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~~December 31, 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~~None
(Former Address, if Changed Since Last ~~Report~~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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated ~~filer” and~~filer,” “smaller reporting company,” and ~~"emerging~~“emerging growth ~~company"~~company” in Rule 12b-2 of the Exchange Act.



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

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

YES ¨ NO ý

As of ~~May 9, 2017,~~February 6, 2018, the registrant had ~~16,844,216~~16,899,667 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~~December 31, 2017 and June 30, ~~2016~~2017	1

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

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

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

Notes to Condensed Consolidated Financial Statements	6

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	3234

Item 3. Quantitative and Qualitative Disclosures About Market Risk	4849

Item 4. Controls and Procedures	51

PART II – OTHER INFORMATION

Item 1. Legal Proceedings	52

~~Item 1A. Risk Factors~~	52

Item 6. Exhibits	52

SIGNATURES	53

EXHIBIT INDEX	54

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			December 31, 2017			June 30, 2017
ASSETS
Current assets:
Cash and cash equivalents	$	5,727		$	21,095		$	5,414		$	6,241
Short-term investments	26,541			25,591			—			368
Accounts and notes receivable, net	50,426			44,364
Accounts receivable, net							62,275			46,446
Inventories	60,712			46,378			73,284			56,251
Income tax receivable	293			247			206			318
Short-term derivative assets	—			3,954
Prepaid expenses	4,789			4,557			9,176			7,540
Assets held for sale	—			7,179
Total current assets	148,488			153,365			150,355			117,164
Property, plant and equipment, net	171,977			118,416			178,148			176,066
Goodwill	9,940			272			21,861			10,996
Intangible assets, net	19,172			6,219			51,036			18,618
Other assets	7,311			9,933			7,263			6,837
Deferred income taxes	66,046			80,786			45,593			63,055
Total assets	$	422,934		$	368,991		$	454,256		$	392,736
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	45,216			23,919			51,218			39,784
Accrued payroll expenses	18,168			24,540			17,286			17,345
Short-term borrowings under revolving credit facility	44,175			109			84,430			27,621
Short-term obligations under capital leases	1,131			1,323			488			958
Short-term derivative liabilities	339			—			1,649			1,857
Other current liabilities	7,074			6,946			10,991			9,702
Total current liabilities	116,103			56,837			166,062			97,267
Accrued pension liabilities	67,331			68,047			50,505			51,281
Accrued postretirement benefits	20,183			20,808			19,112			19,788
Accrued workers’ compensation liabilities	10,248			11,459			6,365			7,548
Other long-term liabilities-capital leases	389			1,036			116			237
Other long-term liabilities	600			28,210			2,156			1,480
Total liabilities	$	214,854		$	186,397		$	244,316		$	177,601
Commitments and contingencies (Note 20)
Commitments and contingencies (Note 21)
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
Preferred stock, $1.00 par value, 500,000 shares authorized; Series A Convertible Participating Cumulative Perpetual Preferred Stock, 21,000 shares authorized; 14,700 and zero shares issued and outstanding at December 31, 2017 and June 30, 2017, respectively; liquidation preference of $38.32 at December 31, 2017							15			—
Common stock, $1.00 par value, 25,000,000 shares authorized; 16,899,667 and 16,846,002 shares issued and outstanding at December 31, 2017 and June 30, 2017, respectively							16,900			16,846
Additional paid-in capital	40,704			39,096			53,322			41,495
Retained earnings	220,070			196,782			203,289			221,182
Unearned ESOP shares	(4,289		)	(6,434		)	(2,145		)	(4,289		)
Accumulated other comprehensive loss	(65,247		)	(63,632		)	(61,441		)	(60,099		)
Total stockholders’ equity	$	208,080		$	182,594		$	209,940		$	215,135
Total liabilities and stockholders’ equity	$	422,934		$	368,991		$	454,256		$	392,736

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 December 31,						Six Months Ended December 31,
	2017			2016			2017			2016			2017			2016			2017			2016
Net sales	$	138,187		$	134,468		$	407,700		$	410,220		$	167,366		$	139,025		$	299,079		$	269,513
Cost of goods sold	84,367			81,908			247,586			254,173			101,847			83,929			184,553			163,219
Gross profit	53,820			52,560			160,114			156,047			65,519			55,096			114,526			106,294
Selling expenses	40,377			38,447			117,912			112,741			49,328			39,097			88,243			77,535
General and administrative expenses	9,196			10,977			31,925			29,951			13,914			13,793			25,241			22,729
Restructuring and other transition expenses	2,547			3,169			9,542			13,855			139			3,965			259			6,995
Net gain from sale of Torrance Facility	—			—			(37,449		)	—			—			(37,449		)	—			(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		)
Net gains from sale of spice assets													(395		)	(334		)	(545		)	(492		)
Net losses (gains) from sales of other assets													91			114			144			(1,439		)
Operating expenses	51,762			52,254			119,641			150,943			63,077			19,186			113,342			67,879
Income from operations	2,058			306			40,473			5,104			2,442			35,910			1,184			38,415
Other income (expense):
Other (expense) income:
Dividend income	273			288			808			840			6			270			11			535
Interest income	147			139			435			359			1			159			2			288
Interest expense	(517		)	(111		)	(1,430		)	(341		)	(861		)	(524		)	(1,384		)	(913		)
Other, net	1,044			613			(1,088		)	35			554			(2,323		)	641			(2,132		)
Total other income (expense)	947			929			(1,275		)	893
Total other expense													(300		)	(2,418		)	(730		)	(2,222		)
Income before taxes	3,005			1,235			39,198			5,997			2,142			33,492			454			36,193
Income tax expense	1,411			43			15,910			318			20,910			13,416			20,200			14,499
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
Net (loss) income													$	(18,768	)	$	20,076		$	(19,746	)	$	21,694
Less: Cumulative preferred dividends, undeclared and unpaid													129			—			129			—
Net (loss) income available to common stockholders													$	(18,897	)	$	20,076		$	(19,875	)	$	21,694
Net (loss) income per common share available to common stockholders—basic													$	(1.13	)	$	1.21		$	(1.19	)	$	1.31
Net (loss) income per common share available to common stockholders—diluted													$	(1.13	)	$	1.20		$	(1.19	)	$	1.30
Weighted average common shares outstanding—basic	16,605,754			16,539,479			16,584,125			16,486,469			16,723,498			16,584,106			16,711,660			16,573,545
Weighted average common shares outstanding—diluted	16,721,774			16,647,415			16,704,200			16,614,275			16,723,498			16,707,003			16,711,660			16,695,687

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

FARMER BROS. CO.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) 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



	Three Months Ended December 31,						Six Months Ended December 31,
	2017			2016			2017			2016
Net (loss) income	$	(18,768	)	$	20,076		$	(19,746	)	$	21,694
Other comprehensive (loss) income, net of tax:
Unrealized losses on derivative instruments designated as cash flow hedges, net of tax	(1,279		)	(1,800		)	(1,711		)	(1,356		)
Losses (gains) on derivative instruments designated as cash flow hedges reclassified to cost of goods sold, net of tax	365			(132		)	369			153
Total comprehensive (loss) income, net of tax	$	(19,682	)	$	18,144		$	(21,088	)	$	20,491

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,						Six Months Ended December 31,
	2017			2016			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:
Net (loss) income							$	(19,746	)	$	21,694
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:							Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
Depreciation and amortization	16,613			15,721			15,330			10,086
(Recovery of) provision for doubtful accounts	(44		)	432
Provision for (recovery of) doubtful accounts							129			(44		)
Interest on sale-leaseback financing obligation	681			—			—			681
Restructuring and other transition expenses, net of payments	2,191			(1,939		)	(958		)	1,082
Deferred income taxes	15,766			72			19,375			13,640
Net gain from sale of Torrance Facility	(37,449		)	—			—			(37,449		)
Net gains from sales of Spice Assets and other assets	(2,289		)	(5,604		)
Net gains from sales of spice assets and other assets							(401		)	(1,931		)
ESOP and share-based compensation expense	2,996			3,488			1,844			2,094
Net losses on derivative instruments and investments	793			11,839			1,033			2,583
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		)
Purchases of trading securities							—			(2,959		)
Proceeds from sales of trading securities							375			1,268
Accounts receivable							(8,102		)	(4,545		)
Inventories	(13,242		)	(4,452		)	(7,682		)	(10,071		)
Income tax receivable	(46		)	(70		)	112			(27		)
Derivative assets (liabilities), net	3,845			(11,580		)	(3,000		)	4,329
Prepaid expenses and other assets	(203		)	865			352			33
Accounts payable	11,293			(997		)	1,264			18,356
Accrued payroll expenses and other current liabilities	(5,712		)	3,209			1,178			(5,210		)
Accrued postretirement benefits	(624		)	(384		)	(676		)	(447		)
Other long-term liabilities	(2,028		)	(337		)	(1,960		)	(1,849		)
Net cash provided by operating activities	$	10,530		$	9,412
Net cash (used in) provided by operating activities							$	(1,533	)	$	11,314
Cash flows from investing activities:
Acquisition of businesses, net of cash acquired	$	(25,853	)	$	—		$	(39,608	)	$	(11,183	)
Purchases of property, plant and equipment	(35,497		)	(16,193		)	(14,672		)	(26,864		)
Purchases of construction-in-progress assets for New Facility	(26,653		)	(13,492		)
Purchases of assets for construction of New Facility							(1,577		)	(21,783		)
Proceeds from sales of property, plant and equipment	3,984			5,990			85			3,332
Net cash used in investing activities	$	(84,019	)	$	(23,695	)	$	(55,772	)	$	(56,498	)
(continued on next page)	(continued on next page)						(continued on next page)

													FARMER BROS. CO.	CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)	(In thousands)
	Nine Months Ended March 31,						Six Months Ended December 31,
	2017			2016			2017			2016
Cash flows from financing activities:
Proceeds from revolving credit facility	$	67,583		$	314		$	69,758		$	34,323
Repayments on revolving credit facility	(23,517		)	(86		)	(12,949		)	(15,900		)
Proceeds from sale-leaseback financing obligation	42,455			—			—			42,455
Proceeds from New Facility lease financing	7,662			13,492
Repayments of New Facility lease financing	(35,772		)	—
Proceeds from New Facility lease financing obligation							—			7,662
Repayments of New Facility lease financing obligation							—			(35,772		)
Payments of capital lease obligations	(1,107		)	(2,710		)	(591		)	(641		)
Payment of financing costs	—			(8		)	(365		)	—
Proceeds from stock option exercises	823			1,610			625			405
Tax withholding payment - net share settlement of equity awards	(6		)	(159		)
Net cash provided by financing activities	$	58,121		$	12,453		$	56,478		$	32,532
Net decrease in cash and cash equivalents	$	(15,368	)	$	(1,830	)	$	(827	)	$	(12,652	)
Cash and cash equivalents at beginning of period	21,095			15,160			6,241			21,095
Cash and cash equivalents at end of period	$	5,727		$	13,330		$	5,414		$	8,443

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
$ —



Supplemental disclosure of non-cash investing and financing activities:
Net change in derivative assets and liabilities included in other comprehensive (loss) income, net of tax	$	(1,342	)	$	(1,203	)
Non-cash additions to property, plant and equipment	$	557		$	11,253
Non-cash portion of earnout receivable recognized—spice assets sale	$	545		$	492
Non-cash portion of earnout payable recognized—China Mist acquisition	$	—		$	500
Non-cash receivable from West Coast Coffee—post-closing final working capital adjustment	$	218		$	—
Non-cash consideration given—Issuance of Series A Preferred Stock	$	11,756		$	—
Non-cash Multiemployer Plan Holdback payable recognized—Boyd Coffee acquisition	$	1,056		$	—
Cumulative preferred dividends, undeclared and unpaid	$	129		$	—

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

FARMER BROS. CO.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Introduction and Basis of Presentation

~~Overview~~

Farmer Bros. Co., a Delaware corporation (including its consolidated subsidiaries unless the context otherwise requires, the ~~“Company,” or “Farmer Bros.”~~“Company”), 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~~six months ended ~~March~~December 31, 2017 are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, ~~2017.~~2018. Events occurring subsequent to ~~March~~December 31, 2017 have been evaluated for potential recognition or disclosure in the unaudited condensed consolidated financial statements for the three and ~~nine~~six months ended ~~March~~December 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~~Company’s Annual Report on Form 10-K for the fiscal year ended June 30, ~~2016,~~2017, filed with the Securities and Exchange Commission (the “SEC”) on September ~~14, 2016~~28, 2017 (the ~~"2016~~“2017 Form ~~10-K"~~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, and Boyd Assets Co., 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 2. Summary of Significant Accounting Policies

For a detailed discussion about the ~~Company's~~Company’s significant accounting policies, see Note ~~1, "~~2, “Summary of Significant Accounting Policies"” to the consolidated financial statements in the ~~2016~~2017 Form 10-K.

During the three and six months ended ~~March~~December 31, 2017, other than as set forth below and the ~~following,~~adoption of Accounting Standards Update (“ASU”) No. 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities” (“ASU 2017-12”), ASU No. 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting” (“ASU 2016-09”), and ASU No. 2015-11, “Inventory (Topic 330): Simplifying the Measurement of Inventory” (“ASU 2015-11”), there were no significant updates made to the ~~Company's~~Company’s significant accounting policies.

~~Business Combinations~~

The Company accounts for business combinations under the acquisition method of accounting. The purchase price of each business acquired is allocated to the tangible and intangible assets acquired and the liabilities assumed based on information regarding their respective fair values on the date of acquisition. Any excess of the purchase price over the fair value of the separately identifiable assets acquired and the liabilities assumed is allocated to goodwill. Management determines the fair values used in purchase price allocations for intangible assets based on historical data, estimated discounted future cash flows, and expected royalty rates for trademarks and trade names, as well as certain other information. The valuation of assets acquired and liabilities assumed requires a number of judgments and is subject to revision as additional information about the fair value of assets and liabilities becomes available. Additional information, which existed as of the acquisition date but unknown to the Company at that time, may become known during the remainder of the measurement period, a period not to exceed twelve months from the acquisition date. Adjustments in the purchase price allocation may require a recasting of the amounts allocated to goodwill and intangible assets. If such an adjustment is required, the Company will recognize a measurement-period adjustment during the period in which it determines the amount of the adjustment, including the effect on earnings of any amounts it would have recorded in previous periods if the accounting had been completed at the acquisition date. Transaction costs, including legal and accounting expenses, are expensed as incurred and are included in general and administrative expenses in the Company's 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 the future payment. These contingent consideration liabilities are recorded at fair value on the acquisition date and are re-measured quarterly based on the then assessed fair value and adjusted if necessary. The results of operations of businesses acquired are included in the Company's condensed consolidated financial statements from their dates of acquisition. See ~~Note 3~~.

~~Goodwill and Indefinite-lived Intangible Assets~~

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

Testing for impairment of goodwill is a two-step process. The first step requires the Company to compare the fair value of its reporting units to the carrying value of the reporting units, including goodwill. If the fair value of a reporting unit is less than its carrying value, goodwill of the reporting unit is potentially impaired and the Company then completes step two to measure the impairment loss, if any. The second step requires the calculation of the implied fair value of goodwill, which is the residual fair value remaining after deducting the fair value of all tangible and intangible net assets of the reporting unit from the fair value of the reporting unit. If the implied fair value of goodwill is less than the carrying amount of goodwill, an impairment loss is recognized equal to the difference.

Indefinite-lived intangible assets are tested for impairment by comparing their fair values to their carrying values. An impairment charge is recorded if the estimated fair value of such assets has decreased below their carrying values. There were no indefinite-lived intangible asset or goodwill impairment charges recorded in the nine months ended March 31, 2017 or 2016.

~~Farmer Bros. Co.~~

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

~~Other Intangible Assets~~

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

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

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

Farmer Bros. Co.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

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 unaudited condensed consolidated financial statements in ~~each of~~ the three months ended ~~March~~December 31, 2017 and 2016 were ~~$7.0 million.~~$7.1 million and $5.8 million, respectively. Coffee brewing equipment costs included in cost of goods sold in the ~~nine~~six months ended ~~March~~December 31, 2017 and 2016 were ~~$19.9~~$13.5 million and ~~$20.4~~$12.3 million, respectively.

The Company capitalizes coffee brewing equipment and depreciates it over ~~an estimated three or~~ five ~~year period, depending on the assessment of the useful life~~years and reports the depreciation expense in cost of goods sold. Such depreciation expense related to capitalized coffee brewing equipment reported in cost of goods sold in the three months ended ~~March~~December 31, 2017 and 2016 was $2.3 million and ~~$2.4~~$2.1 million, respectively, and ~~$6.9~~$4.4 million and ~~$7.5~~$4.5 million, respectively, in the ~~nine~~six months ended ~~March~~December 31, 2017 and 2016. The Company capitalized coffee brewing equipment (included in machinery and equipment) in the amounts of ~~$8.3~~$4.8 million and ~~$5.7~~$5.9 million in the ~~nine~~six months ended ~~March~~December 31, 2017 and 2016, respectively.

Net (Loss) Income Per Common Share

~~Computation of net~~Net (loss) income per share ~~("EPS"~~(“EPS”) represents net (loss) income available to common stockholders divided by the weighted-average number of common shares outstanding for the ~~three months ended March 31, 2017~~period, excluding unallocated shares held by the Company's Employee Stock Ownership Plan (“ESOP”). Dividends on the Company’s outstanding Series A Convertible Participating Cumulative Perpetual Preferred Stock, par value $1.00 per share (“Series A Preferred Stock”), that the Company has paid or intends to pay are deducted from net (loss) income in computing net (loss) income available to common stockholders.

Under the two-class method, net (loss) income available to nonvested restricted stockholders and ~~2016 includes~~holders of Series A Preferred Stock is excluded from net (loss) income available to common stockholders for purposes of calculating basic and diluted EPS.

Diluted EPS represents net income available to holders of common stock divided by the weighted-average number of common shares outstanding, inclusive of the dilutive impact of common equivalent shares outstanding during the period. Common equivalent shares include potentially dilutive shares from share-based compensation including stock options, unvested restricted stock, performance-based restricted stock units, and shares of Series A Preferred Stock, as converted, because they are deemed participating securities. In the absence of contrary information, the Company assumes 100% of the target shares are issuable under performance-based restricted stock units.

The dilutive effect of ~~116,020 and 107,936 shares, respectively, issuable under stock options with exercise prices below the closing price~~Series A Preferred Stock is reflected in diluted EPS by application of the ~~Company's common stock on~~if-converted method. In applying the ~~last trading day~~if-converted method, conversion will not be assumed for purposes of computing diluted EPS if the effect would be anti-dilutive. The Series A Preferred Stock is anti-dilutive whenever the amount of the ~~applicable~~dividend declared or accumulated in the current 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~~per common ~~stock on the last trading day of the applicable period because their inclusion would be anti-dilutive.~~

Computation of EPS for the nine months ended March 31, 2017 and 2016 includes the dilutive effect of 120,075 and 127,806 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 25,508 and 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.share obtainable upon conversion exceeds basic EPS. See Note 19.

Impairment of Goodwill and Indefinite-lived Intangible Assets

~~Farmer Bros. Co.~~

~~Notes~~Historically, the Company performed its annual assessment of impairment of goodwill and indefinite-lived intangible assets as of June 30. During the three months ended December 31, 2017, the Company voluntarily changed its annual impairment assessment date from June 30 to ~~Unaudited Consolidated Financial Statements (continued)~~

January 31. The Company believes this change in assessment date, which represents a change in the method of applying an accounting principle, is preferred under the circumstances. Due to recent acquisitions, the Company’s goodwill and indefinite-lived intangible asset balances have increased. The Company believes the change in measurement date will provide additional time to complete the annual assessment of impairment of goodwill and indefinite-lived intangible assets in advance of year-end reporting.

Shipping and Handling Costs

Shipping and handling costs incurred through outside carriers are recorded as a component of the ~~Company's~~Company’s selling expenses and were ~~$6.0~~$6.9 million and ~~$3.0~~$6.4 million, respectively, in the three months ended ~~March~~December 31, 2017 and 2016, and ~~$17.2~~$12.1 million and ~~$7.9~~$11.2 million, respectively, in the ~~nine~~six months ended ~~March~~December 31, 2017 and 2016. ~~With~~

Share-based Compensation

The Company measures all share-based compensation cost at the grant date, based on the fair values of the awards that are ultimately expected to vest, and recognizes that cost as an expense on a straight line-basis in its consolidated statements of operations over the requisite service period. Fair value of restricted stock and performance-based restricted stock units is

Farmer Bros. Co.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

the closing price of the Company's common stock on the date of grant. The Company estimates the fair value of option awards using the Black-Scholes option valuation model, which requires management to make certain assumptions for estimating the fair value of stock options at the date of grant. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. Because the Company’s ~~move to 3PL for its long-haul distribution~~stock options have characteristics significantly different from those of traded options, and because changes in the ~~third quarter~~subjective input assumptions can materially affect the fair value estimates, in management’s opinion, the existing models may not necessarily provide a reliable single measure of ~~fiscal 2016, payroll, benefits, vehicle costs~~the fair value of the Company’s stock options. Although the fair value of stock options is determined using an option valuation model, that value may not be indicative of the fair value observed in a willing buyer/willing seller market transaction.

In addition, the Company estimates the expected impact of forfeited awards and recognizes share-based compensation cost only for those awards ultimately expected to vest. If actual forfeiture rates differ materially from the Company’s estimates, share-based compensation expense could differ significantly from the amounts the Company has recorded in the current period. The Company periodically reviews actual forfeiture experience and will revise its estimates, as necessary. The Company will recognize as compensation cost the cumulative effect of the change in estimated forfeiture rates on current and prior periods in earnings of the period of revision. As a result, if the Company revises its assumptions and estimates, the Company’s share-based compensation expense could change materially in the future.

