivative instruments that cease to be highly effective hedges, derivative instruments for which the forecasted transaction is reasonably possible but no longer probable of occurring, and cash flow hedges that have been otherwise discontinued remain in AOCI until the hedged item affects earnings. If it becomes probable that the forecasted transaction designated as the hedged item in a cash flow hedge will not occur, any gain or loss deferred in AOCI is recognized in “Other, net” at that time. For derivative instruments that are not designated in a hedging relationship, and for which the normal purchases and normal sales exception has not been elected, the changes in fair value are reported in “Other, net.”

~~The following gains and losses on derivative instruments are netted together and reported in “Other, net” in the Company's consolidated statements of operations:~~

~~Gains and losses on all derivative instruments that are not designated as cash flow hedges and for which the normal purchases and normal sales exception has not been elected; and~~

~~The ineffective portion of unrealized gains and losses on derivative instruments that are designated as cash flow hedges.~~

The fair value of derivative instruments is based upon broker quotes. At March 31, 2016 and June 30, 2015, approximately 90% and 94%, respectively, of the Company's outstanding coffee-related derivative instruments were designated as cash flow hedges (see Note 6).

~~Coffee Brewing Equipment and Service~~

The Company classifies certain expenses related to coffee brewing equipment provided to customers as cost of goods sold. These costs include the cost of the equipment as well as the cost of servicing that equipment (including service employees’ salaries, cost of transportation and the cost of supplies and parts) and are considered directly attributable to the generation of revenues from its customers. Accordingly, such costs included in cost of goods sold in the accompanying consolidated financial

~~Farmer Bros. Co.~~

~~Notes to Unaudited Consolidated Financial Statements (continued)______________________________________________________________________________________________~~

statements in the three months ended March 31, 2016 and 2015 were $7.0 million and $6.7 million, respectively. In addition, depreciation expense related to capitalized coffee brewing equipment reported in cost of goods sold in the three months ended March 31, 2016 and 2015 was $2.4 million and $2.6 million, respectively.

Coffee brewing equipment costs included in cost of goods sold in the nine months ended March 31, 2016 and 2015 were $20.4 million and $19.6 million, respectively. Depreciation expense related to capitalized coffee brewing equipment reported in cost of goods sold in the nine months ended March 31, 2016 and 2015 was $7.5 million and $7.8 million, respectively.

~~The Company capitalized coffee brewing equipment (included in machinery and equipment) in the amount of $5.7 million and $8.6 million in the nine months ended March 31, 2016 and 2015, respectively.~~

~~Revenue Recognition~~

The Company recognizes sales revenue when all of the following have occurred: (1) delivery; (2) persuasive evidence of an agreement exists; (3) pricing is fixed or determinable; and (4) collection is reasonably assured. When product sales are made “off-truck” to the Company’s customers at their places of business or products are shipped by third-party delivery "FOB Destination," title passes and revenue is recognized upon delivery. When customers pick up products at the Company's distribution centers, title passes and revenue is recognized upon product pick up.

~~Net Income (Loss) Per Common Share~~

Net income (loss) per share (“EPS”) represents net income (loss) attributable to common stockholders divided by the weighted-average number of common shares outstanding for the period, excluding unallocated shares held by the Company's Employee Stock Ownership Plan (“ESOP”) (see Note 16). Diluted EPS represents net income attributable to common stockholders divided by the weighted-average number of common shares outstanding, inclusive of the dilutive impact of common equivalent shares outstanding during the period. However, nonvested restricted stock awards (referred to as participating securities) are excluded from the dilutive impact of common equivalent shares outstanding in accordance with authoritative guidance under the two-class method. The nonvested restricted stockholders are entitled to participate in dividends declared on common stock as if the shares were fully vested and hence are deemed to be participating securities. Under the two-class method, net income attributable to nonvested restricted stockholders is excluded from net income attributable to common stockholders for purposes of calculating basic and diluted EPS.

Computation of EPS for the three months ended March 31, 2016 includes the dilutive effect of 107,936 shares issuable under stock options with exercise prices below the closing price of the Company’s common stock on the last trading day of the applicable period, but excludes 59,854 shares issuable under stock options with exercise prices above the closing price of the Company’s common stock on the last trading day of the applicable period because their inclusion would be anti-dilutive. Computation of EPS for the three months ended March 31, 2015 excludes a total of 557,818 shares issuable under stock options, because the Company incurred a net loss and including them would be anti-dilutive.

Computation of EPS for the nine months ended March 31, 2016 and 2015 includes the dilutive effect of 127,806 and 142,391 shares, respectively, issuable under stock options with exercise prices below the closing price of the Company’s common stock on the last trading day of the applicable period, but excludes 35,253 and 6,166 shares, respectively, issuable under stock options with exercise prices above the closing price of the Company’s common stock on the last trading day of the applicable period because their inclusion would be anti-dilutive.

~~Dividends~~

The Company’s Board of Directors has omitted the payment of a quarterly dividend since the third quarter of fiscal 2011. The amount, if any, of dividends to be paid in the future will depend upon the Company’s then available cash, anticipated cash needs, overall financial condition, credit agreement restrictions, future prospects for earnings and cash flows, as well as other relevant factors.

~~Impairment of~~ Goodwill and Indefinite-lived Intangible Assets

The Company ~~performs~~accounts for its ~~annual impairment test of~~ goodwill ~~and/or other~~and indefinite-lived intangible assets ~~as of June 30.~~in accordance with ASC 350, “Intangibles-Goodwill and Other” (“ASC 350”). Goodwill and other indefinite-lived intangible assets are not amortized but instead are reviewed for impairment annually, ~~as well as on~~or more frequently if an ~~interim basis if events~~event occurs or ~~changes in~~ circumstances ~~between annual tests~~change which indicate that an asset might be impaired. Pursuant to ASC 350, the Company performs a qualitative assessment of goodwill and indefinite-lived intangible assets on its consolidated balance sheets, to determine if there is a more likely than not indication that its goodwill and indefinite-lived intangible assets are impaired as of June 30. If the indicators of impairment are present, the Company performs a quantitative assessment to determine the impairment of these assets as of the measurement date.

~~Farmer Bros. Co.~~

~~Notes to Unaudited Consolidated Financial Statements (continued)______________________________________________________________________________________________~~

Testing for impairment of goodwill is a two-step process. The first step requires the Company to compare the fair value of its reporting ~~unit~~units to the carrying value of the ~~net assets of the~~ reporting ~~unit,~~units, including goodwill. If the fair value of ~~the~~a reporting unit is less than its carrying value, goodwill of the reporting unit is potentially impaired and the Company then completes step two to measure the impairment loss, if any. The second step requires the calculation of the implied fair value of goodwill, which is the residual fair value remaining after deducting the fair value of all tangible and intangible net assets of the reporting unit from the fair value of the reporting unit. If the implied fair value of goodwill is less than the carrying amount of goodwill, an impairment loss is recognized equal to the difference. ~~As of March 31, 2016 and 2015, the Company determined that there were no events or circumstances that indicated impairment and, therefore,~~ no ~~goodwill impairment charges were recorded in the three and nine months ended March 31, 2016 or 2015.~~

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 ~~value.~~values. There were no ~~such events~~indefinite-lived intangible asset or ~~circumstances during~~goodwill impairment charges recorded in the ~~three and~~ nine months ended March 31, ~~2016 and 2015.~~2017 or 2016.

~~Long-Lived Assets, Excluding Goodwill and Indefinite-lived~~

Farmer Bros. Co.

Notes to Unaudited Consolidated Financial Statements (continued)

Other Intangible Assets

~~The Company reviews the recoverability~~Other intangible assets consist of ~~its long-lived~~finite-lived intangible assets ~~whenever events or changes in circumstances indicate that the carrying amount of such~~including acquired recipes, non-compete agreements, customer relationships, trade names and trademarks. These assets ~~may not be recoverable. Long-lived assets evaluated~~are amortized over their estimated useful lives and are tested for impairment ~~are grouped~~by grouping them with other assets toat the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities. The estimated future cash flows are based upon, among other things, assumptions about expected future operating performance, and may differ from actual cash flows. If the sum of the projected undiscounted cash flows (excluding interest) is less than the carrying value of the assets, the assets will be written down to the estimated fair value in the period in which the determination is made. The Company reviews the recoverability of its long-lived assets whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. There were no ~~such events or circumstances during~~other intangible asset impairment charges recorded in the ~~three and~~ nine months ended March 31, ~~2016~~2017 or 2016.

Leases

Leases are categorized as either operating or capital leases at inception. Operating lease costs are recognized on a straight-line basis over the term of the lease. An asset and ~~2015.~~a corresponding liability for the capital lease obligation are established for the cost of a capital lease. Capital lease obligations are amortized over the life of the lease.

For build-to-suit leases, the Company establishes an asset and liability for the estimated construction costs incurred to the extent that it is involved in the construction of structural improvements or takes construction risk prior to the commencement of the lease. A portion of the lease arrangement is allocated to the land for which the Company accrues rent expense during the construction period. The amount of rent expense to be accrued is determined using the fair value of the leased land at construction commencement and the Company’s incremental borrowing rate, and recognized on a straight-line basis. Upon exercise of the purchase option on a build-to-suit lease, the Company ~~may incur certain other non-cash~~records an asset ~~impairment~~equal to the value of the option price that includes the value of the land and reverses the rent expense and the asset and liability established to record the construction costs ~~in connection with~~incurred through the ~~Corporate Relocation Plan.~~date of option exercise. See Note 5.

~~Self-Insurance~~Coffee Brewing Equipment and Service

The Company ~~is self-insured for workers’ compensation insurance subject~~classifies certain expenses related to ~~specific retention levels and uses historical analysis~~coffee brewing equipment provided to ~~determine and record the estimates of expected future expenses resulting from workers’ compensation claims. The estimated outstanding losses are the accrued~~customers as cost of ~~unpaid claims. The estimated outstanding losses, including allocated loss adjustment expenses (“ALAE”),~~goods sold. These costs include ~~case reserves,~~ the ~~development~~cost of ~~known claims~~the equipment as well as the cost of servicing that equipment (including service employees’ salaries, cost of transportation and ~~incurred but not reported claims. ALAE~~the cost of supplies and parts) and are considered directly attributable to the ~~direct expenses for settling specific claims. The amounts reflect per occurrence~~generation of revenues from its customers. Accordingly, such costs included in cost of goods sold in the accompanying unaudited condensed consolidated financial statements in each of the three months ended March 31, 2017 and ~~annual aggregate limits maintained by~~2016 were $7.0 million. Coffee brewing equipment costs included in cost of goods sold in the ~~Company. The analysis does not include estimating a provision for unallocated loss adjustment expenses.~~nine months ended March 31, 2017 and 2016 were $19.9 million and $20.4 million, respectively.

The Company ~~accounts for its accrued liability relating~~capitalizes coffee brewing equipment and depreciates it over an estimated three or five year period, depending on the assessment of the useful life and reports the depreciation expense in cost of goods sold. Such depreciation expense related to ~~workers’ compensation claims on an undiscounted basis. The estimated gross undiscounted workers’ compensation liability relating to such claims at~~capitalized coffee brewing equipment reported in cost of goods sold in the three months ended March 31, 2017 and 2016 ~~and June 30, 2015, respectively,~~ was ~~$13.6~~$2.3 million and ~~$13.4~~$2.4 million, respectively, and $6.9 million and $7.5 million, respectively, in the ~~estimated recovery from reinsurance was $2.2~~nine months ended March 31, 2017 and 2016. The Company capitalized coffee brewing equipment (included in machinery and equipment) in the amounts of $8.3 million and ~~$2.5~~$5.7 million ~~respectively. The short-term~~in the nine months ended March 31, 2017 and ~~long-term accrued liabilities~~2016, respectively.

Net Income Per Common Share

Computation of net income per share ("EPS") for ~~workers’ compensation claims are presented~~the three months ended March 31, 2017 and 2016 includes the dilutive effect of 116,020 and 107,936 shares, respectively, issuable under stock options with exercise prices below the closing price of the Company's common stock on the last trading day of the applicable period, but excludes the dilutive effect of 30,401 and 59,854 shares, respectively, issuable under stock options with exercise prices above the closing price of 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"~~common stock on the ~~Company's consolidated balance sheets.~~last trading day of the applicable period because their inclusion would be anti-dilutive.

AtComputation of EPS for the nine months ended March 31, 2017 and 2016 includes the dilutive effect of 120,075 and ~~June 30, 2015,~~127,806 shares, respectively, issuable under stock options with exercise prices below the Company had posted a $7.0 million letter of credit as a security deposit with the State of California Department of Industrial Relations Self-Insurance Plans for participation in the alternative security program for California self-insurers for workers’ compensation liability and a $4.3 million letter of credit as a security deposit for self-insuring workers' compensation, general liability and auto insurance coverages outside of California.

The estimated liability related to the Company's self-insured group medical insurance at March 31, 2016 and June 30, 2015 was $1.0 million, 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.

~~General liability, product liability and commercial auto liability are insured through a captive insurance program. The Company retains the risk within certain aggregate amounts. Cost~~closing price of the ~~insurance through~~Company’s common stock on the ~~captive program is accrued based on estimates~~last trading day of the ~~aggregate liability claims incurred using certain actuarial assumptions~~applicable period, but excludes 25,508 and ~~historical claims experience. The Company's liability reserve for such claims at March 31, 2016 and June 30, 2015 was $1.4 million and $0.8 million, respectively.~~35,253 shares, respectively, issuable under stock options with exercise prices above the closing price of the Company’s common stock on the last trading day of the applicable period because their inclusion would be anti-dilutive. See Note 19.

Farmer Bros. Co.

Notes to Unaudited Consolidated Financial Statements (continued)~~______________________________________________________________________________________________~~

~~The estimated liability related to~~Shipping and Handling Costs

Shipping and handling costs incurred through outside carriers are recorded as a component of the Company's ~~self-insured group medical insurance, general liability, product liability~~selling expenses and ~~commercial auto liability is~~were $6.0 million and $3.0 million, respectively, in the three months ended March 31, 2017 and 2016, and $17.2 million and $7.9 million, respectively, in the nine months ended March 31, 2017 and 2016. With the Company’s move to 3PL for its long-haul distribution in the third quarter of fiscal 2016, payroll, benefits, vehicle costs and other costs associated with the Company’s internal operation of its long-haul distribution previously included onelsewhere in selling expenses are now represented in outsourced shipping and handling costs in the three and nine months ended March 31, 2017. The amount associated with outside carriers for the Company's ~~consolidated balance sheets~~long-haul distribution recorded in ~~“Other current liabilities.”~~shipping and handling costs in the three months ended March 31, 2017 was approximately the same in the three months ended March 31, 2016. The amount associated with outside carriers for the Company's long-haul distribution recorded in shipping and handling costs in the nine months ended March 31, 2017 was less than the comparable aggregate operating costs associated with internally managing the Company’s long-haul distribution in the nine months ended March 31, 2016.

Recently Adopted Accounting Standards

~~None.~~No new accounting standards were adopted by the Company in the three months ended March 31, 2017.

New Accounting Pronouncements

In March 2017, the FASB issued ASU No. 2017-07, "Compensation — Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost" ("ASU 2017-07"). ASU 2017-07 amends the requirements in GAAP related to the income statement presentation of the components of net periodic benefit cost for an entity’s sponsored defined benefit pension and other postretirement plans. The guidance in ASU 2017-07 is effective for annual periods beginning after December 15, 2017, including interim periods within those fiscal years, and is effective for the Company beginning July 1, 2018. The Company is evaluating the impact this guidance will have on its consolidated financial statements and expects the adoption will not have a significant impact on the results of operations, financial position or cash flows of the Company.

In January 2017, the FASB issued ASU No. 2017-04, "Intangibles — Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment" ("ASU 2017-04"). The amendments in ASU 2017-04 address concerns regarding the cost and complexity of the two-step goodwill impairment test, and remove the second step of the test. An entity will apply a one-step quantitative test and record the amount of goodwill impairment as the excess of a reporting unit's carrying amount over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. The new guidance does not amend the optional qualitative assessment of goodwill impairment. The guidance in ASU 2017-04 is effective for annual and interim goodwill impairment tests in fiscal years beginning after December 15, 2019, and is effective for the Company beginning July 1, 2020. Adoption of ASU 2017-04 is not expected to have a material effect on the results of operations, financial position or cash flows of the Company.

In January 2017, the FASB issued ASU No. 2017-01, "Business Combinations (Topic 805): Clarifying the Definition of a Business" ("ASU 2017-01"). The amendments in ASU 2017-01 clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of businesses and provide a screen to determine when an integrated set of assets and activities (collectively referred to as a “set”) is not a business. If the screen is not met, the amendments (1) require that to be considered a business, a set must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output and (2) remove the evaluation of whether a market participant could replace the missing elements. The guidance in ASU 2017-01 is effective for public business entities for annual periods beginning after December 15, 2017, including interim periods within those fiscal years. Early application is permitted in certain circumstances. ASU 2017-01 is effective for the Company beginning July 1, 2018. Adoption of ASU 2017-01 is not expected to have a material effect on the results of operations, financial position or cash flows of the Company.

In November 2016, the FASB issued ASU No. 2016-18, "Statement of Cash Flows (Topic 230): Restricted Cash" ("ASU 2016-18"). The amendments require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. As a result, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amendments do not provide a definition of restricted cash or restricted cash equivalents. ASU 2016-18 is effective for the Company beginning

Farmer Bros. Co.

Notes to Unaudited Consolidated Financial ~~Accounting Standards Board (the "FASB")~~Statements (continued)

July 1, 2018. Adoption of ASU 2016-18 is not expected to have a material effect on the results of operations, financial position or cash flows of the Company.

In March 2016, the FASB issued ASU No. 2016-09, "Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting" ("ASU 2016-09"). ASU 2016-09 is being issued as part of the FASB's Simplification Initiative. The areas for simplification in ASU 2016-09 involve several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. Some of the areas for simplification apply only to nonpublic entities. For public business entities, the amendments in ASU 2016-09 are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted for any entity in any interim or annual period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity that elects early adoption must adopt all of the amendments in the same period. ASU 2016-09 is effective for the Company beginning July 1, 2017. Adoption of ASU 2016-09 ~~is not expected to have a material effect on the results of operations, financial position or cash flows of the Company.~~

In March 2016, the FASB issued ASU No. 2016-05, "Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships (a consensus of the FASB Emerging Issues Task Force" ("ASU 2016-05"). ASU 2016-05 clarifies that "a change in the counterparty to a derivative instrument that has been designated as the hedging instrument in an existing hedging relationship would not, in and of itself, be considered a termination of the derivative instrument" or "a change in a critical term of the hedging relationship." As long as all other hedge accounting criteria in ASC 815 are met, a hedging relationship in which the hedging derivative instrument is novated would not be discontinued or require redesignation. This clarification applies to both cash flow and fair value hedging relationships. For public business entities, ASU 2016-05 is effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early application is permitted including adoption in an interim period. ASU 2016-05 is effective for the Company beginning July 1, 2017. Adoption of ASU 2016-05 is not expected to have a material effect on the results of operations, financial position or cash flows of the Company.

In February 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 842)" ("ASU 2016-02"), which introduces a new lessee model that brings substantially all leases onto the balance sheet. ~~In addition, while~~Under the new guidance, ~~retains most of~~lessees are required to recognize a lease liability, which represents the ~~principles of the existing lessor model in GAAP, it aligns many of those principles with ASC 606, "Revenue From Contracts With Customers."~~discounted obligation to make future minimum lease payments and a related right-of-use asset. For public business entities, ASU 2016-02 is effective for financial statements issued for annual periods beginning after December 15, 2018, and interim periods within those annual periods. Early application is permitted. ASU 2016-02 is effective for the Company beginning July 1, 2019. ~~Adoption of ASU 2016-02~~The Company is ~~not expected to~~evaluating the impact this guidance will have on its consolidated financial statements and expects the adoption will have a ~~material effect~~significant impact on the ~~results of operations,~~Company's financial position ~~or cash flows of~~resulting from the ~~Company.~~increase in assets and liabilities.

In ~~November 2015,~~January 2016, the FASB issued ASU No. ~~2015-17, "Income Taxes (Topic 740)~~2016-01, “Financial Instruments-Overall (Subtopic 825-10): ~~Balance Sheet Classification~~Recognition and Measurement of ~~Deferred Taxes" ("~~Financial Assets and Financial Liabilities” (“ASU ~~2015-17"~~2016-01”)~~, which~~. ASU 2016-01 requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) at fair value, with changes in fair value recognized in net income. Under ASU 2016-01, entities will ~~require entities~~no longer be able to ~~present deferred tax~~recognize unrealized holding gains and losses on available-for-sale equity securities in other comprehensive income, and they will no longer be able to use the cost method of accounting for equity securities that do not have readily determinable fair values. The guidance to classify equity securities with readily determinable fair values into different categories (that is trading or available for sale) is no longer required. ASU 2016-01 eliminates certain disclosure requirements related to financial instruments measured at amortized cost and adds disclosures related to the measurement categories of financial assets ~~("DTAs")~~ and ~~deferred tax liabilities ("DTLs") as noncurrent in a classified balance sheet. ASU 2015-17 simplifies the current~~financial liabilities. The guidance ~~which requires entities to separately present DTAs and DTLs as current and noncurrent in a classified balance sheet. For public business entities, the amendments in ASU 2015-17 are~~is effective ~~for financial statements issued~~ for annual periods beginning after December 15, ~~2016, and~~2017, including interim periods within those ~~annual periods. Early application is permitted as of the beginning of an interim or annual reporting period.~~fiscal years. ASU ~~2015-17~~2016-01 is effective for the Company beginning July 1, ~~2017.~~2018. Adoption of ASU ~~2015-17 is not expected to have a material effect on the results of operations, financial position or cash flows of the Company.~~

In September 2015, the FASB issued ASU No. 2015-16, “Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments” (“ASU 2015-16”). ASU 2015-16 eliminates the requirement that an acquirer in a business combination account for measurement-period adjustments retrospectively. Instead, an acquirer will recognize a measurement-period adjustment during the period in which it determines the amount of the adjustment, including the effect on earnings of any amounts it would have recorded in previous periods if the accounting had been completed at the acquisition date. The guidance is effective for public business entities for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2015, with early adoption permitted. ASU 2015-16 is effective for the Company beginning July

~~Farmer Bros. Co.~~

~~Notes to Unaudited Consolidated Financial Statements (continued)______________________________________________________________________________________________~~

~~1, 2016. Adoption of ASU 2015-16 is not expected to have a material effect on the results of operations, financial position or cash flows of the Company.~~

In August 2015, the FASB issued ASU No. 2015-15, “Interest-Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements” (“ASU 2015-15”). ASU 2015-15 incorporates into the ASC an SEC staff announcement that the SEC staff will not object to an entity presenting the cost of securing a revolving line of credit as an asset, regardless of whether a balance is outstanding. The standard, as issued, did not address revolving lines of credit, which may not have outstanding balances. An entity that repeatedly draws on a revolving credit facility and then repays the balance could present the cost as a deferred asset and reclassify all or a portion of it as a direct deduction from the liability whenever a balance is outstanding. However, the SEC staff’s announcement provides a less-cumbersome alternative. Either way, the cost should be amortized over the term of the arrangement. ASU 2015-15 is effective for the Company beginning July 1, 2016. The SEC staff guidance is also effective for the Company beginning July 1, 2016. Adoption of ASU 2015-15 is not expected to have a material effect on the results of operations, financial position or cash flows of the Company.

In July 2015, the FASB issued ASU No. 2015-12, “Plan Accounting: Defined Benefit Pension Plans (Topic 960), Defined Contribution Pension Plans (Topic 962), Health and Welfare Benefit Plans (Topic 965), (Part I) Fully Benefit-Responsive Investment Contracts, (Part II) Plan Investment Disclosures, (Part III) Measurement Date Practical Expedient” ("ASU 2015-12”). ASU 2015-12 eliminates requirements that employee benefit plans measure the fair value of fully benefit-responsive investment contracts ("FBRICs") and provide the related fair value disclosures. As a result, FBRICs are measured, presented and disclosed only at contract value. Also, plans will be required to disaggregate their investments measured using fair value by general type, either on the face of the financial statements or in the notes, and self-directed brokerage accounts are one general type. Plans no longer have to disclose the net appreciation/depreciation in fair value of investments by general type or individual investments equal to or greater than 5% of net assets available for benefits. In addition, a plan with a fiscal year end that does not coincide with the end of a calendar month is allowed to measure its investments and investment-related accounts using the month end closest to its fiscal year end. The new guidance for FBRICs and plan investment disclosures should be applied retrospectively. The measurement date practical expedient should be applied prospectively. The guidance is effective for fiscal years beginning after December 15, 2015, with early adoption permitted. ASU 2015-12 is effective for the Company beginning July 1, 2016. Adoption of ASU 2015-122016-01 is not expected to have a material effect on the results of operations, financial position or cash flows of the Company.

In July 2015, the FASB issued ASU No. 2015-11, “Inventory (Topic 330): Simplifying the Measurement of Inventory” (“ASU 2015-11”). ASU 2015-11 simplifies the subsequent measurement of inventory by requiring inventory to be measured at the lower of cost and net realizable value. Entities will continue to apply their existing impairment models to inventories that are accounted for using last-in first-out or LIFO and the retail inventory method or RIM. Under current guidance, net realizable value is one of several calculations an entity needs to make to measure inventory at the lower of cost or market. ASU 2015-11 is effective for public business entities for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted, and the guidance must be applied prospectively after the date of adoption. ASU 2015-11 is effective for the Company beginning July 1, 2017. Adoption of ASU 2015-11 is not expected to have a material effect on the results of operations, financial position or cash flows of the Company.

In May 2015, the FASB issued ASU No. 2015-07, “Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent)” (“ASU 2015-07”). ASU 2015-07 removes the requirement to categorize investments for which the fair values are measured using the net asset value per share practical expedient within the fair value hierarchy. It also limits certain disclosures to investments for which the entity has elected to measure the fair value using the practical expedient. ASU 2015-07 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015, with early adoption permitted. ASU 2015-07 is effective for the Company beginning July 1, 2016. The Company is in the process of assessing the impact of the adoption of ASU 2015-07 on its consolidated financial statements.

~~In May~~ 2014, the FASB issued accounting guidance which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers under ASU No. 2014-09, “Revenue from Contracts with ~~Customers (Topic 606)” (“~~Customers” ("ASU ~~2014-09”~~2014-09"). ASU 2014-09 will replace most existing revenue recognition guidance in GAAP when it becomes effective. On July 9, 2015, the FASB issued ASU No. 2015-14, "Revenue ~~From~~from Contracts with Customers (Topic 606): Deferral of the Effective Date," which defers the effective date of ASU 2014-09 by one year allowing early adoption as of the original effective date of January 1, 2017. The deferral results in the new accounting standard being effective for public business entities for annual reporting periods beginning after December 31, 2017, including interim periods within those fiscal years. ASU 2014-09 is effective for the Company beginning July 1, 2018. The Company is currently evaluating the impact of ASU 2014-09 along with the related amendments and interpretations issued under ASU 2016-08, ASU 2016-10, ASU 2016-12 and ASU 2016-20 on its results of operations, financial position and cash flows.

In August 2014, the FASB issued ASU No. 2014-15, "Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern" ("ASU 2014-15"). ASU 2014-15 amended ASC 205-40-Presentation of Financial Statements-Going Concern and requires management to evaluate

Farmer Bros. Co.

Notes to Unaudited Consolidated Financial Statements (continued)~~______________________________________________________________________________________________~~

~~being~~whether there are conditions and events that raise substantial doubt about an entity's ability to continue as a going concern within one year after the financial statements are available to be issued and provide related disclosures of such conditions and events. The amendments in ASU 2014-15 apply to all entities and are effective ~~January 1, 2018. The Company~~for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is ~~currently evaluating the impact~~permitted. Adoption of ASU ~~2014-09~~2014-15 will not have a material impact on ~~its~~the Company's results of operations, financial position and cash flows.

Note 2. 3. Acquisitions

China Mist Brands, Inc.

On October 11, 2016, the Company, through a wholly owned subsidiary, acquired substantially all of the assets and certain specified liabilities of China Mist Brands, Inc. dba China Mist Tea Company (“China Mist”), a provider of flavored iced teas and iced green teas. The acquisition of China Mist is expected to extend the Company's tea product offerings and give the Company a greater presence in the high-growth premium tea industry. As part of the transaction, the Company assumed the lease on China Mist’s existing 17,400 square foot production, distribution and warehouse facility in Scottsdale, Arizona which is terminable upon twelve months’ notice. The Company acquired China Mist for aggregate purchase consideration of $11.7 million, which included $11.2 million in cash paid at closing including working capital adjustments of $0.4 million and up to $0.5 million in contingent consideration to be paid as earnout if certain sales levels are achieved in the calendar years of 2017 or 2018. This contingent earnout liability is currently estimated to have a fair value of $0.5 million and is recorded in other current liabilities on the Company's condensed consolidated balance sheet at March 31, 2017. The earnout is estimated to be paid within the next twelve months.

In the nine months ended March 31, 2017, the Company incurred $0.2 million in transaction costs related to the China Mist acquisition, consisting primarily of legal and accounting expenses, which are included in general and administrative expenses in the Company's condensed consolidated statements of operations.

The financial effect of this acquisition was not material to the Company’s consolidated financial statements. The Company has not presented pro forma results of operations for the acquisition because it is not significant to the Company's consolidated results of operations.

The acquisition was accounted for as a business combination. The fair value of consideration transferred was allocated to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values on the acquisition date, with the remaining unallocated amount recorded as goodwill. The purchase price allocation is preliminary as the Company is in the process of finalizing the valuation.

Farmer Bros. Co.

Notes to Unaudited Consolidated Financial Statements (continued)

The following table summarizes the preliminary allocation of consideration transferred as of the acquisition date:



(In thousands)	Fair Value			Estimated Useful Life (years)

Cash paid, net of cash acquired	$	11,183
Contingent consideration	500
Total consideration	$	11,683

Accounts receivable	$	811
Inventory	544
Prepaid assets	48
Property, plant and equipment	212
Goodwill	1,871
Intangible assets:
Recipes	930			7
Non-compete agreement	100			5
Customer relationships	450			10
Trade name/Trademark—finite-lived	7,100			10
Accounts payable	(383		)
Total consideration, net of cash acquired	$	11,683

In connection with this acquisition, the Company recorded goodwill of $1.9 million, which is deductible for tax purposes. The Company also recorded $8.6 million in finite-lived intangible assets that included recipes, a non-compete agreement, customer relationships and a trade name/trademark. The weighted average amortization period for the finite-lived intangible assets is 9.6 years.

The determination of the fair value of intangible assets acquired was primarily based on significant inputs not observable in an active market and thus represent Level 3 fair value measurements as defined under GAAP.

The fair value assigned to the recipes was determined utilizing the replacement cost method, which captures the direct cost of the development effort plus lost profits over the time to re-create the recipes.

The fair value assigned to the non-compete agreement was determined utilizing the with and without method. Under the with and without method, the fair value of the intangible asset is estimated based on the difference in projected earnings with the agreement in place versus projected earnings based on starting with no agreement in place. Revenue and earnings projections were significant inputs into estimating the value of China Mist's non-compete agreement.

The fair value assigned to the customer relationships was determined based on management's estimate of the retention rate and utilizing certain benchmarks. Revenue and earnings projections were also significant inputs into estimating the value of customer relationships.

The fair value assigned to the trade name/trademark was determined utilizing a multi-period excess earnings approach. Under the multi-period excess earnings approach, the fair value of the intangible asset is estimated to be the present value of future earnings attributable to the asset and this method utilizes revenue and cost projections including an assumed contributory asset charge.

West Coast Coffee Company, Inc.

On February 7, 2017, the Company acquired substantially all of the assets and certain specified liabilities of West Coast Coffee Company, Inc. (“West Coast Coffee”), a coffee roaster and distributor with a focus on the convenience store, grocery and foodservice channels. The acquisition of West Coast Coffee is expected to broaden the Company's reach in the Northwestern United States. As part of the transaction, the Company entered into a three-year lease on West Coast Coffee’s existing 20,400 square foot production, distribution and warehouse facility in Hillsboro, Oregon, which expires January 31, 2020, and assumed leases on six branch warehouses consisting of an aggregate of 24,150 square feet in Oregon, California

Farmer Bros. Co.

