PART I
Overview
Farmer Bros. Co., a Delaware corporation (including its consolidated subsidiaries unless the context otherwise requires, the “Company,” “we,” “us,” “our” or “Farmer Bros.”), is a national coffee roaster, wholesaler and distributor of coffee, tea and culinary products. We serve a wide variety of customers, from small independent restaurants and foodservice operators to large institutional buyers like restaurant, department and convenience store chains, hotels, casinos, healthcare facilities, and gourmet coffee houses, as well as grocery chains with private brand and consumer-branded coffee and tea products, and foodservice distributors. With a robust product line, including organic, Direct Trade, Project D.I.R.E.C.T.® and other sustainably-produced coffees, iced and hot teas, cappuccino, spices, and baking/biscuit mixes, among others, we offer 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 were founded in 1912, incorporated in California in 1923, and reincorporated in Delaware in 2004. We completed the relocation of our corporate headquarters, product development lab, and manufacturing and distribution operations from Torrance, California to Northlake, Texas ("Northlake facility") in the fourth quarter of fiscal 2017. We operate in one business segment.
Products
We are a national coffee roaster, wholesaler and distributor of coffee, tea and culinary products manufactured under supply agreements, under our owned brands, as well as under private labels on behalf of certain customers. Our product categories consist of the following:
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a robust line of roast and ground coffee, including organic, Direct Trade, Project D.I.R.E.C.T.® and other sustainably-produced offerings;
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flavored and unflavored iced and hot teas;
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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;
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other beverages including cappuccino, cocoa, granitas, and concentrated and ready-to-drink cold brew and iced coffee.
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Our owned brand products are sold primarily into the foodservice channel. Our primary brands include Farmer Brothers®, Artisan Collection by Farmer Brothers™, Superior®, Metropolitan™, China Mist® and Boyds®. Our Artisan coffee products include Direct Trade, Project D.I.R.E.C.T.®, Fair Trade Certified™, Rainforest Alliance Certified™, organic and proprietary blends. In addition, we sell whole bean and roast and ground flavored and unflavored coffee products under the Un Momento®, Collaborative Coffee®, Cain's™, McGarvey® and Boyds® brands and iced and hot teas under the China Mist® brand through foodservice distributors at retail. Our roast and ground coffee products are primarily sold in traditional packaging, including bags and fractional packages, as well as single-serve packaging. Our tea products are sold in traditional tea bags and sachets, as well as single-serve tea pods and capsules. For a description of the amount of net sales attributed to each of our product categories in fiscal 2019, 2018 and 2017, see Management's Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations included in Part II, Item 7 of this report.
Business Strategy
Overview
We are a coffee company designed to deliver the coffee people want, the way they want it. We are focused on being a growing and profitable forward-thinking industry leader, championing coffee culture through understanding, leading, building and winning in the business of coffee. Through our sustainability, stewardship, environmental efforts, and leadership we are not only committed to serving the finest products available, considering the cost needs of the customer, but also insist on their sustainable cultivation, manufacture and distribution whenever possible.
In order to achieve our mission, we have had to grow existing capabilities and develop new ones over the years. More recently, we have undertaken initiatives such as, but not limited to, the following:
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develop new products in response to demographic and other trends to better compete in areas such as premium coffees and teas;
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expand production line capacity at the Northlake facility to integrate acquired product volumes and to support top-line growth;
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rethink aspects of our Company culture to improve productivity and employee engagement and to attract and retain talent;
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embrace sustainability across our operations, in the quality of our products, as well as, how we treat our coffee growers; and
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ensure our systems and processes provide high-quality products at a competitive cost, protection against cyber threats, and a safe environment for our employees and partners.
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We differentiate ourselves in the marketplace through our product offerings and through our customer service model, with quality and sustainability as the underpinning, which includes:
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a wide variety of coffee product offerings and packaging options across numerous brands and three quality tiers-value, premium and specialty;
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consumer-branded coffee and tea products;
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channel-based expertise;
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beverage equipment placement and 24/7 service;
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hassle-free inventory and product procurement management;
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Direct-store-delivery ("DSD") customer service;
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product and menu insights; and
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a robust approach to social, environmental and economic sustainability throughout our business.
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Our services provided to DSD customers are conducted primarily in person through Route Sales Representatives, or RSRs, who develop personal relationships with chefs, restaurant owners and food buyers at their delivery locations. We also provide comprehensive coffee programs to our national account customers, including private brand development, green coffee procurement, hedging, category management, sustainable sourcing and supply chain management.
Strategic Initiatives
We are focused on the following strategies to capitalize on our state-of-the-art Northlake facility, reduce costs and better position the Company for growth:
Build our Value Proposition with our Customers
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Commercial Brewing Equipment Service. From installation, to preventative maintenance, and timely repair execution, our customers count on us to meet their equipment needs. Our trained service technicians provide reliable, consistent service coverage across a wide geographic area giving us a competitive advantage. In fiscal 2019, we repurposed a fully dedicated equipment remanufacturing center in Oklahoma City enabling us to restore used equipment to like-new condition enabling us to better manage equipment costs for us and our customers. In addition, we are investing in systems and processes to enable a more efficient go-to-market in fiscal 2020.
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Customer Fill Rates. Providing our customers the product they want, when they want it, is key to customer satisfaction and retention. We are investing in systems and processes to improve our fill rates, an example being the new branch replenishment tool we are rolling out in fiscal 2020 to assist our field team in ordering the right inventory. We believe our stockkeeping unit ("SKU") optimization project will support higher fill rates, while delivering on-trend products our customers demand.
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Customer Service. We have partnered with a leading contact/call center provider to enable us to manage our equipment service program. In fiscal 2020, we are planning expansion of this partnership to provide support to our DSD route business to enable quick resolution of issues and drive better visibility on customer inquiries. We believe this will enable better customer response and help us to improve customer retention.