The Company’s outstanding share-based awards include performance-based non-qualified stock options (“PNQs”) and performance-based restricted stock units (“PBRSUs”) that have performance-based vesting conditions in addition to time-based vesting. Awards with performance-based vesting conditions require the achievement of certain financial and other ~~costs associated with~~performance criteria as a condition to the vesting. The Company recognizes the estimated fair value of performance-based awards, net of estimated forfeitures, as share-based compensation expense over the service period based upon the Company’s ~~internal operation~~determination of ~~its long-haul distribution previously included elsewhere in selling expenses are now represented in outsourced shipping~~whether it is probable that the performance targets will be achieved. At each reporting period, the Company reassesses the probability of achieving the performance criteria and ~~handling costs~~the performance period required to meet those targets. Determining whether the performance criteria will be achieved involves judgment, and the estimate of share-based compensation expense may be revised periodically based on changes in the ~~three and nine months ended March 31, 2017. The amount associated with outside carriers~~probability of achieving the performance criteria. Revisions are reflected in the period in which the estimate is changed. If performance goals are not met, no share-based compensation expense is recognized for the ~~Company's long-haul distribution~~cancelled PNQs or PBRSUs, and, to the extent share-based compensation expense was previously recognized for those cancelled PNQs or PBRSUs, such share-based compensation expense is reversed. If performance goals are exceeded and the payout is more than 100% of the target shares, additional compensation expense is recorded in ~~shipping and handling costs in~~ the ~~three months ended March 31, 2017 was approximately~~period when that determination is certified by the ~~same in~~Compensation Committee of 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.

Board of Directors. See Note 16.

Recently Adopted Accounting Standards

NoIn August 2017, the Financial Accounting Standards Board (“FASB”) issued ASU 2017-12. ASU 2017-12 amends the hedge accounting model in Accounting Standards Codification (“ASC”) 815 to enable entities to better portray the economics of their risk management activities in the financial statements and enhance the transparency and understandability of hedge results. ASU 2017-12 expands an entity’s ability to hedge non-financial and financial risk components and reduce complexity in fair value hedges of interest rate risk. The guidance eliminates the requirement to separately measure and report hedge ineffectiveness and generally requires the entire change in the fair value of a hedging instrument to be presented in the same income statement line as the hedged item. The guidance also eases certain documentation and assessment requirements and modifies the accounting for components excluded from the assessment of hedge effectiveness. The guidance in ASU 2017-12 is effective for annual periods beginning after December 15, 2018, including interim periods within those fiscal years, and is effective for the Company beginning July 1, 2019. Early adoption is permitted in any interim period or fiscal year before the effective date. For cash flow and net investment hedges existing at the date of adoption, entities will apply the new guidance using a modified retrospective approach (i.e., with a cumulative effect adjustment recorded to the opening balance of retained earnings as of the initial application date). The guidance provides transition relief to make it easier for entities to apply certain amendments to existing hedges (including fair value hedges) where the hedge documentation needs to be modified. The Company early adopted ASU 2017-12 as of September 30, 2017 for its cash flow hedges related to coffee commodity purchases. Adoption of ASU 2017-12 resulted in a cumulative adjustment of $0.3 million to the opening balance of retained earnings. Adoption of ASU 2017-12 did not have any other material effect on the results of operations, financial position or cash flows of the Company.

In March 2016, the FASB issued ASU 2016-09. ASU 2016-09 was issued as part of the FASB’s Simplification Initiative. The areas for simplification in ASU 2016-09 involve several aspects of the accounting ~~standards were~~for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification

Farmer Bros. Co.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

on the statement of cash flows. ASU 2016-09 requires that the tax impact related to the difference between share-based compensation for book and tax purposes be recognized as income tax benefit or expense in the reporting period in which such awards vest. ASU 2016-09 also required a modified retrospective adoption for previously unrecognized excess tax benefits. The guidance in ASU 2016-09 is effective for public business entities for annual periods beginning after December 15, 2016, including interim periods within those annual reporting periods. The Company adopted ASU 2016-09 beginning July 1, 2017 on a modified retrospective basis, recognizing all excess tax benefits previously unrecognized, as a cumulative-effect adjustment increasing deferred tax assets by $1.6 million and increasing retained earnings by the same amount as of July 1, 2017. Adoption of ASU 2016-09 did not have any other material effect on the results of operations, financial position or cash flows of the Company.

In July 2015, the FASB issued 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. The Company inadopted ASU 2015-11 beginning July 1, 2017. Adoption of ASU 2015-11 did not have a material effect on the ~~three months ended March 31, 2017.~~results of operations, financial position or cash flows of the Company.

New Accounting Pronouncements

In March 2017, the FASB issued ASU No. 2017-07, ~~"Compensation —~~ “Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit ~~Cost" ("~~Cost” (“ASU ~~2017-07"~~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. ASU 2017-07 changes the income statement presentation of defined benefit plan expense by requiring separation between operating expense (service cost component) and non-operating expense (all other components, including interest cost, amortization of prior service cost, curtailments and settlements, etc.). The operating expense component is reported with similar compensation costs while the non-operating expense components are reported in other income and expense. In addition, only the service cost component is eligible for capitalization as part of an asset such as inventory or property, plant and equipment. 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~~Because the ~~impact this guidance will have on its~~expected operating expense component and non-operating expense components of net periodic benefit cost are not material to the consolidated financial statements ~~and expects~~of the Company, adoption ~~will~~of ASU 2017-07 is not expected to have a ~~significant impact~~material effect on the results of operations, financial position or cash flows of the Company.

In January 2017, the FASB issued ASU No. 2017-04, ~~"Intangibles —~~ “Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill ~~Impairment" ("~~Impairment” (“ASU ~~2017-04"~~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~~unit’s carrying amount over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. ~~The new guidance~~ASU 2017-04 does not amend the optional qualitative assessment of goodwill impairment. The guidance in ASU 2017-04 is effective for annual and interim goodwill impairment tests in fiscal years beginning after December 15, 2019, and is effective for the Company beginning July 1, 2020. Adoption of ASU 2017-04 is not expected to have a material effect on the results of operations, financial position or cash flows of the Company.

In January 2017, the FASB issued ASU No. 2017-01, ~~"Business~~“Business Combinations (Topic 805): Clarifying the Definition of a ~~Business" ("~~Business” (“ASU ~~2017-01"~~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.

Farmer Bros. Co.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

In November 2016, the FASB issued ASU No. 2016-18, ~~"Statement~~“Statement of Cash Flows (Topic 230): Restricted ~~Cash" ("~~Cash” (“ASU ~~2016-18"~~2016-18”). The amendments require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. As a result, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amendments do not provide a definition of restricted cash or restricted cash equivalents. The guidance in ASU 2016-18 is effective for public business entities for annual periods beginning after December 15, 2017, including interim periods within those fiscal years. Early application is permitted in certain circumstances. ASU 2016-18 is effective for the Company beginning

~~Farmer Bros. Co.~~

~~Notes to Unaudited Consolidated Financial 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~~August 2016, the FASB issued ASU No. ~~2016-09, "Compensation—Stock Compensation~~2016-15, “Statement of Cash Flows (Topic ~~718)~~230): ~~Improvements to Employee Share-Based Payment Accounting" ("~~Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force)” (“ASU ~~2016-09"~~2016-15”). ASU ~~2016-09~~2016-15 addresses certain issues where diversity in practice was identified in classifying certain cash receipts and cash payments based on the guidance in ASC 230. ASC 230 is ~~being issued~~principles based and often requires judgment to determine the appropriate classification of cash flows as ~~part~~operating, investing or financing activities. The application of ~~the FASB's Simplification Initiative. The areas for simplification~~judgment has resulted in ~~ASU 2016-09 involve several~~diversity in how certain cash receipts and cash payments are classified. Certain cash receipts and cash payments may have 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~~more than one class of cash flows. ASU ~~2016-09~~2016-15 clarifies that an entity will first apply any relevant guidance in ASC 230 and in other applicable topics. If there is no guidance that addresses those cash receipts and cash payments, an entity will determine each separately identifiable source or use and classify the receipt or payment based on the nature of the cash flow. If a receipt or payment has aspects of more than one class of cash flows and cannot be separated, classification will depend on the predominant source or use. The guidance in ASU 2016-15 is effective for public business entities for annual periods beginning after December 15, 2017, including interim periods within those fiscal years. Early application is permitted in certain circumstances. ASU 2016-15 is effective for the Company beginning July 1, ~~2017.~~2018. Adoption of ASU ~~2016-09~~2016-15 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~~“Leases (Topic 842)~~" ("~~” (“ASU ~~2016-02"~~2016-02”), which introduces a new lessee model that brings substantially all leases onto the balance sheet. Under the new guidance, lessees are required to recognize a lease liability, which represents the discounted obligation to make future minimum lease payments and a related right-of-use asset. For public business entities, ASU 2016-02 is effective for financial statements issued for annual periods beginning after December 15, 2018, and interim periods within those annual periods. Early application is permitted. ASU 2016-02 is effective for the Company beginning July 1, 2019. The Company is evaluating the impact this guidance will have on its consolidated financial statements and expects the adoption will have a significant impact on the ~~Company's~~Company’s financial position resulting from the increase in assets and liabilities.

In January 2016, the FASB issued ASU No. 2016-01, “Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities” (“ASU 2016-01”). ASU 2016-01 requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) at fair value, with changes in fair value recognized in net income. Under ASU 2016-01, entities will no longer be able to recognize unrealized holding gains and losses on available-for-sale equity securities in other comprehensive income, and they will no longer be able to use the cost method of accounting for equity securities that do not have readily determinable fair values. The guidance to classify equity securities with readily determinable fair values into different categories (that is trading or available for sale) is no longer required. ASU 2016-01 eliminates certain disclosure requirements related to financial instruments measured at amortized cost and adds disclosures related to the measurement categories of financial assets and financial liabilities. The guidance is effective for annual periods beginning after December 15, 2017, including interim periods within those fiscal years. ASU 2016-01 is effective for the Company beginning July 1, 2018. Adoption of ASU 2016-01 is not expected to have a material effect on the results of operations, financial position or cash flows of the Company.

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

In May 2014, the FASB issued accounting guidance which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers under ASU No. 2014-09, “Revenue from Contracts with Customers” ("(“ASU ~~2014-09"~~2014-09”). ASU 2014-09 will replace most existing revenue recognition guidance in GAAP when it becomes effective. On ~~July 9,~~August 12, 2015, the FASB issued ASU No. 2015-14, ~~"Revenue~~“Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date,"” which defers the effective date of ASU 2014-09 by one year allowing early adoption as of the original effective date of January 1, 2017. The deferral results in the new accounting standard being effective for public business entities for annual reporting periods beginning after December 31, 2017, including interim periods within those fiscal years. ASU 2014-09 is effective for the Company beginning July 1, 2018. The Company is ~~currently~~in the process of evaluating the provisions of ASU 2014-09 and assessing its impact on the Company’s financial statements, information systems, business processes, and financial statement disclosures. The Company has analyzed its revenue streams and is in the process of performing detailed contract reviews for each stream, and evaluating the impact ASU 2014-09 may have on revenue recognition. The Company primarily recognizes revenue at point of sale or delivery and does not expect that this will change under the new standard. Based on its preliminary reviews, the Company does not expect that the adoption 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~~will have a material impact on its ~~results~~consolidated financial statements; however, the Company’s assessment of ~~operations, financial position and cash flows.~~

~~In August 2014,~~contracts related to recent acquisitions is still in process. At a minimum, the ~~FASB issued~~Company anticipates expanded disclosures related to revenue in order to comply with ASU ~~No. 2014-15, "Presentation~~2014-09. The Company will continue to evaluate the impact of ~~Financial Statements—Going Concern (Subtopic 205-40): Disclosure~~the adoption of ~~Uncertainties about an Entity's Ability~~ASU 2014-09. Preliminary assessments made by the Company are subject to ~~Continue as a Going Concern" ("ASU 2014-15"). ASU 2014-15 amended ASC 205-40-Presentation~~change. The Company has not yet concluded which transition method it will elect but will determine the transition method in the third quarter of ~~Financial Statements-Going Concern and requires management to evaluate~~fiscal 2018.

Farmer Bros. Co.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

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

Note 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 and unflavored iced ~~teas~~ and ~~iced green~~hot 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~~$12.2 million, ~~which included~~consisting of $11.2 million in cash paid at closing including estimated working capital adjustments of $0.4 million, post-closing final working capital adjustments of $0.6 million, and up to $0.5 million in contingent consideration to be paid as earnout if certain sales levels are achieved in the calendar years of 2017 or 2018. This contingent earnout liability is ~~currently~~ estimated to have a fair value of $0.5 million as of the closing date and is recorded in other ~~current~~long-term liabilities on the ~~Company's condensed consolidated balance sheet~~Company’s Condensed Consolidated Balance Sheet at ~~March~~December 31, 2017 and June 30, 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.calendar 2019.

The financial effect of this acquisition was not material to the Company’s condensed 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~~Company’s consolidated results of operations.

~~Farmer Bros. Co.~~

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

final.

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


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

Cash paid, net of cash acquired	$	11,183			$	11,183
Post-closing final working capital adjustments					553
Contingent consideration	500				500
Total consideration	$	11,683			$	12,236

Accounts receivable	$	811			$	811
Inventory	544				544
Prepaid assets	48				48
Property, plant and equipment	212				189
Goodwill	1,871				2,927
Intangible assets:
Recipes	930			7	930			7
Non-compete agreement	100			5	100			5
Customer relationships	450			10	2,000			10
Trade name/Trademark—finite-lived	7,100			10
Trade name/Trademark—indefinite-lived					5,070
Accounts payable	(383		)		(383		)
Total consideration, net of cash acquired	$	11,683			$	12,236

In connection with this acquisition, the Company recorded goodwill of ~~$1.9~~$2.9 million, which is deductible for tax purposes. The Company also recorded ~~$8.6~~$3.0 million in finite-lived intangible assets that included recipes, a non-compete agreement and customer relationships and a$5.1 million in indefinite-lived trade name/trademark. The weighted average amortization period for the finite-lived intangible assets is ~~9.6~~8.9 years. See Note 13.

Farmer Bros. Co.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

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~~Mist’s non-compete agreement.

The fair value assigned to the customer relationships was determined based on ~~management's~~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~~$15.5 million, which included $14.7 million in cash paid at closing including working capital adjustments of $1.2 million, post-closing final working capital adjustments of $(0.2) 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 as of the closing date and is recorded in other long-term liabilities on the Company’s ~~condensed consolidated balance sheet~~Condensed Consolidated Balance Sheet at ~~March~~December 31, 2017 and June 30, 2017. The earnout is estimated to be paid within twenty-four months following 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.closing.

Farmer Bros. Co.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

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


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

Cash paid, net of cash acquired	$	14,671			$	14,671
Contingent consideration	600
Post-closing final working capital adjustments					(218		)
Fair value of contingent consideration					600
Total consideration	$	15,271			$	15,053

Accounts receivable	$	955			$	956
Inventory	939				910
Prepaid assets	20				16
Property, plant and equipment	1,546				1,546
Goodwill	7,797				7,630
Intangible assets:
Non-compete agreements	100			5	100			5
Customer relationships	4,400			10	4,400			10
Trade name—finite-lived	260			7	260			7
Brand name—finite-lived	250			1.7	250			1.7
Accounts payable	(814		)		(833		)
Other liabilities	(182		)		(182		)
Total consideration, net of cash acquired	$	15,271			$	15,053

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~~$7.6 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. See Note 13.

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~~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.

Boyd Coffee Company

On October 2, 2017 (“Closing Date”), the Company, through a wholly owned subsidiary, acquired substantially all of the assets and certain specified liabilities of Boyd Coffee Company (“Boyd Coffee” or “Seller”), a coffee roaster and distributor with a focus on restaurants, hotels, and convenience stores on the West Coast of the United States. The acquired business of Boyd Coffee (the “Boyd Business”) is expected to add to the Company’s product portfolio, improve growth potential, increase the density and penetration of the Company’s distribution footprint, and increase capacity utilization at

Farmer Bros. Co.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

the Company’s production facilities.

At closing, as consideration for the purchase, the Company paid the Seller $38.9 million in cash from borrowings under its senior secured revolving credit facility (see Note 15), and issued to Boyd Coffee 14,700 shares of the Company’s Series A Preferred Stock, with a fair value of $11.8 million as of the Closing Date. Additionally, the Company held back $3.2 million in cash (“Holdback Cash Amount”) and 6,300 shares of Series A Preferred Stock (“Holdback Stock”) with a fair value of $4.8 million as of the Closing Date, for the satisfaction of any post-closing working capital adjustment and to secure the Seller’s (and the other seller parties’) indemnification obligations under the purchase agreement. Any Holdback Cash Amount and Holdback Stock not used to satisfy indemnification claims (including pending claims) will be released to the Seller on the 18-month anniversary of the Closing Date.

In addition to the Holdback Cash, as part of the consideration for the purchase, at closing the Company held back $1.1 million in cash (the “Multiemployer Plan Holdback”) to pay, on behalf of the Seller, any assessment of withdrawal liability made against the Seller following the Closing Date in respect of the Seller’s multiemployer plans. As the Company has not made this payment as of December 31, 2017 and expects settling the pension liability will take greater than twelve months, the Multiemployer Plan Holdback is recorded in other long-term liabilities on the Company’s Condensed Consolidated Balance Sheet at December 31, 2017. See Note 17.

The parties are in the process of determining the final net working capital under the purchase agreement. At December 31, 2017, the Company estimated a net working capital adjustment of $(8.1) million, which is reflected in the preliminary purchase price allocation set forth below.

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	$	38,871
Holdback Cash Amount	3,150
Multiemployer Plan Holdback	1,056
Fair value of Series A Preferred Stock (14,700 shares)(1)	11,756
Fair value of Holdback Stock (6,300 shares)(1)	4,825
Preliminary estimated post-closing working capital adjustment	(8,059		)
Total consideration	$	51,599

Accounts receivable	$	7,166
Inventory	9,415
Prepaid expense and other assets	1,951
Property, plant and equipment	4,936
Goodwill	11,032
Intangible assets:
Customer relationships	31,000			10
Trade name/trademark—indefinite-lived	2,800
Accounts payable	(15,080		)
Other liabilities	(1,621		)
Total consideration	$	51,599

______________

(1) Fair value of Series A Preferred Stock and Holdback Stock as of the Closing Date, estimated as the sum of (a) the present value of the dividends payable thereon and (b) the stated value of the Series A Preferred Stock or Holdback Stock, as the case may be, adjusted for both the conversion premium and the discount for lack of marketability arising from conversion restrictions.

Farmer Bros. Co.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

The acquisition was accounted for as a business combination. The fair value of consideration transferred was allocated to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values on the acquisition date, with the remaining unallocated amount recorded as goodwill. The purchase price allocation is preliminary as the Company is in the process of finalizing the valuation inputs including growth assumptions, cost projections and discount rates which are used in the fair value calculation of certain assets as well as the determination of the final post-closing net working capital adjustment. The preliminary purchase price allocation is subject to change and such change could be material based on numerous factors, including the final estimated fair value of the assets acquired and liabilities assumed and the amount of the final post-closing net working capital adjustment.

In connection with this acquisition, the Company recorded goodwill of $11.0 million, which is deductible for tax purposes. The Company also recorded $31.0 million in finite-lived intangible assets that included customer relationships and $2.8 million in indefinite-lived intangible assets that included a trade name/trademark. The amortization period for the finite-lived intangible assets is 10.0 years. See Note 13.

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

The following table presents the net sales and income before taxes from the Boyd Business operations that are included in the Company’s Condensed Consolidated Statements of Operations for the three and six months ended December 31, 2017 (unaudited):



	Closing Date through December 31, 2017
(In thousands)
Net sales	$	26,290
Income before taxes	$	511

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. However, the Company considers the acquisition to be material to the Company’s financial statements and has provided certain pro forma disclosures pursuant to ASC 805, “Business Combinations.”

The following table sets forth certain unaudited pro forma financial results for the Company for the three and six months ended December 31, 2017 and 2016, as if the acquisition of the Boyd Business was consummated on the same terms as of the first day of the applicable fiscal period.



	Three Months Ended December 31,				Six Months Ended December 31,
	2017		2016		2017		2016
(In thousands)
Net sales	$	167,366	$	166,107	$	321,061	$	319,411
Income before taxes	$	2,142	$	34,171	$	779	$	36,414

At closing, the parties entered into a transition services agreement where the Seller agreed to provide certain accounting, marketing, sales and distribution support during a transition period of up to 12 months. The Company also entered into a co-manufacturing agreement with the Seller for a transition period of up to 12 months as the Company

Farmer Bros. Co.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

transitions production into its plants. Amounts paid by the Company to the Seller for these services totaled $9.2 million in the three and six months ended December 31, 2017.

The Company incurred transaction costs related to the Boyd Business acquisition, consisting primarily of legal and consulting expenses of $1.0 million and $3.4 million during the three and six months ended December 31, 2017, respectively, which are included in general and administrative expenses in the Company's Condensed Consolidated Statements of Operations.

Note 4. Restructuring Plans

Corporate Relocation Plan

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

~~Expenses related to the Corporate Relocation Plan in~~In the three and six months ended ~~March~~December 31, 2017, consisted of $0.4 million in employee retention and separation benefits, $0.6 million in facility-related costs including costs associated with the move of the Company's headquarters and 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, 2017 also included $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, 2017 consisted of $1.1 million in employee retention and separation benefits, $5.9 million in facility-related costs including lease of temporary office space, costs associated with the move of the Company's headquarters and the relocation of certain distribution operations and $1.3 million in other related costs including travel, legal, consulting and other professional services. Facility-related costs in the nine months ended March 31, 2017 also included $2.5 million in non-cash charges, including $1.1 million in depreciation expense associated with the Torrance production facility resulting from the consolidation of coffee production operations with the Houston and Portland production facilities and $1.4 million in non-cash rent expense recognized in the sale-leaseback of the Torrance Facility.

~~The following table sets forth the activity in liabilities~~no expenses associated with the Corporate Relocation Plan ~~for~~were incurred. As of December 31, 2017, the ~~nine months ended March 31, 2017:~~

(In thousands)
Balances,
June 30, 2016
Additions Payments Non-Cash Settled Adjustments
Balances,
March 31, 2017
Employee-related costs(1) $ 2,342
$ 1,109
$ 2,616
$ —
$ —
$ 835
Facility-related costs(2) —
5,850
3,375
2,475
—
—
Other(3) 200
1,294
1,494
—
—
—
Total(2) $ 2,542
$ 8,253
$ 7,485
$ 2,475
$ —
$ 835
Current portion $ 2,542
$ 835
Non-current portion $ —
$ —
Total $ 2,542
$ 835

~~_______________~~

~~(1) Included~~Company had $0.1 million in ~~“Accrued payroll expenses” on~~unpaid expenses related to employee-related costs, which is expected to be paid by 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~~end of ~~coffee production operations with the Houston and Portland production facilities and~~

~~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.~~fiscal 2018.

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~~December 31, 2017, the Company has recognized a total of $31.5 million in aggregate cash costs including ~~$17.4~~$17.1 million in employee retention and separation benefits, ~~$6.7~~$7.0 million in facility-related costs related to the temporary office space, costs associated with the move of the ~~Company's~~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~~December 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 and (b) non-cash rent expense recognized in the sale-leaseback of the Torrance Facility.