Notes to Unaudited Consolidated Financial Statements (continued)

and Nevada, expiring on various dates through November 2020. The Company acquired West Coast Coffee for aggregate purchase consideration of $15.7 million, which included $14.7 million in cash paid at closing including working capital adjustments of $1.2 million and up to $1.0 million in contingent consideration to be paid as earnout if certain sales levels are achieved in the twenty-four months following the closing. This contingent earnout liability is currently estimated to have a fair value of $0.6 million and is recorded in other long-term liabilities on the Company’s condensed consolidated balance sheet at March 31, 2017. The earnout is estimated to be paid within the next twenty-four months.

In the three and nine months ended March 31, 2017, the Company incurred $0.3 million in transaction costs related to the West Coast Coffee acquisition, consisting primarily of legal and accounting expenses, which are included in general and administrative expenses in the Company's condensed consolidated statements of operations.

The following table summarizes the preliminary allocation of consideration transferred as of the acquisition date:



(In thousands)	Fair Value			Estimated Useful Life (years)

Cash paid, net of cash acquired	$	14,671
Contingent consideration	600
Total consideration	$	15,271

Accounts receivable	$	955
Inventory	939
Prepaid assets	20
Property, plant and equipment	1,546
Goodwill	7,797
Intangible assets:
Non-compete agreements	100			5
Customer relationships	4,400			10
Trade name—finite-lived	260			7
Brand name—finite-lived	250			1.7
Accounts payable	(814		)
Other liabilities	(182		)
Total consideration, net of cash acquired	$	15,271

The preliminary purchase price allocation is subject to change based on numerous factors, including the final adjusted purchase price and the final estimated fair value of the assets acquired and liabilities assumed.

In connection with this acquisition, the Company recorded goodwill of $7.8 million, which is deductible for tax purposes. The Company also recorded $5.0 million in finite-lived intangible assets that included non-compete agreements, customer relationships, a trade name and a brand name. The weighted average amortization period for the finite-lived intangible assets is 9.3 years.

The fair value assigned to the non-compete agreements was determined utilizing the with and without method. Under the with and without method, the fair value of the intangible asset is estimated based on the difference in projected earnings

Farmer Bros. Co.

Notes to Unaudited Consolidated Financial Statements (continued)

with the agreements in place versus projected earnings based on starting with no agreements in place. Revenue and earnings projections were significant inputs into estimating the value of West Coast Coffee's non-compete agreements.

The fair value assigned to the customer relationships was determined utilizing a multi-period excess earnings approach. Under the multi-period excess earnings approach, the fair value of the intangible asset is estimated to be the present value of future earnings attributable to the asset and this method utilizes revenue and cost projections including an assumed contributory asset charge.

The fair values assigned to the trade name and the brand name were determined utilizing the relief from royalty method. The relief from royalty method is based on the premise that the intangible asset owner would be willing to pay a royalty rate to license the subject asset. The analysis involves forecasting revenue over the life of the asset, applying a royalty rate and a tax rate, and then discounting the savings back to present value at an appropriate discount rate.

Note 4. Restructuring Plans

Corporate Relocation Plan

On February 5, 2015, the Company announced a plan (the “Corporate Relocation Plan”) to close the ~~Corporate Relocation Plan pursuant to which the Company will close its~~ Torrance ~~facility~~Facility and relocate ~~these~~its corporate headquarters, product development lab, and manufacturing and distribution operations from Torrance, California to athe New Facility housing ~~the Company's manufacturing, distribution, coffee lab and corporate headquarters.~~these operations in Northlake, Texas. Approximately 350 positions were impacted as a result of the Torrance ~~facility~~Facility closure. ~~The New Facility will be located in Northlake, Texas in the Dallas/Fort Worth area.~~ The Company’s decision resulted from a comprehensive review of alternatives designed to make the Company more competitive and better positioned to capitalize on growth opportunities.

The Company expects to close its Torrance facility in phases, and began the process in the spring of 2015. Through April 2015, coffee purchasing, roasting, grinding, packaging and product development took place at the Company’s Torrance, California, Portland, Oregon and Houston, Texas production facilities. In May 2015, the Company moved the coffee roasting, grinding and packaging functions that had been conducted in Torrance to its Houston and Portland production facilities and in conjunction relocated its Houston distribution operations to its Oklahoma City distribution center. As of March 31, 2016, distribution continued to take place out of the Company’s Torrance and Portland production facilities, as well as separate distribution centers in Northlake, Illinois; Oklahoma City, Oklahoma; and Moonachie, New Jersey. Effective September 15, 2015, the Company transferred a majority of its primary administrative offices from Torrance to Fort Worth, Texas, where the Company has leased 32,000 square feet of temporary office space. The transfer of the Company’s primary administrative offices to this temporary office space was substantially completed in the second quarter of fiscal 2016. On December 8, 2015, the Company completed the sale of the Spice Assets to Harris Spice (see Note 4). Pursuant to a transitional co-packaging supply agreement, the Company will provide Harris Spice with certain transition services for a limited time period following closing of the sale. As a result, spice blending, grinding and packaging will continue to take place at the Company’s Torrance production facility until the conclusion of the transition services, which is expected to occur during the fourth quarter of fiscal 2016. In December 2015, the Company announced its plans to replace its long-haul fleet operations with third party logistics ("3PL") and a vendor managed inventory initiative. The first phase of the 3PL program began in January 2016 and is expected to be fully implemented by the end of the fourth quarter of fiscal 2016. In April 2016, the Company entered into a purchase and sale agreement to sell its Torrance facility (see Note 5). Construction of and relocation to the New Facility are expected to be completed by the end of the second quarter of fiscal 2017.

Based on current assumptions and subject to continued implementation of the Corporate Relocation Plan as planned, the Company estimates that it will incur approximately $30.0 million in cash costs consisting of $17.0 million in employee retention and separation benefits, $5.0 million in facility-related costs and $8.0 million in other related costs.

Expenses related to the Corporate Relocation Plan in the three months ended March 31, ~~2016~~2017 consisted of ~~$1.8~~$0.4 million in employee retention and separation benefits, ~~$0.8~~$0.6 million in facility-related costs including ~~lease of temporary office space and~~ costs associated with the move of the Company's headquarters and ~~$0.6~~the relocation of certain distribution operations and $0.3 million in other related costs including travel, legal, consulting and other professional services. Facility-related costs in the three months ended March 31, ~~2016~~2017 also included ~~$0.2 million~~$22,000 in non-cash depreciation expense associated with the Torrance production facility resulting from the consolidation of coffee production operations with the Houston and Portland production facilities.

Expenses related to the Corporate Relocation Plan in the nine months ended March 31, ~~2016~~2017 consisted of ~~$8.5~~$1.1 million in employee retention and separation benefits, ~~$2.7~~$5.9 million in facility-related costs including lease of temporary office space, ~~and~~ costs associated with the move of the Company's headquarters and ~~$2.7~~the relocation of certain distribution operations and $1.3 million in other related costs including travel, legal, consulting and other professional services. Facility-related costs in the nine months ended March 31, ~~2016~~2017 also included ~~$0.8~~$2.5 million in non-cash charges, including $1.1 million in depreciation expense associated with the Torrance production facility resulting from the consolidation of coffee production operations with the Houston and Portland production ~~facilities.~~

~~Since adoption of the Corporate Relocation Plan through March 31, 2016, the Company has recognized a total of $23.2 million of the estimated $30.0~~facilities and $1.4 million in aggregate cash costs consisting of an aggregate of $15.0 million in employee retention and separation benefits, $2.5 million in facility-related costs and $5.7 million in other related costs. The remainder is expected to benon-cash rent expense recognized in the ~~fourth quarter~~sale-leaseback of ~~fiscal 2016 and~~ the ~~first half of fiscal 2017. The Company may incur certain other non-cash asset impairment costs, postretirement benefit costs and pension-related costs.~~

~~Farmer Bros. Co.~~

~~Notes to Unaudited Consolidated Financial Statements (continued)______________________________________________________________________________________________~~

Torrance Facility.

The following table sets forth the activity in liabilities associated with the Corporate Relocation Plan for the nine months ended March 31, ~~2016:~~2017:


(In thousands)	Balances, June 30, 2015		Additions		Payments		Non-Cash Settled		Adjustments		Balances, March 31, 2016		Balances, June 30, 2016		Additions		Payments		Non-Cash Settled		Adjustments		Balances, March 31, 2017
Employee-related costs(1)	$	6,156	$	8,455	$	11,018	$	—	$	—	$	3,593	$	2,342	$	1,109	$	2,616	$	—	$	—	$	835
Facility-related costs(2)	—		2,706		1,883		823		—		—		—		5,850		3,375		2,475		—		—
Other(3)	200		2,694		2,894		—		—		—		200		1,294		1,494		—		—		—
Total(2)	$	6,356	$	13,855	$	15,795	$	823	$	—	$	3,593	$	2,542	$	8,253	$	7,485	$	2,475	$	—	$	835
Current portion	6,356										3,593		$	2,542									$	835
Non-current portion	—										—		$	—									$	—
Total	$	6,356									$	3,593	$	2,542									$	835

_______________

(1) Included in ~~"Accrued~~“Accrued payroll ~~expenses"~~expenses” on the Company's condensed consolidated balance sheets.

Farmer Bros. Co.

Notes to Unaudited Consolidated Financial Statements (continued)

included in "Property, plant and equipment, net" on the Company's condensed consolidated balance sheets and (b) non-cash rent expense recognized in the sale-leaseback of the Torrance Facility.

(3) Included in “Accounts payable” on the Company's condensed consolidated balance sheets.

The Company estimated that it would incur approximately $31 million in cash costs in connection with the Corporate Relocation Plan consisting of $18 million in employee retention and separation benefits, $5 million in facility-related costs and $8 million in other related costs. Since the adoption of the Corporate Relocation Plan through March 31, 2017, the Company has recognized a total of $31.5 million in aggregate cash costs including $17.4 million in employee retention and separation benefits, $6.7 million in facility-related costs related to the temporary office space, costs associated with the move of the Company's headquarters, relocation of the Company’s Torrance operations and certain distribution operations and $7.4 million in other related costs. The Company expects to complete the Corporate Relocation Plan and recognize an additional $0.1 million in other-related costs in the fourth quarter of fiscal 2017. The Company also recognized from inception through March 31, 2017 non-cash depreciation expense of $2.3 million associated with the Torrance production facility resulting from the consolidation of coffee production operations with the Houston and Portland production facilities and $1.4 million in non-cash rent expense recognized in the sale-leaseback of the Torrance Facility. The Company may incur certain pension-related costs in connection with the Corporate Relocation Plan.

The following table sets forth the activity in liabilities associated with the Corporate Relocation Plan from the time of adoption of the Corporate Relocation Plan through the nine months ended March 31, 2017:



(In thousands)	Balances, June 30, 2014		Additions		Payments		Non-Cash Settled		Adjustments		Balances, March 31, 2017
Employee-related costs(1)	$	—	$	17,352	$	16,517	$	—	$	—	$	835
Facility-related costs(2)	—		10,442		6,711		3,731		—		—
Other	—		7,424		7,424		—		—		—
Total(2)	$	—	$	35,218	$	30,652	$	3,731	$	—	$	835

_______________

(1) Included in “Accrued payroll expenses” on the Company's condensed consolidated balance sheets.

(2) Non-cash settled facility-related costs represent (a) depreciation expense associated with the Torrance production facility resulting from the consolidation of coffee production operations with the Houston and Portland production facilities and included in "Property, plant and equipment, net" on the Company's condensed consolidated balance ~~sheets.~~sheets and (b) non-cash rent expense recognized in the sale-leaseback of the Torrance Facility.

~~(3) Included~~

DSD Restructuring Plan

On February 21, 2017, the Company announced a restructuring plan to reorganize its DSD operations in ~~"Accounts payable"~~an effort to realign functions into a channel based selling organization, streamline operations, acquire certain channel specific expertise, and improve selling effectiveness and financial results (the “DSD Restructuring Plan”). The strategic decision to undertake the DSD Restructuring Plan resulted from an ongoing operational review of various initiatives within the DSD selling organization. The Company expects to complete the DSD Restructuring Plan by the end of the second quarter of fiscal 2018.

The Company estimates that it will recognize approximately $3.7 million to $4.9 million of pre-tax restructuring charges by the end of the second quarter of fiscal 2018 consisting of approximately $1.9 million to $2.7 million in employee-related costs, including severance, prorated bonuses for bonus eligible employees, contractual termination payments and outplacement services, and $1.8 million to $2.2 million in other related costs, including legal, recruiting, consulting, other professional services, and travel. The Company may also incur other charges not currently contemplated due to events that may occur as a result of, or associated with, the DSD Restructuring Plan.

Expenses related to the DSD Restructuring Plan in the three and nine months ended March 31, 2017 consisted of $0.9 million in employee-related costs and $0.4 million in other related costs. As of March 31, 2017, the Company had paid a total of $0.1 million of these costs and had a balance of $1.2 million in DSD Restructuring Plan-related liabilities on the Company's condensed consolidated balance ~~sheets.~~sheet.

Farmer Bros. Co.

Notes to Unaudited Consolidated Financial Statements (continued)

Note 5. New Facility

~~Note 3. Facility~~ Lease ~~Obligation~~Agreement and Purchase Option Exercise

On June 15, 2016, the Company exercised the purchase option to purchase the land and the partially constructed New Facility located thereon pursuant to the terms of the lease agreement dated as of July 17, 2015, as amended (the "Lease Agreement"). On September 15, 2016 ("Purchase Option Closing Date"), the Company ~~entered into~~closed the purchase option and acquired the land and the partially constructed New Facility located thereon for an aggregate purchase price of $42.5 million (the “Purchase Price”), consisting of the purchase option price of $42.0 million based on actual construction costs incurred as of the Purchase Option Closing Date plus the option exercise fee, plus amounts paid in respect of real estate commissions, title insurance, and recording fees. Upon closing of the purchase option, the Company recorded the aggregate purchase price of the New Facility in "Property, plant and equipment, net" on its consolidated balance sheet. The asset related to the New Facility lease obligation included in "Property, plant and equipment, net," the offsetting liability for the lease obligation included in "Other long-term liabilities" and the rent expense related to the land were reversed. Concurrent with the purchase option closing, on September 15, 2016, the Company terminated the Lease Agreement. The Company did not pay any early termination penalties in connection with the termination of the Lease Agreement.

Development Management Agreement

In conjunction with the Lease Agreement, ~~pursuant~~the Company also entered into a Development Management Agreement with an affiliate of Stream Realty Partners (the "DMA") to ~~which~~manage, coordinate, represent, assist and advise the Company on matters from the pre-development through construction of the New Facility. Pursuant to the DMA, the Company will ~~lease~~pay the developer a ~~538,000 square foot facility to be constructed on 28.2 acres~~development fee, an oversight fee and a development services fee the amounts of ~~land located~~which are included in ~~Northlake, Texas, which will include corporate offices, areas dedicated to manufacturing~~the construction costs incurred-to-date.

Amended Building Contract

On September 17, 2016, the Company and ~~distribution, as well as~~The Haskell Company (“Builder”) entered into a lab. The Lease Agreement was amended pursuant to the First Amendment to Lease Agreement, dated as of December 29, 2015 (the “First Amendment”), pursuant to which certain delivery dates under the Lease Agreement were extended, and the Second Amendment to Lease Agreement, dated as of March 10, 2016 (the “Second Amendment”), pursuant toChange Order, which, among other things, amended the ~~base rent schedule was increased from $49.6 million to $56.6 million, the option purchase price under the Lease Agreement was increased from 103% to 103.5%, and certain construction items submitted by~~building contract previously entered into between the Company ~~were approved by~~and Builder to provide a guaranteed maximum price and the ~~Lessor.~~basis for the price and the scope of Builder’s services in connection with the construction of the New Facility (the "Amended Building Contract").

Pursuant to the Amended Building Contract, Builder will provide pre-construction and construction services, including specialized industrial design and construction work in connection with Builder’s construction of certain production equipment that will be installed in portions of the New Facility (the “Project”). The Company has engaged other designers and builders to provide traditional construction work on the Project site, including for the foundation, building envelope and roof of the New Facility. Pursuant to the Amended Building Contract, the Company will pay Builder up to $21.9 million for Builder’s services in connection with the Project. This amount is a guaranteed maximum price and is subject to adjustment in accordance with the terms of the Amended Building Contract. The Amended Building Contract includes an “IDB Work Contract Schedule,” which sets forth interim milestones, durations and material dates in relation to the performance and timing of Builder’s work. The Amended Building Contract includes remedies for the Company in the event agreed milestone dates relating to Builder’s services are not met. The Amended Building Contract is subject to customary undertakings, covenants, obligations, rights and conditions. The Builder’s work on the Project was substantially completed as of March 31, 2017.

New Facility Costs

Based on the ~~final budget,~~current forecast, the Company estimates that the total construction costs including the cost of land for the New Facility will be approximately $60 million of which ~~reflects substantial completion~~the Company has paid an aggregate of $54.7 million as of March 31, 2017 and has outstanding contractual obligations of $5.5 million as of March 31, 2017 (see Note 20). In addition to the ~~principal design work for~~costs to complete the construction of the New Facility, the Company estimates that ~~the construction costs for the New Facility~~it will beincur approximately ~~$55.0~~$35 million to ~~$60.0~~$39 million ~~plus an additional $35.0 million to $39.0 million in anticipated capital expenditures~~ for machinery and equipment, furniture and fixtures and related ~~expenditures. As compared to~~expenditures of which the ~~preliminary budget, the final budget reflects, among other things,~~Company has paid an ~~increase in facility size and scope~~aggregate of ~~building design,~~$20.2 million as of March 31, 2017, including a larger warehouse and a larger manufacturing footprint; additional infrastructure and automation to support staged manufacturing and production line capacity allowing for future capacity growth; and certain other estimated landlord costs$15.7 million under the ~~Lease Agreement.~~Amended Building Contract, and has outstanding contractual obligations of $6.2 million as of March 31, 2017 (see Note 20). The majority of the ~~construction costs~~capital expenditures associated with ~~the New Facility are expected to be incurred in early fiscal 2017. Principal design work~~machinery and equipment, furniture and fixtures, and related expenditures for the New Facility ~~was substantially completed in March 2016. The construction of the New Facility is estimated to be completed by the end of the second quarter of fiscal 2017.~~

The New Facility will be constructed by Lessor, at its expense, in accordance with agreed upon specifications and plans determined as set forth in the Lease Agreement. Due to the Company's involvement in the construction of the New Facility, as the deemed general contractor, pursuant to ASC 840, the Company is required to capitalize during the construction period the cash and non-cash assets (with the exception of the land which is not capitalized) contributed by Lessor for the construction as property, plant and equipment on the Company’s consolidated balance sheets, with an offsetting liability for the same amount payable to Lessor included in "Other long-term liabilities."

The Company recorded an asset related to the facility lease obligation included in property, plant and equipment of $19.2 million at March 31, 2016. The facility lease obligation included in "Other long-term liabilities" on the Company’s consolidated balance sheet was $19.2 million at March 31, 2016 (see Note 13). There were no such amounts recorded at June 30, 2015. At March 31, 2016 and June 30, 2015, respectively, the Company had recorded $0 and $0.3 million in "Other receivables" included in "Accounts and notes receivable, net" on its consolidated balance sheets representing costs it incurred associated with the New Facility (see Note 9).

Farmer Bros. Co.

Notes to Unaudited Consolidated Financial Statements (continued)~~______________________________________________________________________________________________~~

A portion of the lease arrangement is allocated to land for which the Company will accrue rent expense during the construction period. The amount of rent expense accrued is determined using the fair value of the leased land at construction commencement and the Company’s incremental borrowing rate, and is recognized on a straight-line basis. Once rent payments commence under the Lease Agreement, all amounts in excess of accrued expense will be recorded as a debt-service payment and recognized as interest expense and a reduction of the financing obligation. Rent expense associated with the portion of the lease arrangement allocated to the land includedwere incurred in the ~~Company’s consolidated statements~~first three quarters of ~~operations in the three~~fiscal 2017. Construction of and ~~nine months ended March 31, 2016 was $67,000 and $0.2 million, respectively. There was no comparable rent expense in the three and nine months ended March 31, 2015.~~

~~The Lease Agreement contains a purchase option exercisable at any time by the Company on or before ninety days prior~~relocation to the scheduled completion date with an option purchase price equal to 103.5% of the total project cost as of the date of the option closing if the option closing occurs on or before July 17, 2016. The option purchase price will increase by 0.35% per month thereafter up to and including the date which is the earlier of (A) ninety days after the scheduled completion date and (B) December 31, 2016. Based upon, among other things, the final budget which includes amounts in respect of construction costs, acquisition of the land upon which the New Facility ~~will be constructed, Lessor and Company fees and expenses (such as legal fees), and preliminary contingency amounts of $2.7 million, the Company estimates that, if it~~ were ~~to exercise the purchase option under the Lease Agreement on or before July 17, 2016, the option purchase price in lieu of the lease payments would be $58.6 million payable~~substantially completed in the ~~year ending June 30,~~third quarter of fiscal 2017. The decision of whether to exercise the option or not will depend upon, among other things, whether the Company can consummate the sale of the Torrance facility at the negotiated price. If the Company does not exercise the purchase option by December 31, 2016, the obligation to pay annual base rent under the Lease Agreement will commence.

The initial term of the lease is for 15 years from the rent commencement date with six options to renew, each with a renewal term of 5 years. The annual base rent under the Lease Agreement will be an amount equal to:

•~~the product of 7.50% and (a) the total estimated budget for the project, or (b) all construction costs outlined in the final budget on or prior to the scheduled completion date; or~~

•the product of 7.50% and the total project costs, to the extent that all components of the document delivery and completion requirement are fully satisfied on or prior to the scheduled completion date.

~~Based on the final budget, the Company estimates that the annual base rent would be approximately $4.2 million. The annual base rent will increase by 2% during each year of the lease term.~~

On July 17, 2015, the Company also entered into a Development Management Agreement (the “DMA”) with Stream Realty Partners-DFW, L.P., a Texas limited partnership (“Developer”). Pursuant to the DMA, which was amended ("First Amendment to DMA") on January 5, 2016 to amend certain dates and on March 25, 2016 ("Second Amendment to DMA") to acknowledge satisfaction of certain project commencement conditions, the Company retained the services of Developer to manage, coordinate, represent, assist and advise the Company on matters concerning the pre-development, development, design, entitlement, infrastructure, site preparation and construction of the New Facility. The term of the DMA is from July 17, 2015 until final completion of the project. Pursuant to the DMA, the Company will pay Developer:

•~~a development fee of 3.25% of all development costs;~~

•~~an oversight fee of 2% of any amounts paid to the Company-contracted parties for any oversight by Developer of Company-contracted work;~~

•~~an incentive fee, the amount of which will be determined by the parties, if final completion occurs prior to the scheduled completion date; and~~

•~~an amount equal to $2.6 million as additional fee in respect of development services.~~

Note 4. 6. Sales of Assets

Sale of Spice Assets

OnIn order to focus on its core products, on December 8, 2015, the Company completed the sale of the Spice Assets to Harris ~~Spice.~~Spice Company ("Harris"). Harris ~~Spice~~ acquired substantially all of the Company’s personal property used exclusively in connection with the ~~Spice Assets,~~manufacture, processing and distribution of raw, processed and blended spices and certain other culinary products (collectively, the "Spice Assets"), including certain equipment; trademarks, tradenames and other intellectual property assets; contract rights under sales and purchase orders and certain other agreements; and a list of certain customers, other than the Company’s DSD ~~Customers,~~customers, and assumed certain

~~Farmer Bros. Co.~~

~~Notes to Unaudited Consolidated Financial Statements (continued)______________________________________________________________________________________________~~

liabilities relating to the Spice Assets. The Company received $6.0 million in cash at closing, and is eligible to receive an earnout amount of up to $5.0 million over a ~~three year~~three-year period based upon a percentage of certain institutional spice sales by Harris ~~Spice~~ following the closing. The Company recognized ~~$0.4~~$0.3 million and $0.8 million in earnout during the three and nine months ended March 31, ~~2016,~~2017, respectively, a portion of which ~~$0.3 million was~~is included in ~~gain~~"Net gains from sale of Spice ~~Assets~~Assets" in ~~each~~the Company's condensed consolidated statements of ~~the three and nine months ended March 31, 2016.~~

~~In connection with the~~operations. The sale of the Spice Assets does not represent a strategic shift for the Company and Harris Spice entered into certain other agreements, including (1) a transitional co-packaging supply agreement pursuant to which the Company, as the contractor, will provide Harris Spice with certain transition services for a six-month transitional period following the closing of the asset sale, and (2) an exclusive supply agreement pursuant to which Harris Spice will supply to the Company, after the closing of the asset sale, spice and culinary products that were previously manufactured by the Company on negotiated pricing terms. While title to the Spice Assets transferred at closing, certain of the assets purchased by Harris Spice areis not expected to ~~be transferred to Harris Spice's own manufacturing facilities, in phases, during~~have a material impact on the ~~transitional period. After the closing~~Company's results of ~~the asset sale,~~operations because the Company will continue to sell ~~certain~~a complete portfolio of spice and other culinary products purchased from Harris ~~Spice~~ under ~~that~~a supply agreement to its DSD customers.

Sale of Torrance Facility

On July 15, 2016, the Company completed the previously-announced sale of the Torrance Facility, consisting of approximately 665,000 square feet of buildings located on approximately 20.33 acres of land, for an aggregate cash sale price of $43.0 million, which sale price was subject to customary adjustments for closing costs and documentary transfer taxes. Cash proceeds from the sale of the Torrance Facility were $42.5 million.

Following the closing of the sale, the Company leased back the Torrance Facility on a triple net basis through October 31, 2016 at zero base rent, and exercised two one-month extensions at a base rent of $100,000 per month. In accordance with ASC 840, “Leases,” due to the Company’s ~~DSD Customers.~~continuing involvement with the property, the Company accounted for the transaction as a financing transaction, deferred the gain on sale of the Torrance Facility and recorded the net sale proceeds of $42.5 million and accrued non-cash interest expense on the financing transaction in "Sale-leaseback financing obligation" on the Company's consolidated balance sheet at September 30, 2016. The Company vacated the Torrance Facility in December 2016 and concluded the leaseback transaction. See Note 7. As a result, at December 31, 2016, the financing transaction qualified for sales recognition under ASC 840. Accordingly, in the nine months ended March 31, 2017, the Company recognized the net gain from sale of the Torrance Facility in the amount of $37.4 million, including non-cash interest expense of $0.7 million and non-cash rent expense of $1.4 million, representing the rent for the zero base rent period previously recorded in "Other current liabilities" and removed the amounts recorded in "Assets held for sale" and the "Sale-leaseback financing obligation" on its consolidated balance sheet.

Sale of Northern California Branch Property

On September 30, 2016, the Company completed the sale of its branch property in Northern California for a sale price of $2.2 million and leased it back through March 31, 2017, at a base rent of $10,000 per month. The Company recognized a net gain on sale of the Northern California property in the nine months ended March 31, 2017 in the amount of $2.0 million.

Note 5.7. Assets Held for Sale

The Company ~~has listed for sale~~had designated its Torrance ~~facility~~Facility and ~~certain~~one of its branch properties in Northern California. The Company is actively marketing these properties and has entered into purchase and sale agreements with prospective buyers. The Company expects these properties will be sold within one year. Accordingly, the Company has designated these propertiesCalifornia as assets held for sale and recorded the carrying values of these properties in the aggregate amount of ~~$9.3~~$7.2 million asin "Assets held for sale" on the Company's consolidated balance sheet at June 30, 2016. As of March 31, ~~2016.~~2017, these assets were sold (see Note 6).

Note 6.8. Derivative Instruments

Farmer Bros. Co.

Notes to Unaudited Consolidated Financial Statements (continued)

Derivative Instruments Held

Coffee-Related Derivative Instruments

The Company is exposed to commodity price risk associated with its ~~PTF~~price to be fixed green coffee purchase contracts, which are described further in Note 1.1 to the consolidated financial statements in the 2016 Form 10-K. 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 March 31, ~~2016~~2017 and June 30, ~~2015:~~

2016:


(In thousands)	March 31, 2016	June 30, 2015	March 31, 2017		June 30, 2016
Derivative instruments designated as cash flow hedges:
Long coffee pounds	33,300	32,288	11,663		32,550
Derivative instruments not designated as cash flow hedges:
Long coffee pounds	4,126	1,954	873		1,618
Less: short coffee pounds	563	—
Less: Short coffee pounds			(713	)	(188	)
Total	36,863	34,242	11,823		33,980

Coffee-related derivative instruments designated as cash flow hedges outstanding as of March 31, ~~2016~~2017 will expire within 2112 months.

~~Farmer Bros. Co.~~

~~Notes to Unaudited Consolidated Financial Statements (continued)______________________________________________________________________________________________~~

Effect of Derivative Instruments on the Financial Statements

Balance Sheets

Fair values of derivative instruments on the Company's condensed consolidated balance sheets:


	Derivative Instruments Designated as Cash Flow Hedges				Derivative Instruments Not Designated as Accounting Hedges				Derivative Instruments Designated as Cash Flow Hedges				Derivative Instruments Not Designated as Accounting Hedges
	March 31,		June 30,		March 31,		June 30,		March 31, 2017		June 30, 2016		March 31, 2017		June 30, 2016
(In thousands)	2016(1)		2015(2)		2016(1)		2015(2)
Financial Statement Location:
Short-term derivative assets:
Coffee-related derivative instruments	$	874	$	128	$	231	$	25	$	522	$	3,771	$	1	$	183
Long-term derivative assets:
Long-term derivative assets(1):
Coffee-related derivative instruments	$	765	$	136	$	—	$	2	$	—	$	2,575	$	—	$	57
Short-term derivative liabilities:
Coffee-related derivative instruments	$	19	$	4,128	$	47	$	2	$	326	$	—	$	536	$	—
Long-term derivative liabilities:
Coffee-related derivative instruments	$	257	$	163	$	—	$	—

~~____________~~________________

(1) Included in ~~"Short-term derivative assets" and~~ "Other assets" on the Company's condensed consolidated balance ~~sheet at March 31, 2016.~~sheets.

~~(2) Included in "Short-term derivative liabilities" and "Other long-term liabilities" on the Company's consolidated balance sheet at June 30, 2015.~~

Farmer Bros. Co.

Notes to Unaudited Consolidated Financial Statements (continued)

Statements of Operations

The following table presents pretax net gains and losses for the Company's coffee-related derivative instruments designated as cash flow hedges, as recognized in ~~"AOCI," "Cost~~accumulated other comprehensive income (loss) “AOCI,” “Cost of goods ~~sold"~~sold” and ~~"Other, net"~~“Other, net”:

Three Months Ended
March 31, Nine Months Ended
March 31, Financial Statement Classification
(In thousands) 2016 2015 2016 2015
Net losses recognized in accumulated other comprehensive income (loss) (effective portion) $ (1,245 ) $ (9,117 ) $ (5,575 ) $ (11,700 ) AOCI
Net (losses) gains recognized in earnings (effective portion) $ (2,677 ) $ (375 ) $ (11,504 ) $ 9,467
Cost of goods sold
Net losses recognized in earnings (ineffective portion) $ (84 ) $ (89 ) $ (568 ) $ (259 ) Other, net



	Three Months Ended March 31,					Nine Months Ended March 31,						Financial Statement Classification
(In thousands)	2017		2016			2017			2016			Financial Statement Classification
Net gains (losses) recognized in accumulated other comprehensive income (effective portion)	$	188	$	(1,245	)	$	(2,029	)	$	(5,575	)	AOCI
Net gains (losses) recognized in earnings (effective portion)	$	865	$	(2,677	)	$	614		$	(11,504	)	Costs of goods sold
Net gains (losses) recognized in earnings (ineffective portion)	$	90	$	(84	)	$	63		$	(568	)	Other, net

For the three and nine months ended March 31, ~~2016~~2017 and ~~2015,~~2016, there were no gains or losses recognized in earnings as a result of excluding amounts from the assessment of hedge effectiveness or as a result of reclassifications to earnings following the discontinuance of any cash flow hedges.

Gains and losses on derivative instruments not designated as accounting hedges are included in “Other, net” in the Company's condensed consolidated statements of operations and in “Net losses ~~(gains)~~ on derivative instruments and investments” in the Company's condensed consolidated statements of cash flows.