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Capitalize on State-of-the-Art Facility
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New Facility Investment. In fiscal 2017, we completed construction of and relocation to our state-of-the-art Northlake facility. In fiscal 2018, we began a project to expand our production lines at the Northlake facility. We are focused on leveraging our investment in the Northlake facility to produce the highest quality coffee in response to the market shift to premium and specialty coffee, support the transition of acquired product volumes, and create opportunities for customer acquisition and sustainable long-term growth.
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Safe Quality Food ("SQF") Certification. We are committed to the highest standards in food quality and safety. In fiscal 2018, the Northlake facility received SQF certification, joining our Portland and Houston SQF-certified facilities. SQF is a Global Food Safety Initiative-based system that strengthens our commitment to supply safe quality coffee products and comply with food safety legislation. Required by many of our national account customers, SQF certification at the Northlake facility marks an important step that will allow us the production platform to increase volume for national account customers as needed.
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Reduce Costs to Compete More Effectively
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Acquisition Integration. Through our recent acquisitions we have worked to reduce costs by integrating the acquired businesses into our existing corporate and operational structure. Eliminating redundant functions, merging delivery networks and combining production processing and facilities have resulted in added synergies and efficiencies compared to their pre-acquisition cost structures.
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New Facility. We undertook the relocation of our corporate headquarters, product development lab, and manufacturing and distribution operations from Torrance, California to Northlake, Texas, in part, to pursue improved production efficiency to allow us to provide a more cost-competitive offering of high-quality products. We believe the ongoing improvements in production efficiency will allow us to operate at a lower cost, generally over the long term.
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DSD Restructuring Plan. As a result of an ongoing operational review of various initiatives within our DSD selling organization, we have reorganized our DSD operations in an effort to streamline operations and improve selling effectiveness and financial results. We continue to analyze our sales organization and evaluate other potential restructuring opportunities in light of our strategic priorities.
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Supply Chain. In recent years, we have undertaken efforts to streamline our supply chain, including replacing our long-haul fleet operations with third-party logistics (“3PL“), resulting in a reduction in our fuel consumption and empty trailer miles, while improving our intermodal and trailer cube utilization; using vendor managed inventory arrangements to reconfigure our packaging methodology and reduce waste; and engaging third-party warehouse management services at the Northlake facility to facilitate cost savings by leveraging the third party's expertise in opening new facilities, implementing lean management practices, improving performance on certain key performance metrics, and standardizing best practices.
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Telematics. In an effort to make our DSD fleet more fuel-efficient, we installed telematics monitoring devices in our delivery trucks, allowing us to see contributing factors to our transportation-related carbon footprint. Installation of telematics monitoring devices has resulted in reduced idling time, a cut in rapid acceleration, and a reduction in fuel expenditures.
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Portfolio of Products
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Optimize Product Portfolio. Since fiscal 2018, we have undertaken efforts to optimize our SKU count reducing our total SKU count by more than 26.7%. We continue to evaluate the productivity of our product assortment in order to optimize our portfolio.
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Strategic Investment in Assets and Evaluation of Cost Structure
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Market Opportunities. We believe we are well-positioned to continue to pursue growth through additional, opportunistic M&A activity to deliver aligned brands, customers and innovation. Our recent acquisitions have added to our product portfolio, improved our growth potential, deepened our distribution footprint and increased our capacity utilization at our production facilities.
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Asset Utilization. We continue to look for ways to deploy our personnel, systems, assets and infrastructure to create or enhance stockholder value. Areas of focus have included corporate staffing and structure, methods of procurement, logistics, inventory management, supporting technology, and real estate assets.
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Investment in Technology. We have invested in technology and process improvements to improve our efficiency and the effectiveness of our sales and distribution network. In recent years, we have completed our advanced routing software initiatives for our last mile delivery and we continue to invest in our hand-held sales and inventory management device for our delivery drivers.
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Branch Consolidation and Property Sales. We evaluate our branch operation structure on an ongoing basis to identify opportunities to streamline the supply chain and reduce costs. In an effort to streamline our branch operations, in the last three fiscal years, we have sold branch properties in Texas, Southern California, Washington and other states.
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Corporate Capabilities and Alignment to Create Stockholder Value
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Investment in Human Resources. Our senior leadership team brings a proven track record of strategic and operational leadership capabilities. We have also added experienced and vibrant talent to our team and continue to benefit from our in-house expertise in sustainability, acquisition and integration, and operations.
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Commitment to Employee Wellness. We are committed to creating a healthier and happier workforce which we believe contributes to our success. We have received certifications as a Fit-Friendly Worksite and a Blue Zone Workplace based on the activities and environment created in our workplace to support healthy living and promote wellness of our associates.
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Employee Development. We have invested in a Learning Management System to enable training facilitation and tracking of training modules to support the development of employees at all levels and functions within the organization. In recent years, we have deployed courses to our Quality, Manufacturing and Maintenance functions and we intend to expand our focus to include critical training modules that impact our entire workforce. We recently completed a Talent Planning Process of all exempt level employees across the organization. We calibrated the assessment of talent and created and began to execute on succession charts for all critical roles to ensure we have the right talent and capabilities to support the business today and in the future.
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Performance Driven Culture. In fiscal 2019, we continued to pursue greater alignment of employee individual goals with Company goals under our compensation plans in order to focus the entire organization on the effort to create value for our stockholders.
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Product Development Lab. The Northlake facility includes a product development lab where we are focused on developing innovative products in response to industry trends and customer needs. Recent new products developed includes Artisan and Metro Single Origin coffees, cold brew coffees, Artisan hot teas and on trend seasonal coffees and cappuccinos.