~~DSD~~Direct Store Delivery (“DSD”) Restructuring Plan

On February 21, 2017, the Company announced a restructuring plan to reorganize its DSD operations in an effort to realign functions into a ~~channel based~~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~~has revised its estimated time of completion of the DSD Restructuring Plan byfrom the end of the second quarter of fiscal 2018 to the end 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~~six months ended ~~March~~December 31, 2017 consisted of ~~$0.9~~$0 and $24,000, respectively, in employee-related costs and $0.1 million and $0.2 million, respectively, in other related costs. Since the adoption of the DSD Restructuring Plan through December 31, 2017, the Company has recognized and paid a total of $2.7 million in aggregate cash costs including $1.1 million in employee-related costs, and ~~$0.4~~$1.6 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 sheet.

Farmer Bros. Co.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

costs. The remaining estimated costs of $1.0 million to $2.2 million are expected to be incurred in the remainder of fiscal 2018.

Note 5. New Facility

Lease Agreement and Purchase Option Exercise

On June 15, 2016, the Company exercised the purchase option to purchase the land and the partially constructed New Facility located thereon pursuant to the terms of the lease agreement dated as of July 17, 2015, as amended (the ~~"Lease Agreement"~~“Lease Agreement”). On September 15, 2016 ("(“Purchase Option Closing ~~Date"~~Date”), the Company closed the purchase option and acquired the land and the partially constructed New Facility located thereon for an aggregate purchase price of $42.5 million (the “Purchase Price”), consisting of the purchase option price of $42.0 million based on actual construction costs incurred as of the Purchase Option Closing Date plus the option exercise fee, plus amounts paid in respect of real estate commissions, title insurance, and recording fees. Upon closing of the purchase option, the Company recorded the aggregate purchase price of the New Facility in ~~"Property,~~“Property, plant and equipment, ~~net"~~net” on its consolidated balance sheet. The asset related to the New Facility lease obligation included in ~~"Property,~~“Property, plant and equipment, net,"” the offsetting liability for the lease obligation included in ~~"Other~~“Other long-term ~~liabilities"~~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, the Company also entered into a Development Management Agreement with an affiliate of Stream Realty Partners (the ~~"DMA"~~“DMA”) to manage, coordinate, represent, assist and advise the Company on matters from the pre-development through construction of the New Facility. ~~Pursuant to~~Services under the DMA ~~the~~have concluded. The Company ~~will pay the developer a development fee, an oversight fee~~incurred and ~~a development services fee the amounts of~~paid $4.0 million under this agreement which ~~are~~is included in ~~the construction costs incurred-to-date.~~“Buildings and Facilities” (see Note 12).

Amended Building Contract

On September 17, 2016, the Company and The Haskell Company (“Builder”) entered into a Change Order, which, among other things, amended the building contract previously entered into between the Company and Builder to provide a guaranteed maximum price and the basis for the price and the scope of Builder’s services in connection with the construction of the New Facility (the ~~"Amended~~“Amended Building ~~Contract"~~Contract”).

Pursuant to the Amended Building Contract, Builder ~~will provide~~provided 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~~In April 2017, the Company ~~has engaged other designers~~ and ~~builders~~Builder entered into a change order to ~~provide traditional construction~~change the scope of work which added $0.6 million to the Amended Building Contract. Builder's work on the Project ~~site, including for the foundation, building envelope~~has been completed. The Company incurred and ~~roof of the New Facility. Pursuant to the Amended Building Contract, the Company will pay Builder up to $21.9~~paid $22.5 million for Builder’s services in connection with the ~~Project. This~~Project which amount is ~~a guaranteed maximum price~~included in “Machinery 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.equipment” (see Note 12).

New Facility Costs

~~Based on the current forecast, the~~The Company ~~estimates~~estimated that the total construction costs including the cost of land for the New Facility ~~will~~would be approximately $60 ~~million~~million. As of ~~which~~December 31, 2017, the Company has ~~paid~~incurred an aggregate of ~~$54.7~~$60.8 million ~~as of March 31, 2017 and has outstanding contractual obligations of $5.5 million as of March 31, 2017 (see~~ ~~Note 20~~).in construction costs. In addition to the costs to complete the construction of the New Facility, the Company ~~estimates~~estimated that it ~~will~~would incur approximately $35 million to $39 million for machinery and equipment, furniture and fixtures and related expenditures in connection with construction of the New Facility of which the Company has ~~paid~~incurred an aggregate of ~~$20.2~~$33.2 million as of ~~March~~December 31, 2017, including ~~$15.7~~$22.5 million under the Amended Building ~~Contract, and has outstanding contractual obligations of $6.2 million as of March 31, 2017 (see~~ ~~Note 20~~).Contract. The majority of the capital expenditures associated with machinery and equipment, furniture and fixtures, and related expenditures ~~for~~in connection with the initial construction of the New Facility

~~Farmer Bros. Co.~~

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

were incurred in the first three quarters of fiscal 2017. ~~Construction of and relocation to~~The Company commenced distribution activities at the New Facility ~~were substantially completed~~during the second quarter of fiscal 2017 and initial production activities late in the third quarter of fiscal 2017. The Company began roasting coffee in the New Facility in the fourth quarter of fiscal 2017.

At December 31, 2017, the Company had committed to purchase additional equipment for the New Facility totaling $6.3 million.

Farmer Bros. Co.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

Note 6. Sales of Assets

~~Sale of Spice Assets~~

In order to focus on its core products, on December 8, 2015, the Company completed the sale of the Spice Assets to Harris Spice Company ("Harris"). Harris acquired substantially all of the Company’s personal property used exclusively in connection with the 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, and assumed certain liabilities relating to the Spice Assets. The Company received $6.0 million in cash at closing, and is eligible to receive an earnout amount of up to $5.0 million over a three-year period based upon a percentage of certain institutional spice sales by Harris following the closing. The Company recognized $0.3 million and $0.8 million in earnout during the three and nine months ended March 31, 2017, respectively, a portion of which is included in "Net gains from sale of Spice Assets" in the Company's condensed consolidated statements of operations. The sale of the Spice Assets does not represent a strategic shift for the Company and is not expected to have a material impact on the Company's results of operations because the Company will continue to sell a complete portfolio of spice and other culinary products purchased from Harris under a supply agreement to its DSD customers.

Sale of Torrance Facility

On July 15, 2016, the Company completed the ~~previously-announced~~ sale of the Torrance Facility, consisting of approximately 665,000 square feet of buildings located on approximately ~~20.33~~20.3 acres of land, for an aggregate cash sale price of $43.0 million, which sale price was subject to customary adjustments for closing costs and documentary transfer taxes. Cash proceeds from the sale of the Torrance Facility were $42.5 million.

Following the closing of the sale, the Company leased back the Torrance Facility on a triple net basis through October 31, 2016 at zero base rent, and exercised two one-month extensions at a base rent of $100,000 per month. In accordance with ASC 840, “Leases,” due to the Company’s continuing involvement with the property, the Company accounted for the transaction as a financing transaction, deferred the gain on sale of the Torrance Facility and recorded the net sale proceeds of $42.5 million and accrued non-cash interest expense on the financing transaction in ~~"Sale-leaseback~~“Sale-leaseback financing ~~obligation"~~obligation” on the Company's ~~consolidated balance sheet~~Condensed 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~~three and six months ended ~~March~~December 31, ~~2017,~~2016, 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~~“Other current ~~liabilities"~~liabilities” and removed the amounts recorded in ~~"Assets~~“Assets held for ~~sale"~~sale” and the ~~"Sale-leaseback~~“Sale-leaseback financing ~~obligation"~~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~~six months ended ~~March~~December 31, ~~2017~~2016 in the amount of $2.0 million.

~~Note 7. Assets Held for Sale~~

The Company had designated its Torrance Facility and one of its branch properties in Northern California as assets held for sale and recorded the carrying values of these properties in the aggregate amount of $7.2 million in "Assets held for sale" on the Company's consolidated balance sheet at June 30, 2016. As of March 31, 2017, these assets were sold (see ~~Note 6~~).

Note 8.7. 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 price to be fixed green coffee purchase contracts, which are described further in Note 12 to the consolidated financial statements in the ~~2016~~2017 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~~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~~December 31, 2017 and June 30, ~~2016:~~2017:


(In thousands)	March 31, 2017		June 30, 2016		December 31, 2017	June 30, 2017
Derivative instruments designated as cash flow hedges:
Long coffee pounds	11,663		32,550		31,763	33,038
Derivative instruments not designated as cash flow hedges:
Long coffee pounds	873		1,618		1,612	2,121
Less: Short coffee pounds	(713	)	(188	)
Total	11,823		33,980		33,375	35,159

Coffee-related derivative instruments designated as cash flow hedges outstanding as of ~~March~~December 31, 2017 will expire within 1219 months.

Farmer Bros. Co.

Notes to Unaudited Condensed 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:~~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, 2017		June 30, 2016		March 31, 2017		June 30, 2016		December 31, 2017		June 30, 2017		December 31, 2017		June 30, 2017
(In thousands)
Financial Statement Location:
Short-term derivative assets:
Short-term derivative assets(1):
Coffee-related derivative instruments	$	522	$	3,771	$	1	$	183	$	233	$	66	$	40	$	—
Long-term derivative assets(1):
Long-term derivative assets(2):
Coffee-related derivative instruments	$	—	$	2,575	$	—	$	57	$	99	$	66	$	—	$	—
Short-term derivative liabilities:
Short-term derivative liabilities(1):
Coffee-related derivative instruments	$	326	$	—	$	536	$	—	$	1,665	$	1,733	$	258	$	190
Long-term derivative liabilities(2):
Coffee-related derivative instruments									$	—	$	446	$	—	$	—

________________

(1) Included in “Short-term derivative liabilities” on the Company’s Condensed Consolidated Balance Sheets.

(2) Included in "Other assets" and “Other long-term liabilities” on the ~~Company's condensed consolidated balance sheets.~~

~~Farmer Bros. Co.~~

~~Notes to Unaudited~~Company’s Condensed Consolidated ~~Financial Statements (continued)~~

Balance Sheets at December 31, 2017 and June 30, 2017, respectively.

Statements of Operations

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

Three Months Ended
March 31,

Nine Months Ended
March 31,
Financial Statement Classification
(In thousands) 2017 2016 2017 2016
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



	Three Months Ended December 31,						Six Months Ended December 31,						Financial Statement Classification
(In thousands)	2017			2016			2017			2016			Financial Statement Classification
Net losses recognized in AOCI	$	(2,094	)	$	(2,943	)	$	(2,459	)	$	(2,217	)	AOCI
Net (losses) gains recognized in earnings	$	(597	)	$	215		$	(604	)	$	(250	)	Costs of goods sold
Net (losses) gains recognized in earnings (ineffective portion)(1)	$	—		$	(41	)	$	48		$	(28	)	Other, net

________________

(1) Amount included in six months ended December 31, 2017 relates to trades terminated prior to the adoption of ASU 2017-12. See Note 2.

For the three and ~~nine~~six months ended ~~March~~December 31, 2017 and 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.

Net losses on derivative instruments and investments in the Company’s Condensed Consolidated Statements of Cash Flows also include net losses on coffee-related derivative instruments designated as cash flow hedges reclassified to cost of goods sold from AOCI in the six months ended December 31, 2017 and 2016. Gains and losses on derivative instruments not designated as accounting hedges are included in “Other, net” in the ~~Company's condensed consolidated statements~~Company’s Condensed Consolidated Statements of ~~operations~~Operations and in “Net losses on derivative instruments and investments” in the ~~Company's condensed consolidated statements~~Company’s Condensed Consolidated Statements of ~~cash flows.~~Cash Flows.

Farmer Bros. Co.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

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


	Three Months Ended March 31,				Nine Months Ended March 31,						Three Months Ended December 31,						Six Months Ended December 31,
(In thousands)	2017		2016		2017			2016			2017			2016			2017			2016
Net gains (losses) on coffee-related derivative instruments	$	188	$	239	$	(1,052	)	$	(455	)
Net losses on coffee-related derivative instruments											$	(190	)	$	(1,204	)	$	(93	)	$	(1,240	)
Net gains (losses) on investments	738		2		(354		)	120			16			(1,320		)	7			(1,092		)
Net gains (losses) on derivative instruments and investments(1)	926		241		(1,406		)	(335		)
Other gains (losses), net	118		372		318			370
Net losses on derivative instruments and investments(1)											(174		)	(2,524		)	(86		)	(2,332		)
Other gains, net											728			201			727			200
Other, net	$	1,044	$	613	$	(1,088	)	$	35		$	554		$	(2,323	)	$	641		$	(2,132	)

___________

(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~~six months ended ~~March~~December 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 of the reporting dates indicated:

(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



(In thousands)		Gross Amount Reported on Balance Sheet		Netting Adjustments			Cash Collateral Posted		Net Exposure
December 31, 2017	Derivative Assets	$	372	$	(372	)	$	—	$	—
	Derivative Liabilities	$	1,923	$	(372	)	$	—	$	1,551
June 30, 2017	Derivative Assets	$	132	$	(132	)	$	—	$	—
	Derivative Liabilities	$	2,369	$	(132	)	$	—	$	2,237

Cash Flow Hedges

Changes in the fair value of the ~~Company's~~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~~December 31, 2017, ~~$1.9~~$(4.1) million of net ~~gains~~losses on coffee-related derivative instruments designated as cash flow hedges are expected to be reclassified into cost of goods sold within the next twelve months. These recorded values are based on market prices of the commodities as of ~~March~~December 31, 2017. Due to the volatile nature of commodity prices, actual gains or losses realized within the next twelve months will likely differ from these values.

Note 9.8. Investments

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

Three Months Ended March 31, Nine Months Ended March 31,
(In thousands) 2017 2016 2017 2016
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 7
17
5
(10 )
Unrealized gains (losses) from trading securities held for investment $ 731
$ (15 ) $ (359 ) $ 130



	Three Months Ended December 31,					Six Months Ended December 31,
(In thousands)	2017		2016			2017		2016
Total gains (losses) recognized from trading securities	$	16	$	(1,350	)	$	7	$	(1,091	)
Less: Realized (losses) gains from sales of trading securities	—		(2		)	7		(2		)
Unrealized gains (losses) from trading securities	$	16	$	(1,348	)	$	—	$	(1,089	)

~~Farmer Bros. Co.~~

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

Note ~~10.~~9. Fair Value Measurements

Assets and liabilities measured and recorded at fair value on a recurring basis were as follows:

(In thousands) Total Level 1 Level 2 Level 3
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
$ —



(In thousands)	Total		Level 1		Level 2		Level 3
December 31, 2017
Preferred stock	$	—	$	—	$	—	$	—
Derivative instruments designated as cash flow hedges:
Coffee-related derivative assets(1)	$	332	$	—	$	332	$	—
Coffee-related derivative liabilities(1)	$	1,665	$	—	$	1,665	$	—
Derivative instruments not designated as accounting hedges:
Coffee-related derivative assets(1)	$	40	$	—	$	40	$	—
Coffee-related derivative liabilities(1)	$	258	$	—	$	258	$	—

	Total		Level 1		Level 2		Level 3
June 30, 2017
Preferred stock(2)	$	368	$	—	$	368	$	—
Derivative instruments designated as cash flow hedges:
Coffee-related derivative assets(1)	$	132	$	—	$	132	$	—
Coffee-related derivative liabilities(1)	$	2,179	$	—	$	2,179	$	—
Derivative instruments not designated as accounting hedges:
Coffee-related derivative liabilities(1)	$	190	$	—	$	190	$	—

____________________


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


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


(2)	Included in “Short-term investments” on the Company’s Condensed Consolidated Balance Sheets.

~~During the three months ended March 31, 2017, there were no transfers of preferred stock from Level 1 to Level 2.~~

Note ~~11.~~10. Accounts ~~and Notes~~ Receivable, Net


	March 31, 2017			June 30, 2016
(In thousands)							December 31, 2017			June 30, 2017
Trade receivables	$	47,891		$	43,113		$	58,727		$	44,531
Other receivables(1)	3,190			1,965			4,320			2,636
Allowance for doubtful accounts	(655		)	(714		)	(772		)	(721		)
Accounts and notes receivable, net	$	50,426		$	44,364
Accounts receivable, net							$	62,275		$	46,446

__________

(1) At ~~March~~December 31, 2017 and June 30, ~~2016,~~2017, respectively, the Company had recorded ~~$0.3~~$1.0 million and ~~$0.5~~$0.4 million, in ~~"Other receivables"~~“Other receivables” included in ~~"Accounts and notes~~“Accounts receivable, ~~net"~~net” on its ~~condensed consolidated balance sheets~~Condensed Consolidated Balance Sheets representing earnout receivable from ~~Harris.~~Harris Spice Company.

Farmer Bros. Co.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

Note ~~12.~~11. Inventories


(In thousands)	March 31, 2017		June 30, 2016		December 31, 2017		June 30, 2017
Coffee
Processed	$	11,125	$	12,362	$	14,514	$	14,085
Unprocessed	24,290		13,534		27,436		17,083
Total	$	35,415	$	25,896	$	41,950	$	31,168
Tea and culinary products
Processed	$	21,011	$	15,384	$	23,432	$	20,741
Unprocessed	77		377		999		74
Total	$	21,088	$	15,761	$	24,431	$	20,815
Coffee brewing equipment parts	$	4,209	$	4,721	$	6,903	$	4,268
Total inventories	$	60,712	$	46,378	$	73,284	$	56,251

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.

~~Because the expected reduction in spice~~The Company does not expect inventory levels at June 30, ~~2017~~2018 to decrease from the levels at June 30, ~~2016 levels is~~2017 and, therefore, recorded no expected ~~to generate a~~ beneficial effect of the liquidation of LIFO inventory quantities in the three and six months ended December 31, 2017. The Company recorded $0.8 million and ~~$2.5~~$1.7 million in expected beneficial effect of the liquidation of LIFO inventory quantities in cost of goods sold in the three and ~~nine~~six months ended ~~March~~December 31, 2017, respectively, which increased income before taxes for the three and 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 income before taxes for the three and nine months ended March 31, 2016 by $0.8 million and $1.1 million,~~ respectively. Interim LIFO calculations must necessarily be based on ~~management's~~management’s estimates of expected fiscal year-end inventory levels and costs. Because these estimates are subject to many forces beyond ~~management's~~management’s control, interim results are subject to the final fiscal year-end LIFO inventory valuation.

Note ~~13.~~12. Property, Plant and Equipment


(In thousands)	March 31, 2017			June 30, 2016			December 31, 2017			June 30, 2017
Buildings and facilities	$	54,364		$	54,768		$	108,999		$	108,682
Machinery and equipment	177,916			177,784			212,180			201,236
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			7,516			7,540
Capitalized software	21,218			21,545			23,063			21,794
Office furniture and equipment	8,220			16,077			12,612			12,758
	345,397			314,709			364,370			352,010
Accumulated depreciation	(189,756		)	(206,162		)	(202,558		)	(192,280		)
Land	16,336			9,869			16,336			16,336
Property, plant and equipment, net	$	171,977		$	118,416		$	178,148		$	176,066

Note 13. Goodwill and Intangible Assets

The carrying value of goodwill in the six months ended December 31, 2017 increased by $10.9 million. This was due to the acquisition of the Boyd Business adding $11.0 million of goodwill as well as the final working capital adjustment made to the West Coast Coffee purchase price allocation which reduced goodwill by $0.1 million. The carrying value of goodwill at December 31, 2017 and June 30, 2017 was $21.9 million and $11.0 million, respectively.

Farmer Bros. Co.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

The following is a summary of the Company’s amortized and unamortized intangible assets other than goodwill:



	December 31, 2017					June 30, 2017
(In thousands)	Gross Carrying Amount(1)		Accumulated Amortization(1)			Gross Carrying Amount(1)		Accumulated Amortization(1)
Amortized intangible assets:
Customer relationships	$	48,353	$	(12,074	)	$	17,353	$	(10,883	)
Non-compete agreements	220		(61		)	220		(38		)
Recipes	930		(155		)	930		(88		)
Trade name/brand name	510		(185		)	510		(84		)
Total amortized intangible assets	$	50,013	$	(12,475	)	$	19,013	$	(11,093	)
Unamortized intangible assets:
Trade names with indefinite lives	$	3,640	$	—		$	3,640	$	—
Trademarks and brand name with indefinite lives	9,858		—			7,058		—
Total unamortized intangible assets	$	13,498	$	—		$	10,698	$	—
Total intangible assets	$	63,511	$	(12,475	)	$	29,711	$	(11,093	)

___________

(1) Reflects the preliminary purchase price allocation for the acquisition of the Boyd Business. Subject to change based on numerous factors, including the final estimated fair value of the assets acquired and the liabilities assumed and the amount of the final post-closing net working capital adjustment. Adjustments in the purchase price allocation may require a recasting of the amounts allocated to goodwill and intangible assets.

Aggregate amortization expense for the three months ended December 31, 2017 and 2016 was $1.1 million and $0.1 million, respectively. Aggregate amortization expense for the six months ended December 31, 2017 and 2016 was $1.4 million and $0.1 million, respectively.

Note 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 ten multiemployer defined contribution plans other than pension plans that provide medical, vision, dental and disability benefits for active, union-represented employees subject to collective bargaining agreements. In addition, the Company sponsors a postretirement defined benefit plan that covers qualified non-union retirees and certain qualified union retirees and provides retiree medical coverage and, depending on the age of the retiree, dental and vision coverage. The Company also provides a postretirement death benefit to certain of its employees and retirees.

The Company 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 (“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'~~Employees’ Plan”). Effective October 1, 2016, the Company

Farmer Bros. Co.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

froze benefit accruals and participation in the Hourly ~~Employees' Plan, a defined benefit pension plan for certain hourly employees covered under collective bargaining agreements.~~Employees’ Plan. After the plan freeze, participants do not accrue any benefits under the plan, and new hires are not eligible to participate in the plan. After the freeze, the participants in the plan are eligible to receive the ~~Company's~~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 December 31,						Six Months Ended December 31,
	2017			2016			2017			2016			2017			2016			2017			2016
(In thousands)
Service cost	$	124		$	97		$	372		$	291		$	—		$	124		$	—		$	248
Interest cost	1,397			1,546			4,191			4,638			1,432			1,397			2,864			2,794
Expected return on plan assets	(1,607		)	(1,710		)	(4,821		)	(5,130		)	(1,456		)	(1,607		)	(2,912		)	(3,214		)
Amortization of net loss(1)	508			370			1,524			1,110
Amortization of net loss⁽¹⁾													418			508			836			1,016
Net periodic benefit cost	$	422		$	303		$	1,266		$	909		$	394		$	422		$	788		$	844

___________

(1) These amounts represent the estimated portion of the net loss 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
	2017	2016	2018	2017
Discount rate	3.55%	4.40%	3.80%	3.55%
Expected long-term rate of return on plan assets	7.75%	7.50%
Expected long-term return on plan assets			6.75%	7.75%

~~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.