~~Farmer Bros. Co.~~

~~Notes to Unaudited Consolidated Financial Statements (continued)______________________________________________________________________________________________~~

Net gains and losses recorded in ~~"Other, net"~~“Other, net” are as follows:


	Three Months Ended March 31,					Nine Months Ended March 31,						Three Months Ended March 31,				Nine Months Ended March 31,
(In thousands)	2016		2015			2016			2015			2017		2016		2017			2016
Net gains (losses) on coffee-related derivative instruments	$	239	$	(1,834	)	$	(455	)	$	(2,690	)	$	188	$	239	$	(1,052	)	$	(455	)
Net gains on investments	2		265			120			281
Net gains (losses) on investments												738		2		(354		)	120
Net gains (losses) on derivative instruments and investments(1)	241		(1,569		)	(335		)	(2,409		)	926		241		(1,406		)	(335		)
Other gains (losses), net	372		—			370			246			118		372		318			370
Other, net	$	613	$	(1,569	)	$	35		$	(2,163	)	$	1,044	$	613	$	(1,088	)	$	35

~~_______________~~___________


~~(1)~~	~~Excludes net (losses) gains on coffee-related derivative instruments designated as cash flow hedges recorded in cost of goods sold in the three and nine months ended March 31, 2016 and 2015.~~

(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 three and nine months ended March 31, 2017 and 2016.

Offsetting of Derivative Assets and Liabilities

The Company has agreements in place that allow for the financial right of offset for derivative assets and liabilities at settlement or in the event of default under the agreements. Additionally, the Company maintains accounts with its brokers to facilitate financial derivative transactions in support of its risk management activities. Based on the value of the Company’s positions in these accounts and the associated margin requirements, the Company may be required to deposit cash into these broker accounts.

Farmer Bros. Co.

Notes to Unaudited Consolidated Financial Statements (continued)

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
March 31, 2016 Derivative assets $ 1,870
$ (323 ) $ —
$ 1,547
Derivative liabilities $ 323
$ (323 ) $ —
$ —
June 30, 2015 Derivative assets $ 291
$ (291 ) $ —
$ —
Derivative liabilities $ 4,292
$ (291 ) $ 1,001
$ 3,000

~~Credit-Risk-Related Features~~

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 March 31, 2016 and June 30, 2015, the Company had $0 and $1.0 million in restricted cash representing cash held on deposit in margin accounts for coffee-related derivative instruments. Changes in commodity prices and the number of coffee-related derivative instruments held could have a significant impact on cash deposit requirements under the Company's broker and counterparty agreements.



(In thousands)		Gross Amount Reported on Balance Sheet		Netting Adjustments			Cash Collateral Posted		Net Exposure
March 31, 2017	Derivative Assets	$	523	$	(523	)	$	—	$	—
	Derivative Liabilities	$	862	$	(523	)	$	—	$	339
June 30, 2016	Derivative Assets	$	6,586	$	—		$	—	$	6,586

Cash Flow Hedges

Changes in the fair value of the Company's coffee-related derivative instruments designated as cash flow hedges, to the extent effective, are deferred in AOCI and reclassified into cost of goods sold in the same period or periods in which the hedged forecasted purchases affect earnings, or when it is probable that the hedged forecasted transaction will not occur by the end of the originally specified time period. Based on recorded values at March 31, ~~2016, $3.4~~2017, $1.9 million of net ~~losses~~gains on coffee-related derivative instruments designated as cash flow hedges are expected to be reclassified into cost of goods sold within the next twelve months. These recorded values are based on market prices of the commodities as of March 31, ~~2016.~~2017. Due to the volatile nature of commodity prices, actual gains or losses realized within the next twelve months ~~may~~will likely differ from these values.

~~Farmer Bros. Co.~~

~~Notes to Unaudited Consolidated Financial Statements (continued)______________________________________________________________________________________________~~

Note 7.9. Investments

The following table shows gains and losses on trading securities held for investment by the Company:


	Three Months Ended March 31,					Nine Months Ended March 31,					Three Months Ended March 31,					Nine Months Ended March 31,
(In thousands)	2016			2015		2016			2015		2017		2016			2017			2016
Total gains recognized from trading securities held for investment	$	2		$	265	$	120		$	281
Total gains (losses) recognized from trading securities held for investment											$	738	$	2		$	(354	)	$	120
Less: Realized gains (losses) from sales of trading securities held for investment	$	17		$	—	$	(10	)	$	39	7		17			5			(10		)
Unrealized (losses) gains from trading securities held for investment	$	(15	)	$	265	$	130		$	242
Unrealized gains (losses) from trading securities held for investment											$	731	$	(15	)	$	(359	)	$	130

Farmer Bros. Co.

Notes to Unaudited Consolidated Financial Statements (continued)

Note 8.10. Fair Value Measurements

The Company groups its assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:

~~Level 1—Valuation is based upon quoted prices for identical instruments traded in active markets.~~

Level 2—Valuation is based upon inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Inputs include quoted prices for similar instruments in active markets, and quoted prices for similar instruments in markets that are not active. 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 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.

~~Farmer Bros. Co.~~

~~Notes to Unaudited Consolidated Financial Statements (continued)______________________________________________________________________________________________~~

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
March 31, 2016
Preferred stock(1) $ 24,814
$ 21,195
$ 3,619
$ —
Derivative instruments designated as cash flow hedges:
Coffee-related derivative assets(2) $ 1,639
$ —
$ 1,639
$ —
Coffee-related derivative liabilities(2) $ 276
$ —
$ 276
$ —
Derivative instruments not designated as accounting hedges:
Coffee-related derivative assets(2) $ 231
$ —
$ 231
$ —
Coffee-related derivative liabilities(2) $ 47
$ —
$ 47
$ —

June 30, 2015 Total Level 1 Level 2 Level 3
Preferred stock(1) $ 23,665
$ 19,132
$ 4,533
$ —
Derivative instruments designated as cash flow hedges:

Coffee-related derivative assets(2) $ 264
$ —
$ 264
$ —
Coffee-related derivative liabilities(2) $ 4,290
$ —
$ 4,290
$ —
Derivative instruments not designated as accounting hedges:
Coffee-related derivative assets(2) $ 27
$ —
$ 27
$ —
Coffee-related derivative liabilities(2) $ 2
$ —
$ 2
$ —



(In thousands)	Total		Level 1		Level 2		Level 3
March 31, 2017
Preferred stock(1)	$	26,541	$	23,606	$	2,935	$	—
Derivative instruments designated as cash flow hedges:
Coffee-related derivative assets(2)	$	522	$	—	$	522	$	—
Coffee-related derivative liabilities(2)	$	326	$	—	$	326	$	—
Derivative instruments not designated as accounting hedges:
Coffee-related derivative assets(2)	$	1	$	—	$	1	$	—
Coffee-related derivative liabilities(2)	$	536	$	—	$	536	$	—

	Total		Level 1		Level 2		Level 3
June 30, 2016
Preferred stock(1)	$	25,591	$	21,976	$	3,615	$	—
Derivative instruments designated as cash flow hedges:
Coffee-related derivative assets(2)	$	6,346	$	—	$	6,346	$	—
Derivative instruments not designated as accounting hedges:
Coffee-related derivative assets(2)	$	240	$	—	$	240	$	—

____________________


(1)	Included in ~~"Short-term investments"~~“Short-term investments” on the Company's condensed consolidated balance sheets.


(2)	The Company's ~~coffee~~coffee-related derivative instruments are traded over-the-counter and, therefore, classified as Level 2.

During the ~~nine~~three months ended March 31, ~~2016,~~2017, there ~~was one transfer~~were no transfers of preferred stock from Level 1 to Level 2, resulting from a decrease in the quantity and quality of information related to trading activity and broker quotes for that security. The Company's coffee derivative instruments that were previously classified as Level 1 were appropriately reclassified as Level 2 because they are traded over-the-counter.

Note 9.11. Accounts and Notes Receivable, Net


							March 31, 2017			June 30, 2016
(In thousands)	March 31, 2016			June 30, 2015
Trade receivables	$	44,926		$	38,783		$	47,891		$	43,113
Other receivables(1)(2)	2,714			2,021
Other receivables(1)							3,190			1,965
Allowance for doubtful accounts	(1,072		)	(643		)	(655		)	(714		)
Accounts and notes receivable, net	$	46,568		$	40,161		$	50,426		$	44,364

__________

(1) At March 31, ~~2016~~2017 and June 30, ~~2015,~~2016, respectively, the Company had recorded $0$0.3 million and ~~$0.3~~$0.5 million, in "Other receivables" included in "Accounts and notes receivable, net" on its ~~consolidated balance sheets representing costs the Company incurred associated with the New Facility.~~

~~(2) At March 31, 2016 and June 30, 2015, respectively, the Company had recorded $0.4 million and $0 in "Other receivables" included in "Accounts and notes receivable, net" on its~~condensed consolidated balance sheets representing earnout receivable from ~~Harris Spice.~~

Harris.

Farmer Bros. Co.

Notes to Unaudited Consolidated Financial Statements (continued)~~______________________________________________________________________________________________~~

Note ~~10.~~12. Inventories


(In thousands)	March 31, 2016		June 30, 2015		March 31, 2017		June 30, 2016
Coffee:
Coffee
Processed	$	15,503	$	13,837	$	11,125	$	12,362
Unprocessed	12,227		11,968		24,290		13,534
Total	$	27,730	$	25,805	$	35,415	$	25,896
Tea and culinary products:
Tea and culinary products
Processed	$	19,905	$	17,022	$	21,011	$	15,384
Unprocessed	2,028		2,764		77		377
Total	$	21,933	$	19,786	$	21,088	$	15,761
Coffee brewing equipment parts	$	4,887	$	4,931	$	4,209	$	4,721
Total inventories	$	54,550	$	50,522	$	60,712	$	46,378

In addition to product cost, inventory costs include expenditures such as direct labor and certain supply and overhead expenses incurred in bringing the inventory to its existing condition and location. The “Unprocessed” inventory values as stated in the above table represent the value of raw materials and the “Processed” inventory values represent all other products consisting primarily of finished goods.

~~Inventories are valued~~Because the expected reduction in spice inventory levels at the lower of cost or market. The Company accounts for coffee, tea and culinary products on the last in, first out ("LIFO") basis and coffee brewing equipment parts on the first in, first out ("FIFO") basis. The Company regularly evaluates these inventoriesJune 30, 2017 from June 30, 2016 levels is expected to ~~determine whether market conditions are appropriately reflected in the recorded carrying value. At the end of each quarter,~~generate a beneficial effect, the Company ~~records the~~recorded $0.8 million and $2.5 million in expected beneficial effect of the liquidation of LIFO inventory quantities if any, and records the actual impact at fiscal year-end. An actual valuation of inventory under the LIFO method is made only at the end of each fiscal year based on the inventory levels and costs at that time. If inventory quantities decline at the end of the fiscal year compared to the beginning of the fiscal year, the reduction results in the liquidation of LIFO inventory quantities carried at the cost prevailing in prior years. This LIFO inventory liquidation may result in a decrease or increase in cost of goods sold ~~depending on whether~~in the ~~cost prevailing in prior years was lower or higher,~~three and nine months ended March 31, 2017, respectively, ~~than~~which increased income before taxes for the ~~current year cost. Accordingly, interim LIFO calculations must necessarily be based on management's estimates of expected fiscal year-end inventory levels~~three and ~~costs. As these estimates are subject to many forces beyond management's control, interim results are subject to the final fiscal year-end LIFO inventory valuation.~~

~~Because the Company anticipates that its inventory levels at June 30, 2016 will decrease from June 30, 2015 levels, the~~nine months ended March 31, 2017 by $0.8 million and $2.5 million, respectively. The Company recorded $0.8 million and $1.1 million in expected beneficial effect of the liquidation of LIFO inventory quantities in cost of goods sold in the three and nine months ended March 31, 2016, respectively, which increased ~~net~~ income before taxes for the three and nine months ended March 31, 2016 by $0.8 million and $1.1 million, respectively. InInterim LIFO calculations must necessarily be based on management's estimates of expected fiscal year-end inventory levels and costs. Because these estimates are subject to many forces beyond management's control, interim results are subject to the ~~three and nine months ended March 31, 2015, the Company recorded $0.7 million and $3.2 million, respectively, in expected beneficial effect of~~final fiscal year-end LIFO inventory ~~liquidation in cost of goods sold which increased net income for the three~~valuation.

Note 13. Property, Plant and ~~nine months ended March 31, 2015 by $0.7 million and $3.2 million, respectively.~~Equipment



(In thousands)	March 31, 2017			June 30, 2016
Buildings and facilities	$	54,364		$	54,768
Machinery and equipment	177,916			177,784
Buildings and facilities—New Facility	52,491			28,110
Machinery and equipment—New Facility	19,646			4,443
Office furniture and equipment—New Facility	3,990			—
Equipment under capital leases	7,552			11,982
Capitalized software	21,218			21,545
Office furniture and equipment	8,220			16,077
	345,397			314,709
Accumulated depreciation	(189,756		)	(206,162		)
Land	16,336			9,869
Property, plant and equipment, net	$	171,977		$	118,416

Farmer Bros. Co.

Notes to Unaudited Consolidated Financial Statements (continued)

Note ~~11.~~14. Employee Benefit Plans

The Company provides benefit plans for most full-time employees, including 401(k), health and other welfare benefit plans and, in certain circumstances, pension benefits. Generally, the plans provide benefits based on years of service and/or a combination of years of service and earnings. In addition, the Company contributes to two multiemployer defined benefit pension plans, one multiemployer defined contribution pension plan and ~~eleven~~ten multiemployer defined contribution plans other than pension plans that provide medical, vision, dental and disability benefits for active, union-represented employees subject to collective bargaining agreements. In addition, the Company sponsors a postretirement defined benefit plan that covers qualified non-union retirees and certain qualified union retirees and provides retiree medical coverage and, depending on the age of the retiree, dental and vision coverage. The Company also provides a postretirement death benefit to certain of its employees and retirees.

~~Farmer Bros. Co.~~

~~Notes to Unaudited Consolidated Financial Statements (continued)______________________________________________________________________________________________~~

The Company is required to recognize the funded status of a benefit plan in its consolidated balance sheets. The Company is also required to recognize in other comprehensive income ~~(loss)~~ (“OCI”) certain gains and losses that arise during the period but are deferred under pension accounting rules.

Single Employer Pension Plans

The Company has a defined benefit pension plan, the Farmer Bros. Co. Pension Plan for Salaried Employees (the “Farmer Bros. Plan”), for Company employees hired prior to January 1, 2010, who are not covered under a collective bargaining agreement. The Company amended the Farmer Bros. Plan, freezing the benefit for all participants effective June 30, 2011. After the plan freeze, participants do not accrue any benefits under the Farmer Bros. Plan, and new hires are not eligible to participate in the Farmer Bros. Plan. As all plan participants became inactive following this pension curtailment, net (gain) loss is now amortized based on the remaining life expectancy of these participants instead of the remaining service period of these participants.

The Company also has two defined benefit pension plans for certain hourly employees covered under collective bargaining agreements (the “Brewmatic Plan” and the “Hourly Employees' Plan”). Effective October 1, 2016, the Company froze benefit accruals and participation in the Hourly Employees' Plan, a defined benefit pension plan for certain hourly employees covered under collective bargaining agreements. After the plan freeze, participants do not accrue any benefits under the plan, and new hires are not eligible to participate in the plan. After the freeze the participants in the plan are eligible to receive the Company's matching contributions to their 401(k).

The net periodic benefit cost for the defined benefit pension plans is as follows:


	Three Months Ended March 31,						Nine Months Ended March 31,						Three Months Ended March 31,						Nine Months Ended March 31,
	2016			2015			2016			2015			2017			2016			2017			2016
(In thousands)
Service cost	$	97		$	97		$	291		$	291		$	124		$	97		$	372		$	291
Interest cost	1,546			1,415			4,638			4,245			1,397			1,546			4,191			4,638
Expected return on plan assets	(1,710		)	(1,823		)	(5,130		)	(5,469		)	(1,607		)	(1,710		)	(4,821		)	(5,130		)
Amortization of net loss(1)	370			303			1,110			909			508			370			1,524			1,110
Net periodic benefit cost (credit)	$	303		$	(8	)	$	909		$	(24	)
Net periodic benefit cost													$	422		$	303		$	1,266		$	909

___________

(1) These amounts represent the estimated portion of the net loss ~~remaining~~ in AOCI that is expected to be recognized as a component of net periodic benefit cost over the current fiscal year.

Weighted-Average Assumptions Used to Determine Net Periodic Benefit Cost


	Fiscal		Fiscal
	2016	2015	2017	2016
Discount rate	4.40%	4.15%	3.55%	4.40%
Expected long-term rate of return on plan assets	7.50%	7.50%	7.75%	7.50%

Farmer Bros. Co.

Notes to Unaudited Consolidated Financial Statements (continued)

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) 2014. The capital market assumptions were developed with a primary focus on forward-looking valuation models and market indicators. The key fundamental economic inputs for these models are future inflation, economic growth, and interest rate environment. Due to the long-term nature of the pension obligations, the investment horizon for the CMA 2014 is 20 to 30 years. In addition to forward-looking models, historical analysis of market data and trends was reflected, as well as the outlook of recognized economists, organizations and consensus CMA from other credible studies.

Multiemployer Pension Plans

The Company participates in two multiemployer defined benefit pension plans that are union sponsored and collectively bargained for the benefit of certain employees subject to collective bargaining agreements, of which the Western Conference of Teamsters Pension Plan (“WCTPP”) is individually significant. The Company makes contributions to these plans generally based on the number of hours worked by the participants in accordance with the provisions of negotiated labor contracts.

~~Farmer Bros. Co.~~

~~Notes to Unaudited Consolidated Financial Statements (continued)______________________________________________________________________________________________~~

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.

In fiscal 2012, the Company withdrew from the Local 807 ~~Labor Management~~Labor-Management Pension Fund ~~(the "Pension Fund"~~(“Pension Fund”) and recorded a charge of $4.3 million associated with withdrawal from this plan, representing the present value of the estimated withdrawal liability expected to be paid in quarterly installments of $0.1 million over 80 quarters. The $4.3 million estimated withdrawal liability, with the short-term and long-term portions reflected in current and long-term liabilities, respectively, is reflected on the Company's consolidated balance sheets at March 31, 2016 and June 30, 2015. On November 18, 2014, the Pension Fund sent the Company a notice of assessment of withdrawal liability in the amount of $4.4 million, which the Pension Fund adjusted to $4.9 million on January 5, 2015. The Company is in the process of negotiating a reduced liability amount. The Company has commenced quarterly installment payments to the Pension Fund of $91,000 pending the final settlement of the liability. The remaining estimated withdrawal liability of $3.6 million and $3.8 million is reflected in the Company's condensed consolidated balance sheets at March 31, 2017 and June 30, 2016, respectively, with the short-term and long-term portions reflected in current and long-term liabilities, respectively.

The Company may incur certain pension-related costs ~~associated~~in connection with the Corporate Relocation Plan. 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 ~~eleven~~ten multiemployer defined contribution plans other than pension plans that provide medical, vision, dental and disability benefits for active, union-represented employees subject to collective bargaining agreements. The plans are subject to the provisions of the Employee Retirement Income Security Act of 1974, and provide that participating employers make monthly contributions to the plans in an amount as specified in the collective bargaining agreements. Also, the plans provide that participants make self-payments to the plans, the amounts of which are negotiated through the collective bargaining process. The Company's participation in these plans is governed by collective bargaining agreements which expire on or before January 31, 2020.

401(k) Plan

The Company's 401(k) Plan is available to all eligible employees who have worked more than 1,000 hours during a calendar year and were employed at the end of the calendar year. Participants in the 401(k) Plan may choose to contribute a percentage of their annual pay subject to the maximum contribution allowed by the Internal Revenue Service. The Company's matching contribution is discretionary, based on approval by the Company's Board of Directors. For the calendar years ~~2016~~2017 and ~~2015,~~2016, the Company's Board of Directors approved a Company matching contribution of 50% of an employee's annual contribution to the 401(k) Plan, up to 6% of the employee's eligible income. The matching contributions (and any earnings thereon) vest at the rate of 20% for each of the participant's first 5 years of vesting service, so that a participant is fully vested in his or her matching contribution account after 5 years of vesting service, subject to accelerated vesting under certain

Farmer Bros. Co.

Notes to Unaudited Consolidated Financial Statements (continued)

circumstances in connection with the Corporate Relocation Plan due to the closure of the Company’s Torrance ~~facility~~Facility or a reduction-in-force at another Company facility designated by the Administrative Committee of the Farmer Bros. Co. Qualified Employee Retirement Plans. A participant is automatically vested in the event of death, disability or attainment of age 65 while employed by the Company. Employees are 100% vested in their contributions. For employees subject to a collective bargaining agreement, the match is only available if so provided in the labor agreement.

The Company recorded matching contributions of ~~$1.2 million and $1.1~~$0.4 million in operating expenses in each of the three months ended March 31, 2017 and 2016, and $1.2 million in operating expenses in each of the nine months ended March 31, ~~2016~~2017 and ~~2015, respectively.~~2016.

Postretirement Benefits

The Company sponsors a postretirement defined benefit plan that covers qualified non-union retirees and certain qualified union retirees (“Retiree Medical Plan”). The plan provides medical, dental and vision coverage for retirees under age 65 and medical coverage only for retirees age 65 and above. Under this postretirement plan, the Company’s contributions toward premiums for retiree medical, dental and vision coverage for participants and dependents are scaled based on length of service, with greater Company contributions for retirees with greater length of service, subject to a maximum monthly Company contribution.

The Company also provides a postretirement death benefit ("(“Death ~~Benefit"~~Benefit”) to certain of its employees and retirees, subject, in the case of current employees, to continued employment with the Company until retirement and certain other

~~Farmer Bros. Co.~~

~~Notes to Unaudited Consolidated Financial Statements (continued)______________________________________________________________________________________________~~

conditions related to the manner of employment termination and manner of death. The Company records the actuarially determined liability for the present value of the postretirement death benefit. The Company has purchased life insurance policies to fund the postretirement death benefit wherein the Company owns the policy but the postretirement death benefit is paid to the employee's or retiree's beneficiary. The Company records an asset for the fair value of the life insurance policies which equates to the cash surrender value of the policies.

~~The Company may be required to recognize postretirement benefit costs in connection with the Corporate Relocation Plan.~~

Retiree Medical Plan and Death Benefit

The following table shows the components of net periodic postretirement benefit cost ~~(credit)~~ for the Retiree Medical Plan and Death Benefit for the three and nine months ended March 31, ~~2016~~2017 and ~~2015.~~2016. Net periodic postretirement benefit ~~credit (credit)~~cost for the three and nine months ended March 31, ~~2016 is~~2017 was based on employee census information and asset information as of ~~June 30, 2015.~~July 1, 2016.


	Three Months Ended March 31,						Nine Months Ended March 31,						Three Months Ended March 31,						Nine Months Ended March 31,
	2016			2015			2016			2015			2017			2016			2017			2016
(In thousands)
Service cost	$	347		$	299		$	1,041		$	897		$	190		$	347		$	570		$	1,041
Interest cost	299			235			897			705			207			299			621			897
Amortization of net gain	(49		)	(125		)	(147		)	(375		)	(157		)	(49		)	(471		)	(147		)
Amortization of net prior service credit	(439		)	(439		)	(1,317		)	(1,317		)	(439		)	(439		)	(1,317		)	(1,317		)
Net periodic postretirement benefit cost (credit)	$	158		$	(30	)	$	474		$	(90	)
Net periodic postretirement benefit (credit) cost													$	(199	)	$	158		$	(597	)	$	474

Weighted-Average Assumptions Used to Determine Net Periodic Postretirement Benefit Cost


	Fiscal		Fiscal
	2016	2015	2017	2016
Retiree Medical Plan discount rate	4.69%	4.29%	3.73%	4.69%
Death Benefit discount rate	4.74%	4.48%	3.79%	4.74%

Farmer Bros. Co.

Notes to Unaudited Consolidated Financial Statements (continued)

Note ~~12.~~15. Bank Loan

~~On March 2, 2015, the~~The Company ~~as Borrower, together with its wholly owned subsidiaries, Coffee Bean International, Inc., an Oregon corporation ("CBI"), FBC Finance Company,~~maintains a California corporation, and Coffee Bean Holding Company, Inc., a Delaware corporation, as additional Loan Parties and as Guarantors, entered into a Credit Agreement (the “Credit Agreement”) and a related Pledge and Security Agreement (the “Security Agreement”) with JPMorgan Chase Bank, N.A. (“Chase”), as Administrative Agent, and SunTrust Bank (“SunTrust”), as Syndication Agent (collectively, the "Lenders") (capitalized terms used below are defined in the Credit Agreement).

~~The Credit Agreement provides for a~~$75.0 million senior secured revolving credit facility (“Revolving Facility”) ~~of up to $75.0 million (“Revolving Commitment”) consisting of Revolving Loans, Letters of Credit~~with JPMorgan Chase Bank, N.A. and ~~Swingline Loans provided by~~SunTrust Bank (collectively, the ~~Lenders,~~“Lenders”), with a sublimit on ~~Letters~~letters of ~~Credit outstanding at any time~~credit and swingline loans of $30.0 million and ~~a sublimit for Swingline Loans of~~ $15.0 ~~million. Chase agreed to provide $45.0~~ million, ~~of the~~respectively. The Revolving ~~Commitment and SunTrust agreed to provide $30.0 million of the Revolving Commitment. The Credit Agreement also~~Facility includes an accordion feature whereby the Company may increase the Revolving Commitment by up to an ~~aggregate amount not to exceed~~additional $50.0 million, subject to certain conditions.

~~The Credit Agreement provides for advances of up to: (a) 85% of~~ Advances are based on the ~~Borrowers'~~Company’s eligible accounts receivable, ~~plus (b) 75% of the Borrowers'~~ eligible inventory, ~~(not to exceed 85% of~~and the ~~product of the most recent Net Orderly Liquidation Value percentage multiplied by the Borrowers’ eligible inventory), plus (c) the lesser of $25.0 million and 75% of the fair market~~ value of ~~the Borrowers’ Eligible Real Property, subject to~~ certain ~~limitations, plus (d) the lesser of $10.0 million~~real property and ~~the Net Orderly Liquidation Value of certain~~ trademarks, less ~~(e) reserves established by the Administrative Agent.~~

~~Farmer Bros. Co.~~

~~Notes to Unaudited Consolidated Financial Statements (continued)______________________________________________________________________________________________~~

required reserves. The ~~Credit Agreement has a~~ commitment fee ~~ranging~~ranges from 0.25% to 0.375% per annum based on ~~Average Revolver Usage.~~average revolver usage. Outstanding obligations ~~under the Credit Agreement~~ are collateralized by all of the ~~Borrowers’ and the Guarantors’~~Company’s assets, excluding ~~among other things,~~certain real property not included in the ~~Borrowing Base,~~borrowing base, machinery and equipment (other than inventory), and the ~~Company’s~~Company's preferred stock portfolio. ~~The Credit Agreement expires on March 2, 2020.~~

~~The Credit Agreement provides for~~Borrowings under the Revolving Facility bear interest ~~rates~~ based on ~~Average Historical Excess Availability~~average historical excess availability levels with a range of PRIME - 0.25% to PRIME + 0.50% or Adjusted LIBO Rate + 1.25% to Adjusted LIBO Rate + 2.00%.

The ~~Credit Agreement contains~~Company is subject to a variety of affirmative and negative covenants of types customary in an asset-based lending facility, including financial covenants relating to the maintenance of a fixed charge coverage ratio in certain ~~circumstances.~~circumstances, and the right of the Lenders to establish reserve requirements, which may reduce the amount of credit otherwise available to the Company. The ~~Credit Agreement allows the~~ Company is allowed to pay dividends, provided, among other things, certain ~~Excess Availability~~excess availability requirements are met, and no event of default exists or has occurred and is continuing as of the date of any such payment and after giving effect thereto. The ~~Credit Agreement also allows the Lenders to establish reserve requirements, which may reduce the amount of credit otherwise available to the Company, and provides for customary events of default.~~Revolving Facility expires on March 2, 2020.

At March 31, ~~2016,~~2017, the Company was eligible to borrow up to a total of ~~$59.2~~$61.7 million under the Revolving ~~Facility. At March 31, 2016, the Company~~Facility and had outstanding borrowings of ~~$0.3~~$44.2 million, utilized ~~$11.5~~$4.4 million of the letters of credit sublimit, including $7.0 million as a security deposit for self-insuring California workers' compensation liability and $4.3 million as a security deposit for self-insuring workers' compensation, general liability and auto insurance coverages outside of California, and had excess availability under the Revolving Facility of ~~$47.4~~$13.1 million. At March 31, ~~2016,~~2017, the weighted average interest rate on the Company's outstanding borrowings under the Revolving Facility was ~~1.67%. At March 31, 2016,~~2.52% and the Company was in compliance with all of the restrictive covenants under the ~~Credit Agreement.~~Revolving Facility.

Note ~~13. Other~~16. Share-based Compensation

Non-qualified stock options with time-based vesting (“NQOs”)

In the nine months ended March 31, 2017, the Company granted no shares issuable upon the exercise of NQOs.

The following table summarizes NQO activity for the nine months ended March 31, 2017:



Outstanding NQOs:	Number of NQOs		Weighted Average Exercise Price ($)	Weighted Average Grant Date Fair Value ($)	Weighted Average Remaining Life (Years)	Aggregate Intrinsic Value ($ in thousands)
Outstanding at June 30, 2016	219,629		13.87	6.28	3.7	3,995
Granted	—		—	—	—	—
Exercised	(58,324	)	10.72	4.88	—	1,306
Cancelled/Forfeited	(18,156	)	25.12	10.89	—	—
Outstanding at March 31, 2017	143,149		13.72	6.26	2.7	3,096
Vested and exercisable at March 31, 2017	129,866		12.40	5.75	2.4	2,981
Vested and expected to vest at March 31, 2017	142,626		13.67	6.24	2.7	3,092

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 $35.35 at March 31, 2017 and $32.06 at June 30, 2016, representing the last trading day of the fiscal periods, 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 the nine months ended March 31, 2017 represents the difference between the exercise price and the value of the Company’s common stock at the time of exercise. NQOs outstanding that are expected to vest are net of estimated forfeitures.

Farmer Bros. Co.

Notes to Unaudited Consolidated Financial Statements (continued)

During the nine months ended March 31, 2017, 10,570 NQO shares vested and 58,324 NQO shares were exercised. Total fair value of NQOs vested during the nine months ended March 31, 2017 was $0.1 million. The Company received $0.5 million and $1.3 million in proceeds from exercises of vested NQOs in the nine months ended March 31, 2017 and 2016, respectively.

At March 31, 2017 and June 30, 2016, respectively, there was $0.1 million and $0.4 million of unrecognized compensation cost related to NQOs. The unrecognized compensation cost related to NQOs at March 31, 2017 is expected to be recognized over the weighted average period of 1.5 years. Total compensation expense for NQOs in the three months ended March 31, 2017 and 2016 was $14,000 and $45,000, respectively. Total compensation expense for NQOs in the nine months ended March 31, 2017 and 2016 was $0.1 million and $0.2 million, respectively.

Non-qualified stock options with performance-based and time-based vesting (“PNQs”)

In the nine months ended March 31, 2017, the Company granted 149,223 shares issuable upon the exercise of PNQs to eligible employees under the Farmer Bros. Co. Amended and Restated 2007 Long-Term ~~Liabilities~~Incentive Plan (the “LTIP”), with 20% of each such grant subject to forfeiture if a target modified net income goal for fiscal 2017 is not attained. For this purpose, “Modified Net Income” is defined as net income (GAAP) before taxes and excluding any gains or losses from sales of assets, and excluding the effect of restructuring and other transition expenses related to the relocation of the Company’s corporate headquarters to Northlake, Texas. These PNQs have an exercise price of $32.85, which was the closing price of the Company’s common stock as reported on Nasdaq 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.

~~Other long-term liabilities include~~Following are the ~~following:~~weighted average assumptions used in the Black-Scholes valuation model for PNQs granted during the nine months ended March 31, 2017.