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Expand Sustainability Leadership
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Sustainability. We believe that our collective efforts in measuring our social and environmental impact, creating programs for waste, water and energy reduction, promoting partnerships in our supply chain that aim at supply chain stability and food security, and focusing on employee engagement place us in a unique position to help retailers and foodservice operators create differentiated coffee and tea programs that can include sustainable supply chains, direct trade purchasing, training and technical assistance, recycling and composting networks, and packaging material reductions. During fiscal 2019, we made the Carbon Disclosure Project's Climate leadership level for our efforts to reduce Scope 1, 2 and 3 emissions (direct emissions, indirect emissions from consumption of purchased electricity, heat or steam and other indirect emissions). Further, in fiscal 2019, we published our annual sustainability report based on the Global Reporting Initiative’s comprehensive compliance standard. In addition, China Mist is a member of the Ethical Tea Partnership (the “ETP”), a non-profit organization that works to improve the sustainability of the tea sector, the lives of tea workers and farmers, and the environment in which tea is produced. As a member of the ETP, China Mist sources all of its tea from tea plantations that are certified, monitored, and regularly audited by the ETP.
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Science-Based Carbon Reduction Targets. We believe combating climate change is critical to the future of our company, the coffee industry, coffee growers and the world. In fiscal 2019 we re-set our science based carbon reduction targets to include the acquisitions of Boyd Coffee, China Mist, and West Coast Coffee. With this new baseline, we established more ambitious goals in line with efforts to limit global warming to 1.5°C. Setting approved targets places us among those responsible businesses that are making measurable contributions to incorporate sustainability within their business strategy.
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Zero Waste to Landfill. Achieving zero waste in our production and distribution facilities is a significant step in reaching our overall sustainability goals. In fiscal 2019 we maintained our goal of 90% waste diversion for our primary production and distribution facilities. To accomplish this goal, we implemented ambitious recycling and composting guidelines across these facilities. The enhanced efforts resulted in an approximate 80% reduction from previous years, meeting the Zero Waste International Alliance requirements for diverting waste sent to landfills in these locations.
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LEED® Certified Facilities. Our Portland production and distribution facility was one of the first in the Northwest to achieve LEED® Silver Certification. Our corporate offices in Northlake, Texas achieved LEED® Silver Certification.
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Expansion of Project D.I.R.E.C.T.® Program. In fiscal 2019, we continued to grow our direct trade sourcing model, Project D.I.R.E.C.T. ®. Project D.I.R.E.C.T . ® is an impact-based product or raw material sourcing framework that utilizes data-based sustainability metrics to influence an inclusive, collaborative approach to sustainability along the supply chain. To evaluate whether coffee is Project D.I.R.E.C.T . ® , we follow an outcome-based evaluation framework. The result of this evaluation impacts where we invest our resources within our supply chain and has led to an increased level of transparency for us. Project D.I.R.E.C.T . ® represents a growing part of our coffee portfolio.
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Green Coffee Traceability. We are committed to the inclusion of more sustainably-sourced coffees in our supply chain. Regulatory and reputational risks can increase when customers, roasters and suppliers cannot see back into their supply chain. To address these concerns, as well as to deepen our commitment to the longevity of the coffee industry, we track traceability levels from all green coffee suppliers on a per-contract basis. During fiscal 2019, we established a system for coffee suppliers to provide information on a per contract basis. This helps us to bring
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transparency to our supply chain, rank our suppliers, and also to identify opportunities to select trusted providers, cooperatives, mills, exporters, etc., when offering sustainable coffees to our customers.
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Supplier Sustainability. We are committed to working with suppliers who share our social, environmental and economic sustainability goals. Regulatory and reputational risks can increase when suppliers are not held to the same strict standards to which we hold ourselves. To address this concern, we annually survey all green coffee suppliers along with our top suppliers of processed coffee and non-coffee products to assess their social, environmental, and economic sustainability practices and alignment with the United Nations Global Compact, a United Nations initiative to encourage businesses worldwide to adopt sustainable and socially responsible policies, documenting 96% compliance with United Nations Global Compact practices from all respondents. In fiscal 2019 we adopted new Supplier Standards of Engagement. These Standards of Engagement set minimum standards for Suppliers that are designed to provide Farmer Bros. visibility into all aspects of its supply chain and meets these objectives. These Standards of Engagement also serve as Supplier’s Certificate of Compliance, executed by the undersigned Supplier, representing Supplier's receipt and acknowledgment of the Standards of Engagement and agreement to comply with the same.
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Charitable Activities
We view charitable involvement as a part of our corporate responsibility and sustainability model: Social, Environmental, and Economic Development, or SEED. We endorse and support communities where our customers, employees, businesses, and suppliers are located, and who have enthusiastically supported us over the past 100 years. Our objective is to provide support toward a mission of supply chain stability with a focus on food security.
Recipient organizations include those with strong local and regional networks that ensure that families have access to nutritious food. Donations may take the form of corporate cash contributions, product donations, employee volunteerism, and workplace giving (with or without matching contributions).
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Recipient organizations include Feeding America, Ronald McDonald House, and local food banks.
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We support industry organizations such as World Coffee Research, which commits to grow, protect, and enhance supplies of quality coffee while improving the livelihoods of the families who produce it, and the Specialty Coffee Association (“SCA”) Sustainability Council and the Coalition for Coffee Communities, which are focused on sustainability in coffee growing regions.
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Our employee-driven CAFÉ Crew organizes employee involvement at local charities and fund raisers, including support of Team Ronald McDonald House, riding in the Ride Against Hunger supported by Tarrant Area Food Bank, hosting local food drives and donation of Farmer Brothers products nearing the end of their shelf life to organizations related to Feeding America.
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All of our usable and near expiring products or products with damaged packaging that can be donated are donated to Feeding America affiliated food banks nationwide, in an effort to keep all edible food waste from going to landfills.