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.

On October 30, 2017, counsel to the Company received written confirmation that the Western Conference of Teamsters Pension Trust (the “WCT Pension Trust”) will be retracting its claim, stated in its letter to the Company dated July 10, 2017 (the “WCT Pension Trust Letter”), that certain of the Company’s employment actions in 2015 resulting from the Corporate Relocation Plan constituted a partial withdrawal from the WCTPP. The written confirmation stated that the WCT Pension Trust has determined that a partial withdrawal did not occur in 2015 and further stated that the withdrawal liability assessment has been rescinded. This rescinding of withdrawal liability assessment applies to Company employment actions in 2015 with respect to the bargaining units that were specified in the WCT Pension Trust Letter. As of

Farmer Bros. Co.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

December 31, 2017, the Company is not able to predict whether the WCT Pension Trust may make a claim, or estimate the extent of potential withdrawal liability, related to the Corporate Relocation Plan for actions or bargaining units other than those specified in the WCT Pension Trust Letter.

In fiscal 2012, the Company withdrew from the Local 807 Labor-Management Pension Fund (“Pension Fund”) and recorded a charge of $4.3 million associated with withdrawal from this plan, representing the present value of the estimated withdrawal liability expected to be paid in quarterly installments of $0.1 million over 80 quarters. On November 18, 2014, the Pension Fund sent the Company a notice of assessment of withdrawal liability in the amount of $4.4 million, which the Pension Fund adjusted to $4.9 million on January 5, 2015. The Company is in the process of negotiating a reduced liability amount. The Company has commenced quarterly installment payments to the Pension Fund of $91,000 pending the final settlement of the liability. The ~~remaining~~total estimated withdrawal liability ~~of $3.6~~is $4.0 million and ~~$3.8 million is~~its present value are reflected in the ~~Company's condensed consolidated balance sheets~~Company’s Condensed Consolidated Balance Sheets at ~~March~~December 31, 2017 and June 30, ~~2016, respectively,~~2017 as short-term with the ~~short-term and long-term portions reflected~~expectation of paying off the liability in ~~current and long-term liabilities, respectively.~~fiscal 2018.

~~The Company may incur certain pension-related costs 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~~Company’s results of operations and cash flows.

Multiemployer Plans Other Than Pension Plans

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

401(k) Plan

The ~~Company's~~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~~Company’s matching contribution is discretionary, based on approval by the ~~Company's~~Company’s Board of Directors. For the calendar years 2018 and 2017, ~~and 2016,~~ the ~~Company's~~Company’s Board of Directors approved a Company matching contribution of 50% of an ~~employee's~~employee’s annual contribution to the 401(k) Plan, up to 6% of the ~~employee's~~employee’s eligible income. The matching contributions (and any earnings thereon) vest at the rate of 20% for each of the ~~participant's~~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, or a reduction-in-force at another Company facility designated by the Administrative Committee of the Farmer Bros. Co. Qualified Employee Retirement ~~Plans.~~Plans, or in connection with certain reductions-in-force that occurred during 2017. 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 ~~$0.4~~$0.5 million and $0.3 million in operating expenses in ~~each of~~ the three months ended ~~March~~December 31, 2017 and 2016, respectively, and ~~$1.2~~$1.0 million and $0.8 million in operating expenses in ~~each of~~ the ~~nine~~six months ended ~~March~~December 31, 2017 and ~~2016.~~2016, respectively.

Postretirement Benefits

The Company sponsors a postretirement defined benefit plan that covers qualified non-union retirees and certain qualified union retirees (“Retiree Medical Plan”). The plan provides medical, dental and vision coverage for retirees under age 65 and 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.

Farmer Bros. Co.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

The Company also provides a postretirement death benefit (“Death Benefit”) to certain of its employees and retirees, subject, in the case of current employees, to continued employment with the Company until retirement and certain other conditions related to the manner of employment termination and manner of death. The Company records the actuarially determined liability for the present value of the postretirement death benefit. The Company has purchased life insurance policies to fund the postretirement death benefit wherein the Company owns the policy but the postretirement death benefit is paid to the ~~employee's~~employee’s or ~~retiree's~~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.

Retiree Medical Plan and Death Benefit

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


	Three Months Ended March 31,						Nine Months Ended March 31,						Three Months Ended December 31,						Six Months Ended December 31,
	2017			2016			2017			2016			2017			2016			2017			2016
(In thousands)
Service cost	$	190		$	347		$	570		$	1,041		$	152		$	190		$	304		$	380
Interest cost	207			299			621			897			209			207			418			414
Amortization of net gain	(157		)	(49		)	(471		)	(147		)	(210		)	(157		)	(420		)	(314		)
Amortization of net prior service credit	(439		)	(439		)	(1,317		)	(1,317		)
Net periodic postretirement benefit (credit) cost	$	(199	)	$	158		$	(597	)	$	474
Amortization of prior service credit													(439		)	(439		)	(878		)	(878		)
Net periodic postretirement benefit credit													$	(288	)	$	(199	)	$	(576	)	$	(398	)

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


	Fiscal		Fiscal
	2017	2016	2018	2017
Retiree Medical Plan discount rate	3.73%	4.69%	4.13%	3.73%
Death Benefit discount rate	3.79%	4.74%	4.12%	3.79%

~~Farmer Bros. Co.~~

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

Note 15. Bank Loan

The Company maintains a ~~$75.0~~$125.0 million senior secured revolving credit facility ~~(“Revolving~~(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 $15.0 million respectively. The Revolving Facility includes an accordion feature whereby the Company may increase the Revolving Commitment by up to an additional $50.0 million, subject to certain conditions. Advances are based on the Company’s eligible accounts receivable, eligible inventory, and the value of certain real property and trademarks, less required reserves. The commitment fee ~~ranges from~~is a flat fee of 0.25% ~~to 0.375%~~ per annum ~~based on~~irrespective of average revolver usage. Outstanding obligations are collateralized by all of the Company’s assets, excluding certain real property not included in the borrowing base and machinery and equipment (other than inventory)~~, and the Company's preferred stock portfolio.~~. Borrowings under the Revolving Facility bear interest based on average historical excess availability levels with a range of PRIME - 0.25% to PRIME + 0.50% or Adjusted LIBO Rate + 1.25% to Adjusted LIBO Rate + 2.00%. The Company is subject to a variety of affirmative and negative covenants of types customary in an asset-based lending facility, including financial covenants relating to the maintenance of a fixed charge coverage ratio in certain circumstances, and the right of the Lenders to establish reserve requirements, which may reduce the amount of credit otherwise available to the Company. The Company is allowed to pay dividends, provided, among other things, certain excess availability requirements are met, and no event of default exists or has occurred and is continuing as of the date of any such payment and after giving effect thereto. The Revolving Facility ~~expires~~matures on ~~March 2, 2020.~~August 25, 2022.

At ~~March~~December 31, 2017, the Company was eligible to borrow up to a total of ~~$61.7~~$110.0 million under the Revolving Facility and had outstanding borrowings of ~~$44.2~~$84.4 million, utilized ~~$4.4~~$1.1 million of the letters of credit sublimit, and had excess availability under the Revolving Facility of ~~$13.1~~$24.5 million. At ~~March~~December 31, 2017, the weighted average interest rate

on the ~~Company's~~Company’s outstanding borrowings under the Revolving Facility was ~~2.52%~~3.62% and the Company was in compliance with all of the restrictive covenants under the Revolving Facility.

Note 16. Share-based Compensation

~~Non-qualified stock options with time-based vesting (“NQOs”)~~Farmer Bros. Co. 2017 Long-Term Incentive Plan

~~In the nine months ended March 31,~~On June 20, 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 “Effective Date”), the Company’s ~~closing stock price of $35.35 at March 31,~~stockholders approved the Farmer Bros. Co. 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.Long-Term Incentive Plan (the “2017 Plan”). 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~~Plan succeeded 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~~prior long-term incentive plans, the Farmer Bros. Co. Amended and Restated 2007 Long-Term Incentive Plan (the ~~“LTIP”~~“Amended Equity Plan”)~~, with 20% of each such grant~~ and the Farmer Bros. Co. 2007 Omnibus Plan (collectively, the “Prior Plans”). On the Effective Date, the Company ceased granting awards under the Prior Plans; however, awards outstanding under the Prior Plans will remain subject to ~~forfeiture if a target modified net income goal~~the terms of the applicable Prior Plan. The 2017 Plan provides for ~~fiscal 2017 is not attained. For this purpose, “Modified Net Income” is defined as net income (GAAP) before taxes~~the grant of stock options (including incentive stock options and ~~excluding any gains or losses from sales of assets, and excluding the effect of restructuring~~non-qualified stock options), stock appreciation rights, restricted stock, restricted stock units, dividend equivalents, performance shares and other ~~transition expenses related~~stock- or cash-based awards to eligible participants. The 2017 Plan also authorizes the grant of awards that are intended to qualify as “qualified performance-based compensation” within the meaning of Section 162(m) of the Internal Revenue Code. Non-employee directors of the Company and employees of the Company or any of its subsidiaries are eligible to receive awards under the 2017 Plan.

The 2017 Plan authorizes the issuance of (i) 900,000 shares of common stock plus (ii) the number of shares of common stock subject to awards under the Company’s Prior Plans that are outstanding as of the Effective Date and that expire or are forfeited, cancelled or similarly lapse following the Effective Date. Subject to certain limitations, shares of common stock covered by awards granted under the 2017 Plan that are forfeited, expire or lapse, or are repurchased for or paid in cash, may be used again for new grants under the 2017 Plan. As of December 31, 2017, there were 950,914 shares available under the 2017 Plan including shares that were forfeited under the Prior Plans. Shares of common stock granted under the 2017 Plan may be authorized but unissued shares, shares purchased on the open market or treasury shares. In no event will more than 900,000 shares of common stock be issuable pursuant to the ~~relocation~~exercise of incentive stock options under the 2017 Plan.

The 2017 Plan contains a minimum vesting requirement, subject to limited exceptions, that awards made under the 2017 Plan may not vest earlier than the date that is one year following the grant date of the award. The 2017 Plan also contains provisions with respect to payment of exercise or purchase prices, vesting and expiration of awards, adjustments and treatment of awards upon certain corporate transactions, including stock splits, recapitalizations and mergers, transferability of awards and tax withholding requirements.

The 2017 Plan may be amended or terminated by the Board at any time, subject to certain limitations requiring stockholder consent or the consent of the applicable participant. In addition, the Administrator of the 2017 Plan may not, without the approval of the Company’s ~~corporate headquarters~~stockholders, authorize certain re-pricings of any outstanding stock options or stock appreciation rights granted under the 2017 Plan. The 2017 Plan will expire on June 20, 2027.

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

In the six months ended December 31, 2017, the Company granted 124,278 shares issuable upon the exercise of NQOs to ~~Northlake, Texas.~~eligible employees under the 2017 Plan. These ~~PNQs~~NQOs have an exercise price of ~~$32.85,~~$31.70 per share, which was the closing price of the Company’s common stock as reported on ~~Nasdaq~~the NASDAQ Global Select Market on the date of grant. One-third of the total number of shares subject to each such stock option vest ratably on each of the first three anniversaries of the grant date, contingent on continued employment, and subject to accelerated vesting in certain circumstances.

Farmer Bros. Co.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

Following are the ~~weighted average~~ assumptions used in the Black-Scholes valuation model for ~~PNQs~~NQOs granted during the ~~nine~~six months ended ~~March~~December 31, 2017.



	~~Nine~~ Six Months Ended ~~March~~ December 31, 2017
Weighted average fair value of ~~PNQs~~NQOs	$~~11.42~~31.70
Risk-free interest rate	~~1.53%~~2.0%
Dividend yield	—%
Average expected term	~~4.9~~4.6 years
Expected stock price volatility	~~37.7%~~35.4%

The following table summarizes NQO activity for the six months ended December 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, 2017	133,464		13.05	5.99	2.6	2,299
Granted	124,278		31.70	10.41	6.9	—
Exercised	(37,266	)	12.09	5.57	—	752
Cancelled/Forfeited	(4,194	)	24.41	10.60	—	—
Outstanding at December 31, 2017	216,282		23.71	8.51	4.8	1,825
Vested and exercisable at December 31, 2017	89,055		12.33	5.74	2.0	1,765
Vested and expected to vest at December 31, 2017	205,308		23.28	8.41	4.7	1,820

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 $32.15 at December 29, 2017 and $30.25 at June 30, 2017, representing the last trading day of the respective 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 six months ended December 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.

During the six months ended December 31, 2017, 945 NQOs vested and 37,266 NQOs were exercised. Total fair value of NQOs vested during the six months ended December 31, 2017 was $12,000. The Company received $0.5 million and $0.4 million in proceeds from exercises of vested NQOs in the six months ended December 31, 2017 and 2016, respectively.

At December 31, 2017 and June 30, 2017, respectively, there was $1.3 million and $80,000 of unrecognized compensation cost related to NQOs. The unrecognized compensation cost related to NQOs at December 31, 2017 is expected to be recognized over the weighted average period of 2.8 years. Total compensation expense for NQOs in the three months ended December 31, 2017 and 2016 was $62,000 and $47,000, respectively. Total compensation expense for NQOs in the six months ended December 31, 2017 and 2016 was $64,000 and $89,000, respectively.

Farmer Bros. Co.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

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

In the six months ended December 31, 2017, the Company granted no shares issuable upon the exercise of PNQs. The following table summarizes PNQ activity for the ~~nine~~six months ended ~~March~~December 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)	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
Outstanding at June 30, 2017							358,786		27.75		10.96	5.2	1,181
Granted	149,223		32.85	11.42	4.8	—	—		—		—	—	—
Exercised	(8,132	)	24.35	10.67	—	73	(6,679	)	26.10		10.87	—	45
Cancelled/Forfeited	(62,262	)	31.43	11.38	—	—	(43,330	)	32.10		11.43	—	—
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
Outstanding at December 31, 2017							308,777		27.17	10.93	10.90	4.6	1,590
Vested and exercisable at December 31, 2017							200,904		25.87		10.80	4.2	1,278
Vested and expected to vest at December 31, 2017							303,990		27.10		10.89	4.5	1,585

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~~$32.15 at ~~March 31,~~December 29, 2017 and ~~$32.06~~$30.25 at June 30, ~~2016~~2017 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~~six months ended ~~March~~December 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~~six months ended ~~March~~December 31, 2017, ~~109,777 PNQ shares~~56,822 PNQs vested and ~~8,132 PNQ shares~~6,679 PNQs were exercised. Total fair value of PNQs vested during the ~~nine~~six months ended ~~March~~December 31, 2017 was ~~$1.2~~$0.6 million. The Company received $0.2 million and ~~$0.3~~$0.1 million in proceeds from exercises of vested PNQs in the ~~nine~~six months ended ~~March~~December 31, 2017 and 2016, respectively.

As of ~~March~~December 31, 2017, the Company met the performance ~~target~~targets 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~~2015 PNQ awards.

In the six months ended December 31, 2017, based on the Company’s failure to achieve certain financial objectives over the applicable performance period, a total of 33,738 shares subject to fiscal 2017 PNQ awards were forfeited, representing 20% of the shares subject to each such award. Subject to certain continued employment conditions and subject to accelerated vesting in certain circumstances, one half of the remaining PNQs subject to the fiscal 2017 PNQ awards are scheduled to vest on each of the second and third anniversaries of the grant date.

At ~~March~~December 31, 2017 and June 30, ~~2016,~~2017, there was ~~$2.1~~$0.9 million and ~~$1.9~~$1.8 million, respectively, of unrecognized compensation cost related to PNQs. The unrecognized compensation cost related to PNQs at ~~March~~December 31, 2017 is expected to be recognized over the weighted average period of ~~1.5~~1.2 years. Total compensation expense related to PNQs in ~~each of~~ the three months ended ~~March~~December 31, 2017 and 2016 was $0.2 ~~million.~~million and $0.4 million, respectively. Total compensation expense related to PNQs in the ~~nine~~six months ended ~~March~~December 31, 2017 and 2016 was ~~$0.8~~$0.4 million and ~~$0.3~~$0.6 million, respectively.

Restricted Stock

During the ~~nine~~six months ended ~~March~~December 31, 2017, the Company granted ~~5,106~~13,110 shares of restricted stock under the 2017 Plan, including 11,406 shares of restricted stock to non-employee directors ~~under the LTIP~~ with a grant date fair value of ~~$35.25~~$34.20 per share and 1,704 shares of restricted stock to eligible employees with a grant date fair value of $31.70 per share. ~~Unlike prior-year awards to non-employee directors, which vest ratably over a period of three years, the~~The fiscal ~~2017~~2018 restricted stock awards cliff vest on the ~~first~~earlier of the one year anniversary of the grant date or the date of the first annual meeting of the Company’s stockholders immediately following the grant date, in the case of non-employee directors, and the third anniversary of the grant date, in the case of eligible employees, in each case subject to continued service to the Company through the vesting date and the acceleration provisions of the ~~LTIP~~2017 Plan and restricted stock agreement. NoDuring the six months ended December 31, 2016, the Company granted 5,106 shares of restricted stock ~~were granted~~ to ~~employees during the nine months ended March 31, 2017.~~non-employee directors.

During the ~~nine~~six months ended ~~March~~December 31, 2017, ~~7,458~~7,934 shares of restricted stock vested.

Farmer Bros. Co.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

The following table summarizes restricted stock activity for the ~~nine~~six months ended ~~March~~December 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



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 and nonvested at June 30, 2017	15,445		29.79	0.9	467
Granted	13,110		33.88	1.7	444
Vested/Released	(7,934	)	32.77	—	272
Cancelled/Forfeited	(3,390	)	25.57	—	—
Outstanding and nonvested at December 31, 2017	17,231		32.35	1.6	554
Expected to vest at December 31, 2017	16,411		32.32	1.5	528

The aggregate intrinsic ~~value~~values 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~~$32.15 at ~~March 31,~~December 29, 2017 and ~~$32.06~~$30.25 at June 30, ~~2016,~~2017, representing the last trading day of the respective fiscal periods. Restricted stock that is expected to vest is net of estimated forfeitures.

At ~~March~~December 31, 2017 and June 30, ~~2016,~~2017, there was ~~$0.3~~$0.5 million and ~~$0.5~~$0.3 million, respectively, of unrecognized compensation cost related to restricted stock. The unrecognized compensation cost related to restricted stock at ~~March~~December 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~~$0.1 million in each of the three months ended December 31, 2017 and ~~$66,000~~2016. Total compensation expense for restricted stock was $0.1 million in each of the six months ended December 31, 2017 and 2016.

Performance-Based Restricted Stock Units (“PBRSUs”)

During the six months ended December 31, 2017, the Company granted 37,414 PBRSUs under the 2017 Plan to eligible employees with a grant date fair value of $31.70 per unit. The fiscal 2018 PBRSU awards cliff vest on the third anniversary of the date of grant based on the Company’s achievement of certain financial performance goals for the performance period July 1, 2017 through June 30, 2020, subject to certain continued employment conditions and subject to acceleration provisions of the 2017 Plan and restricted stock unit agreement. At the end of the three-year performance period, the number of PBRSUs that actually vest will be 0% to 150% of the target amount, depending on the extent to which the Company meets or exceeds the achievement of those financial performance goals measured over the full three-year performance period. No PBRSUs were granted during the six months ended December 31, 2016.

The following table summarizes PBRSU activity for the six months ended December 31, 2017:



Outstanding and Nonvested PBRSUs:	PBRSUs Awarded	Weighted Average Grant Date Fair Value ($)	Weighted Average Remaining Life (Years)	Aggregate Intrinsic Value ($ in thousands)
Outstanding and nonvested at June 30, 2017	—	—	—	—
Granted(1)	37,414	31.70	—	1,186
Vested/Released	—	—	—	—
Cancelled/Forfeited	—	—	—	—
Outstanding and nonvested at December 31, 2017	37,414	31.70	2.9	1,203
Expected to vest at December 31, 2017	32,495	31.70	2.9	1,045

_____________

(1) The target number of PBRSUs is presented in the table. Under the terms of the awards, the recipient may earn between 0% and 150% of the target number of PBRSUs depending on the extent to which the Company meets or exceeds the achievement of the applicable financial performance goals.

The aggregate intrinsic value of PBRSUs outstanding at December 31, 2017 represents the total pretax intrinsic value, based on the Company’s closing stock price of $32.15 at December 29, 2017, representing the last trading day of the fiscal period. PBRSUs that are expected to vest are net of estimated forfeitures.

Farmer Bros. Co.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

At December 31, 2017 and June 30, 2017, there was $1.1 million and $0, respectively, of unrecognized compensation cost related to PBRSUs. The unrecognized compensation cost related to PBRSUs at December 31, 2017 is expected to be recognized over the weighted average period of 2.9 years. Total compensation expense for PBRSUs was $48,000 and $0 for the three months ended ~~March~~December 31, 2017 and 2016, respectively. Total compensation expense for ~~restricted stock~~PBRSUs was ~~$0.2 million~~$48,000 and ~~$0.1 million, respectively, in~~$0 for the ~~nine~~six months ended ~~March~~December 31, 2017 and ~~2016.~~2016, respectively.

~~Farmer Bros. Co.~~

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

Note 17. Other Long-Term Liabilities

Other long-term liabilities include the following:

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



(In thousands)	December 31, 2017		June 30, 2017
Earnout payable(1)	$	1,100	$	1,100
Derivative liabilities—noncurrent	—		380
Multiemployer Plan Holdback—Boyd Coffee	1,056		—
Other long-term liabilities	$	2,156	$	1,480

___________

(1) Lease obligation associated with construction of the New Facility. The lease obligation was reversed upon termination of the Lease Agreement concurrent with the closing of the purchase option on September 15, 2016 (see ~~Note 5~~).

~~(2) Earnout~~Includes $0.5 million and $0.6 million in earnout payable in connection with the ~~Company's~~Company’s acquisition of substantially all of the assets of ~~Rae' Launo Corporation~~China Mist completed on ~~January 12, 2015.~~

~~(3) Earnout payable in connection with~~October 11, 2016 and the ~~Company's~~Company’s acquisition ~~of substantially all of the assets~~ of West Coast Coffee completed on February 7, ~~2017.~~2017, respectively. See Note 3.