(In thousands) March 31, 2016 June 30, 2015
Texas facility lease obligation(1) $ 19,154
$ —
Derivative liabilities —
25
Earnout payable—RLC Acquisition 100
200
Other long-term liabilities $ 19,254
$ 225

~~___________~~

~~(1) Facility lease obligation associated with the construction of New Facility (see Note 3).~~



	Nine Months Ended March 31, 2017
Weighted average fair value of PNQs	$11.42
Risk-free interest rate	1.53%
Dividend yield	—%
Average expected term	4.9 years
Expected stock price volatility	37.7%

The following table summarizes PNQ activity for the nine months ended March 31, 2017:



Outstanding PNQs:	Number of PNQs		Weighted Average Exercise Price ($)	Weighted Average Grant Date Fair Value ($)	Weighted Average Remaining Life (Years)	Aggregate Intrinsic Value ($ in thousands)
Outstanding at June 30, 2016	288,599		25.83	10.82	5.7	1,798
Granted	149,223		32.85	11.42	4.8	—
Exercised	(8,132	)	24.35	10.67	—	73
Cancelled/Forfeited	(62,262	)	31.43	11.38	—	—
Outstanding at March 31, 2017	367,428		27.77	10.97	5.3	2,787
Vested and exercisable at March 31, 2017	149,777		24.01	10.62	4.3	1,698
Vested and expected to vest at March 31, 2017	353,920		27.64	10.96	5.3	2,729

The aggregate intrinsic values outstanding at the end of each fiscal period in the table above represent the total pretax intrinsic values, based on the Company’s closing stock price of $35.35 at March 31, 2017 and $32.06 at June 30, 2016 representing the last trading day of the respective fiscal periods, 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 the nine months ended March 31, 2017 represents the difference between the exercise price and the value of the Company’s common stock at the time of exercise. PNQs outstanding that are expected to vest are net of estimated forfeitures.

Farmer Bros. Co.

Notes to Unaudited Consolidated Financial Statements (continued)

During the nine months ended March 31, 2017, 109,777 PNQ shares vested and 8,132 PNQ shares were exercised. Total fair value of PNQs vested during the nine months ended March 31, 2017 was $1.2 million. The Company received $0.2 million and $0.3 million in proceeds from exercises of vested PNQs in the nine months ended March 31, 2017 and 2016, respectively.

As of March 31, 2017, the Company met the performance target for the second and final tranche of the fiscal 2014 awards and the first tranche of the fiscal 2015 and fiscal 2016 awards and expects that it will achieve the performance targets set forth in the PNQ agreements for the remainder of the fiscal 2015 and 2016 awards, and the fiscal 2017 awards.

At March 31, 2017 and June 30, 2016, there was $2.1 million and $1.9 million, respectively, of unrecognized compensation cost related to PNQs. The unrecognized compensation cost related to PNQs at March 31, 2017 is expected to be recognized over the weighted average period of 1.5 years. Total compensation expense related to PNQs in each of the three months ended March 31, 2017 and 2016 was $0.2 million. Total compensation expense related to PNQs in the nine months ended March 31, 2017 and 2016 was $0.8 million and $0.3 million, respectively.

Restricted Stock

During the nine months ended March 31, 2017, the Company granted 5,106 shares of restricted stock to non-employee directors under the LTIP with a grant date fair value of $35.25 per share. Unlike prior-year awards to non-employee directors, which vest ratably over a period of three years, the fiscal 2017 restricted stock awards cliff vest on the first anniversary of the date of grant subject to continued service to the Company through the vesting date and the acceleration provisions of the LTIP and restricted stock agreement. No shares of restricted stock were granted to employees during the nine months ended March 31, 2017.

During the nine months ended March 31, 2017, 7,458 shares of restricted stock vested.

The following table summarizes restricted stock activity for the nine months ended March 31, 2017:



Outstanding and Nonvested Restricted Stock Awards:	Shares Awarded		Weighted Average Grant Date Fair Value ($)	Weighted Average Remaining Life (Years)	Aggregate Intrinsic Value ($ in thousands)
Outstanding at June 30, 2016	23,792		26.00	1.8	763
Granted	5,106		35.25	0.7	180
Exercised/Released	(7,458	)	24.16	—	253
Cancelled/Forfeited	(5,995	)	—	—	—
Outstanding at March 31, 2017	15,445		29.79	1.1	546
Expected to vest at March 31, 2017	14,843		29.78	1.1	525

The aggregate intrinsic value of shares outstanding at the end of each fiscal period in the table above represent the total pretax intrinsic values, based on the Company’s closing stock price of $35.35 at March 31, 2017 and $32.06 at June 30, 2016, representing the last trading day of the respective fiscal periods. Restricted stock that is expected to vest is net of estimated forfeitures.

At March 31, 2017 and June 30, 2016, there was $0.3 million and $0.5 million, respectively, of unrecognized compensation cost related to restricted stock. The unrecognized compensation cost related to restricted stock at March 31, 2017 is expected to be recognized over the weighted average period of 1.1 years. Total compensation expense for restricted stock was $15,000 and $66,000 for the three months ended March 31, 2017 and 2016, respectively. Total compensation expense for restricted stock was $0.2 million and $0.1 million, respectively, in the nine months ended March 31, 2017 and 2016.

Farmer Bros. Co.

Notes to Unaudited Consolidated Financial Statements (continued)

Note ~~14. Share-based Compensation~~17. Other Long-Term Liabilities

~~On December 5, 2013,~~Other long-term liabilities include the Company’s stockholders approved the Farmer Bros. Co. Amended and Restated 2007 Long-Term Incentive Plan (the “Amended Equity Plan”), which is an amendment and restatement of, and successor to, the Farmer Bros. Co. 2007 Omnibus Plan. The principal change to the Amended Equity Plan was to limit awards under the plan to performance-based stock options and to restricted stock under limited circumstances.following:

~~Stock Options~~



	March 31, 2017		June 30, 2016
(In thousands)
New Facility lease obligation(1)	$	—	$	28,110
Earnout payable—RLC acquisition(2)	—		100
Earnout payable—West Coast Coffee acquisition(3)	600		—
Other long-term liabilities	$	600	$	28,210

The share-based compensation expense recognized in the Company’s consolidated statements of operations is based on awards ultimately expected to vest. Compensation expense is recognized on a straight-line basis over the service period based on the estimated fair value___________

(1) Lease obligation associated with construction of the ~~stock options.~~New Facility. The Company estimates the fair value of option awards using the Black-Scholes option valuation model, which requires management to make certain assumptions for estimating the fair value of stock options at the date of grant. The Black-Scholes option valuation modellease obligation was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company’s stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimates, in management’s opinion the existing models may not necessarily provide a reliable single measurereversed upon termination of the ~~fair value~~Lease Agreement concurrent with the closing of the ~~Company’s stock options. Although~~purchase option on September 15, 2016 (see Note 5).

(2) Earnout payable in connection with the ~~fair value~~Company's acquisition of ~~stock options is determined using an~~substantially all of the assets of Rae' Launo Corporation completed on January 12, 2015.

~~Farmer Bros. Co.~~

~~Notes to Unaudited Consolidated Financial Statements (continued)______________________________________________________________________________________________~~

(3) Earnout payable in connection with the Company's acquisition of substantially all of the assets of West Coast Coffee on February 7, 2017.

~~option valuation model, that value may not be indicative of~~

Note 18. Income Taxes

The Company’ effective tax rates for the ~~fair value observed in a willing buyer/willing seller market transaction.~~

~~Non-Qualified Stock Options with Time-Based Vesting (“NQOs”)~~

~~In the nine~~three months ended March 31, 2017 and 2016 the Company granted 18,589 shares issuable upon the exercise of NQOs with a weighted average exercise price of $29.17 per share to eligible employees under the Amended Equity Plan which vest ratably over a three-year period. In the nine months ended March 31, 2015, the Company granted 13,123 shares issuable upon the exercise of NQOs with a weighted average exercise price of $23.44 per share to eligible employees under the Amended Equity Plan which vest ratably over a three-year period.

~~Following are the weighted average assumptions used in the Black-Scholes valuation model for NQOs granted during the nine months ended March 31, 2016.~~

Nine Months Ended
March 31, 2016
Weighted average fair value of NQOs $ 12.74
Risk-free interest rate 1.71 %
Dividend yield — %
Average expected term 5.1 years
Expected stock price volatility 47.9 %

were 44.4% and 3.5%, respectively. 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~~Company’ effective tax rates for the nine months ended March 31, ~~2016:~~

Outstanding NQOs:
Number
of
NQOs

Weighted
Average
Exercise
Price ($)

Weighted
Average
Grant Date
Fair Value ($)

Weighted
Average
Remaining
Life
(Years)

Aggregate
Intrinsic
Value
($ in thousands)
Outstanding at June 30, 2015 329,300
12.30 5.54 3.9 3,700
Granted 18,589
29.17 12.74 6.6 —
Exercised (100,895 ) 12.99 5.59 — 1,574
Cancelled/Forfeited (18,371 ) 13.45 6.17 — —
Outstanding at March 31, 2016 228,623
13.28 6.05 3.8 3,336
Vested and exercisable, March 31, 2016 188,705
10.50 4.90 3.3 3,278
Vested and expected to vest, March 31, 2016 225,974
13.12 5.99 3.8 3,333

2017 and 2016 were 40.4% and 5.3%, respectively. The ~~aggregate intrinsic value outstanding at~~effective tax rates for the ~~end of each period in the table above represents the total pretax intrinsic value, based on the Company’s closing stock price of $27.87 at March 31, 2016~~three and $23.50 at June 30, 2015, representing the last trading day of the applicable fiscal period, which would have been received by NQO holders had all award holders exercised their NQOs that were in-the-money as of that date. The aggregate intrinsic value of NQO exercises in the nine months ended March 31, ~~2016 represents the difference between the exercise price and the value of the Company’s common stock at the time of exercise. NQOs outstanding that~~2017 are ~~expected to vest are net of estimated forfeitures.~~

A total of 43,225 shares issuable under NQOs vested during the nine months ended March 31, 2016. During each of the nine months ended March 31, 2016 and 2015, the Company received $1.3 million in proceeds from exercises of vested NQOs.

As of March 31, 2016 and June 30, 2015, there was $0.4 million of unrecognized compensation cost related to NQOs. The unrecognized compensation cost related to NQOs at March 31, 2016 is expected to be recognized over the weighted average

~~Farmer Bros. Co.~~

~~Notes to Unaudited Consolidated Financial Statements (continued)______________________________________________________________________________________________~~

period of 2.3 years. Total compensation expense for NQOs in the three months ended March 31, 2016 and 2015 was $45,000 and $0.1 million, respectively. Total compensation expense for NQOs in the nine months ended March 31, 2016 and 2015 was $0.2 million and $0.3 million, respectively.

~~Non-Qualified Stock Options with Performance-Based and Time-Based Vesting (~~“~~PNQs”)~~

In the nine months ended March 31, 2016, the Company granted 143,466 shares issuable upon the exercise of PNQs with a weighted average exercise price of $29.48 per share to eligible employees under the Amended Equity Plan. These PNQs vest over a three-year period with one-third of the total number of shares subject to each such PNQ becoming exercisable each year on the anniversary of the grant date, based on the Company’s achievement of a modified net income target for fiscal 2016 ("FY16 Target") as approved by the Compensation Committee, subject to the participant’s employment by the Company or service on the Board of Directors of the Company on the applicable vesting dates and the acceleration provisions contained in the Amended Equity Plan and the applicable award agreement. But if actual modified net income for fiscal 2016 is lesshigher than the ~~FY16 Target, then 20%~~U.S. statutory rate of ~~the total shares issuable under such grant will be forfeited.~~

~~Following are the weighted average assumptions used in the Black-Scholes valuation model for PNQs granted during the nine months ended March 31, 2016.~~

Nine Months Ended
March 31, 2016
Weighted average fair value of PNQs $ 11.46
Risk-free interest rate 1.71 %
Dividend yield — %
Average expected term 4.9 years
Expected stock price volatility 42.5 %

35.0% primarily due to state income tax expense. The ~~following table summarizes PNQ activity for the nine months ended March 31, 2016:~~

Outstanding PNQs:
Number
of
PNQs

Weighted
Average
Exercise
Price ($)

Weighted
Average
Grant Date
Fair Value ($)

Weighted
Average
Remaining
Life
(Years)

Aggregate
Intrinsic
Value
($ in thousands)
Outstanding at June 30, 2015 224,067
22.44 10.31 6.0 237
Granted 143,466
29.48 11.46 6.5 —
Exercised (14,144 ) 21.20 10.45 — 107
Cancelled/Forfeited (64,790 ) 23.20 10.37 — —
Outstanding at March 31, 2016 288,599
25.83 10.86 6.0 588
Vested and exercisable, March 31, 2016 48,132
22.52 10.31 5.4 257
Vested and expected to vest, March 31, 2016 272,503
25.74 10.85 6.0 579

The aggregate intrinsic value outstanding at the end of each period in the table above represents the total pretax intrinsic value, based on the Company’s closing stock price of $27.87 at March 31, 2016 and $23.50 at June 30, 2015, representing the last trading day of the applicable fiscal period, which would have been received by PNQ holders had all award holders exercised their PNQs that were in-the-money as of that date. The aggregate intrinsic value of PNQ exercises in the nine months ended March 31, 2016 represents the difference between the exercise price and the value of the Company’s common stock at the time of exercise. PNQs outstanding that are expected to vest are net of estimated forfeitures.

As of March 31, 2016, the Company met the performance target for the first year of the fiscal 2014 and fiscal 2015 awards and expects that it will achieve the cumulative performance targets set forth in the PNQ agreements for the fiscal 2014, fiscal 2015 and fiscal 2016 awards. During the nine months ended March 31, 2016, 27,317 shares of PNQs vested. During the nine months ended March 31, 2016 and 2015, respectively, the Company received $0.3 million and $0 in proceeds from exercises of vested PNQs.

As of March 31, 2016 and June 30, 2015, there was $2.1 million and $1.5 million, respectively, in unrecognized compensation cost related to PNQs. The unrecognized compensation cost related to PNQs at March 31, 2016 is expected to be recognized over the weighted average period of 1.6 years. Total compensation expense for PNQs in the three months ended

~~Farmer Bros. Co.~~

~~Notes to Unaudited Consolidated Financial Statements (continued)______________________________________________________________________________________________~~

March 31, 2016 and 2015 was $0.2 million and $0.1 million, respectively. Total compensation expense for PNQs in the nine months ended March 31, 2016 and 2015 was $0.3 million and $0.4 million, respectively.

~~Restricted Stock~~

In the nine months ended March 31, 2016, the Company granted 9,638 shares of restricted stock under the Amended Equity Plan with a weighted average grant date fair value of $29.91 per share to eligible employees and non-employee directors.

Shares of restricted stock generally vest at the end of three years for eligible employees and ratably over a period of three years for non-employee directors. During the nine months ended March 31, 2016, 24,841 shares of restricted stock vested, of which 5,177 shares were withheld to meet the employees' minimum statutory tax withholding and retired.

~~The following table summarizes restricted stock activity for the nine months ended March 31, 2016:~~

Outstanding and Nonvested Restricted Stock Awards:
Shares
Awarded

Weighted
Average
Grant Date
Fair Value
($)

Weighted
Average
Remaining
Life
(Years)

Aggregate
Intrinsic
Value ($ in thousands)
Outstanding at June 30, 2015 47,082
16.48
1.2 1,106
Granted 9,638
29.91
3.0 288
Vested/Released(1) (24,841 ) 14.08
— 747
Cancelled/Forfeited (8,619 ) 13.06
— —
Outstanding at March 31, 2016 23,260
25.88
2.1 648
Expected to vest, March 31, 2016 21,569
25.79
2.1 601

~~_____________~~

~~(1) Includes 5,177 shares that were withheld to meet the employees' minimum statutory tax withholding and retired.~~

The aggregate intrinsic value of shares outstanding at the end of each period in the table above represents the total pretax intrinsic value, based on the Company’s closing stock price of $27.87 at March 31, 2016 and $23.50 at June 30, 2015, representing the last trading day of the applicable fiscal period. Restricted stock that is expected to vest is net of estimated forfeitures.

Compensation expense is recognized on a straight-line basis over the service period based on the estimated fair value of the restricted stock. Compensation expense recognized in the each of the three months ended March 31, 2016 and 2015 was $0.1 million. Compensation expense recognized in the nine months ended March 31, 2016 and 2015 was $0.1 million and $0.2 million, respectively. As of March 31, 2016 and June 30, 2015, there was approximately $0.5 million of unrecognized compensation cost related to restricted stock. The unrecognized compensation cost related to the restricted stock at March 31, 2016 is expected to be recognized over the weighted average period of 2.2 years.

~~Note 15. Income Taxes~~

~~The Company's~~ effective tax rates for the three and nine months ended March 31, 2016 ~~were 3.5% and 5.3%, respectively. The Company’s effective tax rates for the three and nine months ended March 31, 2015 were~~ ~~7.8%~~ ~~and~~ ~~7.5%, respectively.~~

~~The Company's effective tax rates for the current and prior year periods were~~are lower than the U.S. statutory rate of ~~35%~~35.0% primarily due to ~~the impact of~~a valuation allowance recorded against the Company's ~~net operating losses to offset taxable income. As net operating losses are used, the corresponding valuation allowance is decreased.~~deferred tax assets.

The Company evaluates its deferred tax assets quarterly to determine if a valuation allowance is required. ~~The~~In the fourth quarter of fiscal 2016, the Company considered whether a valuation allowance should be recorded against deferred tax assets based on the likelihood that the benefits of the deferred tax assets would or would not ultimately be realized in future periods. In making ~~this~~such assessment, significant weight was given to evidence that could be objectively verified such as recent operating results and less consideration was given to less objective indicators such as future ~~earnings~~income projections.

After consideration of positive and negative evidence, including the recent history of ~~losses,~~income, the Company ~~cannot conclude~~concluded that it is more likely than not that itthe Company will generate future ~~earnings~~income sufficient to realize the ~~Company's net~~majority of the Company’s deferred tax assets as of June 30, 2016. Accordingly, the Company recorded a reduction in its valuation allowance in fiscal 2016 in the amount of $83.2 million.

As of March 31, 2017 and June 30, 2016 the Company had no unrecognized tax benefits. During the quarter ended September 30, 2016, the Internal Revenue Service completed its examination of the Company’s tax years ended June 30, 2013 and 2014 and accepted the returns as filed for each of those years.

Farmer Bros. Co.

Notes to Unaudited Consolidated Financial Statements (continued)

Note 19. Net Income Per Common Share



	Three Months Ended March 31,				Nine Months Ended March 31,
(In thousands, except share and per share amounts)	2017		2016		2017		2016
Net income attributable to common stockholders—basic	$	1,592	$	1,190	$	23,253	$	5,673
Net income attributable to nonvested restricted stockholders	2		2		35		6
Net income	$	1,594	$	1,192	$	23,288	$	5,679

Weighted average common shares outstanding—basic	16,605,754		16,539,479		16,584,125		16,486,469
Effect of dilutive securities:
Shares issuable under stock options	116,020		107,936		120,075		127,806
Weighted average common shares outstanding—diluted	16,721,774		16,647,415		16,704,200		16,614,275
Net income per common share—basic	$	0.10	$	0.07	$	1.40	$	0.34
Net income per common share—diluted	$	0.10	$	0.07	$	1.39	$	0.34

Note 20. Commitments and Contingencies:

For a detailed discussion about the Company's commitments and contingencies, see Note 22, "Commitments and Contingencies" to the consolidated financial statements in the 2016 Form 10-K. During the nine months ended March 31, 2017, other than the following, there were no material changes in the Company’s commitments and contingencies.

Leases

As part of the China Mist transaction, the Company assumed the lease on China Mist’s existing 17,400 square foot production, distribution and warehouse facility in Scottsdale, Arizona which is terminable upon twelve months’ notice. As part of the West Coast Coffee transaction, the Company entered into a three-year lease on West Coast Coffee’s existing 20,400 square foot production, distribution and warehouse facility in Hillsboro, Oregon, which expires January 31, 2020, and assumed leases on six branch warehouses consisting of an aggregate of 24,150 square feet in Oregon, California and Nevada, expiring on various dates through November 2020. See Note 3.

Farmer Bros. Co.

Notes to Unaudited Consolidated Financial Statements (continued)~~______________________________________________________________________________________________~~

~~assets. Accordingly, the Company is maintaining a valuation allowance against its net deferred tax assets. The Company decreased its valuation allowance by $0.6~~Contractual obligations for future fiscal periods are as follows:



	Contractual Obligations
(In thousands)	Capital Lease Obligations			Operating Lease Obligations		New Facility Construction and Equipment Contracts (1)		Pension Plan Obligations		Postretirement Benefits Other Than Pension Plans		Revolving Credit Facility		Purchase Commitments (2)
Three months ending June 30, 2017	$	341		$	1,233	$	11,698	$	1,973	$	270	$	44,175	$	41,919
Year Ending June 30,
2018	$	990		$	4,684	$	—	$	8,304	$	1,102	$	—	$	37,584
2019	$	186		$	3,798	$	—	$	8,554	$	1,143	$	—	$	—
2020	$	51		$	2,133	$	—	$	8,844	$	1,176	$	—	$	—
2021	$	4		$	798	$	—	$	9,074	$	1,210	$	—	$	—
Thereafter	$	—		$	186	$	—	$	47,262	$	6,246	$	—	$	—
				$	12,832	$	11,698	$	84,011	$	11,147	$	44,175	$	79,503
Total minimum lease payments	$	1,572
Less: imputed interest (0.82% to 10.7%)	$	(52	)
Present value of future minimum lease payments	$	1,520
Less: current portion	$	1,131
Long-term capital lease obligations	$	389

___________

(1) Includes $5.5 million in outstanding contractual obligations for construction of the ~~three months ended March 31, 2016 to $82.5 million. The valuation allowance at June 30, 2015 was $84.9 million.~~

~~The Company will continue to monitor all available evidence, both positive~~New Facility and ~~negative,~~$6.2 million in ~~determining whether it is more likely than not that~~outstanding contractual obligations under the ~~Company will realize its net deferred tax assets.~~

AsAmended Building Contract as of March 31, ~~2016 and June 30, 2015, the Company had no unrecognized tax benefits. The Internal Revenue Service is currently auditing the Company's tax year ended June 30, 2013.~~

2017. See

Note ~~16. Net Income (Loss) Per Common Share~~

Three Months Ended
March 31,
Nine Months Ended
March 31,
(In thousands, except share and per share data) 2016 2015 2016 2015
Net income (loss) attributable to common stockholders—basic $ 1,190
$ (2,561 ) $ 5,673
$ 2,829
Net income (loss) attributable to nonvested restricted stockholders 2
(11 ) 6
10
Net income (loss) $ 1,192
$ (2,572 ) $ 5,679
$ 2,839

Weighted average common shares outstanding—basic 16,539,479
16,223,981
16,486,469
16,200,747
Effect of dilutive securities:
Shares issuable under stock options 107,936
—
127,806
142,391
Weighted average common shares outstanding—diluted 16,647,415
16,223,981
16,614,275
16,343,138
Net income (loss) per common share—basic $ 0.07
$ (0.16 ) $ 0.34
$ 0.18
Net income (loss) per common share—diluted $ 0.07
$ (0.16 ) $ 0.34
$ 0.17

~~Note 17. Commitments and Contingencies~~

~~Facility Lease Obligation~~

On July 17, 2015, the Company entered into the Lease Agreement, as amended, with Lessor pursuant to which the Company will lease a 538,000 square foot facility to be constructed on 28.2 acres of land located in Northlake, Texas (see Note 3).

~~Farmer Bros. Co.~~

~~Notes to Unaudited Consolidated Financial Statements (continued)______________________________________________________________________________________________~~

~~Contractual obligations for the remainder of fiscal 2016 and future fiscal years are as follows:~~

Contractual Obligations
(In thousands)
Capital Lease
Obligations

Operating
Lease
Obligations
New Facility Lease Obligation(1)
Pension Plan
Obligations

Postretirement
Benefits Other
Than Pension Plans
Revolving Credit Facility Purchase Commitments(2)
Three months ending June 30,
2016 $ 1,170
$ 1,148
$ —
$ 1,898
$ 269
$ 307
$ 30,696
Year Ending June 30,
2017 1,598
3,836
2,197
7,828
1,171
—
34,617
2018 900
3,088
4,438
8,137
1,306
—
—
2019 144
2,346
4,526
8,407
1,480
—
—
2020 51
1,185
4,617
8,687
1,555
—
—
Thereafter 4
395
60,202
47,033
8,950
—
—
$ 11,998
$ 75,980
$ 81,990
$ 14,731
$ 307
$ 65,313
Total minimum lease payments $ 3,867

Less: imputed interest (0.82% to 10.7%) (749 )
Present value of future minimum lease payments $ 3,118

Less: current portion 1,871

Long-term capital lease obligations $ 1,247

~~____________~~

(1) Includes estimated minimum lease payments commencing December 31, 2016 for the New Facility under the Lease Agreement assuming the purchase option thereunder is not exercised. Calculation of the annual base rent under the Lease Agreement shown in the table is based on the final budget. If the Company were to exercise the purchase option under the Lease Agreement on or before July 17, 2016, the estimated option purchase price in lieu of the lease payments would be $58.6 million payable in the year ending June 30, 2017 (see Note 3).

(2) 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 March 31, ~~2016.~~2017. Amounts shown in the table above: (a) include all coffee purchase contracts that the Company considers to be from normal purchases; and (b) do not include amounts related to derivative instruments that are recorded at fair value on the Company’s consolidated balance sheets.

Self-Insurance

At June 30, 2016, the Company had posted a $7.4 million letter of credit as a security deposit with the State of California Department of Industrial Relations Self-Insurance Plans for participation in the alternative security program for California self-insurers for workers’ compensation liability in California. The State of California notified the Company on December 13, 2016 that it had released and authorized the cancellation of the letter of credit. At March 31, 2017 and June 30, 2016, the Company had posted a $4.4 million and $4.3 million letter of credit, respectively, as a security deposit for self-insuring workers’ compensation, general liability and auto insurance coverages outside of California.

Non-cancelable Purchase Orders

As of March 31, ~~2016,~~2017, the Company had committed to purchase green coffee inventory totaling ~~$59.8~~$68.9 million under fixed-price contracts, ~~other inventory~~equipment for the New Facility totaling ~~$5.3~~$0.5 million and ~~equipment~~other purchases totaling ~~$0.2~~$10.1 million under non-cancelable purchase orders.

Farmer Bros. Co.

Notes to Unaudited Consolidated Financial Statements (continued)

Legal Proceedings

Steve Hernandez vs. Farmer Bros. Co., Superior Court of State of California, County of Los Angeles

On July 24, 2015, former Company employee Hernandez filed a putative class action complaint for damages alleging a single cause of action for unfair competition under the California Business & Professions Code. The claim purports to seek disgorgement of profits for alleged violations of various provisions of the California Labor Code relating to: failing to pay overtime, failing to provide meal breaks, failing to pay minimum wage, failing to pay wages timely during employment and upon termination, failing to provide accurate and complete wage statements, and failing to reimburse business-related expenses. Hernandez’s complaint seeks restitution in an unspecified amount and injunctive relief, in addition to attorneys’ fees and expenses. Hernandez alleges that the putative class is all “current and former hourly-paid or non-exempt individuals” for the four (4) years preceding the filing of the complaint through final judgment, and Hernandez also purports to reserve the right to establish sub-classes as appropriate. On November 12, 2015, a separate putative class representative, Monica Zuno, filed claim under the same class action; the Court has related this case to the Hernandez case. On November 17, 2015, the unified case was assigned to a judge, and this judge ordered the stay on discovery to remain intact until after a decision on the Company’s demurrer action. The plaintiff filed an Opposition to the Demurrer and, in response, on January 5, 2016, the Company filed a reply to this Opposition to the Demurrer. On February 2, 2016, the Court held a hearing on the demurrer and found in the Company’s favor, sustaining the demurrer in its entirety without leave to amend as to the plaintiff Hernandez, and so dismissing Hernandez’s claims and the related putative class. Claims on behalf of the plaintiff Zuno remain at this time. The Company provided responses to discovery following a lift by the Court of the stay on discovery. Responses to plaintiff’s first set of written and document discovery were filed on October 31, 2016. Following an October 31, 2016 hearing on a motion to compel and for sanctions against plaintiff and counsel for failing to appear for deposition, the Court granted the Company’s motion, ruling that all of plaintiff’s objections to the deposition notice were waived and ordered payment to the Company of $2,828 in sanctions. Depositions and written discovery proceeded from December 2016 through the first calendar quarter of 2017. A case management conference occurred on January 26, 2017, and a further case management conference has been scheduled for June 7, 2017 to determine whether Zuno intends to move forward as a purported class action or on an individual basis only. At this time, the Company is not able to predict the probability of the outcome or estimate of loss, if any, related to this matter.



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

~~Forward-Looking Statements~~

Certain statements contained in this Quarterly Report on Form 10-Q are not based on historical fact and are forward-looking statements within the meaning of federal securities laws and regulations. These statements are based on management’s current expectations, assumptions, estimates and observations of future events and include any statements that do not directly relate to any historical or current fact; actual results may differ materially due in part to the risk factors set forth in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended June 30, ~~2015~~2016 filed with the Securities and Exchange Commission (the "SEC") on September 14, ~~2015 (the "2015 10-K").~~2016 and Part II, Item 1A of this report. These forward-looking statements can be identified by the use of words like “anticipates,” “estimates,” “projects,” “expects,” “plans,” “believes,” “intends,” “will,” “could,” “assumes” and other words of similar meaning. Owing to the uncertainties inherent in forward-looking statements, actual results could differ materially from those set forth in forward-looking statements. We intend these forward-looking statements to speak only at the time of this report and do not undertake to update or revise these statements as more information becomes available except as required under federal securities laws and the rules and regulations of the SEC. Factors that could cause actual results to differ materially from those in forward-looking statements include, but are not limited to, the timing and success of completion of construction of the New Facility, the availability of capital resources to fund the construction costs and capital expenditures for the New Facility, the timing and success of implementation of the ~~Company’s corporate relocation plan, the successful completion of the sale of the Company’s Torrance facility, the diversion of management time on the Corporate Relocation~~DSD Restructuring Plan, ~~and other transaction-related issues,~~ the timing and success of the Company in realizing estimated savings from ~~third party~~third-party logistics ("3PL") and vendor managed inventory, the realization of the Company’s cost savings estimates, the timing and success of the Company realizing the benefits of its acquisitions, the relative effectiveness of compensation-based employee incentives in causing improvements in Company performance, the capacity to meet the demands of our large national account customers, the extent of execution of plans for the growth of Company business and achievement of financial metrics related to those plans, the ~~success of the Company to retain and/or attract qualified employees, 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, our ability to retain employees with specialized knowledge, the effectiveness of our hedging strategies in reducing price risk, changes in consumer preferences, our ability to provide sustainability in ways that do not materially impair profitability, changes in the strength of the economy, 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, changes in the quality or dividend stream of third parties’ securities and other investment vehicles in which we have invested our assets, as well as other risks described in this report and other factors described from time to time in our filings with the SEC. The results of operations for the three and nine months ended March 31, ~~2016~~2017 are not necessarily indicative of the results that may be expected for any future period.

~~Corporate Relocation Plan~~

~~On February 5, 2015,~~

Overview

We are a national coffee roaster, wholesaler and distributor of coffee, tea and culinary products manufactured under supply agreements, under our owned brands, as well as under private labels on behalf of certain customers. We were founded in 1912, incorporated in California in 1923, and reincorporated in Delaware in 2004. 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 and convenience store chains, hotels, casinos, hospitals, and gourmet coffee houses, as well as grocery chains with private brand coffee and consumer-facing branded coffee and tea products. Through our sustainability, stewardship, environmental efforts, and leadership we ~~announced~~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 ~~plan approved~~robust line of roast and ground coffee, including organic, Direct Trade, Direct Trade Verified Sustainable ("DTVS") and sustainably-produced offerings; frozen liquid coffee; flavored and unflavored iced and hot teas; culinary products including gelatins and puddings, soup bases, dressings, gravy and sauce mixes, pancake and biscuit mixes, jellies and preserves, and coffee-related products such as coffee filters, sugar and creamers; spices; and other beverages including cappuccino, cocoa, granitas, and ready-to-drink iced coffee. We offer a comprehensive approach to our customers by ~~our Board~~providing not only a breadth of ~~Directors on February 3, 2015, pursuant to which we will close our Torrance, California facility~~high-quality products, but also value-added services such as market insight, beverage planning, and ~~relocate these operations to a new facility~~equipment placement and service.