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Industry and Market Leadership
We have made the following investments in an effort to ensure we are well-positioned within the industry to take advantage of category trends, industry insights, and general coffee and tea knowledge to grow our business:
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Coffee Industry Leadership. Through our dedication to the craft of sourcing, blending and roasting coffee, and our participation and/or leadership positions with the SCA, National Coffee Association, Coalition for Coffee Communities, International Women's Coffee Alliance, Pacific Coast Coffee Association, Roasters Guild and World Coffee Research, we work to help shape the future of the coffee industry. We believe that due to our commitment to the industry, large retail and foodservice operators are drawn to working with us. We were among the first coffee roasters in the nation to receive SCA certification of a state-of-the-art coffee lab and operate Public Domain®, a specialty coffeehouse in Portland, Oregon. We also received SCA certification for our product development lab at the Northlake facility.
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Market Insight and Consumer Research. We have developed a market insight capability internally that reinforces our business-to-business positioning as a thought leader in the coffee and tea industries. We provide trend insights
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that help our customers create winning products and integrated marketing strategies. Within this, we are focused on understanding key demographic groups such as Millennials, Hispanics, and other key demographic groups, as well as key channel trends.
Raw Materials and Supplies
Our primary raw material is green coffee, an exchange-traded agricultural commodity that is subject to price fluctuations. Over the past five years, the coffee “C” market near month price per pound ranged from approximately $0.96 to $1.90. The coffee “C” market near month price as of June 30, 2019 and 2018 was $1.10 and $1.15 per pound, respectively. Our principal packaging materials include cartonboard, corrugated and plastic. We also use a significant amount of electricity, natural gas, and other energy sources to operate our production and distribution facilities.
We purchase green coffee beans from multiple coffee regions around the world. Coffee “C” market prices in fiscal 2019 traded in a $0.35 cent range during the year, and averaged 22% below the historical average for the past five years. There can be no assurance that green coffee prices will remain at these levels in the future. Some of the Arabica coffee beans we purchase do not trade directly on the commodity markets. Rather, we purchase these coffee beans on a negotiated basis from coffee brokers, exporters and growers, including Direct Trade and Fair Trade Certified™ sources and Rainforest Alliance Certified™ farms. Fair Trade Certified™ provides an assurance that farmer groups are receiving the Fair Trade minimum price and an additional premium for certified organic products through arrangements with cooperatives. Direct Trade products provide similar assurance except that the arrangements are provided directly to individual coffee growers instead of to cooperatives, providing these farmers with price premiums and dedicated technical assistance to improve farm conditions and increase both quality and productivity of sustainable coffee crops, at the individual farm level. Rainforest Alliance Certified™ coffee is grown using methods that help promote and preserve biodiversity, conserve scarce natural resources, and help farmers build sustainable lives. Our business model strives to reduce the impact of green coffee price fluctuations on our financial results and to protect and stabilize our margins, principally through customer arrangements and derivative instruments, as further explained in Note 6, Derivative Instruments, of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10‑K.
Intellectual Property
We own a number of United States trademarks and service marks that have been registered with the United States Patent and Trademark Office. We also own other trademarks and service marks for which we have filed applications for U.S. registration. We have licenses to use certain trademarks outside of the United States and to certain product formulas, all subject to the terms of the agreements under which such licenses are granted. We believe our trademarks and service marks are integral to customer identification of our products. It is not possible to assess the impact of the loss of such identification. Depending on the jurisdiction, trademarks are generally valid as long as they are in use and/or their registrations are properly maintained and they have not been found to have become generic. Registrations of trademarks can also generally be renewed indefinitely as long as the trademarks are in use. In addition, we own numerous copyrights, registered and unregistered, registered domain names, and proprietary trade secrets, technology, know-how, and other proprietary rights that are not registered.
Seasonality
We experience some seasonal influences. The winter months historically have generally been our strongest sales months. However, our product line and geographic diversity provide some sales stability during the warmer months when coffee consumption ordinarily decreases. Additionally, we usually experience an increase in sales during the summer and early fall months from seasonal businesses located in vacation areas and from grocery retailers ramping up inventory for the winter selling season. Because of the seasonality of our business, results for any quarter are not necessarily indicative of the results that may be achieved for the full fiscal year.
Distribution
We operate production facilities in Northlake, Texas; Houston, Texas; Portland, Oregon; and Hillsboro, Oregon. Distribution takes place out of the Northlake facility, the Portland and Hillsboro facilities, as well as separate distribution centers in Northlake, Illinois; Moonachie, New Jersey; and Scottsdale, Arizona. Our products reach our customers primarily in the following ways: through our nationwide DSD network of 380 delivery routes and 104 branch warehouses as of June 30, 2019, or direct-shipped via common carriers or third-party distributors. DSD sales are primarily made “off-truck” to our customers at their places of business. We operate a large fleet of trucks and other vehicles to distribute and deliver our products through our DSD network, and we rely on 3PL service providers for our long-haul distribution. We maintain inventory levels at each branch warehouse to promote minimal interruption in supply. We also sell coffee and tea products directly to consumers through our websites and sell certain products at retail and through foodservice distributors.
Customers
We serve a wide variety of customers, from small independent restaurants and foodservice operators to large institutional buyers like restaurant, department and convenience store chains, hotels, casinos, healthcare facilities, and gourmet coffee houses, as well as grocery chains with private brand and consumer-branded coffee and tea products, and foodservice distributors. Although no single customer accounted for 10% or more of our net sales in any of the last three fiscal years, we have a number of large national account customers, the loss of or reduction in sales to one or more of which is likely to have a material adverse effect on our results of operations. During fiscal 2019, our top five customers accounted for approximately 13.3% of our net sales and no one customer exceed 10% of our net sales.