Note 18. Income Taxes

On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act of 2017 (the “Tax Act”). The SEC subsequently issued Staff Accounting Bulletin No. 118, “Income Tax Accounting Implications of the Tax Cuts and Jobs Act” (“SAB 118”), which provides guidance on accounting for the tax effects of the Tax Act. Under SAB 118, companies are able to record a reasonable estimate of the impacts of the Tax Act if one is able to be determined and report it as a provisional amount during the measurement period. The measurement period is not to extend beyond one year from the enactment date. Impacts of the Tax Act that a company is not able to make a reasonable estimate for should not be recorded until a reasonable estimate can be made during the measurement period.

In the three months ended December 31, 2017, the Company revised its estimated annual effective rate to reflect a change in the federal statutory rate from 35.0% to 28.1%. The change in statutory rate was made as a result of the Tax Act. The rate change is administratively effective as of the enactment date and the Company is using a blended rate of 28.1% for its fiscal year ending on June 30, 2018, as prescribed. In addition, in the three months ended December 31, 2017, the Company recognized tax expense related to adjusting its deferred tax balances to reflect the new corporate tax rate. Deferred tax amounts are calculated based on the rates at which they are expected to reverse in the future. The Company is analyzing certain aspects of the Tax Act and refining its calculations which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts. The provisional amount recorded related to the re-measurement of the Company’s deferred tax balance was $(20.3) million at December 31, 2017.

The ~~Company’~~Company’s effective tax rates for the three months ended ~~March~~December 31, 2017 and 2016 were ~~44.4%~~976.2% and ~~3.5%~~40.1%, respectively. The ~~Company’~~Company’s effective tax rates for the ~~nine~~six months ended ~~March~~December 31, 2017 and 2016 were ~~40.4%~~4,449.3% and ~~5.3%~~40.1%, respectively. The effective tax rates for the three and ~~nine~~six months ended ~~March~~December 31, 2017 ~~are~~and 2016 were higher than the U.S. statutory ~~rate~~rates of 28.1% and 35.0%, respectively, primarily due to ~~state~~ income tax ~~expense. The effective~~expense of $(20.3) million resulting from the adjustment of deferred tax ~~rates for the three and nine months ended March 31, 2016 are lower than the U.S. statutory rate of 35.0% primarily~~amounts due to ~~a valuation allowance recorded against~~enactment of the ~~Company's deferred tax assets.~~Tax Act.

The Company evaluates its deferred tax assets quarterly to determine if a valuation allowance is required. 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 such assessment, significant weight ~~was~~is given to evidence that ~~could~~can be objectively verified, such as recent operating results, and less consideration ~~was~~is given to less objective indicators such as future income projections. After consideration of positive and negative evidence, including the recent history of income, the Company concluded that it is more likely than not that the Company will generate future income sufficient to realize the 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.~~assets.

As of ~~March~~December 31, 2017 and June 30, ~~2016~~2017 the Company had no unrecognized tax benefits. ~~During~~

As discussed in Note 2, the ~~quarter ended September 30, 2016,~~Company adopted ASU 2016-09 beginning July 1, 2017 and upon adoption recognized the ~~Internal Revenue Service completed its examination~~excess tax benefits of ~~the Company’s~~$1.6 million as an increase to deferred tax ~~years ended June 30, 2013~~assets and ~~2014 and accepted the returns as filed for each of those years.~~

a corresponding increase to retained earnings.

Farmer Bros. Co.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

Note 19. Net (Loss) Income Per Common Share

Computation of EPS for the three and six months ended December 31, 2017 excludes the dilutive effect of 525,059 shares issuable under stock options, 37,414 PBRSUs and 383,611 shares issuable upon the assumed conversion of the outstanding Series A Preferred Stock because the Company incurred net losses in the three and six months ended December 31, 2017 so their inclusion would be anti-dilutive.

Computation of EPS for the three and six months ended December 31, 2016 includes the dilutive effect of 122,897 shares and 122,142 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 29,032 and 24,804 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.


	Three Months Ended March 31,				Nine Months Ended March 31,				Three Months Ended December 31,					Six Months Ended December 31,
(In thousands, except share and per share amounts)	2017		2016		2017		2016		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
Undistributed net (loss) income available to common stockholders									$	(18,887	)	$	20,052	$	(19,865	)	$	21,669
Undistributed net (loss) income available to nonvested restricted stockholders									(10		)	24		(10		)	25
Net (loss) income available to common stockholders—basic									$	(18,897	)	$	20,076	$	(19,875	)	$	21,694

Weighted average common shares outstanding—basic	16,605,754		16,539,479		16,584,125		16,486,469		16,723,498			16,584,106		16,711,660			16,573,545
Effect of dilutive securities:
Shares issuable under stock options	116,020		107,936		120,075		127,806		—			122,897		—			122,142
Shares issuable PBRSUs									—			—		—			—
Shares issuable under convertible preferred stock									—			—		—			—
Weighted average common shares outstanding—diluted	16,721,774		16,647,415		16,704,200		16,614,275		16,723,498			16,707,003		16,711,660			16,695,687
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
Net (loss) income per common share available to common stockholders—basic									$	(1.13	)	$	1.21	$	(1.19	)	$	1.31
Net (loss) income per common share available to common stockholders—diluted									$	(1.13	)	$	1.20	$	(1.19	)	$	1.30

Note 20. Preferred Stock

The Company is authorized to issue 500,000 shares of preferred stock at a par value of $1.00, including 21,000 authorized shares of Series A Preferred Stock.

Series A Convertible Participating Cumulative Perpetual Preferred Stock

On October 2, 2017, the Company issued 14,700 shares of Series A Preferred Stock in connection with the Boyd Coffee acquisition. The Series A Preferred Stock pays an annual dividend, when, as and if declared by the Company’s Board of Directors, of 3.5% of the stated value per share payable in four quarterly installments in arrears, and has an initial stated value of $1,000 per share, adjustable up or down by the amount of undeclared and unpaid dividends or subsequent payment of accumulated dividends thereon, respectively, and a conversion premium of 22.5%. Dividends may be paid in cash. At December 31, 2017, the Company had undeclared and unpaid preferred dividends of $128,625 on 14,700 issued and outstanding shares of Series A Preferred Stock. Series A Preferred Stock is a participating security because it has rights to earnings that otherwise would have been available to common stockholders. On an as converted basis, holders of Series A Preferred Stock are entitled to vote together with the holders of the Company’s common stock and are entitled to share in the dividends on common stock, when declared. Each share of Series A Preferred Stock is convertible into 26 shares of the Company’s common stock (rounded down to the nearest whole share and subject to adjustment in accordance with the terms of the Certificate of Designations filed with the Secretary of State of the State of Delaware). Series A Preferred Stock is a perpetual stock and, therefore, not redeemable. Based on its characteristics, the Company classified Series A Preferred Stock as permanent equity.

Farmer Bros. Co.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

Series A Preferred Stock is carried on the Company’s balance sheet at the amount recorded at inception until converted. The Company may mandatorily convert all but not a portion of the Series A Preferred Stock one year from the date of issue. The holder may convert 20%, 30% and 50%, of the Series A Preferred Stock at the end of the first, second and third year, respectively, from the date of issue. Series A Preferred Stock cannot be sold or transferred by the holder for a period of three years from the date of issue, with the exception of transfer by holder, not for value, or to the holder’s shareholder.

Note 21. Commitments and Contingencies:

For a detailed discussion about the ~~Company's~~Company’s commitments and contingencies, see Note ~~22, "~~23, “Commitments and Contingencies"” to the consolidated financial statements in the ~~2016~~2017 Form 10-K. During the ~~nine~~six months ended ~~March~~December 31, 2017, other than the following, there were no material changes in the Company’s commitments and contingencies.

~~Leases~~New Facility Construction and Equipment Contracts

~~As part of the China Mist transaction,~~At December 31, 2017, 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~~had committed to ~~Unaudited Consolidated Financial Statements (continued)~~

~~Contractual obligations~~purchase additional equipment 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 New Facility ~~and $6.2~~totaling $6.3 million.

Borrowings Under Revolving Credit Facility

At December 31, 2017, the Company had outstanding borrowings of $84.4 million under its Revolving Facility, as compared to outstanding borrowings of $27.6 million at June 30, 2017. The increase in outstanding ~~contractual~~borrowings in the six months ended December 31, 2017 included $39.5 million to fund the cash paid at closing for the purchase of the Boyd Business and the initial Company obligations under the ~~Amended Building Contract as of March 31, 2017. See~~ ~~Note 5~~.

(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, 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.post-closing transition services agreement.

Non-cancelable Purchase Orders

As of ~~March~~December 31, 2017, the Company had committed to purchase green coffee inventory totaling ~~$68.9~~$55.3 million under fixed-price contracts, ~~equipment for the New Facility totaling $0.5 million~~ and other purchases totaling ~~$10.1~~$12.9 million under non-cancelable purchase orders.

Legal Proceedings

Council for Education and Research on Toxics (“CERT”) v. Brad Berry Company Ltd., et al., Superior Court of the State of California, County of Los Angeles

On August 31, 2012, CERT filed an amendment to a private enforcement action adding a number of companies as defendants, including CBI, which sell coffee in California. The suit alleges that the defendants have failed to issue clear and reasonable warnings in accordance with Proposition 65 that the coffee they produce, distribute and sell contains acrylamide. This lawsuit was filed in Los Angeles Superior Court (the “Court”). CERT has demanded that the alleged violators remove acrylamide from their coffee or provide Proposition 65 warnings on their products and pay $2,500 per day for each and every violation while they are in violation of Proposition 65.

Acrylamide is produced naturally in connection with the heating of many foods, especially starchy foods, and is believed to be caused by the Maillard reaction, though it has also been found in unheated foods such as olives. With respect to coffee, acrylamide is produced when coffee beans are heated during the roasting process-it is the roasting itself that produces the acrylamide. While there has been a significant amount of research concerning proposals for treatments and other processes aimed at reducing acrylamide content of different types of foods, to our knowledge there is currently no known strategy for reducing acrylamide in coffee without negatively impacting the sensorial properties of the product.

The Company has joined a Joint Defense Group, or JDG, 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 will be tried first. Fact discovery and expert

Farmer Bros. Co.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

~~Legal Proceedings~~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.

~~Steve~~ ~~Hernandez vs. Farmer Bros. Co., Superior~~Following final trial briefing, the Court heard, on April 9, 2015, final arguments on the Phase 1 issues. On September 1, 2015, the Court ruled against the JDG on the Phase 1 affirmative defenses. The JDG received permission to file an interlocutory appeal, which was filed by writ petition on October 14, 2015. On January 14, 2016, the Court of ~~State of California, County of Los Angeles~~Appeals denied the JDG’s writ petition thereby denying the interlocutory appeal so that the case stays with the trial court.

On ~~July 24, 2015, former Company employee Hernandez~~February 16, 2016, the Plaintiff filed a ~~putative class action complaint~~motion for ~~damages alleging~~summary adjudication arguing that based upon facts that had been stipulated by the JDG, the Plaintiff had proven its prima facie case and all that remains is a ~~single cause~~determination of ~~action for unfair competition under the California Business & Professions Code. The claim purports~~whether any affirmative defenses are available 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.Defendants. On ~~November 12, 2015, a separate putative class representative, Monica Zuno, filed claim under the same class action;~~March 16, 2016, 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~~reinstated the stay on discovery for all parties except for the four largest defendants. Following a hearing on April 20, 2016, the Court granted Plaintiff’s motion for summary adjudication on its prima facie case. Plaintiff filed its motion for summary adjudication of affirmatives defenses on May 16, 2016. At the August 19, 2016 hearing on Plaintiff’s motion for summary adjudication (and the JDG’s opposition), the Court denied Plaintiff’s motion, thus maintaining the ability of the JDG to ~~remain intact~~defend the issues at trial. On October 7, 2016, the Court continued the Plaintiff’s motion for preliminary injunction until ~~after~~the trial for Phase 2.

In November 2016, the parties pursued mediation, but were not able to resolve the dispute.

In December 2016, discovery resumed for all defendants. Depositions of “person most knowledgeable” witnesses for each defendant in the JDG commenced in late December and proceeded through early 2017, followed by new interrogatories served upon the defendants. The Court set a fact and discovery cutoff of May 31, 2017 and an expert discovery cutoff of August 4, 2017. Depositions of expert witnesses were completed by the end of July. On July 6, 2017, the Court held hearings on a number of discovery motions and denied Plaintiff’s motion for sanctions as to all the defendants.

At a final case management conference on August 21, 2017 the Court set August 31, 2017 as the new trial date for Phase 2, though later changed the starting date for trial to September 5, 2017. The Court elected to break up trial for Phase 2 into two segments, the first focused on liability and the second on remedies. After 14 days at trial, both sides rested on the liability segment, and the Court set a date of November 21, 2017 for the hearing for all evidentiary issues related to this liability segment. The Court also set deadlines for evidentiary motions, issues for oral argument, and oppositions to motions. This hearing date was subsequently moved to January 19, 2018. The Court has indicated that following the January 19, 2018 hearing it will schedule another hearing to announce its decision on the ~~Company’s demurrer action. The plaintiff filed an Opposition to~~liability phase of the ~~Demurrer and, in response, on January 5, 2016,~~trial. Based upon the ~~Company filed a reply to this Opposition to the Demurrer. On February 2, 2016, the Court held a hearing~~Court’s decision on the ~~demurrer and found~~liability phase, if there is a remedies phase, then the remedies phase would commence later 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. 2018.

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.

The Company is a party to various other pending legal and administrative proceedings. It is management’s opinion that the outcome of such proceedings will not have a material impact on the Company’s financial position, results of operations, or cash flows.

Note 22. Subsequent Event

On February 6, 2018, the Company entered into an amendment to the lease for its Portland, Oregon production and distribution facility. Pursuant to the lease amendment, the term of the lease is extended for 10 years, commencing on October 1, 2018 and expiring on September 30, 2028, with options to renew up to an additional 10 years. The aggregate of the future minimum operating lease payments over the 10-year lease term is $8.7 million.



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

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, ~~2016~~2017 filed with the Securities and Exchange Commission (the ~~"SEC"~~“SEC”) on September ~~14, 2016 and Part II, Item 1A of this report.~~28, 2017. 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,~~Corporate Relocation Plan, the timing and success of implementation of the DSD Restructuring Plan, the ~~timing~~Company’s success in consummating acquisitions and ~~success~~integrating acquired businesses, the adequacy and availability of ~~the Company in realizing estimated savings from third-party logistics ("3PL") and vendor managed inventory, the realization of~~capital resources to fund the Company’s ~~cost savings estimates,~~existing and planned business operations and the ~~timing and success of the Company realizing the benefits of its acquisitions,~~Company’s capital expenditure requirements, 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~~six months ended ~~March~~December 31, 2017 are not necessarily indicative of the results that may be expected for any future period.

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,~~healthcare facilities, and gourmet coffee houses, as well as grocery chains with private brand ~~coffee~~ and ~~consumer-facing~~consumer branded coffee and tea products. Through our sustainability, stewardship, environmental efforts, and leadership we are not only committed to serving the finest products available, considering the cost needs of the customer, but also insist on their sustainable cultivation, manufacture and distribution whenever possible. Our product categories consist of a robust line of roast and ground coffee, including organic, Direct Trade, Direct Trade Verified Sustainable ~~("DTVS"~~(“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 providing not only a breadth of high-quality products, but also value-added services such as market insight, beverage planning, and equipment placement and service.

We operate production facilities in Northlake, Texas (the ~~"New Facility"~~“New Facility”); Houston, Texas; Portland, Oregon; and Hillsboro, ~~Oregon; and Scottsdale, Arizona.~~Oregon. Distribution takes place out of the New Facility, ~~the~~ Portland ~~Hillsboro~~ and ~~Scottsdale~~Hillsboro facilities, as well as separate distribution centers in Northlake, 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”)~~Jersey; 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.~~Scottsdale, Arizona. We commenced distribution activities at the New Facility during the second quarter of fiscal 2017 and initial production activities late in the third quarter of fiscal 2017. We began roasting coffee in the New Facility in the fourth quarter of fiscal 2017.

Our products reach our customers primarily in two ways: through our nationwide ~~DSD~~Direct Store Delivery (“DSD”) network of ~~646~~449 delivery routes and ~~114~~111 branch warehouses as of ~~March~~December 31, 2017, or direct-shipped via common carriers

or third-party distributors. DSD sales are made “off-truck” to our customers at their places of business. We operate a large fleet of trucks and other vehicles to distribute and deliver our products, and we rely on ~~3PL~~third-party logistics 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, in fiscal 2015 we began the process of relocating our corporate headquarters, product development lab, and manufacturing and distribution operations from Torrance, California (the “Torrance Facility”) to the New Facility ~~housing these operations in Northlake, Texas~~ (the “Corporate Relocation Plan”). Approximately 350 positions were impacted as a result of the Torrance Facility closure.

~~The significant milestones associated with our~~ We completed the 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~~in the fourth quarter of ~~the impact of these activities on our financial condition and liquidity.~~fiscal 2017.

Recent Developments

Acquisitions

On ~~February 21,~~October 2, 2017, we announced a restructuring plan to reorganize our DSD operations in an effort to realign functions into a channel based selling organization, streamline operations, acquire certain channel specific expertise, and improve selling effectiveness and financial results (the “DSD Restructuring Plan”). The strategic decision to undertake the DSD Restructuring Plan resulted from an ongoing operational review of various initiatives within the DSD selling organization. We expect to complete the DSD Restructuring Plan by the endacquired substantially all of the ~~second quarter~~assets and certain specified liabilities of ~~fiscal 2018.~~

~~We estimate that we will recognize approximately $3.7 to $4.9 million of pre-tax restructuring charges by~~Boyd Coffee Company (“Boyd Coffee”), a coffee roaster and distributor with a focus on restaurants, hotels, and convenience stores on the ~~end~~West Coast of the ~~second quarter~~United States, in consideration of cash and preferred stock. The acquired business of Boyd Coffee (the “Boyd Business”) is expected to add to our product portfolio, improve growth potential, increase the density and penetration of our distribution footprint, and increase capacity utilization at our production facilities.

In 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. 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~~,2017, we completed two acquisitions. On October 11, 2016, we acquired substantially all of the ~~Notes to Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1~~assets and certain specified liabilities of ~~this report.~~

OnChina Mist Brands, Inc. dba China Mist Tea Company (“China Mist”), a provider of flavored and unflavored iced and hot teas, and on February 7, 2017, we acquired substantially all of the assets and certain specified liabilities of West Coast Coffee Company, Inc. (“West Coast Coffee”), a coffee roaster and distributor with a focus on the convenience store, grocery and foodservice ~~channels 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~~channels. The China Mist acquisition is expected to extend our tea product offerings and ~~up to $1.0 million in contingent consideration to be paid as earnout if certain sales levels are achieved~~give us a greater presence in the ~~twenty-four months following~~high-growth premium tea industry, while the ~~closing. The~~ acquisition of West Coast Coffee is expected to broaden our reach in the Northwestern United States.

SeeLiquidity, Capital Resources and Financial Condition below for further details of the impact of these acquisitions on our financial condition and liquidity, and Note 3, ~~Acquisitions—West Coast Coffee~~

~~Company, Inc.,~~Acquisitions, 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~~DSD Restructuring Plan

As a result of ~~the assets and certain specified liabilities~~an ongoing operational review 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 achievedvarious initiatives within our DSD selling organization, in the ~~calendar years~~third quarter of fiscal 2017, ~~or 2018. We anticipate that the acquisition of China Mist will extend~~we commenced a plan to reorganize our ~~tea product offerings~~DSD operations in an effort to realign functions into a channel based selling organization, streamline operations, acquire certain channel specific expertise, and ~~give us a greater presence in the high-growth premium tea industry.~~improve selling effectiveness and financial results (the “DSD Restructuring Plan”). See Liquidity, Capital Resources and Financial Condition—Liquidity—DSD Restructuring Plan, below, and Note 34, ~~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~~Restructuring Plans—Direct Store Delivery (“~~Builder”~~DSD”) entered into a Change Order, which, among other things, amended the building contract previously entered into between us and Builder to provide a guaranteed maximum price and the basis for the price and the scope of Builder’s services in connection with the construction of the New Facility (the "Amended Building Contract"). Pursuant to the Amended Building Contract, we will pay Builder up to $21.9 million for Builder’s services in connection with the pre-construction and construction services, including specialized industrial design and construction work in connection with Builder’s construction of certain production equipment that will be installed in portions of the New Facility. 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 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 partially constructed New Facility as of the Purchase Option Closing Date, 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. See ~~Note 5~~, ~~New Facility,~~ ~~of the Notes to Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this report.~~

On July 15, 2016, we completed the sale of the Torrance Facility consisting of approximately 665,000 square feet of buildings located on approximately 20.33 acres of land, for an aggregate cash sale price of $43.0 million, which sale price was subject to customary adjustments for closing costs and documentary transfer taxes. Cash proceeds from the sale of the Torrance Facility were $42.5 million. Following the closing of the sale, we leased back the Torrance Facility on a triple net basis through October 31, 2016 at zero base rent, and exercised two one-month extensions at a base rent of $100,000 per month. We vacated the Torrance Facility in December 2016 and concluded the leaseback transaction. Accordingly, 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” 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~~Restructuring Plan, of the Notes to Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this report.

Results of Operations

Financial Highlights

Volume of green coffee pounds processed and sold increased ~~6.9%~~18.7% and 9.4%, respectively, in ~~each of~~ the three and ~~nine~~six months ended ~~March~~December 31, 2017 as compared to the three and ~~nine~~six months ended ~~March~~December 31, 2016.

Gross profit increased ~~2.4%~~$10.4 million to ~~$53.8~~$65.5 million in the three months ended ~~March~~December 31, 2017 from ~~$52.6~~$55.1 million in the three months ended ~~March~~December 31, 2016. Gross profit increased ~~2.6%~~$8.2 million to ~~$160.1~~$114.5 million in the ~~nine~~six months ended ~~March~~December 31, 2017, from ~~$156.0~~$106.3 million in the ~~nine~~six months ended ~~March 31, 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, 2017, from 38.0% in the nine months ended MarchDecember 31, 2016.

Gross margin decreased to 39.1% and 38.3%, respectively, in the three and six months ended December 31, 2017, from 39.6% and 39.4%, respectively, in the three and six months ended December 31, 2016.