We operate production facilities in Northlake, Texas (the "New Facility") ~~housing our manufacturing, distribution, coffee lab~~; Houston, Texas; Portland, Oregon; Hillsboro, Oregon; and ~~corporate headquarters (the "Corporate Relocation Plan"). Approximately 350 positions are impacted as a result~~Scottsdale, Arizona. Distribution takes place out of the ~~Torrance facility closure. The~~ New Facility, ~~will be located~~the Portland, Hillsboro and Scottsdale facilities, as well as separate distribution centers in Northlake, ~~Texas~~Illinois; and Moonachie, New Jersey. On July 15, 2016 we completed the sale of certain property, including our former headquarters in Torrance, California (the “Torrance Facility”) and leased it back. We vacated the Torrance Facility after transitioning our remaining Torrance operations to our other facilities and concluded the leaseback arrangement as of December 31, 2016. We commenced distribution activities at the New Facility during the second quarter of fiscal 2017 and initial production activities late in the ~~Dallas/Fort Worth area.~~ third quarter of fiscal 2017.

Our ~~decision resulted from~~products reach our customers primarily in two ways: through our nationwide DSD network of 646 delivery routes and 114 branch warehouses as of March 31, 2017, or direct-shipped via common carriers or third-party distributors. We operate a ~~comprehensive review~~large fleet of ~~alternatives designed~~trucks and other vehicles to distribute and deliver our products, and we rely on 3PL service providers for our long-haul distribution. DSD sales are made “off-truck” to our customers at their places of business.

Corporate Relocation

In an effort to make the Company more competitive and better positioned to capitalize on growth ~~opportunities.~~

~~We expect to close our Torrance facility~~opportunities, in ~~phases, and~~fiscal 2015 we began the process ~~in the spring~~ of ~~2015. Through April 2015, coffee purchasing, roasting, grinding, packaging and~~relocating our corporate headquarters, product development ~~took place at our~~lab, and manufacturing and distribution operations from Torrance, California ~~Portland, Oregon and Houston, Texas production facilities. In May 2015, we moved~~to the ~~coffee roasting, grinding and packaging functions that had been conducted in Torrance to our Houston and Portland production facilities and in conjunction relocated our Houston distribution~~New Facility housing these operations ~~to our Oklahoma City distribution center. As of March 31, 2016, distribution continued to take place out of our Torrance and Portland production facilities, as well as separate distribution centers~~ in Northlake, ~~Illinois; Oklahoma City, Oklahoma; and Moonachie, New Jersey. Effective September 15, 2015, we transferred~~Texas (the “Corporate Relocation Plan”). Approximately 350 positions were impacted as a majority of our primary administrative offices from Torrance to Fort Worth, Texas, where we have leased 32,000 square feet of temporary office space. The transfer of our primary administrative offices to this temporary office space was substantially completed in the second quarter of fiscal 2016. On December 8, 2015, we completed the sale of certain assets associated with our manufacture, processing and distribution of raw, processed and blended spices and certain other culinary products (collectively, the “Spice Assets”) to Harris Spice Company Inc., a California corporation (“Harris Spice”). Pursuant to a transitional co-packaging supply agreement, we will provide Harris Spice with certain transition services for a limited time period following closingresult of the ~~sale. As a result, spice blending, grinding and packaging will continue to take place at our~~ Torrance ~~production facility until the conclusion of the transition services, which is expected to occur during the fourth quarter~~Facility closure.

The significant milestones associated with our Corporate Relocation Plan are as follows:



Event		Date
Announced Corporate Relocation Plan		Q3 fiscal 2015
Transitioned coffee processing and packaging from Torrance production facility and consolidated them with Houston and Portland production facilities		Q4 fiscal 2015
Moved Houston distribution operations to Oklahoma City distribution center		Q4 fiscal 2015
Entered into the lease agreement and development management agreement for New Facility		Q1 fiscal 2016
Commenced construction of New Facility		Q1 fiscal 2016
Transitioned primary administrative offices from Torrance to temporary leased offices in Fort Worth, Texas		Q1-Q2 fiscal 2016
Sold Spice Assets to Harris		Q2 fiscal 2016
Principal design work completed on New Facility		Q3 fiscal 2016
Completed transition services to Harris and ceased spice processing and packaging at Torrance Facility		Q4 fiscal 2016
Entered into purchase and sale agreement to sell Torrance Facility		Q4 fiscal 2016
Exercised purchase option on New Facility		Q4 fiscal 2016
Closed sale of Torrance Facility		Q1 fiscal 2017
Closed purchase option for New Facility		Q1 fiscal 2017
Entered into amended building contract with The Haskell Company		Q1 fiscal 2017
Exited from Torrance Facility		Q2 fiscal 2017
Substantial completion of construction and relocation to New Facility		Q3 fiscal 2017
Transitioned Oklahoma City distribution operations to New Facility		Q3 fiscal 2017

See Liquidity, Capital Resources and Financial Condition below for further details of ~~fiscal 2016. In December 2015,~~the impact of these activities on our financial condition and liquidity.

Recent Developments

On February 21, 2017, we announced a restructuring plan to reorganize our ~~plans~~DSD operations in an effort to replace our long-haul fleet operations with third party logistics ("3PL") and a vendor managed inventory initiative. The first phase of the 3PL program began in January 2016 and is expected to be fully implemented by the end of the fourth quarter of fiscal 2016. In April 2016, we enteredrealign functions into a ~~purchase~~channel based selling organization, streamline operations, acquire certain channel specific expertise, and ~~sale agreement~~improve selling effectiveness and financial results (the “DSD Restructuring Plan”). The strategic decision to ~~sell our Torrance facility. Construction~~undertake the DSD Restructuring Plan resulted from an ongoing operational review of ~~and relocation~~various initiatives within the DSD selling organization. We expect to complete the ~~New Facility are expected to be completed~~DSD Restructuring Plan by the end of the second quarter of fiscal ~~2017.~~2018.

~~Based on current assumptions and subject to continued implementation of the Corporate Relocation Plan as planned, we~~We estimate that we will ~~incur~~recognize approximately ~~$30.0 million in cash costs consisting of $17.0 million in employee retention and separation benefits, $5.0 million in facility-related costs and $8.0 million in other related costs.~~

~~Expenses related~~$3.7 to the Corporate Relocation Plan in the three months ended March 31, 2016 consisted of $1.8 million in employee retention and separation benefits, $0.8 million in facility-related costs including lease of temporary office space and costs associated with the move of the Company's headquarters, and $0.6 million in other related costs including travel, legal, consulting and other professional services. Facility-related costs in the three months ended March 31, 2016 also included $0.2 million in non-cash depreciation expense associated with the Torrance production facility resulting from the consolidation of coffee production operations with the Houston and Portland production facilities.

Expenses related to the Corporate Relocation Plan in the nine months ended March 31, 2016 consisted of $8.5 million in employee retention and separation benefits, $2.7 million in facility-related costs including lease of temporary office space and costs associated with the move of the Company's headquarters, and $2.7 million in other related costs including travel, legal, consulting and other professional services. Facility-related costs in the nine months ended March 31, 2016 also included $0.8 million in non-cash depreciation expense associated with the Torrance production facility resulting from the consolidation of coffee production operations with the Houston and Portland production facilities.

~~Since adoption of the Corporate Relocation Plan through March 31, 2016, we have recognized a total of $23.2~~$4.9 million of the estimated $30.0 million in aggregate cash costs consisting of an aggregate of $15.0 million in employee retention and separation benefits, $2.5 million in facility-related costs and $5.7 million in other related costs. The remainder is expected to be recognized in the fourth quarter of fiscal 2016 and the first half of fiscal 2017. We may incur certain other non-cash asset impairment costs, postretirement benefit costs and pension-related costs.

~~The following table sets forth the activity in liabilities associated with the Corporate Relocation Plan for the nine months ended March 31, 2016:~~

(In thousands)
Balances,
June 30, 2015
Additions Payments Non-Cash Settled Adjustments Balances,
March 31, 2016
Employee-related costs(1) $ 6,156
$ 8,455
$ 11,018
$ —
$ —
$ 3,593
Facility-related costs(2) —
2,706
1,883
823
—
—
Other(3) 200
2,694
2,894
—
—
—
Total $ 6,356
$ 13,855
$ 15,795
$ 823
$ —
$ 3,593
Current portion 6,356
3,593
Non-current portion —
—
Total $ 6,356
$ 3,593

~~_______________~~


~~(1)~~	~~Included in "Accrued payroll expenses" on the Company's consolidated balance sheets.~~


~~(2)~~	Non-cash settled facility-related costs represent depreciation expense associated with the Torrance production facility resulting from the consolidation of coffee production operations with the Houston and Portland production facilities and included in "Property, plant and equipment, net" on the Company’s consolidated balance sheets.


~~(3)~~	~~Included in "Accounts payable" on the Company's consolidated balance sheets.~~

~~Facility Lease Obligation~~

On July 17, 2015, we entered into a lease agreement, as amended (the “Lease Agreement”) with WF-FB NLTX, LLC, a Delaware limited liability company (the “Lessor”), to lease a 538,000 square foot facility to be constructed on 28.2 acres of land located in Northlake, Texas, which will include corporate offices, areas dedicated to manufacturing and distribution, as well as a lab. The Lease Agreement was amended pursuant to the First Amendment to Lease Agreement, dated as of December 29, 2015 (the “First Amendment”), pursuant to which certain delivery dates under

the Lease Agreement were extended, and the Second Amendment to Lease Agreement, dated as of March 10, 2016 (the “Second Amendment”), pursuant to which, among other things, the base rent schedule was increased from $49.6 million to $56.6 million, the option purchase price under the Lease Agreement was increased from 103% to 103.5%, and certain construction items submitted by the Company were approved by the Lessor. The foregoing summary of the First Amendment and the Second Amendment does not purport to be complete and is subject to, and qualified in its entirety by reference to the full text of the First Amendment and the Second Amendment which are filed with this Quarterly Report on Form 10-Q as Exhibit 10.36 and Exhibit 10.37, respectively. Principal design work for the New Facility was substantially completed in March 2016. The construction of the New Facility is estimated to be completedpre-tax restructuring charges by the end of the second quarter of fiscal ~~2017.~~2018 consisting of approximately $1.9 million to $2.7 million in employee-related costs, including severance, prorated bonuses for bonus eligible employees, contractual termination payments and outplacement services, and $1.8 million to $2.2 million in other related costs, including legal, recruiting, consulting, other professional services, and travel. We may also incur other charges not currently contemplated due to events that may occur as a result of, or associated with, the DSD Restructuring Plan. See Note 4, Restructuring Plans—DSD Restructuring Plan, of the Notes to Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this report.

~~The New Facility will~~On February 7, 2017, we acquired substantially all of the assets and certain specified liabilities of West Coast Coffee Company, Inc. (“West Coast Coffee”), a coffee roaster and distributor with a focus on the convenience store, grocery and foodservice channels for aggregate purchase consideration of $15.7 million, which included $14.7 million in cash paid at closing including working capital adjustments of $1.2 million and up to $1.0 million in contingent consideration to be ~~constructed by Lessor, at its expense, in accordance with agreed upon specifications and plans determined~~paid as ~~set forth~~earnout if certain sales levels are achieved in the ~~Lease Agreement. Due~~twenty-four months following the closing. The acquisition of West Coast Coffee is expected to broaden our ~~involvement~~reach in the Northwestern United States. See Note 3, Acquisitions—West Coast Coffee

Company, Inc., of the Notes to Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this report.

On October 11, 2016, we acquired substantially all of the assets and certain specified liabilities of China Mist Brands, Inc. dba China Mist Tea Company (“China Mist”), a provider of flavored iced teas and iced green teas, for aggregate purchase consideration of $11.7 million, which included $11.2 million in cash paid at closing including working capital adjustments of $0.4 million and up to $0.5 million in contingent consideration to be paid as earnout if certain sales levels are achieved in the calendar years of 2017 or 2018. We anticipate that the acquisition of China Mist will extend our tea product offerings and give us a greater presence in the high-growth premium tea industry. See Note 3, Acquisitions-China Mist Brands, Inc., of the Notes to Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this report.

On September 17, 2016, we and The Haskell Company (“Builder”) entered into a Change Order, which, among other things, amended the building contract previously entered into between us and Builder to provide a guaranteed maximum price and the basis for the price and the scope of Builder’s services in connection with the construction of the New Facility as(the "Amended Building Contract"). Pursuant to the ~~deemed general contractor, pursuant~~Amended Building Contract, we will pay Builder up to ~~Accounting Standards Codification (“ASC”) 840, “Leases,” we are required to capitalize during~~$21.9 million for Builder’s services in connection with the pre-construction and construction ~~period the cash~~services, including specialized industrial design and ~~non-cash assets (with the exception~~construction work in connection with Builder’s construction of certain production equipment that will be installed in portions of the New Facility. See Note 5, New Facility, and Note 20, Commitments and Contingencies of the Notes to Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this report.

On September 15, 2016 (the "Purchase Option Closing Date"), we closed the purchase option and acquired the land ~~which is not capitalized) contributed by Lessor~~and the partially constructed New Facility located thereon for an aggregate purchase price of $42.5 million (the “Purchase Price”), consisting of the purchase option price of $42.0 million based on actual construction costs incurred for the construction as property, plant and equipment on our consolidated balance sheets with an offsetting liability for the same amount payable to Lessor included in "Other long-term liabilities." We recorded an asset related to the facility lease obligation included in property, plant and equipment of $19.2 million at March 31, 2016. The facility lease obligation included in "Other long-term liabilities" on our consolidated balance sheet was $19.2 million at March 31, 2016. There were no such amounts recorded at June 30, 2015. At March 31, 2016 and June 30, 2015, respectively, we recorded $0 and $0.3 million in “Other receivables” included in "Accounts and notes receivable, net" on our consolidated balance sheets representing costs we incurred associated with thepartially constructed New ~~Facility.~~

A portion of the lease arrangement is allocated to the land for which we will accrue rent expense during the construction period. The amount of rent expense to be accrued is determined using the fair value of the leased land at construction commencement and our incremental borrowing rate, and is recognized on a straight-line basis. Once rent payments commence under the Lease Agreement, all amounts in excess of accrued rent expense will be recorded as a debt-service payment and recognized as interest expense and a reduction of the financing obligation. Rent expense associated with the portion of the lease arrangement allocated to the land included in our consolidated statements of operations in the three and nine months ended March 31, 2016 was $67,000 and $0.2 million, respectively. There was no comparable rent expense in the three and nine months ended March 31, 2015.

The Lease Agreement contains a purchase option exercisable at any time by us on or before ninety days prior to the scheduled completion date with an option purchase price equal to 103.5% of the total project costFacility as of the date of the option closing if the option closing occurs on or before July 17, 2016. The option purchase price will increase by 0.35% per month thereafter up to and including the date which is the earlier of (A) ninety days after the scheduled completion date and (B) December 31, 2016. Based upon, among other things, the final budget which includesPurchase Option Closing Date, plus amounts paid in respect of ~~construction costs, acquisition of the land upon which the New Facility will be constructed, Lessor~~real estate commissions, title insurance, and Company fees and expenses (such as legal fees), and preliminary contingency amounts of $2.7 million, we estimate that, if we were to exercise the purchase option under the Lease Agreement on or before July 17, 2016, the option purchase pricerecording fees. The Purchase Price was paid in lieu of the lease payments would be $58.6 million payable in the year ending June 30, 2017. The decision of whether to exercise the option or not will depend upon, among other things, whether we can consummatecash from proceeds received from the sale of the Torrance ~~facility at the negotiated price. If we do not exercise the purchase option by December 31, 2016, the obligation to pay rent under the Lease Agreement will commence. The initial term~~Facility. See Note 5, New Facility, of the ~~lease is for 15 years from the rent commencement date with six options~~Notes to ~~renew, each with a renewal term~~Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of ~~5 years. The annual base rent under the Lease Agreement will be an amount equal to:~~

•~~the product of 7.50% and (a) the total estimated budget for the project, or (b) all construction costs outlined in the final budget on or prior to the scheduled completion date; or~~this report.

~~Based on the final budget, we estimate that the annual base rent would be approximately $4.2 million. The annual base rent will increase by 2% during each year of the lease term.~~

On July 17, 2015, we also entered into a Development Management Agreement (the “DMA”) with Stream Realty Partners-DFW, L.P., a Texas limited partnership (“Developer”). Pursuant to the DMA, which was amended ("First Amendment to DMA") on January 5,15, 2016, to amend certain dates and on March 25, 2016 ("Second Amendment to DMA") to acknowledge satisfaction of certain project commencement conditions, we retained the services of Developer to manage, coordinate, represent, assist and advise us on matters concerning the pre-development,

development, design, entitlement, infrastructure, site preparation and construction of the New Facility. The foregoing summary of the First Amendment to DMA and the Second Amendment to DMA does not purport to be complete and is subject to, and qualified in its entirety by reference to the full text of the First Amendment to DMA and the Second Amendment to DMA which are filed with this Quarterly Report on Form 10-Q as Exhibit 10.39 and Exhibit 10.40, respectively. The term of the DMA is from July 17, 2015 until final completion of the project. Pursuant to the DMA, we will pay Developer:

~~a development fee of 3.25% of all development costs;~~

~~an oversight fee of 2% of any amounts paid to the Company-contracted parties for any oversight by Developer of Company-contracted work;~~

~~an incentive fee, the amount of which will be determined by the parties, if final completion occurs prior to the scheduled completion date; and~~

~~an amount equal to $2.6 million as additional fee in respect of development services.~~

~~Sale of Spice Assets~~

~~On December 8, 2015,~~ we completed the sale of the ~~Spice Assets~~Torrance Facility consisting of approximately 665,000 square feet of buildings located on approximately 20.33 acres of land, for an aggregate cash sale price of $43.0 million, which sale price was subject to ~~Harris Spice. Harris Spice acquired substantially all of our personal property used exclusively in connection with the Spice Assets, including certain equipment; trademarks, tradenames~~customary adjustments for closing costs and other intellectual property assets; contract rights under sales and purchase orders and certain other agreements; and a list of certain customers, other than our direct store delivery customers (“DSD Customers”), and assumed certain liabilities relating to the Spice Assets. We received $6.0 million in cash at closing, and we are eligible to receive an earnout amount of up to $5.0 million over a three year period based upon a percentage of certain institutional spice sales by Harris Spice following the closing. Gaindocumentary transfer taxes. Cash proceeds from the ~~earnout is recognized when earned~~sale of the Torrance Facility were $42.5 million. Following the closing of the sale, we leased back the Torrance Facility on a triple net basis through October 31, 2016 at zero base rent, and ~~when realization is assured beyond~~exercised two one-month extensions at a ~~reasonable doubt.~~base rent of $100,000 per month. We ~~recognized $0.4 million~~vacated the Torrance Facility in ~~earnout during~~December 2016 and concluded the ~~three and~~leaseback transaction. Accordingly, in the nine months ended March 31, ~~2016,~~2017, we recognized a net gain from the sale of ~~which $0.3~~the Torrance Facility in the amount of $37.4 million, ~~was~~including non-cash interest expense of $0.7 million and non-cash rent expense of $1.4 million, representing the rent for the zero base rent period previously recorded in “Other current liabilities” and removed the amounts recorded in “Assets Held for Sale” and the “Sale-leaseback financing obligation” on our consolidated balance sheet. See Note 6, Sales of Assets—Sale of Torrance Facility, and Note 7, Assets Held for Sale, of the Notes to Unaudited Condensed Consolidated Financial Statements included in ~~gain from sale~~Part I, Item 1 of ~~Spice Assets~~this report.

Results of Operations

Financial Highlights

Volume of green coffee pounds processed and sold increased 6.9% in each of the three and nine months ended March 31, ~~2016.~~

~~We have followed the guidance in ASC 205-20, "Presentation of Financial Statements — Discontinued Operations,"~~2017 as updated by Accounting Standards Update ("ASU") No. 2014-08, "Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity" and have not presented the sale of the Spice Assets as discontinued operations. The sale of the Spice Assets does not represent a strategic shift for us and is not expected to have a major effect on our results of operations because we will continue to sell spice products to our DSD Customers.

In connection with the sale of the Spice Assets, we and Harris Spice entered into certain other agreements, including (1) a transitional co-packaging supply agreement pursuant to which we, as the contractor, will provide Harris Spice with certain transition services for a six-month transitional period following the closing of the asset sale, and (2) an exclusive supply agreement pursuant to which Harris Spice will supply to us, after the closing of the asset sale, spice and culinary products that were previously manufactured by us on negotiated pricing terms. While titlecompared to the Spice Assets transferred at closing, certain of the assets purchased by Harris Spice are expected to be transferred to Harris Spice's own manufacturing facilities, in phases, during the transitional period. After the closing of the asset sale, we will continue to sell certain spicethree and ~~other culinary products purchased from Harris Spice under that supply agreement to our DSD Customers.~~

~~Assets Held for Sale~~

We consider properties to be assets held for sale when (1) management commits to a plan to sell the property; (2) it is unlikely that the disposal plan will be significantly modified or discontinued; (3) the property is available for immediate sale in its present condition; (4) actions required to complete the sale of the property have been initiated; (5) sale of the property is probable and we expect the completed sale will occur within one year; and (6) the property is actively being marketed for sale at a price that is reasonable given our estimate of current market value. We have listed for sale our Torrance facility and certain of our branch properties in Northern California. We are actively marketing these properties and have entered into purchase and sale agreements with prospective buyers. We expect these properties will be sold within one year. Accordingly, we have designated these properties as assets held for sale and recorded the carrying values of these properties in the aggregate amount of $9.3 million as "Assets held for sale" on our consolidated balance sheet atnine months ended March 31, 2016.

We have entered into a Purchase and Sale Agreement for the sale of our Torrance facility for an aggregate sale price of $43.0 million. In connection with the Purchase and Sale Agreement, the Buyer agreedGross profit increased 2.4% to ~~pay an aggregate~~

deposit of $2.0 million. The deposit may be retained by the Seller if the transaction does not close as a result of the Buyer's breach or default under the Purchase and Sale Agreement. The Purchase and Sale Agreement contains representations, warranties and covenants of the parties, closing conditions, termination provisions and other provisions customary for similar transactions. The closing of the sale of the Torrance facility is estimated to take place on June 30, 2016, unless otherwise extended as set forth$53.8 million in the ~~Purchase and Sale Agreement. Pursuant to the Purchase and Sale Agreement, we are entitled to lease back the Torrance facility for an initial term of four~~three months subject to two one-month extensions at our option. The foregoing summary does not purport to be complete and is subject to, and qualified in its entirety by reference to the full text of the Purchase and Sale Agreement which is filed with this Quarterly Report on Form 10-Q as Exhibit 10.41.

~~Liquidity and Capital Resources~~

~~Credit Facility~~

Onended March 2, 2015, we, as Borrower, together with our wholly owned subsidiaries, Coffee Bean International, Inc., an Oregon corporation ("CBI"), FBC Finance Company, a California corporation, and Coffee Bean Holding Company, Inc., a Delaware corporation, as additional Loan Parties and as Guarantors, entered into a Credit Agreement (the “Credit Agreement”) and a related Pledge and Security Agreement (the “Security Agreement”) with JPMorgan Chase Bank, N.A. (“Chase”), as Administrative Agent, and SunTrust Bank (“SunTrust”), as Syndication Agent (collectively, the "Lenders") (capitalized terms used below are defined31, 2017 from $52.6 million in the ~~Credit Agreement).~~

The Credit Agreement provides for a senior secured revolving credit facility (“Revolving Facility”) of up to $75.0 million (“Revolving Commitment”) consisting of Revolving Loans, Letters of Credit and Swingline Loans provided by the Lenders, with a sublimit on Letters of Credit outstanding at any time of $30.0 million and a sublimit for Swingline Loans of $15.0 million. Chase agreed to provide $45.0 million of the Revolving Commitment and SunTrust agreed to provide $30.0 million of the Revolving Commitment. The Credit Agreement also includes an accordion feature whereby we may increase the Revolving Commitment by an aggregate amount not to exceed $50.0 million, subject to certain conditions.

The Credit Agreement provides for advances of up to: (a) 85% of the Borrowers' eligible accounts receivable, plus (b) 75% of the Borrowers' eligible inventory (not to exceed 85% of the product of the most recent Net Orderly Liquidation Value percentage multiplied by the Borrowers’ eligible inventory), plus (c) the lesser of $25.0 million and 75% of the fair market value of the Borrowers’ Eligible Real Property, subject to certain limitations, plus (d) the lesser of $10.0 million and the Net Orderly Liquidation Value of certain trademarks, less (e) reserves established by the Administrative Agent.

The Credit Agreement has a commitment fee ranging from 0.25% to 0.375% per annum based on Average Revolver Usage. Outstanding obligations under the Credit Agreement are collateralized by all of the Borrowers’ and the Guarantors’ assets, excluding, among other things, real property not included in the Borrowing Base, machinery and equipment (other than inventory), and the Company’s preferred stock portfolio. The Credit Agreement expires on March 2, 2020.

The Credit Agreement provides for interest rates based on Average Historical Excess Availability levels with a range of PRIME - 0.25% to PRIME + 0.50% or Adjusted LIBO Rate + 1.25% to Adjusted LIBO Rate + 2.00%.

The Credit Agreement contains a variety of affirmative and negative covenants of types customary in an asset-based lending facility, including financial covenants relating to the maintenance of a fixed charge coverage ratio in certain circumstances. The Credit Agreement allows us to pay dividends, provided, among other things, certain Excess Availability requirements are met, and no event of default exists or has occurred and is continuing as of the date of any such payment and after giving effect thereto. The Credit Agreement also allows the Lenders to establish reserve requirements, which may reduce the amount of credit otherwise available to us, and provides for customary events of default.

Atthree months ended March 31, ~~2016, we were eligible~~2016. Gross profit increased 2.6% to borrow up to a total of $59.2 million under the Revolving Facility. At March 31, 2016, we had outstanding borrowings of $0.3 million, utilized $11.5 million of the letters of credit sublimit, and had excess availability under the Revolving Facility of $47.4 million. At March 31, 2016, the weighted average interest rate on our outstanding borrowings under the Revolving Facility was 1.67%. At March 31, 2016, we were in compliance with all of the restrictive covenants under the Credit Agreement.

At April 30, 2016, we had estimated outstanding borrowings of $0.3 million, utilized $11.5 million of the letters of credit sublimit, and had excess availability under the Revolving Facility of $47.4 million. At April 30, 2016, the weighted average interest rate on our outstanding borrowings under the Revolving Facility was 1.67%.

~~Liquidity~~

We generally finance our operations through cash flows from operations and borrowings under our Revolving Facility described above. As of March 31, 2016, we had $13.3 million in cash and cash equivalents and $24.8 million in short-term investments. We believe our Revolving Facility, to the extent available, in addition to our cash flows from operations and other liquid assets, the net proceeds from the sale of the Spice Assets, and the expected net proceeds from the sale of our Torrance facility, including additional anticipated proceeds from the disposal of miscellaneous fixed assets relating to the Torrance facility, collectively, will be sufficient to fund our working capital and capital expenditure requirements for the next 12 to 18 months including the expected capital expenditures associated with the Corporate Relocation Plan, construction costs for the New Facility and anticipated capital expenditures for machinery and equipment, furniture and fixtures, and related expenditures.

~~We generate cash from operating activities primarily from cash collections related to the sale of our products. Net cash provided by operating activities was $9.4~~$160.1 million in the nine months ended March 31, ~~2016 compared to $4.5~~2017 from $156.0 million in the nine months ended March 31, ~~2015. Net cash provided by operating activities~~2016.

Gross margin decreased to 38.9% in the three months ended March 31, 2017, from 39.1% in the three months ended March 31, 2016. Gross margin increased to 39.3% in the nine months ended March 31, ~~2016 was primarily due to higher net income and a higher level of cash inflows~~2017, from operating activities resulting primarily from proceeds from sales of short-term investments and higher accruals for incentive compensation payments to eligible employees, partially offset by higher cash outflows from purchase of short-term investments, and increases in derivative assets, accounts receivable and inventory balances. Net cash provided by operating activities38.0% in the nine months ended March 31, ~~2016~~2016.

Income from operations was $2.1 million and $40.5 million, respectively, in the three and nine months ended March 31, 2017 as compared to $0.3 million and $5.1 million, respectively, in the three and nine months ended March 31, 2016. Income from operations included ~~the release of restriction on $1.0~~a $37.4 million ~~in cash held in coffee-related derivative margin accounts, as we had a~~ net gain ~~position in such accounts. Net cash provided by operating activities~~from the sale of the Torrance Facility in the nine months ended March 31, ~~2015 was primarily due to lower net income~~2017 and a higher level of cash outflows from operating activities primarily from payments of accounts payable balances and payroll expenses including a reversal of previously accrued incentive compensation for eligible employees, partially offset by a decrease in derivative assets. In addition, timing differences between the receipt or payment of cash and recognition of the related net (losses) gains from derivative instruments contributed to the differences in cash from operations in the reported periods. In the nine months ended March 31, 2016, non-cash net losses from derivative instruments contributed to the increase in cash flows from operations. In the nine months ended March 31, 2015, non-cash net gains of $5.4 million from ~~derivative instruments contributed to~~ the ~~decrease in cash flows from operations.~~

~~Net cash used in investing activities was $23.7 million~~sale of Spice Assets in the nine months ended March 31, ~~2016~~2016.

Net income was $1.6 million, or $0.10 per diluted common share, in the three months ended March 31, 2017, compared to ~~$14.5~~$1.2 million, or $0.07 per diluted common share, in the three months ended March 31, 2016. Net income was $23.3 million, or $1.39 per diluted common share, in the nine months ended March 31, ~~2015. Net cash used in investing activities~~2017, compared to $5.7 million, or $0.34 per diluted common share, in the nine months ended March 31, ~~2016 included $16.2~~2016.

EBITDA increased 52.7% to $10.0 million ~~for purchases of property, plant~~ and ~~equipment and $13.5 million~~EBITDA Margin was 7.3% in ~~purchases of construction-in-progress assets in connection with~~ the ~~construction of the New Facility~~three months ended March 31, 2017, as ~~the deemed owner under the lease arrangement, offset by proceeds from sales of assets of $6.0 million, including $5.3 million in proceeds from the sale of the Spice Assets,~~ compared to ~~$13.6~~EBITDA of $6.6 million ~~for purchases~~and EBITDA Margin of ~~property, plant~~4.9% in the three months ended March 31, 2016. EBITDA increased 159.5% to $57.2 million and ~~equipment offset by proceeds from sales of assets, primarily equipment, of $0.2 million~~EBITDA Margin was 14.0% in the nine months ended March 31, ~~2015.~~

~~Net cash provided by financing activities was $12.5~~2017, as compared to EBITDA of $22.1 million and EBITDA Margin of 5.4% in the nine months ended March 31, ~~2016~~2016.

Adjusted EBITDA increased 24.0% to $12.2 million and Adjusted EBITDA Margin was 8.8% in the three months ended March 31, 2017, as compared to ~~$7.5~~Adjusted EBITDA of $9.8 million and Adjusted EBITDA Margin of 7.3% in the three months ended March 31, 2016. Adjusted EBITDA increased 5.7% to $34.3 million and Adjusted EBITDA Margin was 8.4% in the nine months ended March 31, ~~2015. Net cash provided by financing activities~~2017, as compared to Adjusted EBITDA of $32.5 million and Adjusted EBITDA Margin of 7.9% in the nine months ended March 31, 2016 included $13.5 million in proceeds from lease financing in connection with the construction of the New Facility as the deemed owner under the lease arrangement, and net borrowings on our credit facility of $0.2 million, compared to net borrowings of $9.5 million in the nine months ended March 31, 2015. Proceeds from stock option exercises during the nine months ended March 31, 2016 were $1.6 million compared to $1.3 million in the nine months ended March 31, 2015. 2016.

Net cash provided by financing activities in the nine months ended March 31, 2016 was partially offset by $2.7 million used to pay capital lease obligations and $8,000 used to pay financing cost obligations associated with the Revolving Facility. Net cash provided by financing activities in the nine months ended March 31, 2015 was partially offset by $3.0 million used to pay capital lease obligations and $0.2 million used to pay financing cost obligations associated with the Revolving Facility.