Most of our customers rely on us for distribution; however, some of our customers use third-party distribution or conduct their own distribution. Some of our customers are “price” buyers, seeking the low-cost provider with less concern for service, while others find great value in the service programs we provide. We offer a full return policy to ensure satisfaction and extended terms for those customers who qualify. Historically, our product returns have not been significant.
Competition
The coffee industry is highly competitive, including with respect to price, product quality, service, convenience, technology and innovation, and competition could become increasingly more intense due to the relatively low barriers to entry. We face competition from many sources, including the institutional foodservice divisions of multi-national manufacturers of retail products many of which have greater financial and other resources than we do, such as The J.M. Smucker Company (Folgers Coffee) and The Kraft Heinz Company (Maxwell House Coffee), wholesale foodservice distributors such as Sysco Corporation and US Foods, regional and national coffee roasters such as S&D Coffee & Tea (Cott Corporation), Massimo Zanetti Beverage USA, Trilliant Food and Nutrition LLC, Gaviña & Sons, Inc., Royal Cup, Inc., Ronnoco Coffee, LLC, and Community Coffee Company, L.L.C., specialty coffee suppliers such as Rogers Family Company, Distant Lands Coffee, Mother Parkers Tea & Coffee Inc., Starbucks Corporation and Peet’s Coffee & Tea (JAB Holding Company), and retail brand beverage manufacturers such as Keurig Dr. Pepper Inc.. As many of our customers are small foodservice operators, we also compete with cash and carry and club stores (physical and on-line) such as Costco, Sam’s Club and Restaurant Depot and on-line retailers such as Amazon. We also face competition from growth in the single-serve, ready-to-drink coffee beverage and cold-brewed coffee channels, as well as competition from other beverages, such as soft drinks (including highly caffeinated energy drinks), juices, bottled water, teas and other beverages.
We believe our state-of-the-art production facility, longevity, product quality and offerings, national distribution and equipment service network, industry and sustainability leadership, market insight, comprehensive approach to customer relationship management, and superior customer service are the major factors that differentiate us from our competitors. We compete well when these factors are valued by our customers, and we are less effective when only price matters. Our customer base is price sensitive, and we are often faced with price competition.
Working Capital
We finance our operations internally and through borrowings under our existing credit facility. For a description of our liquidity and capital resources, see Results of Operations and Liquidity, Capital Resources and Financial Condition included in Part II, Item 7 of this report and Note 17, Other Current Liabilities, of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10‑K. Our working capital needs are greater in the months leading up to our peak sales period during the winter months, which we typically finance with cash flows from operations. In anticipation of our peak sales period, we typically increase inventory in the first quarter of the fiscal year. We use various techniques including demand forecasting and planning to determine appropriate inventory levels for seasonal demand.
Regulatory Environment
The conduct of our businesses, including, among other things, the production, storage, distribution, sale, labeling, quality and safety of our products, and occupational safety and health practices, are subject to various laws and regulations administered by federal, state and local governmental agencies in the United States. Our facilities are subject to various laws and regulations regarding the release of material into the environment and the protection of the environment in other ways. We are not a party to any material legal proceedings arising under these regulations except as described in Note 22, Commitments and Contingencies, of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10‑K.
Employees
On June 30, 2019, we employed approximately 1,521 employees, 421 of whom are subject to collective bargaining agreements expiring on or before June 30, 2022.
Other
The nature of our business does not provide for maintenance of or reliance upon a sales backlog. None of our business is subject to renegotiation of profits or termination of contracts or subcontracts at the election of the government. We have no material revenues from foreign operations or long-lived assets located in foreign countries.
Available Information
Our Internet website address is http://www.farmerbros.com, where we make available, free of charge, through a link maintained on our website under the heading “Investor Relations—SEC Filings,” copies of our annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, including amendments thereto, as soon as reasonably practicable after filing such material electronically or otherwise furnishing it to the SEC. In addition, these reports and the other documents we file with the SEC are available at a website maintained by the SEC at http://www.sec.gov. Copies of our Corporate Governance Guidelines, the Charters of the Audit, Compensation, and Nominating and Corporate Governance Committees of the Board of Directors, and our Code of Conduct and Ethics can also be found on our website.
You should carefully consider each of the following factors, as well as the other information in this report, in evaluating our business and prospects. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently consider immaterial may also negatively affect our business operations. If any of the following risks actually occurs, our business, financial condition and results of operations could be harmed. In that case, the trading price of our common stock could decline.
Competition in the coffee industry and beverage category could impact our profitability or harm our competitive position.
The coffee industry is highly competitive, including with respect to price, product quality, service, convenience, technology and innovation, and competition could become increasingly more intense due to the relatively low barriers to entry. We face competition from many sources, including the institutional foodservice divisions of multi-national manufacturers of retail products many of which have greater financial and other resources than we do, wholesale foodservice distributors, regional and national coffee roasters, specialty coffee suppliers, and retail brand beverage manufacturers. As many of our customers are small foodservice operators, we also compete with cash and carry and club stores and on-line retailers.
We consider our roasting and blending methods essential to the flavor and richness of our coffees and, therefore, essential to our brand. Because our roasting methods cannot be patented, we would be unable to prevent competitors from copying these methods if such methods became known. In addition, competitors may be able to develop roasting or blending methods that are more advanced than our production methods, which may also harm our competitive position.
Increased competition in coffee or other beverage channels may have an adverse impact on sales of our products. If we do not succeed in differentiating ourselves through, among other things, our product and service offerings, or if we are not effective in setting proper pricing, then our competitive position may be weakened and our sales and profitability may be materially adversely affected.
Increases in the cost of green coffee could reduce our gross margin and profit and may increase volatility in our results.