Income from operations was ~~$2.1~~$2.4 million and ~~$40.5~~$1.2 million, respectively, in the three and ~~nine~~six months ended ~~March~~December 31, 2017 as compared to ~~$0.3~~income from operations of $35.9 million and ~~$5.1~~$38.4 million, respectively, in the three and ~~nine~~six months ended ~~March~~December 31, 2016. Income from operations in the three and six months ended December 31, 2016 included a $37.4 million net gain from the sale of the Torrance ~~Facility in the nine months ended March 31, 2017 and net gains of $5.4 million from the sale of Spice Assets in the nine months ended March 31, 2016.~~Facility.

Net ~~income~~loss was ~~$1.6~~$(18.8) million, or ~~$0.10~~$(1.13) per ~~diluted~~ common share available to common stockholders, in the three months ended ~~March~~December 31, 2017, compared to ~~$1.2~~net income of $20.1 million, or ~~$0.07~~$1.20 per ~~diluted~~ common share available to common stockholders—diluted, in the three months ended ~~March~~December 31, 2016. Net ~~income~~loss was ~~$23.3~~$(19.7) million, or ~~$1.39~~$(1.19) per ~~diluted~~ common share available to common stockholders, in the ~~nine~~six months ended ~~March~~December 31, 2017, compared to ~~$5.7~~net income of $21.7 million, or ~~$0.34~~$1.30 per ~~diluted~~ common share available to common stockholders—diluted, in the ~~nine~~six months ended ~~March~~December 31, 2016. Net loss in the three and six months ended December 31, 2017 included income tax expense of $20.9 million and $20.2 million, respectively, as compared to income tax expense of $13.4 million and $14.5 million, respectively, in the three and six months ended December 31, 2016.

EBITDA ~~increased 52.7%~~decreased (71.7)% to ~~$10.0~~$11.1 million and EBITDA Margin was ~~7.3%~~6.6% in the three months ended ~~March~~December 31, 2017, as compared to EBITDA of ~~$6.6~~$39.1 million and EBITDA Margin of ~~4.9%~~28.1% in the three months ended ~~March~~December 31, 2016. EBITDA ~~increased 159.5%~~decreased (63.6)% to ~~$57.2~~$17.2 million and EBITDA Margin was ~~14.0%~~5.7% in the ~~nine~~six months ended ~~March~~December 31, 2017, as compared to EBITDA of ~~$22.1~~$47.2 million and EBITDA Margin of ~~5.4%~~17.5% in the ~~nine~~six months ended ~~March~~December 31, 2016.*

Adjusted EBITDA increased ~~24.0%~~15.7% to ~~$12.2~~$12.9 million and Adjusted EBITDA Margin was ~~8.8%~~7.7% in the three months ended ~~March~~December 31, 2017, as compared to Adjusted EBITDA of ~~$9.8~~$11.2 million and Adjusted EBITDA Margin of ~~7.3%~~8.0% in the three months ended ~~March~~December 31, 2016. Adjusted EBITDA increased ~~5.7%~~0.3% to ~~$34.3~~$22.2 million and Adjusted EBITDA Margin was ~~8.4%~~7.4% in the ~~nine~~six months ended ~~March~~December 31, 2017, as compared to Adjusted EBITDA of ~~$32.5~~$22.2 million and Adjusted EBITDA Margin of ~~7.9%~~8.2% in the ~~nine~~six months ended ~~March~~December 31, 2016.*


•	(* EBITDA, EBITDA Margin, Adjusted EBITDA and Adjusted EBITDA Margin are non-GAAP financial measures. See Non-GAAP Financial Measures in Part I, Item 2 of this report for a reconciliation of these non-GAAP measures to their corresponding GAAP measures.)

Net Sales

Net sales in the three months ended ~~March~~December 31, 2017 increased ~~$3.7~~$28.4 million, or ~~2.8%~~20.4%, to ~~$138.2~~$167.4 million from ~~$134.5~~$139.0 million in the three months ended ~~March~~December 31, 2016 ~~primarily~~ due to a ~~$5.3~~$17.6 million increase in net sales of roast and ground coffee, ~~and~~ a ~~$1.5~~$5.5 million increase in net sales of other beverages, a $3.7 million increase in net sales of culinary products, a $0.8 million increase in net sales of frozen liquid coffee, a $0.4 million increase in net sales of tea products, ~~primarily from the addition of China Mist, partially offset by~~and a ~~$(2.4)~~$0.4 million ~~decrease~~increase in net sales of spice ~~products resulting from~~products. These changes were primarily due to the ~~sale~~addition of ~~our institutional spice assets and~~the Boyd Business which added a ~~$(0.7)~~total of $26.3 million ~~decrease in~~to net sales as well as the benefit of ~~coffee (frozen liquid) products resulting from the loss of a large casino customer.~~higher prices to our cost plus customers. Net sales in the three months ended ~~March~~December 31, 2017 included ~~$1.2~~$(0.4) 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 $(2.3) million in price decreases to customers utilizing such arrangements in the three months ended December 31, 2016.

Net sales in the six months ended December 31, 2017 increased $29.6 million, or 11.0%, to $299.1 million from $269.5 million in the six months ended December 31, 2016 due to a $19.2 million increase in net sales of roast and ground coffee, a $4.2 million increase in net sales of other beverages, a $3.6 million increase in net sales of culinary products, a $1.7 million increase in net sales of tea products, a $0.8 million increase in net sales of frozen liquid coffee, and a $0.3 million increase in net sales of spice products. These changes were primarily due to the addition of the Boyd Business which added a total of $26.3 million to net sales as well as the benefit of higher prices to our cost plus customers. Net sales in the six months ended December 31, 2017 included the benefit of $0.5 million in price increases to customers utilizing commodity-based pricing arrangements, where the changes in the green coffee commodity costs are passed on to the customer, as compared to ~~$(3.8)~~$(6.6) million in price decreases to customers utilizing such arrangements in the ~~three~~six months ended ~~March~~December 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~~changes in net sales in the three and ~~nine~~six months ended ~~March~~December 31, 2017 compared to the same periods in the prior fiscal year were due to the following:



(In millions)	Three Months Ended December 31, 2017 vs. 2016			Six Months Ended December 31, 2017 vs. 2016
Effect of change in unit sales	$	29.7		$	18.9
Effect of pricing and product mix changes	(1.3		)	10.7
Total increase in net sales	$	28.4		$	29.6

Unit sales increased 21.6% in the three months ended December 31, 2017 as compared to the same period in the prior fiscal year, while average unit price decreased by (1.0)% resulting in an increase in net sales of 20.4%. The increase in unit sales was primarily due to a 76.9% increase in unit sales of other beverages, which accounted for approximately 13% of total net sales, a 53.2% increase in unit sales of frozen liquid coffee products, which accounted for approximately 6% of total net sales, a 24.8% increase in unit sales of culinary products, which accounted for approximately 10% of total net sales, and a 18.7% increase in unit sales of roast and ground coffee products, which accounted for approximately 62% of total net sales. Average unit price decreased (1.0)% primarily due to the ~~following:~~

(In millions)
Three Months Ended
March 31, 2017 vs. 2016

Nine Months Ended
March 31, 2017 vs. 2016
Effect of change in unit sales $ 0.8
$ 9.5
Effect of pricing and product mix changes 2.9
(12.0 )
Total increase (decrease) in net sales $ 3.7
$ (2.5 )

~~Unit sales increased 0.6%~~addition of the Boyd Business. In the three months ended December 31, 2017, we processed and sold approximately 29.1 million pounds of green coffee as compared to approximately 24.5 million pounds of green coffee processed and sold in the three months ended ~~March~~December 31, 2016. There were no new product category introductions in the three months ended December 31, 2017 or 2016 which had a material impact on our net sales.

Unit sales increased 6.7% in the six months ended December 31, 2017 as compared to the same period in the prior fiscal year, and average unit price increased by ~~2.1%~~3.9% resulting in an increase in net sales of ~~2.8%~~11.0%. ~~In the three months ended~~

~~March 31, 2017,~~The increase in unit sales was primarily due to a 41.9% increase in unit sales of other beverages, which accounted for approximately 11% of total net sales, a 26.0% increase in unit sales of frozen liquid coffee products, which accounted for approximately 6% of total net sales, and a 9.4% increase in unit sales of roast and ground coffee which accounted for approximately 63% of total net sales, offset by a (22.8)% decrease in unit sales of culinary products, which accounted for approximately ~~64%~~10% of total net sales, ~~increased 6.9%, offset by~~and a ~~(80.6)~~(21.6)% decrease in unit sales of spice products, which accounted for approximately 4% of total net ~~sales, due to the sale of our institutional spice assets, while the average~~sales. Average unit price increased primarily due to price increases on substantially all of our products with the ~~higher average unit price~~exception of ~~roast and ground~~ coffee ~~products primarily driven by the pass-through of higher green coffee commodity purchase costs to our customers.~~(frozen liquid). In the ~~three~~six months ended ~~March~~December 31, 2017, we processed and sold approximately ~~24.4~~52.3 million pounds of green coffee as compared to approximately ~~22.8~~47.8 million pounds of green coffee processed and sold in the ~~three~~six months ended ~~March~~December 31, 2016. There were no new product category introductions in the ~~three~~six months ended ~~March 31, 2017 or 2016 which had a material impact on our net sales.~~

Unit sales increased 2.4% in the nine months ended March 31, 2017 as compared to the same period in the prior fiscal year, but average unit price decreased by (2.9)% resulting in a decrease in net sales of (0.6)%. In the nine months ended March 31, 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 72.2 million pounds of green coffee as compared to approximately 67.6 million pounds of green coffee processed and sold in the nine months ended March 31, 2016. There were no new product category introductions in the nine months ended MarchDecember 31, 2017 or 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,
2017 2016
(In thousands) $ % of total $ % of total
Net Sales by Product Category:
Coffee (Roast & Ground) $ 87,833
64 % $ 82,568
61 %
Coffee (Frozen Liquid) 8,228
6 % 8,907
7 %
Tea (Iced & Hot) 7,662
5 % 6,159
4 %
Culinary 13,855
10 % 13,220
10 %
Spice 5,948
4 % 8,381
6 %
Other beverages(1) 13,947
10 % 14,430
11 %
Net sales by product category 137,473
99 % 133,665
99 %
Fuel surcharge 714
1 % 803
1 %
Net sales $ 138,187
100 % $ 134,468
100 %

~~____________~~

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


	Nine Months Ended March 31,								Three Months Ended December 31,
	2017				2016				2017				2016
(In thousands)	$		% of total		$		% of total		$		% of total		$		% of total
Net Sales by Product Category:
Coffee (Roast & Ground)	$	256,013	63	%	$	252,020	61	%	$	104,457	62	%	$	86,838	62	%
Coffee (Frozen Liquid)	24,623		6	%	27,145		7	%	9,326		6	%	8,484		6	%
Tea (Iced & Hot)	21,371		5	%	18,420		4	%	7,751		5	%	7,341		5	%
Culinary	41,354		10	%	40,198		10	%	17,376		10	%	13,689		10	%
Spice	18,303		4	%	25,428		6	%	6,333		4	%	5,966		4	%
Other beverages(1)	43,831		11	%	44,488		11	%	21,429		13	%	15,976		12	%
Net sales by product category	405,495		99	%	407,699		99	%	166,672		100	%	138,294		99	%
Fuel surcharge	2,205		1	%	2,521		1	%	694		—	%	731		1	%
Net sales	$	407,700	100	%	$	410,220	100	%	$	167,366	100	%	$	139,025	100	%

____________

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



	Six Months Ended December 31,
	2017				2016
(In thousands)	$		% of total		$		% of total
Net Sales by Product Category:
Coffee (Roast & Ground)	$	187,340	63	%	$	168,180	62	%
Coffee (Frozen Liquid)	17,150		6	%	16,395		6	%
Tea (Iced & Hot)	15,423		5	%	13,709		5	%
Culinary	31,139		10	%	27,499		10	%
Spice	12,607		4	%	12,355		5	%
Other beverages(1)	34,035		11	%	29,884		11	%
Net sales by product category	297,694		99	%	268,022		99	%
Fuel surcharge	1,385		1	%	1,491		1	%
Net sales	$	299,079	100	%	$	269,513	100	%

____________

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

Cost of Goods Sold

Cost of goods sold in the three months ended ~~March~~December 31, 2017 increased ~~$2.5~~$17.9 million, or ~~3.0%~~21.3%, to ~~$84.4~~$101.8 million, or ~~61.1%~~60.9% of net sales, from ~~$81.9~~$83.9 million, or ~~60.9%~~60.4% of net sales, in the three months ended ~~March~~December 31, 2016. The increase in cost of goods sold was primarily due to the addition of the Boyd Business making up $16.2 million of the increase. Cost of goods sold as a percentage of net sales in the three months ended ~~March~~December 31, 2017 increased primarily due to ~~startup~~higher manufacturing costs associated with the production operations in the New ~~Facility.~~

Cost of goods sold in the nine months ended March 31, 2017 decreased $(6.6) million, or (2.6)%, to $247.6 million, or 60.7% of net sales, from $254.2 million, or 62.0% of net sales, in the nine months ended March 31, 2016. The decrease in cost of goods sold as a percentage of net sales in the nine months ended March 31, 2017 was primarily due to lower conversion costs from supply chain improvements and lower hedgedFacility, higher cost of green ~~coffee.~~

~~Because~~coffee, and the ~~expected reduction in spice inventory levels at June 30, 2017 from June 30, 2016 levels is expected to generate a beneficial effect, we recorded $0.8 million and $2.5 million in expected~~absence of the beneficial effect of the liquidation of LIFO inventory quantities in ~~cost of goods sold~~the three months ended December 31, 2017, as compared to the same period 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.~~prior fiscal year. In the three ~~and nine~~ months ended ~~March~~December 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 income before taxes for the three ~~and nine~~ months ended ~~March~~December 31, 2016 by $0.8 ~~million and $1.1 million, respectively.~~

~~Gross Profit~~

~~Gross profit in~~million. In the three months ended ~~March~~December 31, 2017, we recorded no expected beneficial effect of the liquidation of LIFO inventory quantities in cost of goods sold.

Cost of goods sold in the six months ended December 31, 2017 increased ~~$1.2~~$21.3 million, or ~~2.4%~~13.1%, to ~~$53.8~~$184.6 million, or 61.7% of net sales, from ~~$52.6~~$163.2 million, or 60.6% of net sales, in the ~~three~~six months ended ~~March~~December 31, ~~2016 and gross margin decreased~~2016. The increase in cost of goods sold was primarily due to ~~38.9%~~the addition of the Boyd Business making up $16.2 million of the increase. Cost of goods sold as a percentage of net sales in the ~~three~~six months ended ~~March~~December 31, 2017 ~~from 39.1% in the three months ended March 31, 2016. Gross margin was impacted by the startup~~increased primarily due to higher manufacturing 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 hedgedhigher 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 effectabsence 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~~six months ended December 31, 2017, as compared to the same period in the prior fiscal year. In the six months ended December 31, 2016, we recorded $1.7 million in expected beneficial effect of ~~$0.8~~the liquidation of LIFO inventory quantities in cost of goods sold which increased income before taxes for the six months ended December 31, 2016 by $1.7 million. In the six months ended December 31, 2017, we recorded no expected beneficial effect of the liquidation of LIFO inventory quantities in cost of goods sold.

Gross Profit

Gross profit in the three months ended December 31, 2017 increased $10.4 million, or 18.9%, to $65.5 million from $55.1 million in the three months ended December 31, 2016 and ~~$1.1~~gross margin decreased to 39.1% in the three months ended December 31, 2017 from 39.6% in the three months ended December 31, 2016. This increase in gross profit was primarily due to the addition of the Boyd Business, while the decrease in gross margin was primarily due to the addition of the Boyd Business carrying a slightly lower gross margin, higher manufacturing costs associated with the production operations in the New Facility, and the absence of the beneficial effect of the liquidation of LIFO inventory quantities in the three months ended December 31, 2017, as compared to the same period in the prior fiscal year.

Gross profit in the six months ended December 31, 2017 increased $8.2 million, ~~respectively.~~or 7.7%, to $114.5 million from $106.3 million in the six months ended December 31, 2016 and gross margin decreased to 38.3% in the six months ended December 31, 2017 from 39.4% in the six months ended December 31, 2016. This increase in gross profit was primarily due to the addition of the Boyd Business, while the decrease in gross margin was primarily due to the addition of the Boyd Business carrying a slightly lower gross margin, higher manufacturing costs associated with the production operations in the New Facility, and the absence of the beneficial effect of the liquidation of LIFO inventory quantities in the six months ended December 31, 2017, as compared to the same period in the prior fiscal year.

Operating Expenses

In the three months ended ~~March~~December 31, 2017, operating expenses ~~decreased $(0.5)~~increased $43.9 million, or ~~(0.9)%~~228.8%, to ~~$51.8~~$63.1 million, or ~~37.5%~~37.7% of net sales, from ~~$52.3~~$19.2 million, or ~~38.9%~~13.8% of net sales, in the three months ended ~~March~~December 31, 2016, primarily due to the effect of the recognition of $37.4 million in net gain from the sale of the Torrance Facility in the three months ended December 31, 2016, a ~~$(1.8)~~$10.2 million ~~decrease~~increase in selling expenses, and a $0.1 million increase in general and administrative expenses. The increase in operating expenses ~~and~~was partially offset by a ~~$(0.6)~~$(3.8) million decrease in restructuring and other transition expenses associated with the Corporate Relocation ~~Plan, partially offset by a $1.9 million increase in selling expenses.~~Plan. Restructuring and other transition expenses in the three ~~and nine~~ months ended ~~March~~December 31, 2017 ~~also include~~included expenses ~~related to~~associated with the DSD Restructuring Plan.

~~General and administrative~~Selling expenses ~~decreased $(1.8)~~increased $10.2 million in the three months ended ~~March~~December 31, 2017 as compared to the same period in the prior fiscal year, primarily due to ~~$1.9~~$5.9 million and $0.8 million in ~~lower employee~~selling expenses from the addition of the Boyd Business and ~~retiree medical costs, partially offset by $0.3~~West Coast Coffee, respectively, exclusive of their related depreciation and amortization expense, and $1.4 million in ~~acquisition-related consulting~~higher depreciation and amortization expense.

General and administrative expenses ~~and $0.2~~increased $0.1 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.

~~Restructuring and other transition expenses~~ in the three months ended March 31, 2017 decreased $(0.6) million, 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 three months ended March 31, 2017 associated with the DSD Restructuring Plan.

~~Selling expenses increased $1.9 million during the three months ended March~~December 31, 2017 as compared to the same period in the prior fiscal year primarily due to ~~$1.3~~$2.6 million and $0.2 million in general and administrative expenses from the ~~consolidation~~addition of ~~China Mist~~the Boyd Business and West Coast Coffee, exclusive of their related depreciation and ~~$0.5~~amortization expense, $1.0 million in ~~operations-related consulting expenses,~~acquisition and integration costs and $0.3 million in higher depreciation and amortization expense, partially offset by ~~a $0.5 million reduction in incentive compensation expense and $0.5~~the absence of $3.7 million in ~~lower workers' compensation expense.~~

~~In each of~~non-recurring 2016 proxy contest expenses incurred in the three months ended ~~March~~December 31, 2016.

Restructuring and other transition expenses in the three months ended December 31, 2017 decreased $(3.8) million, as compared to the same period in the prior fiscal year primarily due to the absence of expenses related to our Corporate Relocation Plan, partially offset by $0.1 million in costs incurred in connection with the DSD Restructuring Plan in the three months ended December 31, 2017.

In the three months ended December 31, 2017 and 2016 net gains from sale of ~~Spice Assets~~spice assets included $0.4 million and $0.3 million, respectively, in earnout.

In the ~~nine~~six months ended ~~March~~December 31, 2017, operating expenses ~~decreased $(31.3)~~increased $45.5 million, or ~~(20.7)%~~67.0%, to ~~$119.6~~$113.3 million or ~~29.3%~~37.9% of net sales, from ~~$150.9~~$67.9 million, or ~~36.8%~~25.2% of net sales, in the ~~nine~~six months ended ~~March~~December 31, 2016, primarily due to the effect of the recognition of $37.4 million in net gain from the sale of the Torrance Facility in the six months ended December 31, 2016, a $10.7 million increase in selling expenses, a $2.5 million increase in general and ~~lower~~administrative expenses and a $1.6 million reduction in net gains from sales of other assets. The increase in operating expenses was partially offset by a $(6.7) million decrease in 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.~~

Plan. Restructuring and other transition expenses ~~decreased $(4.3) million~~ in the ~~nine~~six months ended ~~March~~December 31, 2017 ~~as compared to the same period in the prior fiscal year because most of the planned~~also included 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~~$10.7 million ~~during~~in the ~~nine~~six months ended ~~March~~December 31, 2017 as compared to the same period in the prior fiscal year, primarily due to ~~operations-related consulting~~$5.9 million and $1.5 million in selling expenses ~~higher depreciation expense, sales training expenses and~~from the ~~consolidation~~addition of ~~China Mist~~the Boyd

Business and West Coast Coffee, ~~partially offset by lower workers' compensation~~respectively, exclusive of their related depreciation and amortization expense ~~savings from utilizing 3PL for our long-haul distribution~~ and ~~the absence of expenses related to the institutional spice assets.~~$2.1 million in higher depreciation and amortization expense.

General and administrative expenses increased ~~$2.0~~$2.5 million in the ~~nine~~six months ended ~~March~~December 31, 2017 as compared to the same period in the prior fiscal year primarily due to $3.4 million in acquisition and integration costs, $2.6 million in expenses from the addition of the Boyd Business, and $1.1 million in higher depreciation and amortization expense, partially offset by the absence of $5.0 million in non-recurring 2016 proxy contest expenses ~~partially offset by lower expenses associated with~~incurred in the ~~Company’s Employee Stock Ownership Plan (the “ESOP”) resulting from the payoff of one of the two ESOP loans. During the nine~~six months ended ~~March~~December 31, 2016.

Restructuring and other transition expenses in the six months ended December 31, 2017 ~~we incurred $5.2~~decreased $(6.7) 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~~year primarily due to the absence of ~~other assets, primarily from the sale of~~expenses related to our ~~Northern California branch property, were $1.5~~Corporate Relocation Plan, partially offset by $0.3 million in costs incurred in connection with the ~~nine~~DSD Restructuring Plan in the six months ended ~~March~~December 31, 2017.

In each of the six months ended December 31, 2017 ~~as compared to $0.2 million, primarily~~and 2016 net gains from sale of ~~equipment,~~spice assets included $0.5 million in ~~the nine months ended March 31, 2016.~~earnout.