Based on current assumptions and subject to continued implementation of the Corporate Relocation Plan as planned, we estimate that we will incur approximately $30.0 million in cash costs consisting of $17.0 million in employee retention and separation benefits, $5.0 million in facility-related costs and $8.0 million in other related costs. Since adoption of the Corporate Relocation Plan through March 31, 2016, we have recognized a total of $23.2 million of the estimated $30.0 million in aggregate cash costs consisting of an aggregate of $15.0 million in employee retention and separation benefits, $2.5 million in facility-related costs and $5.7 million in other related costs. The

remainder is expected to be recognized in the fourth quarter of fiscal 2016 and the first half of fiscal 2017. We may incur certain other non-cash asset impairment costs, postretirement benefit costs and pension-related costs.

In the nine months ended March 31, 2016, we capitalized $16.2 million in property, plant and equipment purchases, which included $5.7 million in expenditures to replace normal wear and tear of coffee brewing equipment, $7.1 million in expenditures for vehicles, and machinery and equipment, $1.9 million in expenditures for machinery and equipment for the New Facility, $0.2 million in building and facility improvements and $1.3 million in IT-related expenditures. Our capital expenditures unrelated to the Corporate Relocation Plan and the New Facility for the remainder of fiscal 2016 are expected to include expenditures to replace normal wear and tear of coffee brewing equipment, vehicles, machinery and equipment and IT-related expenditures.

Based on the final budget, which reflects substantial completion of the principal design work for the New Facility, we estimate that the construction costs for the New Facility will be approximately $55.0 million to $60.0 million plus an additional $35.0 million to $39.0 million in anticipated capital expenditures for machinery and equipment, furniture and fixtures, and related expenditures. As compared to the preliminary budget, the final budget reflects, among other things, an increase in facility size and scope of building design, including a larger warehouse and a larger manufacturing footprint; additional infrastructure and automation to support staged manufacturing and production line capacity allowing for future capacity growth; and certain other estimated landlord costs under the Lease Agreement. The majority of the construction costs associated with the New Facility are expected to be incurred in early fiscal 2017.

We recorded an asset related to the facility lease obligation included in property, plant and equipment of $19.2 million at March 31, 2016. The facility lease obligation included in "Other long-term liabilities" on our consolidated balance sheet was $19.2 million at March 31, 2016. There were no such amounts recorded at June 30, 2015. The Lease Agreement contains a purchase option exercisable at any time by us on or before ninety days prior to the scheduled completion date with an option purchase price equal to 103.5% of the total project cost as of the date of the option closing if the option closing occurs on or before July 17, 2016. The option purchase price will increase by 0.35% per month thereafter up to and including the date which is the earlier of (A) ninety days after the scheduled completion date and (B) December 31, 2016. Based upon, among other things, the final budget which includes amounts in respect of construction costs, acquisition of the land upon which the New Facility will be constructed, Lessor and Company fees and expenses (such as legal fees), and preliminary contingency amounts of $2.7 million, we estimate that, if we were to exercise the purchase option under the Lease Agreement on or before July 17, 2016, the option purchase price in lieu of the lease payments would be $58.6 million payable in the year ending June 30, 2017. The decision of whether to exercise the option or not will depend upon, among other things, whether we can consummate the sale of the Torrance facility at the negotiated price. If we do not exercise the purchase option by December 31, 2016, the obligation to pay annual base rent under the Lease Agreement will commence. Based on the final budget, we estimate that the annual base rent would be approximately $4.2 million. The annual base rent will increase by 2% during each year of the lease term..

~~Our working capital is composed of the following:~~

(In thousands) March 31, 2016 June 30, 2015
Current assets(1)(2)(3) $ 154,323
$ 135,685
Current liabilities 60,558
64,874
Working capital $ 93,765
$ 70,811

~~__________~~

(1) At March 31, 2016 and June 30, 2015, respectively, we recorded $0 and $0.3 million in "Other receivables" included in "Accounts and notes receivable, net" on our consolidated balance sheets representing costs we incurred associated with the New Facility.

(2) At March 31, 2016 and June 30, 2015, respectively, we had recorded $0.4 million and $0 in "Other receivables" included in "Accounts and notes receivable, net" on our consolidated balance sheets representing earnout receivable from Harris Spice.

(3) At March 31, 2016, we recorded the carrying value of our Torrance facility and certain of our branch properties in Northern California listed for sale in the aggregate amount of $9.3 million in "Assets held for sale" on our consolidated balance sheet.

~~Contractual Obligations~~

~~The amounts disclosed in our 2015 10-K include our commitments and contractual obligations. Significant changes since June 30, 2015 were as follows:~~

~~Facility Lease Obligation~~

~~The following table contains information regarding total contractual obligations as of March 31, 2016, including capital leases:~~

Payment due by period
(In thousands) Total Less Than
One Year 1-3
Years 4-5
Years More Than
5 Years
Contractual obligations:
Capital lease obligations(1) $ 3,867
$ 1,170
$ 2,498
$ 195
$ 4
Operating lease obligations 11,998
1,148
6,924
3,531
395
New Facility lease obligation(2) 75,980
—
6,635
9,143
60,202
Pension plan obligations 81,990
1,898
15,965
17,094
47,033
Postretirement benefits other than pension plans 14,731
269
2,477
3,035
8,950
Revolving credit facility 307
307
—
—
—
Purchase commitments(3) 65,313
30,696
34,617
—
—
Total contractual obligations $ 254,186
$ 35,488
$ 69,116
$ 32,998
$ 116,584

~~__________________~~


~~(1)~~	~~Includes imputed interest of $0.7 million.~~

(2) Includes estimated minimum lease payments commencing December 31, 2016 for the New Facility under the Lease Agreement assuming the purchase option thereunder is not exercised. Calculation of the annual base rent under the Lease Agreement shown in the table is based on the final budget. If the Company were to exercise the purchase option under the Lease Agreement on or before July 17, 2016, the estimated option purchase price in lieu of the lease payments would be $58.6 million payable in the year ending June 30, 2017.

(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 March 31, 2016. 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.

~~Non-cancelable Purchase Orders~~

As of March 31, 2016, we had committed to purchase green coffee inventory totaling $59.8 million under fixed-price contracts, other inventory totaling $5.3 million and equipment totaling $0.2 million under non-cancelable purchase orders.

~~Results of Operations~~Sales

Net sales in the three months ended March 31, ~~2016~~2017 increased ~~$2.0~~$3.7 million, or ~~1.5%~~2.8%, to ~~$134.5~~$138.2 million from ~~$132.5~~$134.5 million in the three months ended March 31, ~~2015. Net sales in the nine months ended March 31,~~ 2016 ~~decreased $3.1~~primarily due to a $5.3 million ~~or 0.7%, to $410.2 million from $413.3 million in the nine months ended March 31, 2015. The~~ increase in net sales of roast and ground coffee and a $1.5 million increase in net sales of tea products, primarily from the addition of China Mist, partially offset by a $(2.4) million decrease in net sales of spice products resulting from the sale of our institutional spice assets and a $(0.7) million decrease in net sales of coffee (frozen liquid) products resulting from the loss of a large casino customer. Net sales in the three months ended March 31, 2016 was primarily due to an increase in net sales of our coffee (roast & ground) and spice products, resulting from higher volumes sold, and an increase in net sales of culinary and other beverages, resulting from pricing and product mix changes compared to the same period in the prior fiscal year. The increase in net sales in the three months ended March 31, 2016 was partially offset by a decrease in net sales of coffee (frozen) and tea, primarily due to lower volumes sold. Net sales in the nine months ended March 31, 2016 decreased compared to the same period in the prior year, primarily due to a decrease in net sales of coffee and tea products, partially offset by an increase in net sales of spice products and other beverages. Net sales in the three and nine months ended March 31, 2016,2017 included ~~$3.8 million and $3.2~~$1.2 million in price ~~decreases, respectively,~~increases to customers utilizing commodity-based pricing arrangements, where the changes in the green coffee commodity costs are passed on to the ~~customer.~~ customer, as compared to $(3.8) million in price decreases to customers utilizing such arrangements in the three months ended March 31, 2016.

Net sales in the nine months ended March 31, 2017 decreased $(2.5) million, or (0.6)%, to $407.7 million from $410.2 million in the nine months ended March 31, 2016. A $4.0 million increase in net sales from roast and ground coffee, a $3.0 million increase in net sales from tea products primarily from the addition of China Mist net sales from the date of its acquisition and a $1.2 million increase in net sales from culinary products were offset by a $(7.1) million decrease in net sales of spice products resulting from the sale of our institutional spice assets, a $(2.5) million decrease in net sales of coffee (frozen liquid) products and a $(0.7) million decrease in net sales of other beverages. Net sales in the nine months ended March 31, 2017 included $(5.4) million in price decreases to customers utilizing commodity-based pricing arrangements, where the changes in the green coffee commodity costs are passed on to the customer, as compared to $(3.2) million in price decreases to customers utilizing such arrangements in the nine months ended March 31, 2016.

The change in net sales in the three and nine months ended March 31, ~~2016 as~~2017 compared to the same period in the prior fiscal year was due to the following:


(In millions)	Three Months Ended March 31, 2016 vs. March 31, 2015		Nine Months Ended March 31, 2016 vs. March 31, 2015			Three Months Ended March 31, 2017 vs. 2016		Nine Months Ended March 31, 2017 vs. 2016
Effect of change in unit sales	$	1.3	$	0.2		$	0.8	$	9.5
Effect of pricing and product mix changes	$	0.7	(3.3		)	2.9		(12.0		)
Total increase (decrease) in net sales	$	2.0	$	(3.1	)	$	3.7	$	(2.5	)

~~Total unit~~Unit sales increased 6%0.6% in the three months ended March 31, ~~2016~~2017 as compared to the same period in the prior fiscal year, ~~primarily due to~~and average unit price increased by 2.1% resulting in an increase in net sales of 2.8%. In the three months ended

March 31, 2017, unit sales of ~~our~~roast and ground coffee ~~(roast & ground) and spice~~ products, which accounted for approximately 64% of total net sales, increased 6.9%, offset ~~in part,~~ by a (80.6)% decrease in unit sales of ~~tea, culinary~~spice products, which accounted for approximately 4% of net sales, due to the sale of our institutional spice assets, while the average unit price increased primarily due to the higher average unit price of roast and ~~other beverages.~~ground coffee products primarily driven by the pass-through of higher green coffee commodity purchase costs to our customers. In the three months ended March 31, ~~2016~~,2017, we processed and sold approximately ~~22.8~~24.4 million pounds of green coffee as compared to approximately ~~20.9~~22.8 million pounds of green coffee processed and sold in the ~~same period of the prior fiscal year.~~three months ended March 31, 2016. There were no new product category introductions in the three months ended March 31, ~~2016~~2017 or ~~2015~~2016 which had a material impact on our net sales.

~~Total unit~~Unit sales ~~were flat~~increased 2.4% in the nine months ended March 31, ~~2016~~2017 as compared to the same period in the prior fiscal year, ~~with increases~~but average unit price decreased by (2.9)% resulting in ~~unit~~a decrease in net sales of ~~our coffee (roast & ground) and spice products, offset, in part, by decreases in unit sales of coffee (frozen), tea, culinary products and other beverages.~~(0.6)%. In the nine months ended March 31, ~~2016~~2017, unit sales of our roast and ground coffee products which accounted for approximately 63% of our total net sales increased 6.9%, while the average unit price decreased primarily due to the lower average unit price of roast and ground coffee products primarily driven by the pass-through of lower green coffee commodity purchase costs to our customers. In the nine months ended March 31, 2017, we processed and sold approximately ~~67.4~~72.2 million pounds of green coffee as compared to approximately ~~66.8~~67.6 million pounds of green coffee processed and sold in the ~~same period of the prior fiscal year.~~nine months ended March 31, 2016. There were no new product category introductions in the nine months ended March 31, ~~2016~~2017 or ~~2015~~2016 which had a material impact on our net sales.

The following tables present net sales aggregated by product category for the respective periods indicated:


	Three Months Ended March 31,								Three Months Ended March 31,
	2016				2015				2017				2016
(In thousands)	$		% of total		$		% of total		$		% of total		$		% of total
Net Sales by Product Category:
Coffee (Roast & Ground)	$	82,568	61	%	$	82,076	62	%	$	87,833	64	%	$	82,568	61	%
Coffee (Frozen)	8,907		7	%	9,092		7	%
Coffee (Frozen Liquid)									8,228		6	%	8,907		7	%
Tea (Iced & Hot)	6,159		4	%	6,512		5	%	7,662		5	%	6,159		4	%
Culinary	13,220		10	%	13,150		10	%	13,855		10	%	13,220		10	%
Spice	8,381		6	%	7,751		5	%	5,948		4	%	8,381		6	%
Other beverages(1)	14,430		11	%	13,055		10	%	13,947		10	%	14,430		11	%
Net sales by product category	133,665		99	%	131,636		99	%	137,473		99	%	133,665		99	%
Fuel surcharge	803		1	%	871		1	%	714		1	%	803		1	%
Net sales	$	134,468	100	%	$	132,507	100	%	$	138,187	100	%	$	134,468	100	%

____________

(1) Includes all beverages other than coffee and tea.



	Nine Months Ended March 31,
	2017				2016
(In thousands)	$		% of total		$		% of total
Net Sales by Product Category:
Coffee (Roast & Ground)	$	256,013	63	%	$	252,020	61	%
Coffee (Frozen Liquid)	24,623		6	%	27,145		7	%
Tea (Iced & Hot)	21,371		5	%	18,420		4	%
Culinary	41,354		10	%	40,198		10	%
Spice	18,303		4	%	25,428		6	%
Other beverages(1)	43,831		11	%	44,488		11	%
Net sales by product category	405,495		99	%	407,699		99	%
Fuel surcharge	2,205		1	%	2,521		1	%
Net sales	$	407,700	100	%	$	410,220	100	%

____________

(1) Includes all beverages other than coffee and tea.

Nine Months Ended March 31,
2016 2015
(In thousands) $ % of total $ % of total
Net Sales by Product Category:
Coffee (Roast & Ground) $ 252,020
61 % $ 255,600
62 %
Coffee (Frozen) 27,145
7 % 27,952
7 %
Tea (Iced & Hot) 18,420
4 % 20,719
5 %
Culinary 40,198
10 % 40,797
10 %
Spice 25,428
6 % 23,855
5 %
Other beverages(1) 44,488
11 % 41,594
10 %
Net sales by product category 407,699
99 % 410,517
99 %
Fuel surcharge 2,521
1 % 2,783
1 %
Net sales $ 410,220
100 % $ 413,300
100 %

~~____________~~

~~(1) Includes all beverages other than coffee and tea.~~Cost of Goods Sold

Cost of goods sold in the three months ended March 31, ~~2016 decreased $(4.0)~~2017 increased $2.5 million, or ~~4.7%~~3.0%, to $84.4 million, or 61.1% of net sales, from $81.9 million, or 60.9% ~~of net sales, from $85.9 million, or 64.9%~~ of net sales, in the three months ended March 31, ~~2015.~~ 2016. Cost of goods sold as a percentage of net sales in the three months ended March 31, 2017 increased due to startup costs associated with the production operations in the New Facility.

Cost of goods sold in the nine months ended March 31, ~~2016~~2017 decreased ~~$(11.3)~~$(6.6) million, or ~~4.3%~~(2.6)%, to $247.6 million, or 60.7% of net sales, from $254.2 million, or 62.0% ~~of net sales, from $265.5 million, or 64.2%~~ of net sales, in the nine months ended March 31, ~~2015.~~2016. The decrease in cost of goods sold as a percentage of net sales in the ~~three and~~ nine months ended March 31, ~~2016~~2017 was primarily due to lower ~~coffee commodity~~conversion costs ~~compared to the same period in the prior fiscal year, increased~~from supply chain ~~efficiencies realized primarily through the consolidation~~improvements and lower hedged cost of ~~our former Torrance coffee production volumes into our Houston manufacturing facility, and other supply chain improvements.~~green coffee.

Because ~~we anticipate that our~~the expected reduction in spice inventory levels at June 30, ~~2016 will decrease~~2017 from June 30, ~~2015~~2016 levels ,is expected to generate a beneficial effect, we recorded $0.8 million and ~~$1.1~~$2.5 million ~~respectively,~~ in expected beneficial effect of the liquidation of LIFO inventory quantities in cost of goods sold ~~for~~in the three and nine months ended March 31, 2017, respectively, which increased income before taxes in the three and nine months ended March 31, 2017 by $0.8 million and $2.5 million, respectively. In the three and nine months ended March 31, 2016, we recorded $0.8 million and $1.1 million in expected beneficial effect of the liquidation of LIFO inventory quantities in cost of goods sold which increased ~~net~~ income inbefore taxes for the three and nine months ended March 31, 2016 by $0.8 million and $1.1 million, respectively. In the three and nine months ended March 31, 2015, we recorded $0.7 million and $3.2 million, respectively, in expected beneficial effect of LIFO inventory liquidation in cost of goods sold which increased net income for the three and nine months ended March 31, 2015 by $0.7 million and $3.2 million, respectively.

Gross ~~profit in the three months ended~~ ~~March 31, 2016~~ increased $6.0 million, or 12.9%, to $52.6 million from $46.6 million in the three months ended March 31, 2015, due to the increase in net sales and the decrease in cost of goods sold. Gross margin increased to 39.1% in the three months ended March 31, 2016 from 35.1% in the three months ended March 31, 2015, primarily due to lower coffee commodity costs compared to same period in the prior fiscal year and supply chain efficiencies realized primarily through the consolidation of our former Torrance coffee production volumes into our Houston manufacturing facility. Profit

Gross profit in the three months ended March 31, 2017 increased $1.2 million, or 2.4%, to $53.8 million from $52.6 million in the three months ended March 31, 2016 and ~~2015~~gross margin decreased to 38.9% in the three months ended March 31, 2017 from 39.1% in the three months ended March 31, 2016. Gross margin was impacted by the startup costs associated with the production operations in the New Facility, partially offset by favorable pricing. Gross profit in the nine months ended March 31, 2017 increased $4.1 million, or 2.6%, to $160.1 million from $156.0 million in the nine months ended March 31, 2016 and gross margin increased to 39.3% in the nine months ended March 31, 2017 from 38.0% in the nine months ended March 31, 2016. This increase in gross profit was primarily due to lower conversion costs and lower hedged cost of green coffee partially offset by the decrease in net sales and the startup costs associated with the production operations in the New Facility. Gross profit in the three and nine months ended March 31, 2017 included $0.8 million and $2.5 million, respectively, in beneficial effect of the liquidation of LIFO inventory quantities. Gross profit in each of the three and nine months ended March 31, 2016 included the beneficial effect of the liquidation of LIFO inventory quantities in the amount of $0.8 million and ~~$0.7~~$1.1 million, respectively. Gross profit in the nine months ended March 31, 2016 increased $8.2 million, or 5.6%, to $156.0 million from $147.8 million in the nine months ended March 31, 2015, primarily due to lower coffee commodity costs as compared to the same period in the prior fiscal year and supply chain efficiencies realized primarily through the consolidation of our former Torrance coffee production volumes into our Houston manufacturing facility, partially offset by the decrease in net sales. Gross profit in the nine months ended March 31, 2016 and 2015, respectively, included the beneficial effect of the liquidation of LIFO inventory quantities in the amount of $1.1 million and $3.2 million. Gross margin increased to 38.0% in the nine months ended March 31, 2016 from 35.8% in the nine months ended March 31, 2015, primarily due to lower coffee commodity costs compared to the same period in the prior fiscal year and supply chain efficiencies realized primarily through the consolidation of our former Torrance coffee production volumes into our Houston manufacturing facility.

Operating Expenses

In the three months ended March 31, ~~2016,~~2017, operating expenses ~~increased $4.3~~decreased $(0.5) million, or (0.9)%, to $51.8 million or 37.5% of net sales, from $52.3 million, or 38.9% ~~of net sales, as compared to $48.0 million, or 36.2%~~ of net sales, in the three months ended March 31, ~~2015. Operating expenses in the three months ended March 31,~~ 2016, ~~increased~~ primarily due to ~~$4.4~~a $(1.8) million ~~and $0.8 million increases~~decrease in general and administrative expenses and ~~selling expenses, respectively, partially offset by~~ a ~~$(0.4)~~$(0.6) million decrease in restructuring and other transition expenses associated with the Corporate Relocation Plan, ~~as compared~~partially offset by a $1.9 million increase in selling expenses. Restructuring and other transition expenses in the three and nine months ended March 31, 2017 also include expenses related to the DSD Restructuring Plan.

General and administrative expenses decreased $(1.8) million in the three months ended March 31, ~~2015. The increase~~2017 as compared to the same period in ~~general~~the prior fiscal year primarily due to $1.9 million in lower employee and ~~administrative~~retiree medical costs, partially offset by $0.3 million in acquisition-related consulting expenses and $0.2 million in non-recurring proxy contest-related expenses. During the three months ended March 31, 2017, we incurred $0.2 million in expenses incurred in connection with successfully defending against a proxy contest (the "2016 proxy contest"), including non-recurring legal fees, financial advisory fees, proxy solicitor fees, mailing and printing costs of proxy solicitation materials and other costs that were in excess of the level of expenses normally incurred for an annual meeting of stockholders.

31, 2016 was primarily due to higher accrual for incentive compensation to eligible employees as compared to a reduction in accrual for incentive compensation to eligible employees in the prior year periodRestructuring and ~~an increase in retiree medical costs. The increase in selling~~other transition expenses in the three months ended March 31, ~~2016 was primarily due to higher accrual for incentive compensation to eligible employees~~2017 decreased $(0.6) million, as compared to ~~a reduction in accrual for incentive compensation to eligible employees~~the same period in the prior fiscal year ~~period and higher costs associated with a minor re-alignment~~because most of the planned expenses related to our ~~DSD organization,~~Corporate Relocation Plan have already been recognized in prior periods, partially offset by ~~lower fuel, freight and depreciation expense. Operating expenses~~$1.3 million in costs incurred in the three months ended March 31, ~~2016 also reflected $4,000 in net gains from sales of assets, primarily equipment, as compared to $0.1~~2017 associated with the DSD Restructuring Plan.

Selling expenses increased $1.9 million ~~in net losses from sales of assets, primarily equipment, in~~during the three months ended March 31, ~~2015.~~2017 as compared to the same period in the prior fiscal year, primarily due to $1.3 million from the consolidation of China Mist and West Coast Coffee and $0.5 million in operations-related consulting expenses, partially offset by a $0.5 million reduction in incentive compensation expense and $0.5 million in lower workers' compensation expense.

In each of the three months ended March 31, 2017 and 2016 net gains from sale of Spice Assets included $0.3 million in earnout.

In the nine months ended March 31, ~~2016~~,2017, operating expenses ~~increased $7.8~~decreased $(31.3) million, or (20.7)%, to $119.6 million or 29.3% of net sales, from $150.9 million, or 36.8% ~~of net sales, as compared to $143.1 million, or 34.6%~~ of net sales, in the nine months ended March 31, ~~2015. Operating~~2016, primarily due to the recognition of $37.4 million in net gain from the sale of the Torrance Facility and lower restructuring and other transition expenses associated with the Corporate Relocation Plan, partially offset by the absence of net gain from the sale of Spice Assets, and an increase in general and administrative expenses and selling expenses.

Restructuring and other transition expenses decreased $(4.3) million in the nine months ended March 31, ~~2016~~2017, as compared to the same period in the prior fiscal year because most of the planned expenses related to our Corporate Relocation Plan have already been recognized in prior periods, partially offset by $1.3 million in costs incurred in the nine months ended March 31, 2017 associated with the DSD Restructuring Plan.

Selling expenses increased $5.2 million during the nine months ended March 31, 2017 as compared to the same period in the prior fiscal year, primarily due to ~~a $9.3~~operations-related consulting expenses, higher depreciation expense, sales training expenses and the consolidation of China Mist and West Coast Coffee, partially offset by lower workers' compensation expense, savings from utilizing 3PL for our long-haul distribution and the absence of expenses related to the institutional spice assets.

General and administrative expenses increased $2.0 million ~~increase~~ in the nine months ended March 31, 2017 as compared to the same period in the prior fiscal year primarily due to non-recurring 2016 proxy contest expenses, partially offset by lower expenses associated with the Company’s Employee Stock Ownership Plan (the “ESOP”) resulting from the payoff of one of the two ESOP loans. During the nine months ended March 31, 2017, we incurred $5.2 million, or $0.31 per share, in expenses successfully defending against the 2016 proxy contest including non-recurring legal fees, financial advisory fees, proxy solicitor fees, mailing and printing costs of proxy solicitation materials and other costs.

During the nine months ended March 31, 2017, net gains from the sale of Spice Assets included $0.8 million in earnout, as compared to $5.4 million in net gains from the sale of Spice Assets in the same period in the prior fiscal year. Net gains from sales of other assets, primarily from the sale of our Northern California branch property, were $1.5 million in the nine months ended March 31, 2017 as compared to $0.2 million, primarily from sale of equipment, in the nine months ended March 31, 2016.

Income from Operations

Income from operations in the three months ended March 31, 2017 was $2.1 million as compared to $0.3 million in the three months ended March 31, 2016. Income from operations in the nine months ended March 31, 2017 was $40.5 million as compared to $5.1 million in the nine months ended March 31, 2016.

The higher income from operations in the three months ended March 31, 2017 as compared to the comparable prior fiscal year period was primarily due to higher gross profit, lower general and administrative expenses, lower restructuring and other transition expenses associated with the Corporate Relocation Plan, and ~~a $7.4 million increase in general and administrative expenses, partially offset by~~higher net gains from sales of other assets, ~~of $5.6 million including the~~partially offset by higher selling expenses and lower net ~~gain~~gains from the sale of ~~the~~ Spice ~~Assets of $5.4 million, and a decrease in selling expenses of $3.0 million as compared to the nine months ended March 31, 2015.~~ Assets.

The ~~increase in general and administrative expenses~~higher income from operations in the nine months ended March 31, ~~2016~~2017 as compared to the comparable prior fiscal year period was primarily due to net gains from the sales of the Torrance Facility and other real estate, lower restructuring and other transition expenses associated with the Corporate Relocation Plan and higher ~~accrual for incentive compensation to eligible employees as compared to a reduction in accrual for incentive compensation to eligible employees~~gross profit, partially offset by higher selling expenses, higher general and administrative expenses and lower net gains from the sale of Spice Assets.

Total Other Income (Expense)

Total other income and other expense in the ~~prior year period~~three and ~~an increase in employee and retiree medical costs. The decrease in selling expenses in the~~ nine months ended March 31, ~~2016~~2017 was $0.9 million and $(1.3) million, respectively, compared to total other income of $0.9 million in each of the three and nine months ended March 31, 2016. Total other income in the three months ended March 31, 2017 was primarily due to ~~lower fuel~~net gains on investments and ~~freight expenses and lower depreciation expense,~~derivative instruments partially offset by higher ~~accrual for incentive compensation to eligible employees and expenses due to the minor re-alignment of our DSD operations,~~interest expense as compared to the same period in the prior fiscal year.

~~Income~~ Net gains and net losses on investments resulting from ~~operations~~mark-to-market in the three months ended March 31, 2016 was $0.3 million as compared to loss from operations of $(1.4) million in the three months ended March 31, 2015, primarily due to the increase in gross profit, partially offset by higher general and ~~administrative expenses and selling expenses. Income from operations in the~~ nine months ended March 31, ~~2016 was $5.1~~2017 were $0.7 million and $(0.4) million, respectively, as compared to ~~$4.7 million in the nine months ended March 31, 2015, primarily due to the increase in gross profit and~~ net gains on ~~sales~~investments of ~~assets~~$2,000 and the decrease in selling expenses, partially offset by the increase in restructuring and other transition expenses incurred in connection with the Corporate Relocation Plan and the increase in general and administrative expenses.

~~Total other income~~$0.1 million, respectively, in the ~~three months ended March 31, 2016 was $0.9 million as compared to total other expense~~comparable periods of ~~$(1.4) million in~~ the ~~three months ended March 31, 2015. Total other income in the three months ended March 31, 2016 was primarily due to lower interest expense of $0.1 million~~prior fiscal year. Net gains and ~~$0.4 million in miscellaneous income, as compared to total other expense in the three months ended March 31, 2015 which included $0.5 million in interest expense and $(1.8) million in~~ net losses on coffee-related derivative instruments. Total other income in the nine months ended March 31, 2016 was $0.9 million as compared to total other expense of $(1.6) million in the nine months ended March 31, 2015, primarily due to lower interest expense in the nine months ended March 31, 2016 and $(2.7) million in net losses on coffee-related derivative instruments in all the ~~nine months ended March 31, 2015.~~

~~Net gains on coffee-related derivative instruments recorded in "Other, net" in the three months ended March 31, 2016 included $0.3 million in~~reported periods were due to mark-to-market net gains and net losses on coffee-related derivative instruments not designated as accounting ~~hedges~~hedges. Net gains and ~~$(0.1)~~net losses on such coffee-related derivative instruments in each of the three and nine months ended March 31, 2017 were $0.2 million and $(1.1) million, respectively, compared to net gains of $0.2 million and net losses of $(0.5) million, respectively, in the comparable periods of the prior fiscal year. In the three and nine months ended March 31, 2017, we recognized $90,000 and $63,000, respectively, in net ~~losses~~gains on coffee-related derivative instruments designated as cash flow hedges due to ~~ineffectiveness. Net~~ineffectiveness, as compared to net losses ~~on coffee-related derivative instruments recorded~~of $(84,000) and $(0.6) million in ~~"Other, net"~~the three and nine months ended March 31, 2016, respectively.

Interest expense in the three and nine months ended March 31, 2017, was $(0.5) million and $(1.4) million, respectively, as compared to $(0.1) million and $(0.3) million, respectively, in the comparable periods of the prior fiscal year. The higher interest expense in the three months ended March 31, 2015 included $(1.7) million in net losses on coffee-related derivative instruments not designated as accounting hedges and $(0.1) million in net losses on coffee-related derivative instruments designated as cash flow hedges2017 was primarily due to ~~ineffectiveness. Net losses on coffee-related derivative instruments recorded in "Other, net"~~higher loan balance. The higher interest expense in the nine months ended March 31, 2016 included $0.1 million in net gains on coffee-related derivative instruments not designated as accounting hedges and $(0.6) million in net losses on coffee-related derivative instruments designated as cash flow hedges2017 was primarily due to ~~ineffectiveness. Net losses on coffee-related derivative instruments recorded~~higher loan balance and non-recurring and non-cash interest expense related to the sale-leaseback of the Torrance Facility in ~~"Other, net" in~~ the amount of $(0.7) million.

Income Taxes

In the three and nine months ended March 31, 2015 included $(2.4) million in net losses on coffee-related derivative instruments not designated as accounting hedges and $(0.3) million in net losses on coffee-related derivative instruments designated as cash flow hedges due to ineffectiveness.

~~In the three months ended March 31, 2016 and March 31, 2015,~~2017, we recorded income tax expense of $1.4 million and $15.9 million, respectively, compared to $43,000 and ~~income tax benefit of $(0.2)~~$0.3 million ~~respectively. In~~in the three and nine months ended March 31, 2016, ~~and 2015,~~respectively. In the fourth quarter of fiscal 2016, we ~~recorded income~~released the majority of our valuation allowance against our deferred tax ~~expense of $0.3 million and $0.2 million, respectively.~~

assets. As of June 30, ~~2015,~~2016, our ~~valuation allowance was $84.9~~net deferred tax assets totaled $80.8 million. In the three and nine months ended March 31, ~~2016, we decreased~~2017 our valuation allowance by $0.6 million to $82.5 million. We will continue to monitor all available evidence, both positive and negative, in determining whether it is more likely than not that we will realize our net deferred tax ~~assets.~~ assets decreased by $1.1 million and $14.7 million, respectively, primarily as a result of deferring the gain on the sale of the Torrance Facility.

The Internal Revenue Service completed its examination of our tax years ended June 30, 2013 and 2014 and accepted the returns as filed for those years.