Our primary raw material is green coffee, an exchange-traded agricultural commodity that is subject to price fluctuations. The supply of green coffee, similar to any agricultural commodity, may be impacted by, among other things, climate change, weather, natural disasters, real or perceived supply shortages, crop disease (such as coffee rust) and pests, general increase in farm inputs and costs of production, an increase in green coffee purchased and sold on a negotiated basis rather than directly on commodity markets in response to higher production costs relative to “C” market prices, political and economic conditions or uncertainty, labor actions, foreign currency fluctuations, armed conflict in coffee producing nations, acts of terrorism, government actions and trade barriers, and the actions of producer organizations that have historically attempted to influence green coffee prices through agreements establishing export quotas or by restricting coffee supplies.
Speculative trading in coffee commodities can also influence coffee prices. Additionally, specialty green coffees tend to trade on a negotiated basis at a premium above the “C” market price which premium, depending on the supply and demand at the time of purchase, may be significant. We purchase over-the-counter coffee-related derivative instruments to enable us to lock in the price of green coffee commodity purchases on our behalf or at the direction of our customers under commodity-based pricing arrangements. Although we account for certain coffee-related derivative instruments as accounting hedges, the portion of open hedging contracts that are not designated as accounting hedges are marked to period-end market price and unrealized gains or losses based on whether the period-end market price was higher or lower than the price we locked-in are recognized in our financial results at the end of each reporting period. Depending on contractual restrictions, we may be unable to pass these cost to our customers by increasing the price of products. If we are unable to increase prices sufficiently to offset increased input costs, or if our sales volume decreases significantly as a result of price increases, our results of operations and financial condition may be adversely affected
Although coffee “C” market prices in fiscal 2019 averaged 22% below the historical average for the past five years, there can be no assurance that green coffee prices will remain at these levels in the future. There can be no assurance that our purchasing practices and hedging activities will mitigate future price risk. As a result, increases in the cost of green coffee could have an adverse impact on our profitability.
We face exposure to other commodity cost fluctuations, which could impact our margins and profitability.
In addition to green coffee, we are exposed to cost fluctuations in other commodities under supply arrangements, including raw materials, tea, spices, and packaging materials such as cartonboard, corrugated and plastic. We are also exposed to flucutations in the cost of fuel. We purchase certain ingredients, finished goods and packaging materials under cost-plus supply arrangements whereby our costs may increase based on an increase in the underlying commodity price or changes in production costs. The cost of these commodities depend on various factors beyond our control, including economic and political conditions, foreign currency fluctuations, and global weather patterns. The changes in the prices we pay may take place on a monthly, quarterly or annual basis depending on the product and supplier. Unlike green coffee, we do not purchase any derivative instruments to hedge cost fluctuations in these other commodities. As a result, to the extent we are unable to pass along such costs to our customers through price increases, our margins and profitability will decrease.
Our efforts to secure an adequate supply of quality coffees and other raw materials may be unsuccessful and impact our ability to supply our customers or expose us to commodity price risk.
Maintaining a steady supply of green coffee is essential to keeping inventory levels low while securing sufficient stock to meet customer needs. We rely upon our ongoing relationships with our key suppliers to support our operations. Some of the Arabica coffee beans we purchase do not trade directly on the commodity markets. Rather, we purchase these coffee beans on a negotiated basis from coffee brokers, exporters and growers. If any of these supply relationships deteriorate or we are unable to renegotiate contracts with suppliers (with similar or more favorable terms) or find alternative sources for supply, we may be unable to procure a sufficient quantity of high-quality coffee beans and other raw materials at prices acceptable to us or at all which could negatively affect our results of operations. Further, non-performance by suppliers could expose us to supply risk under coffee purchase commitments for delivery in the future. In addition, the political situation in many of the Arabica coffee growing regions, including Africa, Indonesia, and Central and South America, can be unstable, and such instability could affect our ability to purchase coffee from those regions. If green coffee beans from a region become unavailable or prohibitively expensive, we could be forced to use alternative coffee beans or discontinue certain blends, which could adversely impact our sales. A raw material shortage could result in disruptions in our ability to deliver products to our customers, a deterioration of our relationship with our customers, decreased revenues or could impair our ability to expand our business.
Interruption or increased costs of our supply chain and sales network or Labor force, including a disruption in operations at any of our production and distribution facilities, could affect our ability to manufacture or distribute products and could adversely affect our business and sales.
Our sales and distribution network requires a large investment to maintain and operate, and we rely on a limited number of production and distribution facilities. We also operate a large fleet of trucks and other vehicles to distribute and deliver our products through our DSD network, and we rely on 3PL service providers for our long-haul distribution. Certain products are also distributed by third parties or direct shipped via common carrier. Many of these costs are beyond our control, and many are fixed rather than variable.
There are potential adverse effects of labor disputes with our own employees or by others who provide warehousing, transportation (lines, truck drivers, 3PL service providers) or cargo handling (longshoremen), both domestic and foreign, of our raw materials or other products. We have union contracts relating to a significant portion of our workforce. Although we believe union relations have been amicable in the past, there is no assurance that this will continue in the future or that we will not be subject to future union organizing activity. The terms and conditions of existing, renegotiated or new collective bargaining agreements could also increase our costs or otherwise affect our ability to fully implement future operational changes to enhance our efficiency or to adapt to changing business needs or strategy.
In addition, we use a significant amount of electricity, gasoline, diesel and oil, natural gas and other energy sources to operate our production and distribution facilities. An increase in the price, disruption of supply or shortage of fuel and other energy sources that may be caused by increased demand or by events such as natural disasters, power outages, or the like, could lead to higher electricity, transportation and other commodity costs, including the pass-through of such costs under our agreements with 3PL service providers and other suppliers, that could negatively impact our profitability.