Income from Operations

Income from operations in the three and six months ended ~~March~~December 31, 2017 was ~~$2.1~~$2.4 million and $1.2 million, respectively, as compared to ~~$0.3~~$35.9 million and $38.4 million, respectively, in the three and six months ended ~~March~~December 31, 2016.

Income from operations in the ~~nine~~three and six 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~~December 31, 2017 as compared to the comparable periods of the prior fiscal year ~~period~~ was primarily ~~due to~~driven by lower net gains from sales of assets, including $37.4 million in net gains from the sale of the Torrance Facility recognized in the prior year periods, and higher ~~gross profit, lower~~selling expenses and higher general and administrative expenses primarily due to the addition of the Boyd Business, acquisition and integration costs, and higher depreciation and amortization expense, partially offset by higher gross profit and lower restructuring and other transition expenses associated with the Corporate Relocation ~~Plan, and higher net gains from sales of other assets, partially offset by higher selling expenses and lower net gains from the sale of Spice Assets.~~

The higher income from operations in the nine months ended March 31, 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 gross profit, partially offset by higher selling expenses, higher general and administrative expenses and lower net gains from the sale of Spice Assets.

Plan.

Total Other (Expense) Income ~~(Expense)~~

Total ~~other income and~~ other expense in the three and ~~nine~~six months ended ~~March~~December 31, 2017 was ~~$0.9~~$(0.3) million and ~~$(1.3)~~$(0.7) million, respectively, compared to ~~total other income of $0.9~~$(2.4) million and $(2.2) million in ~~each of~~ the three and ~~nine~~six months ended ~~March~~December 31, 2016. ~~Total~~The changes in total other ~~income~~expense in the three and six months ended ~~March~~December 31, 2017 ~~was~~were primarily ~~due~~a result of liquidating substantially all of our investment in preferred securities in the fourth quarter of fiscal 2017 to ~~net gains~~fund expenditures associated with our New Facility, and lower mark-to-market losses on ~~investments and~~coffee-related derivative instruments, ~~partially~~ offset by higher interest expense as compared to the same ~~period~~periods in the prior fiscal year.

Net gains ~~and net losses~~ on investments ~~resulting from mark-to-market~~ in the three and ~~nine~~six months ended ~~March~~December 31, 2017 were ~~$0.7 million~~$16,000 and ~~$(0.4) million,~~$7,000, respectively, as compared to net ~~gains~~losses on investments of ~~$2,000~~$(1.3) million and ~~$0.1~~$(1.1) million ~~respectively,~~ in the comparable periods of the prior fiscal year. Net ~~gains and net~~ losses on coffee-related derivative instruments in ~~all~~ the ~~reported~~three and six months ended December 31, 2017 were $(0.2) million and $(0.1) million, respectively, compared to $(1.2) million in each of the comparable periods ~~were~~of the prior fiscal year due to mark-to-market ~~net gains and~~ net losses on coffee-related derivative instruments not designated as accounting hedges. Net gains and 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 gains on coffee-related derivative instruments designated as cash flow hedges due to ineffectiveness, as compared to net losses of $(84,000) and $(0.6) million in the three and nine months ended March 31, 2016, respectively.

Interest expense in the three and ~~nine~~six months ended ~~March~~December 31, 2017, was ~~$(0.5)~~$(0.9) million and $(1.4) million, respectively, as compared to ~~$(0.1)~~$(0.5) million and ~~$(0.3)~~$(0.9) million, respectively, in the comparable periods of the prior fiscal year. The higher interest expense in the three and six months ended ~~March~~December 31, 2017 was primarily due to higher loan balance. The higher interest expense in the nine months ended March 31, 2017 was primarily due to higher loan balance and non-recurring and non-cash interest expense related to the sale-leaseback of the Torrance Facility in the amount of $(0.7) million.outstanding borrowings on our revolving credit facility.

Income Taxes

In the three and ~~nine~~six months ended ~~March~~December 31, 2017, we recorded income tax expense of ~~$1.4~~$20.9 million and ~~$15.9~~$20.2 million, respectively, compared to ~~$43,000~~$13.4 million and ~~$0.3~~$14.5 million, respectively, in the three and ~~nine~~six months ended ~~March~~December 31, ~~2016, respectively. In the fourth quarter of fiscal 2016, we released the majority of our valuation allowance against our deferred tax assets.~~2016. As of June 30, ~~2016,~~2017, our net deferred tax assets totaled ~~$80.8~~$63.1 million. In the ~~three and nine~~six months ended ~~March~~December 31, 2017, our net deferred tax assets decreased by ~~$1.1~~$17.5 million ~~and $14.7 million, respectively,~~to $45.6 million. These changes are primarily ~~as a~~the result of ~~deferring~~ the ~~gain on the sale~~ Tax Cut and Jobs Act of 2017 effective December 22, 2017. See Note 18, Income Taxes, of the ~~Torrance Facility.~~Notes to Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this report.

~~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~~Loss

As a result of the foregoing factors, net ~~income~~loss was ~~$1.6~~$(18.8) million, or ~~$0.10~~$(1.13) per ~~diluted~~ common share available to common stockholders, in the three months ended ~~March~~December 31, 2017 as compared to ~~$1.2~~net income of $20.1 million, or ~~$0.07~~$1.20 per ~~diluted~~ common share available to common stockholders—diluted, in the three months ended ~~March~~December 31, 2016. Net ~~income~~loss was ~~$23.3~~$(19.7) million, or ~~$1.39~~$(1.19) per ~~diluted~~ common share available to common stockholders, in the ~~nine~~six months ended ~~March~~December 31, 2017 as compared to ~~$5.7~~net income of $21.7 million, or ~~$0.34~~$1.30 per ~~diluted~~ common share available to common stockholders—diluted, in the ~~nine~~six months ended ~~March~~December 31, 2016.

Non-GAAP Financial Measures

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

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

restructuring and other transition expenses;

net gains and losses from sales of assets;

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

non-recurring 2016 proxy contest-related expenses; ~~and~~

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

acquisition and integration costs;

and including the impact of:

income taxes on non-GAAP adjustments.

“Non-GAAP net (loss) income per diluted common share” is defined as Non-GAAP net (loss) 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 (loss) income excluding the impact of:

income taxes;

interest expense; and

depreciation and amortization expense.

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

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

income taxes;

interest expense;

(loss) income from short-term investments;

depreciation and amortization expense;

ESOP and share-based compensation expense;

non-cash impairment losses;

non-cash pension withdrawal expense;

other similar non-cash expenses;

restructuring and other transition expenses;

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

non-recurring 2016 proxy contest-related ~~expenses.~~expenses; and

acquisition and integration costs.

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

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

In the first quarter of fiscal 2017, we modified the calculation of Non-GAAP net (loss) income and Non-GAAP net (loss) 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"~~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 applicable 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.rate. 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.

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

Beginning in the fourth quarter of fiscal 2017, we modified the calculation of Non-GAAP net (loss) income, Non-GAAP net (loss) income per diluted common share, Adjusted EBITDA and Adjusted EBITDA Margin to exclude acquisition and integration costs. Acquisition and integration costs include legal expenses, consulting expenses and internal costs associated with acquisitions and integration of those acquisitions. Beginning in the fourth quarter of fiscal 2017 acquisition and integration costs were significant and, we believe, excluding them will help investors to better understand our operating results and more accurately compare them across periods. We have not adjusted the historical presentation of Non-GAAP net (loss) income, Non-GAAP net (loss) income per diluted common share, Adjusted EBITDA and Adjusted EBITDA Margin because acquisition and integration costs in prior periods were not material to the Company’s results of operations.

We believe these non-GAAP financial measures provide a useful measure of the Company’s operating results, a meaningful comparison with historical results and with the results of other companies, and insight into the ~~Company's~~Company’s ongoing operating performance. Further, management utilizes these measures, in addition to GAAP measures, when evaluating and comparing the ~~Company's~~Company’s operating performance against internal financial forecasts and budgets.

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

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



	Three Months Ended December 31,						Six Months Ended December 31,
(In thousands, except per share data)	2017			2016			2017			2016
Net (loss) income, as reported	$	(18,768	)	$	20,076		$	(19,746	)	$	21,694
Restructuring and other transition expenses	139			3,965			259			6,995
Net gain from sale of Torrance Facility	—			(37,449		)	—			(37,449		)
Net gains from sale of spice assets	(395		)	(334		)	(545		)	(492		)
Net losses (gains) from sales of other assets	91			114			144			(1,439		)
Non-recurring 2016 proxy contest-related expenses	—			3,719			—			4,990
Interest expense on sale-leaseback financing obligation	—			371			—			681
Acquisition and integration costs	972			—			3,382			—
Income tax (benefit) expense on non-GAAP adjustments	(258		)	11,549			(1,037		)	10,418
Non-GAAP net (loss) income	$	(18,219	)	$	2,011		$	(17,543	)	$	5,398

Net (loss) income per common share—diluted, as reported	$	(1.12	)	$	1.20		$	(1.18	)	$	1.30
Impact of restructuring and other transition expenses	$	0.01		$	0.24		$	0.02		$	0.42
Impact of net gain from sale of Torrance Facility	$	—		$	(2.24	)	$	—		$	(2.24	)
Impact of net gains from sale of spice assets	$	(0.02	)	$	(0.02	)	$	(0.03	)	$	(0.03	)
Impact of net losses (gains) from sales of other assets	$	0.01		$	0.01		$	0.01		$	(0.09	)
Impact of non-recurring 2016 proxy contest-related expenses	$	—		$	0.22		$	—		$	0.30
Impact of interest expense on sale-leaseback financing obligation	$	—		$	0.02		$	—		$	0.04
Impact of acquisition and integration costs	$	0.06		$	—		$	0.20		$	—
Impact of income tax (benefit) expense on non-GAAP adjustments	$	(0.02	)	$	0.69		$	(0.06	)	$	0.62
Non-GAAP net (loss) income per diluted common share	$	(1.09	)	$	0.12		$	(1.05	)	$	0.32

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



	Three Months Ended December 31,						Six Months Ended December 31,
(In thousands)	2017			2016			2017			2016
Net (loss) income, as reported	$	(18,768	)	$	20,076		$	(19,746	)	$	21,694
Income tax expense	20,910			13,416			20,200			14,499
Interest expense	861			524			1,384			913
Depreciation and amortization expense	8,077			5,075			15,330			10,086
EBITDA	$	11,080		$	39,091		$	17,168		$	47,192
EBITDA Margin	6.6		%	28.1		%	5.7		%	17.5		%

Set forth below is a reconciliation of reported net (loss) income to Adjusted 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,						Three Months Ended December 31,						Six Months Ended December 31,
(In thousands)	2017			2016			2017			2016			2017			2016			2017			2016
Net income, as reported	$	1,594		$	1,192		$	23,288		$	5,679
Net (loss) income, as reported													$	(18,768	)	$	20,076		$	(19,746	)	$	21,694
Income tax expense	1,411			43			15,910			318			20,910			13,416			20,200			14,499
Interest expense	517			111			1,430			341			861			524			1,384			913
Income from short-term investments	(1,156		)	(427		)	(882		)	(1,312		)
(Income) loss from short-term investments													(21		)	895			(19		)	274
Depreciation and amortization expense	6,527			5,234			16,613			15,721			8,077			5,075			15,330			10,086
ESOP and share-based compensation expense	902			837			2,996			3,488			1,038			1,152			1,844			2,094
Restructuring and other transition expenses	2,547			3,169			9,542			13,855			139			3,965			259			6,995
Net gain from sale of Torrance Facility	—			—			(37,449		)	—			—			(37,449		)	—			(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			—
Net gains from sale of spice assets													(395		)	(334		)	(545		)	(492		)
Net losses (gains) from sales of other assets													91			114			144			(1,439		)
Non-recurring proxy contest-related expenses													—			3,719			—			4,990
Acquisition and integration costs													972			—			3,382			—
Adjusted EBITDA	$	12,180		$	9,820		$	34,345		$	32,486		$	12,904		$	11,153		$	22,233		$	22,165
Adjusted EBITDA Margin	8.8		%	7.3		%	8.4		%	7.9		%	7.7		%	8.0		%	7.4		%	8.2		%

Liquidity, Capital Resources and Financial Condition

Credit Facility

We maintain a ~~$75.0~~$125.0 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 $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~~is a flat fee of 0.25% ~~to 0.375%~~ per annum ~~based on~~irrespective of average revolver usage. Outstanding obligations are collateralized by all of our assets, excluding certain real property not included in the borrowing base, and 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~~matures on ~~March 2, 2020.~~

August 25, 2022.

At ~~March~~December 31, 2017, we were eligible to borrow up to a total of ~~$61.7~~$110.0 million under the Revolving Facility and had outstanding borrowings of ~~$44.2~~$84.4 million, utilized ~~$4.4~~$1.1 million of the letters of credit sublimit, and had excess availability under the Revolving Facility of ~~$13.1~~$24.5 million. At ~~March~~December 31, 2017, the weighted average interest rate on our outstanding borrowings under the Revolving Facility was ~~2.52%~~3.62%. At ~~March~~December 31, 2017, we were in compliance with all of the restrictive covenants under the Revolving Facility.

At ~~April 30, 2017,~~January 31, 2018, we had estimated outstanding borrowings of ~~$44.2~~$80.2 million, utilized ~~$4.4~~$1.1 million of the letters of credit sublimit, and had excess availability under the Revolving Facility of ~~$13.1~~$28.7 million. At ~~April 30, 2017,~~January 31, 2018, the weighted average interest rate on our outstanding borrowings under the Revolving Facility was ~~2.66%~~3.59%.

Liquidity

We generally finance our operations through cash flows from operations and borrowings under our Revolving Facility described above. At ~~March~~December 31, 2017, we had ~~$5.7~~$5.4 million in cash and cash ~~equivalents~~equivalents. In the fourth quarter of fiscal 2017, we liquidated substantially all of our preferred stock portfolio, net of purchases, to fund expenditures associated with our New Facility in Northlake, Texas. In the second quarter ended December 31, 2017, we liquidated the remaining security in our preferred stock portfolio and ~~$26.5 million in short-term investments.~~ at December 31, 2017 the preferred stock portfolio was closed.

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.months.

Changes in Cash Flows

We generate cash from operating activities primarily from cash collections related to the sale of our products.

Net cash used in operating activities was $(1.5) million in the six months ended December 31, 2017 compared to net cash provided by operating activities ~~was $10.5~~of $11.3 million in the ~~nine~~six months ended ~~March~~December 31, 2016. Net cash used in operating activities in the six months ended December 31, 2017 ~~compared~~was primarily due to ~~$9.4 million in the nine months ended March 31, 2016. The~~a higher level of ~~net~~cash outflows from operating activities primarily due to an increase in inventory balances and payment of accounts payable balances, and lower cash inflows from operations due to an increase in accounts receivable balances. The increase in cash outflows was primarily related to the addition of the Boyd Business as well as softer than expected sales resulting in higher inventories. Net cash provided by operating activities in the ~~nine~~six months ended ~~March~~December 31, ~~2017 compared to the same period of the prior fiscal year~~2016 was primarily due to higher net income and a higher level of cash inflows from operating activities resulting primarily from the increase in deferred income taxes and accounts payable balances, partially offset by cash outflows from increases in inventory, ~~and accounts receivable balances,~~ payment of previously accrued bonus and restructuring and other transition expenses related to the ~~Corporate Relocation Plan, cash outflows from~~Torrance Facility closure, 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~~assets and lower cash inflows from operating activities resulting primarily from an increase in derivative assets and proceeds from sales of short-term investments partially offset by cash outflows from purchases of short-term investments, increases inhigher 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 nine months ended March 31, 2016 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.balances.

Net cash used in investing activities in the ~~nine~~six months ended ~~March~~December 31, 2017 was ~~$84.0~~$55.8 million as compared to ~~$23.7~~$56.5 million in the ~~nine~~six months ended ~~March~~December 31, 2016. In the ~~nine~~six months ended ~~March~~December 31, 2017, net cash used in investing activities included ~~$35.5~~$39.6 million in cash, primarily used to acquire the Boyd Business, $14.7 million in cash used for purchases of property, plant and equipment, ~~$26.7~~and $1.6 million in purchases of ~~construction-in-progress~~ assets in connection with construction of the New Facility, partially offset by $0.1 million in proceeds from sales of property, plant and equipment, primarily equipment. In the six months ended December 31, 2016, net cash used in investing activities included $26.9 million for purchases of property, plant and equipment, $21.8 million in purchases of assets in connection with construction of the New Facility, and ~~$25.9~~$11.1 million net of cash acquired, in connection with the China Mist ~~and West Coast Coffee acquisitions, partially~~acquisition, offset by ~~$4.0~~$3.3 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~~six months ended ~~March~~December 31, 2017 was ~~$58.1~~$56.5 million as compared to ~~$12.5~~$32.5 million in the ~~nine~~six months ended ~~March~~December 31, 2016. Net cash provided by financing activities in the ~~nine~~six months ended ~~March~~December 31, 2017 included ~~$42.5 million in proceeds from the sale of the Torrance Facility, $44.1~~$56.8 million in net borrowings under our Revolving Facility, ~~primarily~~and $0.6 million in proceeds from stock option exercises, partially offset by $0.6 million used to pay ~~for~~capital lease obligations and $0.4 million in financing costs associated with the ~~China Mist and West Coast Coffee acquisitions and for expenditures related to~~amendment of the ~~Corporate Relocation Plan,~~Revolving Facility. Net cash provided by financing activities in the six months ended December 31, 2016 included $42.5 million in proceeds from sale-leaseback financing associated with the sale of the Torrance Facility, $7.7 million in proceeds from lease financing in connection with the purchase of the partially constructed New Facility, $18.4 million in net borrowings under our Revolving Facility, and ~~$0.8~~$0.4 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~~$0.6 million used to pay capital lease obligations. ~~Net cash provided by financing activities in~~

Acquisitions

On October 2, 2017, we acquired substantially all of the ~~nine months ended March 31, 2016 included $13.5~~assets and certain specified liabilities of Boyd Coffee. At closing, for consideration of the purchase, we paid Boyd Coffee $38.9 million in ~~proceeds~~cash 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~~issued to Boyd Coffee 14,700 shares of Series A Convertible Participating Cumulative Perpetual Preferred Stock (“Series A Preferred Stock”), with a fair value of $11.8 million as of the closing date. Additionally, we held back $3.2 million in ~~proceeds from stock option exercises, partially offset by $2.7~~cash and 6,300 shares of Series A Preferred Stock, with a fair value of $4.8 million as of the closing date, for the satisfaction of any post-closing working capital adjustments and to secure Boyd Coffee’s (and the other seller parties’) indemnification obligations under the purchase agreement.

In addition to the $3.2 million cash holdback, as part of the consideration for the purchase, at closing we held back $1.1 million in cash to pay, ~~capital lease obligations, $8,000~~on behalf of Boyd Coffee, any assessment of withdrawal liability made against Boyd Coffee following the closing date in ~~deferred financing costs for the Revolving Facility, and $0.2 million in tax withholding payments associated with net share settlement~~respect of ~~equity awards.~~

~~Sale of Spice Assets~~

~~In order to focus on our core product offerings,~~Boyd Coffee’s multiemployer plans. The parties are in the ~~second quarter~~process of ~~fiscal 2016,~~determining the final net working capital under the purchase agreement. At December 31, 2017, we ~~completed~~estimated a net working capital adjustment of $(8.1) million, which is reflected in the ~~sale~~preliminary purchase price allocation. The purchase price allocation is preliminary as we are in the process of finalizing the valuation inputs including growth assumptions, cost projections and discount rates which are used in the fair value calculation 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~~,as well as the determination of the ~~Notes~~final post-closing net working capital adjustment. The preliminary purchase price allocation is subject 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~~change and such change could be material based on numerous factors, including the ~~sale~~final estimated fair value 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~~assets acquired 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,liabilities assumed 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~~the final post-closing net working capital adjustment.

At closing, the parties entered into a transition services agreement where Boyd Coffee agreed to provide certain accounting, marketing, sales and distribution support during a transition period of up to 12 months. We also entered into a co-manufacturing agreement with Boyd Coffee for a transition period of up to 12 months as we transition production into our plants. Amounts paid by the Company to Boyd Coffee for these services totaled $9.2 million ~~including non-cash interest expense of $0.7 million~~in the three 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.~~six months ended December 31, 2017.

~~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~~$12.2 million, ~~which included~~consisting of $11.2 million in cash paid at closing including working capital adjustments of $0.4 million, post-closing final working capital adjustments of $0.6 million, and up to $0.5 million in contingent consideration to be paid as earnout if certain sales levels are achieved in the calendar years of 2017 or 2018. 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~~$15.5 million, which included $14.7 million in cash paid at closing including working capital adjustments of $1.2 million, post-closing working capital adjustment of $(0.2) 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 have revised our estimated time of completion of the DSD Restructuring Plan from the end of the second quarter of fiscal 2018 to the end of fiscal 2018. 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~~three and six months ended ~~March~~December 31, 2017 consisted of ~~$0.9~~$0 and $24,000, respectively, in employee-related costs and $0.1 million and $0.2 million, respectively, in other related costs. Since the adoption of the DSD Restructuring Plan through December 31, 2017, we have recognized and paid a total of $2.7 million in aggregate cash costs including $1.1 million in employee-related costs, and ~~$0.4~~$1.6 million in other related costs. AsThe remaining estimated costs of ~~March 31, 2017, we had paid a total~~$1.0 million to $2.2 million are expected to be incurred in the remainder 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.~~fiscal 2018. 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~~Plans-Direct Store Delivery (“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~~December 31, 2017, we have recognized a total of $31.5 million in aggregate cash costs, including ~~$17.4~~$17.1 million in employee retention and

separation benefits, ~~$6.7~~$7.0 million in facility-related costs related to the temporary office space, costs associated with the move of the ~~Company's~~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~~Condensed Consolidated Statements of ~~operations.~~Operations. We ~~expect to complete~~completed the Corporate Relocation Plan ~~and recognize an additional $0.1 million in other related costs~~ in the fourth quarter of fiscal ~~2017.~~2017 and have $0.1 million in unpaid expenses related to employee-related costs, which is expected to be paid by the end of fiscal 2018. Additionally, from inception through ~~March~~December 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 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~~We estimated that the total construction costs including the cost of the land for the New Facility ~~will~~would be approximately $60 ~~million~~million. As of ~~which~~December 31, 2017, we have ~~paid~~incurred an aggregate of ~~$54.7~~$60.8 million ~~as of March 31, 2017 and have outstanding contractual obligations of $5.5 million as of March 31, 2017.~~in construction costs. In addition to the costs to complete the construction of the New Facility, we ~~expect to~~estimated that we would incur approximately $35 million to $39 million for machinery and equipment, furniture and fixtures, and related expenditures in connection with construction of the New Facility of which we have ~~paid~~incurred an aggregate of ~~$20.2~~$33.2 million as of ~~March~~December 31, 2017, including ~~$15.7~~$22.5 million under the ~~Amended Building Contract, and have outstanding contractual obligations of $6.2 million as of March 31, 2017.~~amended building contract for 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. The majority of the capital expenditures associated with machinery and equipment, furniture and fixtures and related expenditures ~~for~~in connection with the initial construction of the New Facility were incurred in the first three quarters of fiscal 2017. ~~Construction of and relocation to~~We commenced distribution activities at the New Facility ~~were substantially completed~~during the second quarter of fiscal 2017 and initial production activities late in the third quarter of fiscal 2017. We began roasting coffee in the New Facility in the fourth quarter of fiscal 2017.