Net Income

As a result of the foregoing factors, net income ~~in the three months ended~~ ~~March 31, 2016~~was ~~$1.2~~$1.6 million,, or ~~$0.07~~$0.10 per diluted ~~common share, compared to net loss of~~ ~~$(2.6) million, or~~ ~~$(0.16)~~ ~~per~~ common share, in the three months ended March 31, ~~2015. Net income~~2017 as compared to $1.2 million, or $0.07 per diluted common share, in the ~~nine~~three months ended March 31, ~~2016~~2016. Net income was ~~$5.7~~$23.3 million, or ~~$0.34 per diluted common share, compared to net income of $2.8 million, or $0.17~~$1.39 per diluted common share, in the nine months ended March 31, ~~2015.~~2017 as compared to $5.7 million, or $0.34 per diluted common share, in the nine months ended March 31, 2016.

Non-GAAP Financial Measures

In addition to net income determined in accordance with ~~GAAP,~~U.S. generally accepted accounting principles (“GAAP”), we use the following non-GAAP financial measures in assessing our operating performance:

“Non-GAAP net income” is defined as net income excluding the impact of:

restructuring and other transition ~~expenses, net of tax; and~~expenses;

net gains and losses from sales of ~~assets, net~~assets;

non-cash income tax expense (benefit), including the release of ~~tax.~~valuation allowance on deferred tax assets;

non-recurring 2016 proxy contest-related expenses; and

non-cash interest expense accrued on the Torrance Facility sale-leaseback financing obligation;

and including the impact of:

income taxes on non-GAAP adjustments.

“Non-GAAP net income per diluted common share” is defined as Non-GAAP net income divided by the weighted-average number of common shares outstanding, inclusive of the dilutive effect of common equivalent shares outstanding during the period.

“EBITDA” is defined as net income excluding the impact of:

income taxes;

interest expense; and

depreciation and amortization expense.

“EBITDA Margin” is defined as EBITDA expressed as a percentage of net sales.

“Adjusted EBITDA” is defined as net income excluding the impact of:

income taxes;

interest expense;

income from short-term investments;

depreciation and amortization expense;

ESOP and share-based compensation expense;

non-cash impairment losses;

non-cash pension withdrawal expense;

other similar non-cash expenses;

restructuring and other transition expenses; ~~and~~

net gains and losses from sales of ~~assets.~~assets; and

non-recurring 2016 proxy contest-related expenses.

“Adjusted EBITDA Margin” is defined as Adjusted EBITDA expressed as a percentage of net sales.

Restructuring and other transition expenses are expenses that are directly attributable to (i) the Corporate Relocation Plan, consisting primarily of employee retention and separation benefits, facility-related costs and other related costs such as travel, legal, consulting and other professional ~~services.~~services; and (ii) beginning in the third quarter of fiscal 2017, the DSD Restructuring Plan, consisting primarily of severance, prorated bonuses for bonus eligible employees, contractual termination payments and outplacement services, and other related costs, including legal, recruiting, consulting, other professional services, and travel.

In the first quarter of fiscal 2017, we modified the calculation of Non-GAAP net income and Non-GAAP net income per diluted common share (i) to exclude non-recurring expenses for legal and other professional services incurred in connection with the 2016 proxy contest that were in excess of the level of expenses normally incurred for an annual meeting of stockholders ("2016 proxy contest-related expenses") and non-cash interest expense accrued on the Torrance Facility sale-leaseback financing obligation which has been included in the computation of the gain on sale upon conclusion of the leaseback arrangement, and (ii) to include income tax expense (benefit) on the non-GAAP adjustments based on the Company’s marginal tax rate of 39.0%. There was no similar adjustment for non-cash income tax expense in the comparable period of the prior fiscal year due to the valuation allowance recorded against the Company’s deferred tax assets. We also modified Adjusted EBITDA and Adjusted EBITDA Margin to exclude 2016 proxy contest-related expenses. These modifications to our non-GAAP financial measures were made because such expenses are not reflective of our ongoing operating results and adjusting for them will help investors with comparability of our results. The historical presentation of the non-GAAP financial measures was not affected by these modifications.

Beginning in the third quarter of fiscal 2017 and for all periods presented, we include EBITDA in our non-GAAP financial measures. We believe that EBITDA facilitates operating performance comparisons from period to period by isolating the effects of certain items that vary from period to period without any correlation to core operating performance or that vary widely among similar companies. These potential differences may be caused by variations in capital structures (affecting interest expense), tax positions (such as the impact on periods or companies of changes in effective tax rates or net

operating losses) and the age and book depreciation of facilities and equipment (affecting relative depreciation expense). We also present EBITDA and EBITDA Margin because (i) we believe that these measures are frequently used by securities analysts, investors and other interested parties to evaluate companies in our industry, (ii) we believe that investors will find these measures useful in assessing our ability to service or incur indebtedness, and (iii) we use these measures internally as benchmarks to compare our performance to that of our competitors.

In the third quarter of fiscal 2017, we also modified the calculation of Adjusted EBITDA to exclude income from our short-term investments because we believe excluding income generated from our investment portfolio is a measure more reflective of our operating results. The historical presentation of Adjusted EBITDA was recast to be comparable to the current period presentation.

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. In the fourth quarter of fiscal 2015, we modified previously reported non-GAAP financial measures to exclude net gains and losses on sales of assets because we believe these gains and losses are not reflective of our ongoing operating results. As a result, we began referring to the measures previously titled “Net income excluding restructuring and other transition expenses” and “Net income excluding restructuring and other transition expenses per common share-diluted” as “Non-GAAP net income” and “Non-GAAP net income per diluted common share.” In addition, we redefined “Adjusted EBITDA” to also exclude net gains and losses from sales of assets. The historical presentation of these measures has been recast to conform to the revised definitions and the current year presentation.

Non-GAAP net income, Non-GAAP net income per diluted common share, EBITDA, EBITDA Margin, Adjusted EBITDA and Adjusted EBITDA Margin, as defined by us, may not be comparable to similarly titled measures reported by other companies. We do not intend for non-GAAP financial measures to be considered in isolation or as a substitute for other measures prepared in accordance with GAAP.

Set forth below is a reconciliation of reported net income to Non-GAAP net income and reported net income ~~(loss)~~ per common ~~share—diluted~~share-diluted to Non-GAAP net income per diluted common share (unaudited):

Three Months Ended
March 31, Nine Months Ended
March 31,
($ in thousands, except per share data) 2016 2015 2016 2015
Net income (loss), as reported(1) $ 1,192
$ (2,572 ) $ 5,679
$ 2,839
Restructuring and other transition expenses, net of tax of zero 3,169
3,596
13,855
4,570
Net gain from sale of spice assets, net of tax of zero (335 ) —
(5,441 ) —
Net (gains) losses from sales of assets, net of tax of zero (4 ) 107
(163 ) 346
Non-GAAP net income $ 4,022
$ 1,131
$ 13,930
$ 7,755
Net income (loss) per common share—diluted, as reported $ 0.07
$ (0.16 ) $ 0.34
$ 0.17
Impact of restructuring and other transition expenses, net of tax of zero $ 0.19
$ 0.22
$ 0.83
$ 0.28
Impact of net gain from sale of spice assets, net of tax of zero $ (0.02 ) $ —
$ (0.32 ) $ —
Impact of (gains) losses from sales of assets, net of tax of zero $ —
$ 0.01
$ (0.01 ) $ 0.02
Non-GAAP net income per diluted common share $ 0.24
$ 0.07
$ 0.84
$ 0.47



	Three Months Ended March 31,						Nine Months Ended March 31,
(In thousands)	2017			2016			2017			2016
Net income, as reported	$	1,594		$	1,192		$	23,288		$	5,679
Restructuring and other transition expenses	2,547			3,169			9,542			13,855
Net gain from sale of Torrance Facility	—			—			(37,449		)	—
Net gains from sale of Spice Assets	(272		)	(335		)	(764		)	(5,441		)
Net gains from sales of other assets	(86		)	(4		)	(1,525		)	(163		)
Non-recurring 2016 proxy contest-related expenses	196			—			5,186			—
Interest expense on sale-leaseback financing obligation	—			—			681			—
Income tax expense (benefit) on non-GAAP adjustments	(930		)	—			9,488			—
Non-GAAP net income	$	3,049		$	4,022		$	8,447		$	13,930

Net income per common share—diluted, as reported	$	0.10		$	0.07		$	1.39		$	0.34
Impact of restructuring and other transition expenses	$	0.15		$	0.19		$	0.57		$	0.83
Impact of net gain from sale of Torrance Facility	$	—		$	—		$	(2.24	)	$	—
Impact of net gains from sale of Spice Assets	$	(0.02	)	$	(0.02	)	$	(0.05	)	$	(0.33	)
Impact of net gains from sales of other assets	$	(0.01	)	$	—		$	(0.09	)	$	(0.01	)
Impact of non-recurring 2016 proxy contest-related expenses	$	0.01		$	—		$	0.31		$	—
Impact of interest expense on sale-leaseback financing obligation	$	—		$	—		$	0.04		$	—
Impact of income tax expense (benefit) on non-GAAP adjustments	$	(0.06	)	$	—		$	0.57		$	—
Non-GAAP net income per diluted common share	$	0.17		$	0.24		$	0.50		$	0.83

~~____________~~

(1) Includes $0.8 million and $0.7 million in beneficial effect of liquidation of LIFO inventory quantities in the three months ended March 31, 2016 and 2015, respectively. Includes $1.1 million and $3.2 million in beneficial effect of liquidation of LIFO inventory quantities in the nine months ended March 31, 2016 and 2015, respectively.

Set forth below is a reconciliation of reported net income ~~(loss)~~to EBITDA (unaudited):



	Three Months Ended March 31,						Nine Months Ended March 31,
(In thousands)	2017			2016			2017			2016
Net income, as reported	$	1,594		$	1,192		$	23,288		$	5,679
Income tax expense	1,411			43			15,910			318
Interest expense	517			111			1,430			341
Depreciation and amortization expense	6,527			5,234			16,613			15,721
EBITDA	$	10,049		$	6,580		$	57,241		$	22,059
EBITDA Margin	7.3		%	4.9		%	14.0		%	5.4		%

Set forth below is a reconciliation of reported net income to Adjusted EBITDA (unaudited):

Three Months Ended
March 31, Nine Months Ended
March 31,
($ in thousands) 2016 2015 2016 2015
Net income (loss), as reported(1) $ 1,192
$ (2,572 ) $ 5,679
$ 2,839
Income tax expense (benefit) 43
(218 ) 318
232
Interest expense 111
474
341
889
Depreciation and amortization expense(2) 5,234
6,135
15,721
18,554
ESOP and share-based compensation expense 837
1,414
3,488
4,294
Restructuring and other transition expenses(3) 3,169
3,596
13,855
4,570
Net gain from sale of spice assets (335 ) —
(5,441 ) —
Net (gains) losses from sales of assets (4 ) 107
(163 ) 346
Adjusted EBITDA $ 10,247
$ 8,936
$ 33,798
$ 31,724
Adjusted EBITDA Margin 7.6 % 6.7 % 8.2 % 7.7 %



	Three Months Ended March 31,						Nine Months Ended March 31,
(In thousands)	2017			2016			2017			2016
Net income, as reported	$	1,594		$	1,192		$	23,288		$	5,679
Income tax expense	1,411			43			15,910			318
Interest expense	517			111			1,430			341
Income from short-term investments	(1,156		)	(427		)	(882		)	(1,312		)
Depreciation and amortization expense	6,527			5,234			16,613			15,721
ESOP and share-based compensation expense	902			837			2,996			3,488
Restructuring and other transition expenses	2,547			3,169			9,542			13,855
Net gain from sale of Torrance Facility	—			—			(37,449		)	—
Net gains from sale of Spice Assets	(272		)	(335		)	(764		)	(5,441		)
Net gains from sales of other assets	(86		)	(4		)	(1,525		)	(163		)
Non-recurring 2016 proxy contest-related expenses	196			—			5,186			—
Adjusted EBITDA	$	12,180		$	9,820		$	34,345		$	32,486
Adjusted EBITDA Margin	8.8		%	7.3		%	8.4		%	7.9		%

~~____________~~

~~(1) Includes $0.8~~

Liquidity, Capital Resources and Financial Condition

Credit Facility

We maintain a $75.0 million senior secured revolving credit facility (the “Revolving Facility”) with JPMorgan Chase Bank, N.A. and SunTrust Bank (collectively, the “Lenders”), with a sublimit on letters of credit and swingline loans of $30.0 million and ~~$0.7~~$15.0 million respectively. The Revolving Facility includes an accordion feature whereby we may increase the Revolving Commitment by up to an additional $50.0 million, subject to certain conditions. Advances are based on our eligible accounts receivable, eligible inventory, and the value of certain real property and trademarks, less required reserves. The commitment fee ranges from 0.25% to 0.375% per annum based on average revolver usage. Outstanding obligations are collateralized by all of our assets, excluding certain real property not included in the borrowing base, machinery and equipment (other than inventory), and our preferred stock portfolio. Borrowings under the Revolving Facility bear interest based on average historical excess availability levels with a range of PRIME - 0.25% to PRIME + 0.50% or Adjusted LIBO Rate + 1.25% to Adjusted LIBO Rate + 2.00%. We are subject to a variety of affirmative and negative covenants of types customary in an asset-based lending facility, including financial covenants relating to the maintenance of a fixed charge coverage ratio in certain circumstances, and the right of the Lenders to establish reserve requirements, which may reduce the amount of credit otherwise available to us. We are allowed to pay dividends, provided, among other things, certain excess availability requirements are met, and no event of default exists or has occurred and is continuing as of the date of any such payment and after giving effect thereto. The Revolving Facility expires on March 2, 2020.

At March 31, 2017, we were eligible to borrow up to a total of $61.7 million under the Revolving Facility and had outstanding borrowings of $44.2 million, utilized $4.4 million of the letters of credit sublimit, and had excess availability under the Revolving Facility of $13.1 million. At March 31, 2017, the weighted average interest rate on our outstanding borrowings under the Revolving Facility was 2.52%. At March 31, 2017, we were in compliance with all of the restrictive covenants under the Revolving Facility.

At April 30, 2017, we had estimated outstanding borrowings of $44.2 million, utilized $4.4 million of the letters of credit sublimit, and had excess availability under the Revolving Facility of $13.1 million. At April 30, 2017, the weighted average interest rate on our outstanding borrowings under the Revolving Facility was 2.66%.

Liquidity

We generally finance our operations through cash flows from operations and borrowings under our Revolving Facility described above. At March 31, 2017, we had $5.7 million in ~~beneficial effect~~cash and cash equivalents and $26.5 million in short-term investments. We believe our Revolving Facility, to the extent available, in addition to our cash flows from operations and other liquid assets, collectively, will be sufficient to fund our working capital and capital expenditure requirements for the next 12 to 18 months including additional construction costs to complete the New Facility and anticipated capital expenditures for machinery and equipment, furniture and fixtures, and related expenditures and the expected expenditures associated with the Corporate Relocation Plan and DSD Restructuring Plan.

Changes in Cash Flows

We generate cash from operating activities primarily from cash collections related to the sale of ~~liquidation of LIFO inventory quantities~~our products.

Net cash provided by operating activities was $10.5 million in the ~~three~~nine months ended March 31, ~~2016 and 2015, respectively. Includes $1.1 million and $3.2~~2017 compared to $9.4 million in ~~beneficial effect~~the nine months ended March 31, 2016. The higher level of ~~liquidation~~net cash provided by operating activities in the nine months ended March 31, 2017 compared to the same period of ~~LIFO~~the prior fiscal year was primarily due to higher net income and a higher level of cash inflows from operating activities primarily from the increase in deferred income taxes and accounts payable balances, partially offset by cash outflows from increases in inventory ~~quantities~~and accounts receivable balances, payment of previously accrued bonus and restructuring and other transition expenses related to the Corporate Relocation Plan, cash outflows from purchases of short-term investments and a decrease in derivative assets. Net cash provided by operating activities in the nine months ended March 31, 2016 was due to cash inflows from operating activities resulting primarily from an increase in derivative assets and ~~2015, respectively.~~

~~(2) Excludes~~proceeds from sales of short-term investments partially offset by cash outflows from purchases of short-term investments, increases in accounts receivable and inventory balances, and payments of accounts payable balances and accrued payroll and other liabilities. Net cash provided by operating activities in the ~~three and~~ nine months ended March 31, 2016 ~~respectively, $0.2~~included the release of restriction on $1.0 million in cash held in coffee-related derivative margin accounts, as we had a net gain position in such accounts.

Net cash used in investing activities in the nine months ended March 31, 2017 was $84.0 million as compared to $23.7 million in the nine months ended March 31, 2016. In the nine months ended March 31, 2017, net cash used in investing activities included $35.5 million in cash used for purchases of property, plant and equipment, $26.7 million in purchases of construction-in-progress assets in connection with the construction of the New Facility and $25.9 million net of cash acquired in connection with the China Mist and West Coast Coffee acquisitions, partially offset by $4.0 million in proceeds from sales of property, plant and equipment, primarily real estate. In the nine months ended March 31, 2016, net cash used in investing activities included $16.2 million for purchases of property, plant and equipment and $13.5 million in purchases of construction-in-progress assets in connection with construction of the New Facility, partially offset by proceeds from sales of assets of $6.0 million, including $5.3 million in proceeds from the sale of Spice Assets.

Net cash provided by financing activities in the nine months ended March 31, 2017 was $58.1 million as compared to $12.5 million in the nine months ended March 31, 2016. Net cash provided by financing activities in the nine months ended March 31, 2017 included $42.5 million in proceeds from the sale of the Torrance Facility, $44.1 million in net borrowings under our Revolving Facility primarily to pay for the China Mist and West Coast Coffee acquisitions and for expenditures related to the Corporate Relocation Plan, $7.7 million in proceeds from lease financing in connection with the purchase of the partially constructed New Facility, and $0.8 million in proceeds from stock option exercises, partially offset by $35.8 million in repayments on lease financing to acquire the partially constructed New Facility upon purchase option closing, and $1.1 million used to pay capital lease obligations. Net cash provided by financing activities in the nine months ended March 31, 2016 included $13.5 million in proceeds from lease financing in connection with the construction of the New Facility,

$0.2 million in net borrowings under our Revolving Facility, and $1.6 million in proceeds from stock option exercises, partially offset by $2.7 million to pay capital lease obligations, $8,000 in deferred financing costs for the Revolving Facility, and $0.2 million in tax withholding payments associated with net share settlement of equity awards.

Sale of Spice Assets

In order to focus on our core product offerings, in the second quarter of fiscal 2016, we completed the sale of certain assets associated with our manufacture, processing and distribution of raw, processed and blended spices and certain other culinary products to Harris. See Note 6, Sales of Assets—Sale of Spice Assets, of the Notes to Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this report.

Sale of Torrance Facility

On July 15, 2016, we completed the sale of the Torrance Facility for an aggregate cash sale price of $43.0 million, which sale price was subject to customary adjustments for closing costs and documentary transfer taxes. Cash proceeds from the sale of the Torrance Facility were $42.5 million. Following the closing of the sale, we leased back the Torrance Facility on a triple net basis through October 31, 2016 at zero base rent, and exercised two one-month extensions at a base rent of $100,000 per month. We vacated the Torrance Facility in December 2016 and concluded the leaseback transaction. Accordingly, in the nine months ended March 31, 2017, we recognized a net gain from the sale of the Torrance Facility in the amount of $37.4 million, including non-cash interest expense of $0.7 million and non-cash rent expense of $1.4 million, representing the rent for the zero base rent period previously recorded in “Other current liabilities” on our consolidated balance sheet. See Note 6, Sale of Assets—Sale of Torrance Facility and Note 7, Assets Held for Sale, of the Notes to Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this report.

Acquisitions

On October 11, 2016, we acquired substantially all of the assets and certain specified liabilities of China Mist for aggregate purchase consideration of $11.7 million, which included $11.2 million in cash paid at closing including working capital adjustments of $0.4 million and up to $0.5 million in contingent consideration to be paid as earnout if certain sales levels are achieved in the calendar years of 2017 or 2018. On February 7, 2017, we acquired substantially all of the assets and certain specified liabilities of West Coast Coffee for aggregate purchase consideration of $15.7 million including working capital adjustments of $1.2 million and up to $1.0 million in contingent consideration to be paid as earnout if certain sales levels are achieved in the twenty-four months following the closing. We funded the purchase price for these acquisitions with proceeds under our Revolving Facility and cash flows from operations. See Note 3, Acquisitions, of the Notes to Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this report.

DSD Restructuring Plan

On February 21, 2017, we announced the DSD Restructuring Plan. We estimate that we will recognize approximately $3.7 million to $4.9 million of pre-tax restructuring charges by the end of the second quarter of fiscal 2018 consisting of approximately $1.9 million to $2.7 million in employee-related costs, including severance, prorated bonuses for bonus eligible employees, contractual termination payments and outplacement services, and $1.8 million to $2.2 million in other related costs, including legal, recruiting, consulting, other professional services, and travel. Expenses related to the DSD Restructuring Plan in the nine months ended March 31, 2017 consisted of $0.9 million in employee-related costs and $0.4 million in other related costs. As of March 31, 2017, we had paid a total of $0.1 million of these costs and had a balance of $1.2 million in DSD Restructuring Plan-related liabilities on our condensed consolidated balance sheet. We may also incur other charges not currently contemplated due to events that may occur as a result of, or associated with, the DSD Restructuring Plan. We expect to complete the DSD Restructuring Plan by the end of the second quarter of fiscal 2018. See Note 4, Restructuring Plans-DSD Restructuring Plan, of the Notes to Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this report.

Corporate Relocation Plan

We estimated that we would incur approximately $31 million in cash costs in connection with the Corporate Relocation Plan consisting of $18 million in employee retention and separation benefits, $5 million in facility-related costs and $8 million in other related costs. Since the adoption of the Corporate Relocation Plan in fiscal 2015 through March 31, 2017, we have recognized a total of $31.5 million in aggregate cash costs, including $17.4 million in employee retention and

separation benefits, $6.7 million in facility-related costs related to the temporary office space, costs associated with the move of the Company's headquarters, relocation of our Torrance operations and certain distribution operations and $7.4 million in other related costs recorded in “Restructuring and other transition expenses” in our condensed consolidated statements of operations. We expect to complete the Corporate Relocation Plan and recognize an additional $0.1 million in other related costs in the fourth quarter of fiscal 2017. Additionally, from inception through March 31, 2017, we recognized non-cash depreciation expense of $2.3 million associated with the Torrance production facility resulting from the consolidation of coffee production operations with the Houston and Portland production ~~facilities.~~

~~(3) Includes~~facilities and $1.4 million in non-cash rent expense recognized in the sale-leaseback of the Torrance Facility. We may incur certain pension-related costs in connection with the Corporate Relocation Plan which are not included in the estimated $31 million in aggregate cash costs. See Note 4, Restructuring Plans—Corporate Relocation Plan, of the Notes to Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this report.

Purchase Option Exercise

On September 15, 2016, we closed the purchase option and acquired the land and the partially constructed New Facility located thereon for an aggregate purchase price of $42.5 million, consisting of the purchase option price of $42.0 million based on actual construction costs incurred for the partially constructed New Facility as of the Purchase Option Closing Date, plus the option exercise fee, plus amounts paid in respect of real estate commissions, title insurance, and recording fees. The Purchase Price was paid in cash from proceeds received from the sale of the Torrance Facility. Upon closing of the purchase option, we recorded the aggregate purchase price of the New Facility in "Property, plant and equipment, net" on our consolidated balance sheet. The asset related to the New Facility lease obligation included in "Property, plant and equipment, net," the offsetting liability for the lease obligation included in "Other long-term liabilities" and the rent expense related to the land were reversed. See Note 5, New Facility—Lease Agreement and Purchase Option Exercise, of the Notes to Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this report.

New Facility Costs

Based on the current forecast, we estimate that the total construction costs including the cost of the land for the New Facility will be approximately $60 million of which we have paid an aggregate of $54.7 million as of March 31, 2017 and have outstanding contractual obligations of $5.5 million as of March 31, 2017. In addition to the costs to complete the construction of the New Facility, we expect to incur approximately $35 million to $39 million for machinery and equipment, furniture and fixtures, and related expenditures of which we have paid an aggregate of $20.2 million as of March 31, 2017, including $15.7 million under the Amended Building Contract, and have outstanding contractual obligations of $6.2 million as of March 31, 2017. See Note 5, New Facility, and Note 20,Commitments and Contingencies, of the Notes to Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this report. The majority of the capital expenditures associated with machinery and equipment, furniture and fixtures and related expenditures for the New Facility were incurred in the first three quarters of fiscal 2017. Construction of and relocation to the New Facility were substantially completed in the third quarter of fiscal 2017.

The following table summarizes the expenditures paid for the New Facility as of March 31, 2017 as compared to the final budget:



	Expenditures paid						Budget
(In thousands)	Nine Months Ended March 31, 2017		Through Fiscal Year Ended June 30, 2016		Total		Lower bound		Upper bound
Building and facilities, including land	$	26,606	$	28,110	$	54,716	$	55,000	$	60,000
Machinery and equipment; furniture and fixtures	15,764		4,443		20,207		35,000		39,000
Total	$	42,370	$	32,553	$	74,923	$	90,000	$	99,000

Capital Expenditures

For the nine months ended March 31, 2017 and 2016, ~~respectively, $0.2~~our capital expenditures were as follows:



	Nine Months Ended March 31,
(In thousands)	2017		2016
Coffee brewing equipment	$	8,280	$	5,679
Building and facilities	230		200
Vehicles, machinery and equipment	9,439		7,060
Software, office furniture and equipment	1,831		1,320
Total capital expenditures excluding New Facility	$	19,780	$	14,259
New Facility:
Building and facilities, including land	$	26,606	$	13,492
Machinery and equipment	11,774		1,934
Software, office furniture and equipment	3,990		—
Total capital expenditures	$	62,150	$	29,685

As we complete the first phase of capital spending on our New Facility, we anticipate spending between $16 million to $18 million in capital expenditures in the remainder of fiscal 2017. Our expected capital expenditures for fiscal 2017 unrelated to the New Facility include expenditures to replace normal wear and tear of coffee brewing equipment, vehicles, machinery and equipment and mobile sales solution hardware, and are expected to be $2.5 million to $3.5 million for the remainder of fiscal 2017 and approximately $20 million to $22 million, annually.

Depreciation and amortization expense was $6.5 million and ~~$0.8~~$5.2 million, in the three months ended March 31, 2017 and 2016, respectively. Depreciation and amortization expense was $16.6 million and $15.7 million in the nine months ended March 31, 2017 and 2016, respectively. We anticipate depreciation and amortization expense ~~associated with~~to increase to $7.0 million to $7.5 million in the ~~Torrance production facility resulting from~~fourth quarter of fiscal 2017. We also anticipate our depreciation and amortization expense will be approximately $8.0 million to $8.5 million per quarter in fiscal 2018 based on our existing fixed asset commitments and the ~~consolidation~~useful lives of ~~coffee production operations with~~our intangible assets.

Working Capital

At March 31, 2017 and June 30, 2016, our working capital was composed of the ~~Houston and Portland production facilities.~~following:



	March 31, 2017		June 30, 2016
(In thousands)
Current assets	$	148,488	$	153,365
Current liabilities	116,103		56,837
Working capital	$	32,385	$	96,528

Contractual Obligations

As part of the China Mist transaction, we assumed the lease on China Mist’s existing 17,400 square foot production, distribution and warehouse facility in Scottsdale, Arizona which is terminable upon twelve months’ notice. As part of the West Coast Coffee transaction, we entered into a three-year lease on West Coast Coffee’s existing 20,400 square foot production, distribution and warehouse facility in Hillsboro, Oregon, which expires January 31, 2020, and assumed leases on six branch warehouses consisting of an aggregate of 24,150 square feet in Oregon, California and Nevada, expiring on various dates through November 2020.

The following table contains information regarding total contractual obligations as of March 31, 2017, including capital leases:



	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	$	12,832	$	1,233	$	8,482	$	2,931	$	186
New Facility construction and equipment contracts(1)	11,698		11,698		—		—		—
Capital lease obligations(2)	1,572		341		1,176		55		—
Pension plan obligations	84,011		1,973		16,858		17,918		47,262
Postretirement benefits other than pension plans	11,147		270		2,245		2,386		6,246
Revolving credit facility	44,175		44,175		—		—		—
Purchase commitments(3)	79,503		41,919		37,584		—		—
Total contractual obligations	$	244,938	$	101,609	$	66,345	$	23,290	$	53,694

______________

(1) Includes $5.5 million in outstanding contractual obligations for construction of the New Facility and $6.2 million outstanding contractual obligations under the Amended Building Contract as of March 31, 2017. See Note 5, New Facility, of the Notes to Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this report.

(2) Includes imputed interest of $0.1 million.

(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 March 31, 2017. Amounts shown in the table above: (a) include all coffee purchase contracts that the Company considers to be from normal purchases; and (b) do not include amounts related to derivative instruments that are recorded at fair value on the Company’s consolidated balance sheets.

As of March 31, 2017, we had committed to purchase green coffee inventory totaling $68.9 million under fixed-price contracts, equipment for the New Facility totaling $0.5 million and other purchases totaling $10.1 million under non-cancelable purchase orders.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements.



Item 3.	Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk

We are exposed to market value risk arising from changes in interest rates on our securities portfolio. Our portfolio of preferred securities has sometimes included investments in ~~derivatives~~derivative instruments that provide a natural economic hedge of interest rate risk. We review the interest rate sensitivity of these securities and may enter into “short positions” in futures contracts on U.S. Treasury securities or hold put options on such futures contracts to reduce the impact of certain interest rate changes. Specifically, we attempt to manage the risk arising from changes in the general level of interest rates. We do not transact in futures contracts or put options for speculative purposes. The number and type of futures and options contracts entered into depends on, among other items, the specific maturity and issuer redemption provisions for each preferred stock held, the slope of the U.S. Treasury yield curve, the expected volatility of U.S. Treasury yields, and the costs of using futures and/or options.

The following table demonstrates the impact of varying interest rate changes based on our preferred securities holdings and market yield and price relationships at March 31, ~~2016.~~2017. This table is predicated on an “instantaneous” change

in the general level of interest rates and assumes predictable relationships between the prices of our preferred securities holdings and the yields on U.S. Treasury securities. At March 31, ~~2016,~~2017, we had no futures contracts or put options with respect to our preferred securities portfolio designated as interest rate risk hedges.


($ in thousands)	Market Value of Preferred Securities at March 31, 2016		Change in Market Value			Market Value of Preferred Securities at March 31, 2017		Change in Market Value
Interest Rate Changes
–150 basis points	$	25,738	$	924		$	27,940	$	1,399
–100 basis points	$	25,534	$	720		$	27,561	$	1,020
Unchanged	$	24,814	$	—		$	26,541	$	—
+100 basis points	$	23,938	$	(876	)	$	25,477	$	(1,064	)
+150 basis points	$	23,512	$	(1,302	)	$	24,952	$	(1,589	)

~~The Credit Agreement for~~Borrowings under our Revolving Facility ~~provides for~~bear interest ~~rates~~ based on ~~Average Historical Excess Availability~~average historical excess availability levels with a range of PRIME - 0.25% to PRIME + 0.50% or Adjusted LIBO Rate + 1.25% to Adjusted LIBO Rate + 2.00%.

At March 31, ~~2016,~~2017, we had outstanding borrowings of ~~$0.3~~$44.2 million, utilized ~~$11.5~~$4.4 million of the letters of credit sublimit, and had excess availability under the Revolving Facility of ~~$47.4~~$13.1 million. AtThe weighted average interest rate on our outstanding borrowings under the Revolving Facility at March 31, ~~2016,~~2017 was 2.52%.

The following table demonstrates the impact of interest rate changes on our annual interest expense on outstanding borrowings under the Revolving Facility, excluding interest on letters of credit, based on the weighted average interest rate on the ~~Company's outstanding borrowings under the Revolving Facility was 1.67%.~~loan as of March 31, 2017:



($ in thousands)	Principal	Interest Rate		Annual Interest Expense
–150 basis points	$44,175	1.11	%	$	490,343
–100 basis points	$44,175	1.61	%	$	711,218
Unchanged	$44,175	2.61	%	$	1,152,968
+100 basis points	$44,175	3.61	%	$	1,594,718
+150 basis points	$44,175	4.11	%	$	1,815,593

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 LIFO basis. In the normal course of business we hold a large green coffee inventory and enter into forward commodity purchase agreements with suppliers. We are subject to price risk resulting from the volatility of green coffee prices. Due to competition and market conditions, volatile price increases cannot always be passed on to our customers.