A disruption in operations at any of these facilities or any other disruption in our supply chain or increase in prices relating to service by our 3PL service providers, common carriers or distributors, service technicians or vendor-managed inventory arrangements, or otherwise, whether as a result of casualty, natural disaster, power loss, telecommunications failure, terrorism, labor shortages, shipping costs, trade restrictions, contractual disputes, weather, environmental incident, interruptions in port operations or highway arteries, increased downtime due to certain aging production infrastructure, pandemic, strikes, work stoppages, the financial or operational instability of key suppliers, distributors and transportation providers, or other causes, could significantly impair our ability to operate our business, adversely affect our relationship with our customers, and impact our financial condition or results of operations.
We rely on co-packers to provide our supply of tea, spice, culinary and other products. Any failure by co-packers to fulfill their obligations or any termination or renegotiation of our co-pack agreements could adversely affect our results of operations.
We have a number of supply agreements with co-packers that require them to provide us with specific finished goods, including tea, spice and culinary products. For some of our products we essentially rely upon a single co-packer as our sole-source for the product. The failure for any reason of any such sole-source or other co-packer to fulfill its obligations under the applicable agreements with us, including the failure by our co-packers to comply with food safety, environmental, or other laws and regulations, or the termination or renegotiation of any such co-pack agreement could result in disruptions to our supply of finished goods, cause damage to our reputation and brands, and have an adverse effect on our results of operations. Additionally, our co-packers are subject to risk, including labor disputes, union organizing activities, financial liquidity, inclement weather, natural disasters, supply constraints, and general economic and political conditions that could limit their ability to timely provide us with acceptable products, which could disrupt our supply of finished goods, or require that we incur additional expense by providing financial accommodations to the co-packer or taking other steps to seek to minimize or avoid supply disruption, such as establishing a new co-pack arrangement with another provider. A new co-pack arrangement may not be available on terms as favorable to us as our existing co-pack arrangements, or at all.
Our restructuring activities may be unsuccessful or less successful than we anticipate, which may adversely affect our business, operating results and financial condition.
We have implemented, and may in the future implement, restructuring activities, such as the DSD Restructuring Plan and recent efficiency initiatives in an effort to achieve strategic objectives and improve financial results. We cannot guarantee that we will be successful in implementing these activities in a timely manner or at all, or that such efforts will advance our business strategy as expected or result in realizing the anticipated benefits. Costs associated with restructuring activities may be greater than anticipated which could cause us to incur indebtedness in amounts in excess of expectations. Execution of restructuring activities has required, and will continue to require a substantial amount of management time and operational resources, including implementation of administrative and operational changes necessary to achieve the anticipated benefits. These activities may have adverse effects on existing business relationships with suppliers and customers, and impact employee morale. Management continues to analyze the Company’s sales organization and evaluate other potential restructuring opportunities in light of the Company’s strategic priorities which could result in additional restructuring charges the amount of which could be material. If we are unable to realize the anticipated benefits from our restructuring activities, we could be cost disadvantaged in the marketplace, and our competitiveness and our profitability could decrease.
Customer quality control problems or food safety issues may adversely affect our brands thereby negatively impacting our sales or leading to potential product recalls or product liability claims.
Selling products for human consumption involves inherent legal risks. Our success depends on our ability to provide customers with high-quality products and service. Although we take measures to ensure that we sell only fresh products, we have no control over our products once they are purchased by our customers. Clean water is critical to the preparation of coffee, tea and other beverages. We have no ability to ensure that our customers use a clean water supply to prepare these beverages. Instances or reports of food safety issues involving our products, whether or not accurate, such as unclean water supply, food or beverage-borne illnesses, tampering, contamination, mislabeling, or other food or beverage safety issues, including due to the failure of our third-party co-packers to maintain the quality of our products and to comply with our product specifications, could damage the value of our brands, negatively impact sales of our products, and potentially lead to product recalls, production interruptions, product liability claims, litigation or damages. A significant product liability claim against us, whether or not successful, or a widespread product recall may reduce our sales and harm our business.
Government regulations affecting the conduct of our business could increase our operating costs, reduce demand for our products or result in litigation.
The conduct of our business is subject to various laws and regulations including those relating to food safety, ingredients, manufacturing, processing, packaging, storage, marketing, advertising, labeling, quality and distribution of our products, import of raw materials, as well as environmental laws and those relating to privacy, worker health and workplace safety. These laws and regulations and interpretations thereof are subject to change as a result of political, economic or social events. In addition, our product advertising could make us the target of claims relating to false or deceptive advertising under U.S. federal and state laws, including the consumer protection statutes of some states. Any new laws and regulations or changes in government policy, existing laws and regulations or the interpretations thereof could require us to change certain of our operational processes and procedures, or implement new ones, and may increase our operating and compliance costs, which could adversely affect our results of operations. In addition, modifications to international trade policy, or the imposition of increased or new tariffs, quotas or trade barriers on key commodities, could adversely impact our business and results of operations. In some cases, increased regulatory scrutiny could interrupt distribution of our products or force changes in our production processes or procedures (or force us to implement new processes or procedures). In addition, compliance with any new or more stringent laws or regulations, or stricter interpretations of existing laws, including increased government regulations to limit carbon dioxide and other greenhouse gas emissions, could require us to reduce emissions and to incur compliance costs which could affect our profitability or impede the production or distribution of our products. If we fail to comply with applicable laws and regulations, we may be subject to civil remedies, including fines, injunctions, recalls or seizures, as well as potential criminal sanctions, which could have a material adverse effect on our results of operations and adversely affect our reputation and brand image. In addition, claims or liabilities of this sort may not be covered by insurance or by any rights of indemnity or contribution that we may have against others.
We could face significant withdrawal liability if we withdraw from participation in the multiemployer pension plans in which we participate.