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


	Expenditures paid						Budget				Expenditures Incurred						Budget
(In thousands)	Nine Months Ended March 31, 2017		Through Fiscal Year Ended June 30, 2016		Total		Lower bound		Upper bound		Six Months Ended December 31, 2017		Through Fiscal Year Ended June 30, 2017		Total		Lower bound		Upper bound
Building and facilities, including land	$	26,606	$	28,110	$	54,716	$	55,000	$	60,000	$	—	$	60,770	$	60,770	$	55,000	$	60,000
Machinery and equipment; furniture and fixtures	15,764		4,443		20,207		35,000		39,000		—		33,241		$	33,241	35,000		39,000
Total	$	42,370	$	32,553	$	74,923	$	90,000	$	99,000	$	—	$	94,011	$	94,011	$	90,000	$	99,000

Capital Expenditures

For the ~~nine~~six months ended ~~March~~December 31, 2017 and 2016, our capital expenditures paid were as follows:


	Nine Months Ended March 31,				Six Months Ended December 31,
(In thousands)	2017		2016		2017		2016
Coffee brewing equipment	$	8,280	$	5,679	$	4,816	$	5,885
Building and facilities	230		200		265		—
Vehicles, machinery and equipment	9,439		7,060		5,051		5,735
Software, office furniture and equipment	1,831		1,320		1,625		1,739
Total capital expenditures excluding New Facility	$	19,780	$	14,259
Capital expenditures excluding New Facility					$	11,757	$	13,359
New Facility:
Building and facilities, including land(1)	$	26,606	$	13,492	$	1,577	$	21,783
Machinery and equipment	11,774		1,934		2,489		10,554
Software, office furniture and equipment	3,990		—		426		2,951
Capital expenditures, New Facility					$	4,492	$	35,288
Total capital expenditures	$	62,150	$	29,685	$	16,249	$	48,647

~~As we complete the first phase~~___________

(1) Includes $21.8 million in purchase of ~~capital spending on our~~assets for New Facility construction in the six months ended December 31, 2016.

In the six months ended December 31, 2017, we ~~anticipate spending between $16 million to $18~~paid $4.5 million in capital expenditures for the New Facility. In fiscal 2018 we anticipate paying between $8 million to $11 million in capital expenditures to support investments in the ~~remainder~~business and to expand our customer base of which $2.7 million has been paid in the six months ended December 31, 2017. Additionally, in fiscal ~~2017. Our expected capital expenditures for fiscal 2017 unrelated~~2018 we expect to ~~the New Facility include~~pay approximately $20 million to $22 million in expenditures to replace normal wear and tear of coffee brewing equipment, vehicles, machinery and equipment and mobile sales solution hardware ~~and are expected to be $2.5~~of which $9.1 million ~~to $3.5 million for~~has been paid in the ~~remainder of fiscal 2017 and approximately $20 million to $22 million, annually.~~six months ended December 31, 2017.

Depreciation and amortization expense was ~~$6.5~~$8.1 million and ~~$5.2~~$5.1 million in the three months ended ~~March~~December 31, 2017 and 2016, respectively. Depreciation and amortization expense was ~~$16.6~~$15.3 million and ~~$15.7~~$10.1 million, in the ~~nine~~six months ended ~~March~~December 31, 2017 and 2016, respectively. We ~~anticipate depreciation and amortization expense to increase to $7.0 million to $7.5 million in the 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 the remainder of fiscal 2018 based on our existing fixed asset commitments and the useful lives of our intangible assets.

Working Capital

At ~~March~~December 31, 2017 and June 30, ~~2016,~~2017, our working capital was composed of the following:


	March 31, 2017		June 30, 2016		December 31, 2017			June 30, 2017
(In thousands)
Current assets	$	148,488	$	153,365	$	150,355		$	117,164
Current liabilities	116,103		56,837		166,062			97,267
Working capital	$	32,385	$	96,528	$	(15,707	)	$	19,897

Contractual Obligations

AsDuring the three months ended December 31, 2017, other than the following, there were no material changes in our contractual obligations.

At December 31, 2017, we had committed to purchase additional equipment for the New Facility totaling $6.3 million.

At December 31, 2017, we had outstanding borrowings of $84.4 million under our Revolving Facility, as compared to outstanding borrowings of $27.6 million at June 30, 2017. The increase in outstanding borrowings in the six months ended December 31, 2017 included $39.5 million to fund the purchase price for the Boyd Business and initial Company obligations under the post-closing transition services agreement.

In connection with the Boyd Coffee acquisition, as part of the ~~China Mist transaction,~~consideration for the purchase, at closing we ~~assumed~~held back $1.1 million in cash to pay, on behalf of Boyd Coffee, any assessment of withdrawal liability made against Boyd Coffee following the ~~lease on China Mist’s existing 17,400 square foot production, distribution and warehouse facility~~closing date in ~~Scottsdale, Arizona which is terminable upon twelve months’ notice.~~respect of Boyd Coffee’s multiemployer plans. 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~~have not made this payment as of ~~March~~December 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~~and we expect settling the pension liability will take greater than twelve months, the multiemployer plan holdback is recorded 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~~other long-term liabilities on our 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~~Balance Sheet at December 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~~December 31, 2017, we had committed to purchase green coffee inventory totaling ~~$68.9~~$55.3 million under fixed-price contracts ~~equipment for the New Facility totaling $0.5 million~~ and other purchases totaling ~~$10.1~~$12.9 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 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~~In the ~~impact~~fourth quarter of ~~varying interest rate changes based on our preferred securities holdings and market yield and price relationships at March 31, 2017. This table is predicated on an “instantaneous” change~~

~~in the general level of interest rates and assumes predictable relationships between the prices~~fiscal 2017, we liquidated substantially all of our preferred ~~securities holdings and~~stock portfolio, net of purchases, to fund expenditures associated with our New Facility in Northlake, Texas. In the ~~yields on U.S. Treasury securities. At March~~second quarter ended December 31, 2017, we ~~had no futures contracts or put options with respect to~~liquidated the remaining security in our preferred ~~securities~~stock portfolio ~~designated as interest rate risk hedges.~~

($ in thousands)
Market Value of
Preferred
Securities at
March 31, 2017

Change in Market
Value
Interest Rate Changes
–150 basis points $ 27,940
$ 1,399
–100 basis points $ 27,561
$ 1,020
Unchanged $ 26,541
$ —
+100 basis points $ 25,477
$ (1,064 )
+150 basis points $ 24,952
$ (1,589 )
and at December 31, 2017 the preferred stock portfolio was closed.

Borrowings under our Revolving Facility bear interest based on average historical excess availability levels with a range of PRIME - 0.25% to PRIME + 0.50% or Adjusted LIBO Rate + 1.25% to Adjusted LIBO Rate + 2.00%.

At ~~March~~December 31, 2017, we had outstanding borrowings of ~~$44.2~~$84.4 million, utilized ~~$4.4~~$1.1 million of the letters of credit sublimit, and had excess availability under the Revolving Facility of ~~$13.1~~$24.5 million. The weighted average interest rate on our outstanding borrowings under the Revolving Facility at ~~March~~December 31, 2017 was ~~2.52%~~3.62%.

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 ~~loan~~outstanding borrowings as of ~~March~~December 31, 2017:


($ in thousands)	Principal	Interest Rate		Annual Interest Expense		Principal	Interest Rate		Annual Interest Expense
–150 basis points	$44,175	1.11	%	$	490,343	$84,430	2.13	%	$	1,798
–100 basis points	$44,175	1.61	%	$	711,218	$84,430	2.63	%	$	2,221
Unchanged	$44,175	2.61	%	$	1,152,968	$84,430	3.63	%	$	3,065
+100 basis points	$44,175	3.61	%	$	1,594,718	$84,430	4.63	%	$	3,909
+150 basis points	$44,175	4.11	%	$	1,815,593	$84,430	5.13	%	$	4,331

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-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 18 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 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 in AOCI and subsequently reclassified into cost of goods sold in the period or periods when the hedged transaction affects earnings. For the three months ended ~~March~~December 31, 2017 and 2016, respectively, we reclassified ~~$0.9 million in net gains and $(2.7)~~$(0.6) million in net losses ~~on derivative instruments designated as cash flow hedges, excluding tax, respectively, into cost of goods sold from AOCI. For the nine months ended March 31,~~

~~2017~~ and ~~2016, we reclassified $0.6~~$0.2 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~~derivative’s change in fair value is recognized currently in “Other, net.” For the six months ended December 31, 2017 and 2016, respectively, we reclassified $(0.6) million and $(0.3) million in net losses on derivative instruments designated as cash flow hedges, excluding tax, respectively, into cost of goods sold from AOCI. Gains or losses deferred in AOCI associated with terminated derivative instruments, derivative instruments that cease to be highly effective hedges, derivative instruments for which the forecasted transaction is reasonably possible but no longer probable of occurring, and cash flow hedges that have been otherwise discontinued remain in AOCI until the hedged item affects earnings. If it becomes probable that the forecasted transaction designated as the hedged item in a cash flow hedge will not occur, we recognize any gain or loss

deferred in AOCI in “Other, net” at that time. For the three months ended ~~March~~December 31, 2017 and 2016, we recognized in “Other, net” ~~$90,000 in net gains~~$0 and ~~$(0.1) million~~$(41,000) in net losses, respectively, on coffee-related derivative instruments designated as cash flow hedges due to ineffectiveness. For the ~~nine~~six months ended ~~March~~December 31, 2017 and 2016, we recognized in “Other, net” ~~$63,000~~$48,000 in net gains and ~~$(0.6) million~~$(28,000) 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, 2017 and 2016, we recorded in “Other, net” net gains of $0.2 million on coffee-related derivative instruments not designated as accounting hedges. For the nine months ended March~~December 31, 2017 and 2016, we recorded in “Other, net” net losses of $(0.2) million and $(1.2) million, respectively, on coffee-related derivative instruments not designated as accounting ~~hedges~~hedges. In the six months ended December 31, 2017 and 2016, we recorded in ~~the amounts~~“Other, net” net losses of ~~$(1.1)~~$(93,000) and $(1.2) million, ~~and $(0.5) million, respectively.~~respectively, on coffee-related derivative instruments not designated as accounting hedges.

The following table summarizes the potential impact as of ~~March~~December 31, 2017 to net income and AOCI from a hypothetical 10% change in coffee commodity prices. The information provided below relates only to the coffee-related derivative instruments and does not include, when applicable, the corresponding changes in the underlying hedged items:


	Increase (Decrease) to Net Income					Increase (Decrease) to AOCI					Increase (Decrease) to Net Income					Increase (Decrease) to AOCI
	10% Increase in Underlying Rate		10% Decrease in Underlying Rate			10% Increase in Underlying Rate		10% Decrease in Underlying Rate			10% Increase in Underlying Rate		10% Decrease in Underlying Rate			10% Increase in Underlying Rate		10% Decrease in Underlying Rate
(In thousands)
Coffee-related derivative instruments(1)	$	18	$	(18	)	$	1,702	$	(1,702	)
Coffee-related derivative instruments⁽¹⁾											$	211	$	(211	)	$	4,202	$	(4,202	)

__________

(1) The ~~Company's~~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~~December 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 principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosures.

As of ~~March~~December 31, 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~~December 31, 2017 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

On October 2, 2017, we completed the acquisition of substantially all of the assets and certain specified liabilities of Boyd Coffee Company. We are currently integrating processes, employees, technologies and operations. Management will continue to evaluate our internal controls over financial reporting as we complete the integration.



PART II - OTHER INFORMATION



Item 1.	Legal Proceedings

The information set forth in Note 2021, Commitments and Contingencies, of the Notes to Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of 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 February 21, 2017, we announced the DSD Restructuring Plan in an effort to realign functions into a channel based selling organization, streamline operations, acquire certain channel specific expertise, and improve selling effectiveness and financial results. We cannot guarantee that we will be successful in implementing the DSD Restructuring Plan in a 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 expectations. We may be unable to realize the contemplated benefits in connection with the 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 key employees leaving the Company or may make it more difficult to recruit new employees, and may have an adverse impact on our business. If we fail to achieve our objectives of the DSD Restructuring Plan, further restructuring may be necessary. Management continues to analyze the Company’s DSD organization and evaluate other potential restructuring opportunities in light of the Company’s strategic priorities which could result in additional restructuring charges the amount of which could be material.



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 President and Chief Executive Officer (chief executive officer)
			~~May 10, 2017~~February 7, 2018

	By:		/s/ David G. Robson
			David G. Robson Treasurer and Chief Financial Officer (principal financial and accounting officer)
			~~May 10, 2017~~February 7, 2018

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~~2.1 to the Company’s Current Report on Form 8-K filed with the SEC on November ~~30,~~20, 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).*

2.3		Asset Purchase Agreement, dated as of August 18, 2017, by and among Farmer Bros. Co., Boyd Assets Co., Boyd Coffee Company, and each of the parties set forth on Exhibit A thereto (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on August 21, 2017 and incorporated herein by reference).*

3.1		Certificate of Incorporation of Farmer Bros. Co. (filed as Exhibit 3.1 to the ~~Company's Annual~~Company’s Current Report on Form ~~10-K for the fiscal year ended June 30, 2014~~8-K filed with the SEC on ~~September 16, 2014~~June 26, 2017 and incorporated herein by reference).

3.2		Certificate of Amendment to the Certificate of Incorporation of Farmer Bros. Co. (filed as Exhibit 3.2 to the Company's Current Report on Form 8-K filed with the SEC on June 26, 2017 and incorporated herein by reference).

3.3		Amended and Restated Bylaws (filed 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~~3.4		Certificate of Elimination (filed as Exhibit 3.3 to the Company's Registration Statement on Form ~~8-A/~~8-A12B/A filed with the SEC on September 24, 2015 and incorporated herein by reference).

3.5		Certificate of Designations of Series A Convertible Participating Cumulative Perpetual Preferred Stock of Farmer Bros. Co. (filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC on October 3, 2017 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/~~8-A12B/A filed with the SEC on September 24, 2015 and incorporated herein by reference).

4.2		Specimen Stock Certificate for Series A Convertible Participating Cumulative Perpetual Preferred Stock (filed as Exhibit 4.2 to the Company’s Quarterly Report on Form 10-Q filed with the SEC on November 7, 2017 and incorporated herein by reference).

4.3		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 filed with the 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).

~~10.3~~		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 filed with the SEC on March 6, 2015 and incorporated herein by reference).



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

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

10.5		First Amendment to Credit Agreement and First Amendment to Pledge and Security Agreement, dated as of August 25, 2017, by and among Farmer Bros. Co. ~~Pension Plan for Salaried Employees~~, China Mist Brands, Inc., Coffee Bean International, Inc., FBC Finance Company, Coffee Bean Holding Company, Inc., the Lenders party thereto and JPMorgan Chase Bank, N.A., as Administrative Agent (filed as Exhibit ~~10.3~~10.1 to the Company’s ~~Quarterly~~Current Report on Form ~~10-Q for the quarter ended September 30, 2012~~8-K filed with the SEC on ~~November 5, 2012~~August 30, 2017 and incorporated herein by reference).**

10.6		Joinder Agreement, dated as of November 29, 2017, by and among Boyd Assets Co., Farmer Bros. Co., as the Borrower’s Representative, and JPMorgan Chase Bank, N.A., as Administrative Agent, under that certain Credit Agreement dated as of March 2, 2015, as amended by that certain First Amendment to Credit Agreement, dated as of August 25, 2017(filed herewith).

10.7		Joinder to Pledge and Security Agreement, dated as of November 29, 2017, by and among Farmer Bros. Co., Coffee Bean International, Inc., FBC Finance Company, Coffee Bean Holding Co., Inc., China Mist Brands, Inc., Boyd Assets Co. and JPMorgan Chase Bank, N.A., as Administrative Agent (filed herewith).

10.8		Farmer Bros. Co. Pension Plan for Salaried Employees (filed (filed as Exhibit 10.6 to the Company’s Quarterly Report on Form 10-Q filed with the SEC on November 7, 2017 and incorporated herein by reference).**

10.9		Amendment No. 1 to Farmer Bros. Co. Retirement Plan effective June 30, 2011 (filed as Exhibit 10.4 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).**




~~10.7~~10.10		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).**

~~10.8~~10.11		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).**

~~10.9~~10.12		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).**

~~10.10~~10.13		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 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).**

~~10.11~~10.14		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~~10.12 to the ~~Company’s~~Company's Annual Report on Form 10-K for the fiscal year ended June 30, ~~2012~~2017 filed with the SEC on September ~~7, 2012~~28, 2017 and incorporated herein by reference).**

~~10.12~~

10.15		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).**

~~10.13~~10.16		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 10.11 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).**

~~10.14~~10.17		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~~10.18		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, 2017 (filed herewith).**

10.19		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 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).

~~10.16~~10.20		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 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).

~~10.17~~10.21		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 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).

~~10.18~~10.22		Employment Agreement, dated March 9, 2012, by and between Farmer Bros. Co. and Michael H. Keown (filed ~~herewith)~~as Exhibit 10.18 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2017 filed with the SEC on May 10, 2017 and incorporated herein by reference).**



~~10.19~~10.23		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).**

~~10.20~~10.24		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 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).**

~~10.21~~10.25		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 Current Report on Form 8-K filed with the SEC on September 29, 2015 and incorporated herein by reference).**

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

~~10.23~~10.26		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~~10.27		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~~

10.28		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)~~as Exhibit 10.25 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2017 filed with the SEC on May 10, 2017 and incorporated herein by reference).**

~~10.26~~10.29		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~~10.30		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~~10.27 to the ~~Company's Current~~Company’s Quarterly Report on Form ~~8-K~~10-Q filed with the SEC on ~~December 12, 2012~~November 7, 2017 and incorporated herein by reference).**

~~10.28~~10.31		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).**

~~10.29~~10.32		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).**

~~10.30~~10.33		Form of Farmer Bros. Co. 2017 Long-Term Incentive Plan Stock Option Award Agreement (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on December 4, 2017 and incorporated herein by reference).**

10.34		Form of Farmer Bros. Co. 2017 Long-Term Incentive Plan Stock Restricted Stock Unit Award Agreement (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on December 4, 2017 and incorporated herein by reference).**

10.35		Form of Farmer Bros. Co. 2017 Long-Term Incentive Plan Stock Restricted Stock Grant Agreement (Directors) (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on December 4, 2017 and incorporated herein by reference).**

10.36		Form of Farmer Bros. Co. 2017 Long-Term Incentive Plan Stock Restricted Stock Grant Agreement (Employees) (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on December 4, 2017 and incorporated herein by reference).**

10.37		Farmer Bros. Co. 2017 Long-Term Incentive Plan (as approved by the stockholders at the Special Meeting of Stockholders on June 20, 2017) filed as Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the SEC on June 26, 2017 and incorporated herein by reference)**

10.38		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).**

~~10.31~~10.39		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).**

~~10.32~~10.40		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).**

~~10.33~~10.41		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).**



10.42
~~10.34~~		Stock Ownership Guidelines for Directors and Executive Officers (filed as Exhibit 10.27 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).**

~~10.35~~10.43		Form of Change in Control Severance Agreement for Executive Officers of the Company (with schedule of executive officers attached) (filed ~~herewith)~~as Exhibit 10.35 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2017 filed with the SEC on May 10, 2017 and incorporated herein by reference).**

~~10.36~~10.44		Form of First Amendment to Change in Control Severance 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)~~as Exhibit 10.36 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2017 filed with the SEC on May 10, 2017 and incorporated herein by reference).**

~~10.37~~10.45		Form of Indemnification Agreement for Directors and Officers of the Company, as adopted on December ~~5, 2013~~8, 2017 (with schedule of indemnitees attached) (filed as Exhibit ~~10.4~~10.1 to the Company’s Current Report on Form 8-K filed with the SEC on ~~February 23,~~December 13, 2017 and incorporated herein by reference).**

~~10.38~~10.46		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).

~~10.39~~10.47		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 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).

~~10.40~~10.48		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 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).

~~10.41~~10.49		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~~10.33 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)~~2016 and incorporated herein by reference).

~~10.42~~10.50		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).

~~10.43~~10.51		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 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).

~~10.44~~10.52		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 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~~10.53		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).

~~10.46~~10.54		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~~10.55		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 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~~10.56		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~~Company’s Quarterly Report on Form 10-Q for the fiscal period ended ~~March~~December 31, 2017, formatted in eXtensible Business Reporting Language: (i) ~~Condensed~~ Consolidated Balance Sheets, (ii) ~~Condensed~~ Consolidated Statements of Operations, (iii) ~~Condensed~~ Consolidated Statements of Comprehensive (Loss) Income, (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.

5859



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		$	—



(In thousands)	Balances, June 30, 2016		Additions		Payments		Non-Cash Settled		Adjustments		Balances, March 31, 2017
Employee-related costs(1)	$	2,342	$	1,109	$	2,616	$	—	$	—	$	835
Facility-related costs(2)	—		5,850		3,375		2,475		—		—
Other(3)	200		1,294		1,494		—		—		—
Total(2)	$	2,542	$	8,253	$	7,485	$	2,475	$	—	$	835
Current portion	$	2,542									$	835
Non-current portion	$	—									$	—
Total	$	2,542									$	835



(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



	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



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



	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



($ in thousands)	Market Value of Preferred Securities at March 31, 2017		Change in Market Value
Interest Rate Changes
–150 basis points	$	27,940	$	1,399
–100 basis points	$	27,561	$	1,020
Unchanged	$	26,541	$	—
+100 basis points	$	25,477	$	(1,064	)
+150 basis points	$	24,952	$	(1,589	)