We purchase over-the-counter ~~coffee~~coffee-related derivative instruments to enable us to lock in the price of green coffee commodity purchases. These derivative instruments also may be entered into at the direction 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 2418 months or longer in the future. 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.

~~When~~When we designate coffee-related derivative instruments as cash flow hedges, we formally document the hedging instruments and hedged items, and measure at each balance sheet date the effectiveness of our hedges. The effective portion of the change in fair value of the derivative is reported asin AOCI and subsequently reclassified into cost of goods sold in the period or periods when the hedged transaction affects earnings. InFor the three months ended March 31, 2017 and 2016, ~~and 2015,~~respectively, we reclassified ~~$2.7 million and $0.4~~$0.9 million in net gains and $(2.7) million in net losses on derivative instruments designated as cash flow hedges, excluding tax, respectively, into cost of goods sold from AOCI. InFor the nine months ended March 31,

2017 and 2016, ~~and 2015,~~ we reclassified ~~$(11.5) million and $9.5~~$0.6 million in net gains and $(11.5) million in net losses on derivative instruments designated as cash flow hedges, excluding tax, respectively, into cost of goods sold from

AOCI. Any ineffective portion of the derivative's change in fair value is recognized currently in “Other, net.” Gains or losses deferred in AOCI associated with terminated derivative instruments, derivative instruments that cease to be highly effective hedges, derivative instruments for which the forecasted transaction is reasonably possible but no longer probable of occurring, and cash flow hedges that have been otherwise discontinued remain in AOCI until the hedged item affects earnings. If it becomes probable that the forecasted transaction designated as the hedged item in a cash flow hedge will not occur, we recognize any gain or loss deferred in AOCI in “Other, net” at that time. ~~In each of~~For the three months ended March 31, ~~2016~~2017 and ~~2015,~~2016, we recognized in ~~"Other, net"~~“Other, net” $90,000 in net gains and $(0.1) million in net losses, respectively, on coffee-related derivative instruments designated as cash flow hedges due to ineffectiveness. InFor the nine months ended March 31, ~~2016~~2017 and ~~2015,~~2016, we recognized in ~~"Other, net"~~“Other, net” $63,000 in net gains and $(0.6) million ~~and $(0.3) million, respectively,~~ in net losses, respectively, on coffee-related derivative instruments designated as cash flow hedges due to ineffectiveness.

For derivative instruments that are not designated in a hedging relationship, and for which the normal purchases and normal sales exception has not been elected, the changes in fair value are reported in “Other, net.” In each of the three months ended March 31, ~~2016~~2017 and ~~2015,~~2016, we recorded in ~~"Other, net"~~“Other, net” net gains of ~~$0.3~~$0.2 million ~~and net losses of $(1.7) million, respectively,~~ on coffee-related derivative instruments not designated as accounting hedges. InFor the nine months ended March 31, ~~2016~~2017 and ~~2015,~~2016, we recorded in ~~"Other, net" $0.1 million in~~“Other, net” net ~~gains and $(2.4) million in net~~ losses ~~respectively,~~ on coffee-related derivative instruments not designated as accounting ~~hedges.~~hedges in the amounts of $(1.1) million and $(0.5) million, respectively.

The following table summarizes the potential impact as of March 31, ~~2016~~2017 to net income and ~~OCI~~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:

(In thousands) Increase (Decrease) to Net Income Increase (Decrease) to OCI
10% Increase in Underlying Rate 10% Decrease in Underlying Rate 10% Increase in Underlying Rate 10% Decrease in Underlying Rate

Coffee-related derivative instruments(1) $ 512
$ (512 ) $ 4,484
$ (4,484 )



	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)	10% Increase in Underlying Rate		10% Decrease in Underlying Rate			10% Increase in Underlying Rate		10% Decrease in Underlying Rate
Coffee-related derivative instruments(1)	$	18	$	(18	)	$	1,702	$	(1,702	)

__________


~~(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 March 31, 2016. These contracts are not included in the sensitivity analysis above as the underlying price has been fixed.

(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 March 31, 2017. These contracts are not included in the sensitivity analysis above as the underlying price has been fixed.



Item 4.	Controls and Procedures

Disclosure Controls and Procedures

Disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (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~~principal executive and ~~Chief Financial Officer,~~principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosures.

As of March 31, ~~2016,~~2017, our management, with the participation of our Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial and accounting officer), carried out an evaluation of the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15(e) promulgated under the Exchange Act. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective.

Changes in Internal Control Over Financial Reporting

Management has determined that there has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Exchange Act) during our fiscal quarter ended March 31, ~~2016~~2017 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.



PART II - OTHER INFORMATION



Item 1.	Legal Proceedings

~~Council for Education~~The information set forth in Note 20, Commitments and ~~Research on Toxics (“CERT”) v. Brad Berry Company Ltd.~~Contingencies, ~~et al., Superior Court~~ of the ~~State~~Notes to Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of ~~California, County of Los Angeles~~this Form 10-Q is incorporated herein by reference.



Item 1A.	Risk Factors

Our DSD Restructuring Plan may be unsuccessful or less successful than we presently anticipate, which may adversely affect our business, operating results and financial condition.

On ~~August 31, 2012, CERT filed~~February 21, 2017, we announced the DSD Restructuring Plan in an ~~amendment~~effort to realign functions into a ~~private enforcement action adding~~channel based selling organization, streamline operations, acquire certain channel specific expertise, and improve selling effectiveness and financial results. We cannot guarantee that we will be successful in implementing the DSD Restructuring Plan in a ~~number~~timely manner or at all, or that such efforts will not interfere with our ability to achieve our business objectives. The DSD Restructuring Plan costs may be greater than anticipated which could cause us to incur indebtedness in amounts in excess of ~~companies as defendants, including CBI, which sell coffee in California. The suit alleges that~~expectations. We may be unable to realize the defendants have failed to issue clear and reasonable warnings in accordance with Proposition 65 that the coffee they produce, distribute and sell contains acrylamide. This lawsuit was filed in Los Angeles Superior Court (the “Court”). CERT has demanded that the alleged violators remove acrylamide from their coffee or provide Proposition 65 warnings on their products and pay $2,500 per day for each and every violation while they are in violation of Proposition 65.

~~Acrylamide is produced naturally~~contemplated benefits in connection with the ~~heating~~reduction in workforce and other potential restructuring activities, which may have an adverse impact on our performance. Moreover, reductions in force can be difficult to manage, may cause concerns from current and potential customers, suppliers and other third parties with whom we do business which may cause them to delay or curtail doing business with us, may increase the likelihood of ~~many foods, especially starchy foods,~~key employees leaving the Company or may make it more difficult to recruit new employees, and ~~is believed~~may have an adverse impact on our business. If we fail to achieve our objectives of the DSD Restructuring Plan, further restructuring may be ~~caused by~~necessary. Management continues to analyze the ~~Maillard reaction, though it has also been found~~Company’s DSD organization and evaluate other potential restructuring opportunities in ~~unheated foods such as olives. With respect to coffee, acrylamide is produced when coffee beans are heated during~~light of the ~~roasting process-it is~~Company’s strategic priorities which could result in additional restructuring charges the ~~roasting itself that produces the acrylamide. While there has been a significant~~ amount of research concerning proposals for treatments and other processes aimed at reducing acrylamide content of different types of foods, to our knowledge there is currently no known strategy for reducing acrylamide in coffee without negatively impacting the sensorial properties of the product.

The Company has joined a Joint Defense Group and, along with the other co-defendants, has answered the complaint, denying, generally, the allegations of the complaint, including the claimed violation of Proposition 65 and further denying CERT’s right to any relief or damages, including the right to require a warning on products. The Joint Defense Group contends that based on proper scientific analysis and proper application of the standards set forth in Proposition 65, exposures to acrylamide from the coffee products pose no significant risk of cancer and, thus, these exposures are exempt from Proposition 65’s warning requirement.

To date, the pleadings stage of the case has been completed. The Court has phased trial so that the “no significant risk level” defense, the First Amendment defense, and the preemption defense willwhich could be tried first. Fact discovery and expert discovery on these “Phase 1” defenses have been completed, and the parties filed trial briefs. Trial commenced on September 8, 2014, and testimony completed on November 4, 2014, for the three Phase 1 defenses. Following two continuances, the Court heard on April 9, 2015 final arguments on the Phase 1 issues. On July 25, 2015, the Court issued its Proposed Statement of Decision with respect to Phase 1 defenses against the defendants, which was confirmed, on September 2, 2015 in the Final Statement of Decision. The Court has stated that all defendants would be included in “Phase 2,” though this remains unresolved, including the extent of the involvement or participation in discovery. Following permission from the Court, on October 14, 2015 the Joint Defense Group filed a writ petition for an interlocutory appeal. In late December 2015, plaintiff’s counsel served letters proposing a new plan to file the anticipated motion for summary adjudication and a new set of discovery on all defendants. On January 14, 2016, the Court of Appeals denied the Joint Defense Group’s writ petition thereby denying the interlocutory appeal. On February 16, 2016, CERT filed a motion for summary adjudication arguing that based upon facts that had been stipulated by defendants, CERT had proven its prima facie case and all that remains is a determination of whether any affirmative defenses are available to defendants. On March 16, 2016, the Court reinstated the stay on discovery for all defendant parties except for the four largest defendants, so the Company is not currently obligated to participate in discovery. Following a hearing on April 20, 2016, the Court granted CERT’s motion for summary adjudication on its prima facie case. CERT is expected to file its motion for summary adjudication of affirmatives defenses, and the deadline for defendants’ opposition will be set at a June 6, 2016 hearing. At this time, the Company is not able to predict the probability of the outcome or estimate of loss, if any, related to this matter. material.

~~Steve Hernandez vs. Farmer Bros. Co. and Monica Zuno vs. Farmer Bros. Co., Superior Court of State of California, County of Los Angeles~~

upon termination, failing to provide accurate and complete wage statements, and failing to reimburse business-related expenses. Hernandez’s complaint seeks restitution in an unspecified amount and injunctive relief, in addition to attorneys’ fees and expenses. Hernandez alleges that the putative class is all “current and former hourly-paid or non-exempt individuals” for the four (4) years preceding the filing of the complaint through final judgment, and Hernandez also purports to reserve the right to establish sub-classes as appropriate. On November 12, 2015, a separate putative class representative, Monica Zuno, filed claim under the same class action; the Court has related this case to the Hernandez case. On November 17, 2015, the unified case was assigned to a judge, and this judge ordered the stay on discovery to remain intact until after a decision on the Company’s demurrer action. The plaintiff filed an Opposition to the Demurrer and, in response, on January 5, 2016, the Company filed a reply to this Opposition to the Demurrer. On February 2, 2016, the Court held a hearing on the demurrer. and found in our favor, sustaining the demurrer in its entirety without leave to amend as to the plaintiff Hernandez, and so dismissing Hernandez’s claims and the related putative class. Claims on behalf of the plaintiff Zuno remain at this time, pending the filing of an amended complaint on behalf of this remaining plaintiff and reduced putative class. The Court has lifted the stay on discovery and has set August 12, 2016 for a status conference. At this time, we are not able to predict the probability of the outcome or estimate of loss, if any, related to this matter.



Item 6.	Exhibits

See Exhibit Index.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.




FARMER BROS. CO.

By:		/s/ ~~MICHAEL H. KEOWN~~
	Michael H. Keown
		Michael H. Keown President and Chief Executive Officer (chief executive officer)
	~~(chief executive officer)~~	May 10, 2017
	~~May 6, 2016~~

By:		/s/ ~~ISAAC N. JOHNSTON, JR.~~David G. Robson
	~~Isaac N. Johnston, Jr.~~	David G. Robson Treasurer and Chief Financial Officer (principal financial and accounting officer)
	~~Treasurer and Chief Financial Officer~~
	~~(principal financial and accounting officer)~~
	May ~~6, 2016~~10, 2017

EXHIBIT INDEX



2.1		Asset Purchase Agreement, dated as of November 16, 2015, by and between Farmer Bros. Co. and Harris Spice Company Inc. (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on November 30, 2015 and incorporated herein by reference).*

2.2		Purchase Agreement, dated as of September 9, 2016, among Tea Leaf Acquisition Corp., China Mist Brands, Inc., certain stockholders of China Mist Brands, Inc., for certain limited purposes, Daniel W. Schweiker and John S. Martinson, and Daniel W. Schweiker, in his capacity as the sellers’ representative (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on September 14, 2016 and incorporated herein by reference).*

3.1		Certificate of Incorporation (filed as Exhibit 3.1 to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2014 filed with the SEC on September 16, 2014 and incorporated herein by reference).

3.2		Amended and Restated Bylaws (filed ~~herewith)~~as Exhibit 3.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2016 filed with the SEC on May 6, 2016 and incorporated herein by reference).

3.3		Certificate of Elimination (filed as Exhibit 3.3 to the Company's Registration Statement on Form 8-A/A filed with the SEC on September 24, 2015 and incorporated herein by reference).

4.1		Specimen Stock Certificate (filed as Exhibit 4.1 to the Company's Registration Statement on Form 8-A/A filed with the SEC on September 24, 2015 and incorporated herein by reference).

4.2		Registration Rights Agreement, dated as of June 16, 2016, among Farmer Bros. Co. and the Investors identified on the signature pages thereto (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on June 21, 2016 and incorporated herein by reference).

10.1		Credit Agreement, dated as of March 2, 2015, by and among Farmer Bros. Co., Coffee Bean International, Inc., FBC Finance Company, Coffee Bean Holding Co., Inc., the Lenders party thereto and JPMorgan Chase Bank, N.A., as Administrative Agent (filed as Exhibit 10.1 to the Company's Current Report on Form 8-K ~~for~~filed with the ~~period ended~~SEC on March 6, 2015 and incorporated herein by reference).

10.2		Joinder Agreement, dated as of October 11, 2016, by and among China Mist Brands, Inc., Farmer Bros. Co., as the Borrower’s Representative, and JPMorgan Chase Bank, N.A., as Administrative Agent, under that certain Credit Agreement dated as of March 2, 2015 (filed as Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 2016 filed with the SEC on February 9, 2017 and incorporated herein by reference).

~~10.2~~10.3		Pledge and Security Agreement, dated as of March 2, 2015, by and among Farmer Bros. Co., Coffee Bean International, Inc., FBC Finance Company, Coffee Bean Holding Co., Inc. and JPMorgan Chase Bank, N.A., as Administrative Agent (filed as Exhibit 10.2 to the Company's Current Report on Form 8-K ~~for~~filed with the ~~period ended~~SEC on March 6, 2015 and incorporated herein by reference).

10.4		Joinder to Pledge and Security Agreement, dated as of October 11, 2016, by and among Farmer Bros. Co., Coffee Bean International, Inc., FBC Finance Company, Coffee Bean Holding Co., Inc., China Mist Brands, Inc. and JPMorgan Chase Bank, N.A., as Administrative Agent (filed as Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2016 filed with the SEC on February 9, 2017 and incorporated herein by reference).

~~10.3~~10.5		Farmer Bros. Co. Pension Plan for Salaried Employees (filed as Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2012 filed with the SEC on November 5, 2012 and incorporated herein by reference).**

~~10.4~~10.6		Amendment No. 1 to Farmer Bros. Co. Retirement Plan effective June 30, 2011 (filed as Exhibit ~~10.14~~10.4 to the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, ~~2011~~2016 filed with the SEC on September ~~12, 2011~~14, 2016 and incorporated herein by reference).**




~~10.5~~10.7		Action of the Administrative Committee of the Farmer Bros. Co. Qualified Employee Retirement Plans amending the Farmer Bros. Co. Retirement Plan, effective as of December 6, 2012 (filed as Exhibit 10.8 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2013 filed with the SEC on May 6, 2013 and incorporated herein by reference).**

~~10.6~~10.8		Farmer Bros. Co. 2005 Incentive Compensation Plan (filed as Exhibit 10.10 to the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 2013 filed with the SEC on February 10, 2014 and incorporated herein by reference).**

~~10.7~~10.9		Amendment to Farmer Bros. Co. 2005 Incentive Compensation Plan (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on December 10, 2014 and incorporated herein by reference).**

~~10.8~~10.10		Farmer Bros. Co. Amended and Restated Employee Stock Ownership Plan, as adopted by the Board of Directors on December 9, 2010 and effective as of January 1, 2010 (filed ~~herewith)~~as Exhibit 10.8 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2016 filed with the SEC on May 6, 2016 and incorporated herein by reference).**

~~10.9~~10.11		Action of the Administrative Committee of the Farmer Bros. Co. Qualified Employee Retirement Plans amending the Farmer Bros. Co. Amended and Restated Employee Stock Ownership Plan, effective as of January 1, 2012 (filed as Exhibit 10.7 to the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2012 filed with the SEC on September 7, 2012 and incorporated herein by reference).**

~~10.10~~10.12		Action of the Administrative Committee of the Farmer Bros. Co. Qualified Employee Retirement Plans amending the Farmer Bros. Co. Amended and Restated Employee Stock Ownership Plan, effective as of January 1, 2015 (filed as Exhibit 10.10 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2015 filed with the SEC on November 9, 2015 and incorporated herein by reference).**



~~10.11~~10.13		Action of the Administrative Committee of the Farmer Bros. Co. Qualified Employee Retirement Plans amending the Farmer Bros. Co. Amended and Restated Employee Stock Ownership Plan, effective as of January 1, 2015 ~~((filed~~(filed as Exhibit 10.11 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2015 filed with the SEC on November 9, 2015 and incorporated herein by reference).**

~~10.12~~10.14		Amendment dated October 6, 2016 to Farmer Bros. Co. Amended and Restated Employee Stock Ownership Plan (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on October 7, 2016 and incorporated herein by reference).**

10.15		ESOP Loan Agreement including ESOP Pledge Agreement and Promissory Note, dated March 28, 2000, between Farmer Bros. Co. and Wells Fargo Bank, N.A., Trustee for the Farmer Bros Co. Employee Stock Ownership Plan (filed ~~herewith)~~as Exhibit 10.12 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2016 filed with the SEC on May 6, 2016 and incorporated herein by reference).

~~10.13~~10.16		Amendment No. 1 to ESOP Loan Agreement, dated June 30, 2003, between Farmer Bros. Co. and Wells Fargo Bank, N.A., Trustee for the Farmer Bros Co. Employee Stock Ownership Plan (filed ~~herewith)~~as Exhibit 10.13 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2016 filed with the SEC on May 6, 2016 and incorporated herein by reference).

~~10.14~~10.17		ESOP Loan Agreement No. 2 including ESOP Pledge Agreement and Promissory Note, dated July 21, 2003 between Farmer Bros. Co. and Wells Fargo Bank, N.A., Trustee for the Farmer Bros Co. Employee Stock Ownership Plan (filed ~~herewith)~~as Exhibit 10.14 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2016 filed with the SEC on May 6, 2016 and incorporated herein by reference).

~~10.15~~10.18		Employment Agreement, dated March 9, 2012, by and between Farmer Bros. Co. and Michael H. Keown (filed ~~as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on March 13, 2012 and incorporated herein by reference)~~herewith).**

~~10.16~~		Employment Agreement, dated as of April 1, 2013, by and between Farmer Bros. Co. and Mark J. Nelson (filed as Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the SEC on April 4, 2013 and incorporated herein by reference).**

~~10.17~~	Amendment No. 1 to Employment Agreement, dated as of January 1, 2014, by and between Farmer Bros. Co. and Mark J. Nelson (filed as Exhibit 10.2 to the Company's Current Report on Form 8-K filed with the SEC on March 5, 2014 and incorporated herein by reference).**

~~10.18~~	Amendment No. 2 to Employment Agreement, dated as of November 23, 2015, between Farmer Bros. Co. and Mark J. Nelson (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on November 30, 2015 and incorporated herein by reference).**

10.19	Employment Agreement, dated as of December 2, 2014, by and between Farmer Bros. Co. and Barry C. Fischetto (filed as Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the SEC on December 5, 2014 and incorporated herein by reference).**

~~10.20~~	Employment Agreement, effective as of May 27, 2015, by and between Farmer Bros. Co. and Scott W. Bixby (filed as Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the SEC on May 20, 2015 and incorporated herein by reference).**

~~10.21~~10.20	Employment Agreement, effective as of August 6, 2015, by and between Farmer Bros. Co. and Thomas J. Mattei, Jr. (filed as Exhibit 10.20 to the ~~Company's~~Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2015 filed with the SEC on September 14, 2015 and incorporated herein by reference).**

~~10.22~~10.21	Employment Agreement, dated as of September 25, 2015, by and between Farmer Bros. Co. and Isaac N. Johnston, Jr. (filed as Exhibit 10.1 to the ~~Company's~~Company’s Current Report on Form 8-K filed with the SEC on September 29, 2015 and incorporated herein by reference).**

~~10.23~~10.22	~~Separation~~Employment Agreement, dated as of ~~July 16, 2014,~~February 17, 2017, by and between Farmer Bros. Co. and ~~Mark A. Harding~~David G. Robson (filed as Exhibit 10.1 to the ~~Company's~~Company’s Current Report on Form 8-K filed with the SEC on ~~July 17, 2014~~February 23, 2017 and incorporated herein by reference).**

10.23	Employment Agreement, dated as of February 17, 2017, by and between Farmer Bros. Co. and Ellen D. Iobst (filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the SEC on February 23, 2017 and incorporated herein by reference).**

10.24	Employment Agreement, dated as of February 17, 2017, by and between Farmer Bros. Co. and Scott A. Siers (filed as Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the SEC on February 23, 2017 and incorporated herein by reference).**

10.25	Form of First Amendment to Employment Agreement entered into between Farmer Bros. Co. and each of Michael H. Keown, David G. Robson, Ellen D. Iobst, Scott W. Bixby, Scott A. Siers and Thomas J. Mattei, Jr. (filed herewith).**

10.26	Confidential General Release and Separation Agreement by and between Barry C. Fischetto and Farmer Bros. Co. dated February 17, 2017 (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on February 17, 2017 and incorporated herein by reference).**

10.27	Farmer Bros. Co. 2007 Omnibus Plan, as amended (as approved by the stockholders at the 2012 Annual Meeting of Stockholders on December 6, 2012) (filed as Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the SEC on December 12, 2012 and incorporated herein by reference).**

~~10.25~~10.28	Farmer Bros. Co. Amended and Restated 2007 Long-Term Incentive Plan (as approved by the stockholders at the 2013 Annual Meeting of Stockholders on December 5, 2013) (filed as Exhibit 10.2 to the Company's Current Report on Form 8-K filed with the SEC on December 11, 2013 and incorporated herein by reference).**



~~10.26~~10.29		Addendum to Farmer Bros. Co. Amended and Restated 2007 Long-Term Incentive Plan (filed as Exhibit 10.30 to the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 2014 filed with the SEC on February 9, 2015 and incorporated herein by reference).**

~~10.27~~10.30		Form of Farmer Bros. Co. 2007 Omnibus Plan Stock Option Grant Notice and Stock Option Agreement (filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the SEC on April 4, 2013 and incorporated herein by reference).**

~~10.28~~10.31		Form of Farmer Bros. Co. Amended and Restated 2007 Long-Term Incentive Plan Stock Option Grant Notice and Stock Option Agreement (filed as Exhibit 10.2 to the Company's Current Report on Form 8-K filed with the SEC on December 18, 2013 and incorporated herein by reference).**

~~10.29~~10.32		Form of Farmer Bros. Co. 2007 Omnibus Plan Restricted Stock Award Grant Notice and Restricted Stock Award Agreement (filed as Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the SEC on April 4, 2013 and incorporated herein by reference).**

~~10.30~~10.33		Form of Farmer Bros. Co. Amended and Restated 2007 Long-Term Incentive Plan Restricted Stock Award Grant Notice and Restricted Stock Award Agreement (filed as Exhibit 10.3 to the Company's Current Report on Form 8-K filed with the SEC on December 18, 2013 and incorporated herein by reference).**




~~10.31~~10.34		Stock Ownership Guidelines for Directors and Executive Officers (filed as Exhibit ~~10.32~~10.27 to the ~~Company's Quarterly~~Company’s Annual Report on Form ~~10-Q~~10-K for the fiscal year ended June 30, 2016 filed with the SEC on ~~November 10, 2014~~September 14, 2016 and incorporated herein by reference).**

~~10.32~~		Form of Target Award Notification Letter (Fiscal 2015) under Farmer Bros. Co. 2005 Incentive Compensation Plan (filed as Exhibit 10.2 to the Company's Current Report on Form 8-K filed with the SEC on September 17, 2014 and incorporated herein by reference).**

~~10.33~~10.35		Form of Change in Control Severance Agreement for Executive Officers of the Company (with schedule of executive officers attached) (filed ~~as Exhibit 10.3~~herewith).**

10.36		Form of First Amendment to ~~the Company's Current Report on Form 8-K filed with the SEC on September 29, 2015~~Change in Control Severance Agreement entered into between Farmer Bros. Co. and ~~incorporated herein by reference)~~each of Michael H. Keown, David G. Robson, Ellen D. Iobst, Scott W. Bixby, Scott A. Siers and Thomas J. Mattei, Jr. (filed herewith).**

~~10.34~~10.37		Form of Indemnification Agreement for Directors and Officers of the Company, as adopted on December 5, 2013 (with schedule of indemnitees attached) (filed as Exhibit ~~10.2~~10.4 to the ~~Company's~~Company’s Current Report on Form 8-K filed with the SEC on ~~September 29, 2015~~February 23, 2017 and incorporated herein by reference).**

~~10.35~~10.38		Lease Agreement, dated as of July 17, 2015, by and between Farmer Bros. Co. as Tenant, and WF-FB NLTX, LLC as Landlord (filed as Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the SEC on July 23, 2015 and incorporated herein by reference).

~~10.36~~10.39		First Amendment to Lease Agreement dated as of December 29, 2015, by and between Farmer Bros. Co. as Tenant, and WF-FB NLTX, LLC as Landlord (filed ~~herewith)~~as Exhibit 10.36 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2016 filed with the SEC on May 6, 2016 and incorporated herein by reference).

~~10.37~~10.40		Amendment No. 2 to Lease Agreement dated as of March 10, 2016, by and between Farmer Bros. Co. as Tenant, and WF-FB NLTX, LLC as Landlord (filed ~~herewith)~~as Exhibit 10.37 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2016 filed with the SEC on May 6, 2016 and incorporated herein by reference).

~~10.38~~10.41		Termination of Lease Agreement, dated as of September 15, 2016, by and between Farmer Bros. Co. as Tenant, and WF-FB NLTX, LLC as Landlord (filed as Exhibit 10.36 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2016 filed with the SEC on November 9, 2016).

10.42		Development Management Agreement dated as of July 17, 2015, by and between Farmer Bros. Co., as Tenant and Stream Realty Partners-DFW, L.P., as Developer (filed as Exhibit 10.2 to the Company's Current Report on Form 8-K filed with the SEC on July 23, 2015 and incorporated herein by reference).

~~10.39~~10.43		First Amendment to Development Management Agreement dated as of January 1, 2016, by and between Farmer Bros. Co., as Tenant and Stream Realty Partners-DFW, L.P., as Developer (filed ~~herewith)~~as Exhibit 10.39 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2016 filed with the SEC on May 6, 2016 and incorporated herein by reference).

~~10.40~~10.44		Second Amendment to Development Management Agreement dated as of March 25, 2016, by and between Farmer Bros. Co., as Tenant and Stream Realty Partners-DFW, L.P., as Developer (filed ~~herewith)~~as Exhibit 10.40 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2016 filed with the SEC on May 6, 2016 and incorporated herein by reference).

10.45		AIA Document A141 - 2014, Standard Form of Agreement Between Owner and Design-Builder, dated as of September 22, 2015, between Farmer Bros. Co. and The Haskell Company (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on September 22, 2016 and incorporated herein by reference).

~~10.41~~10.46		Change Order No. 12, dated as of September 17, 2016, between Farmer Bros. Co. and The Haskell Company (filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the SEC on September 22, 2016 and incorporated herein by reference).



10.47		Agreement of Purchase and Sale and Joint Escrow Instructions, dated as of April 11, 2016, by and between Farmer Bros. Co. as Seller, and Bridge Acquisition, LLC as Buyer (filed ~~herewith)~~as Exhibit 10.41 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2016 filed with the SEC on May 6, 2016 and incorporated herein by reference).

10.48

First Amendment to Agreement of Purchase and Sale and Joint Escrow Instructions, dated as of June 1, 2016, by and between Farmer Bros. Co. and Bridge Acquisition, LLC (filed as Exhibit 10.39 to the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2016 filed with the SEC on September 14, 2016 and incorporated herein by reference).



31.1		Principal Executive Officer Certification Pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).

31.2		Principal Financial and Accounting Officer Certification Pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).

32.1		Principal Executive Officer Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).

32.2		Principal Financial and Accounting Officer Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).

101		The following financial statements from the Company's Quarterly Report on Form 10-Q for the fiscal ~~quarter~~period ended March 31, ~~2016,~~2017, formatted in eXtensible Business Reporting Language: (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations, (iii) Condensed Consolidated Statements of Comprehensive Income, ~~(Loss),~~ (iv) Condensed Consolidated Statements of Cash Flows, and (v) Notes to Unaudited Condensed Consolidated Financial Statements (furnished herewith).

________________



*	Pursuant to Item 601(b)(2) of Regulation S-K, the schedules and/or exhibits to this agreement have been omitted. The Registrant undertakes to supplementally furnish copies of the omitted schedules and/or exhibits to the Securities and Exchange Commission upon request.

**	Management contract or compensatory plan or arrangement.

5258



	Nine Months Ended March 31, 2016
Weighted average fair value of NQOs	$	12.74
Risk-free interest rate	1.71		%
Dividend yield	—		%
Average expected term	5.1 years
Expected stock price volatility	47.9		%



Outstanding NQOs:	Number of NQOs		Weighted Average Exercise Price ($)	Weighted Average Grant Date Fair Value ($)	Weighted Average Remaining Life (Years)	Aggregate Intrinsic Value ($ in thousands)
Outstanding at June 30, 2015	329,300		12.30	5.54	3.9	3,700
Granted	18,589		29.17	12.74	6.6	—
Exercised	(100,895	)	12.99	5.59	—	1,574
Cancelled/Forfeited	(18,371	)	13.45	6.17	—	—
Outstanding at March 31, 2016	228,623		13.28	6.05	3.8	3,336
Vested and exercisable, March 31, 2016	188,705		10.50	4.90	3.3	3,278
Vested and expected to vest, March 31, 2016	225,974		13.12	5.99	3.8	3,333



	Nine Months Ended March 31, 2016
Weighted average fair value of PNQs	$	11.46
Risk-free interest rate	1.71		%
Dividend yield	—		%
Average expected term	4.9 years
Expected stock price volatility	42.5		%



	Three Months Ended March 31,						Nine Months Ended March 31,
($ in thousands, except per share data)	2016			2015			2016			2015
Net income (loss), as reported(1)	$	1,192		$	(2,572	)	$	5,679		$	2,839
Restructuring and other transition expenses, net of tax of zero	3,169			3,596			13,855			4,570
Net gain from sale of spice assets, net of tax of zero	(335		)	—			(5,441		)	—
Net (gains) losses from sales of assets, net of tax of zero	(4		)	107			(163		)	346
Non-GAAP net income	$	4,022		$	1,131		$	13,930		$	7,755
Net income (loss) per common share—diluted, as reported	$	0.07		$	(0.16	)	$	0.34		$	0.17
Impact of restructuring and other transition expenses, net of tax of zero	$	0.19		$	0.22		$	0.83		$	0.28
Impact of net gain from sale of spice assets, net of tax of zero	$	(0.02	)	$	—		$	(0.32	)	$	—
Impact of (gains) losses from sales of assets, net of tax of zero	$	—		$	0.01		$	(0.01	)	$	0.02
Non-GAAP net income per diluted common share	$	0.24		$	0.07		$	0.84		$	0.47



(In thousands)	Increase (Decrease) to Net Income					Increase (Decrease) to OCI
	10% Increase in Underlying Rate		10% Decrease in Underlying Rate			10% Increase in Underlying Rate		10% Decrease in Underlying Rate
	10% Increase in Underlying Rate		10% Decrease in Underlying Rate			10% Increase in Underlying Rate		10% Decrease in Underlying Rate
Coffee-related derivative instruments(1)	$	512	$	(512	)	$	4,484	$	(4,484	)