We participate in two multiemployer defined benefit pension plans and one multiemployer defined contribution pension plan for certain union employees. We make periodic contributions to these plans to allow them to meet their pension benefit obligations to their participants. Our required contributions to these plans could increase due to a number of factors, including the funded status of the plans and the level of our ongoing participation in these plans. Our risk of such increased payments may be greater if any of the participating employers in these underfunded plans withdraws from the plan due to insolvency and we are not able to contribute an amount sufficient to fund the unfunded liabilities associated with its participants in the plan. In the event we withdraw from participation in one or more of these plans, we could be required to make an additional lump-sum contribution to the plan. Our withdrawal liability for any multiemployer pension plan would depend on the extent of the plan’s funding of vested benefits. The amount of any potential withdrawal liability could be material to our results of operations and cash flows.
Litigation pending against us could expose us to significant liabilities and damage our reputation.
We are currently party to various legal and other proceedings, and additional claims may arise in the future. See Note 22, Commitments and Contingencies, of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10‑K. Regardless of the merit of particular claims, litigation may be expensive, time-consuming, operationally disruptive and distracting to management, and could negatively affect our brand name and image and subject us to statutory penalties and costs of enforcement. We can provide no assurances as to the outcome of any litigation or the resolution of any other claims against us. An adverse outcome of any litigation or other claim could negatively affect our financial condition, results of operations and liquidity.
We are self-insured and our reserves may not be sufficient to cover future claims.
We are self-insured for many risks up to varying deductible amounts. The premiums associated with our insurance continue to increase. General liability, fire, workers’ compensation, directors' and officers' liability, life, employee medical, dental and vision, and automobile risks present a large potential liability. While we accrue for this liability based on historical claims experience, future claims may exceed claims we have incurred in the past. Should a different number of claims occur compared to what was estimated or the cost of the claims increase beyond what was anticipated, reserves recorded may not be sufficient and the accruals may need to be adjusted accordingly in future periods. A successful claim against us that is not
covered by insurance or is in excess of our reserves or available insurance limits could negatively affect our business, financial condition and results of operations.
Loss of business from one or more of our large national account customers and efforts by these customers to improve their profitability could have a material adverse effect on our operations.
We have a number of large national account customers, the loss of or reduction in sales to one or more of which is likely to have a material adverse effect on our results of operations. During fiscal 2019, our top five customers accounted for approximately 13% of our net sales. We generally do not have long-term contracts with the majority of our customers. Accordingly, the majority of our customers can stop purchasing our products at any time without penalty and are free to purchase products from our competitors. There can be no assurance that our customers will continue to purchase our products in the same mix or quantities or on the same terms as they have in the past. In addition, because of the competitive environment facing many of our customers and industry consolidation which has produced large customers with increased buying power and negotiating strength, our customers have increasingly sought to improve their profitability through pricing concessions and more favorable trade terms. To the extent we provide pricing concessions or favorable trade terms, our margins would be reduced. If we are unable to continue to offer terms that are acceptable to our customers, they may reduce purchases of our products which would adversely affect our financial performance. Requirements that may be imposed on us by our customers, such as sustainability, inventory management or product specification requirements, may have an adverse effect on our results of operations. Additionally, our customers may face financial difficulties, bankruptcy or other business disruptions that may impact their operations and their purchases from us and may affect their ability to pay us for products which could adversely affect our sales and profitability.
Our accounts receivable represents a significant portion of our current assets and a substantial portion of our trade accounts receivables relate principally to a limited number of customers, increasing our exposure to bad debts and counter-party risk which could potentially have a material adverse effect on our results of operations.
A significant portion of our trade accounts receivable are from five customers. The concentration of our accounts receivable across a limited number of parties subjects us to individual counter-party and credit risk as these parties may breach our agreement, claim that we have breached the agreement, become insolvent and/or declare bankruptcy, delaying or reducing our collection of receivables or rendering collection impossible altogether. Certain of the parties use third-party distributors or do business through a network of affiliate entities which can make collection efforts more challenging and, at times, collections may be economically unfeasible. Adverse changes in general economic conditions and/or contraction in global credit markets could precipitate liquidity problems among our debtors. This could increase our exposure to losses from bad debts and have a material adverse effect on our business, financial condition and results of operations.
We depend on the expertise of key personnel and have experienced significant turnover in our senior management. The unexpected loss of one or more of these key employees or difficulty recruiting and retaining qualified personnel could have a material adverse effect on our operations and competitive position.
Our success largely depends on the efforts and abilities of our executive officers and other key personnel. In the past several months, we have experienced significant turnover in our senior management ranks, including our former CEO. The lack of management continuity could adversely affect our ability to successfully manage our business and execute our strategy, as well as result in operational and administrative inefficiencies and added costs, and may make recruiting for future management positions more difficult. We must continue to recruit, retain, motivate and develop management and other employees sufficiently to maintain our current business and support our projected growth and strategic initiatives. This may require significant investments in training, coaching and other career development and retention activities. Activities related to identifying, recruiting, hiring and integrating qualified individuals require significant time and attention. We may also need to invest significant amounts of cash and equity to attract talented new employees, and we may never realize returns on these investments. Competition for talent is intense, and we might not be able to identify and hire the personnel we need to continue to evolve and grow our business. If we are not able to effectively retain and grow our talent, our ability to achieve our strategic objectives will be adversely affected, which may impact our financial condition and results of operations. Further, any unplanned turnover or failure to develop or implement an adequate succession plan for our senior management and other key employees, could deplete our institutional knowledge base, erode our competitive advantage, and negatively affect our business, financial condition and results of operations. We do not maintain key person life insurance policies on any of our executive officers.
Increased severe weather patterns may increase commodity costs, damage our facilities and disrupt our production capabilities and supply chain.
There is increasing concern that a gradual increase in global average temperatures due to increased concentration of carbon dioxide and other greenhouse gases in the atmosphere have caused and will continue to cause significant changes in weather patterns around the globe and an increase in the frequency and severity of extreme weather events. Major weather phenomena are dramatically affecting coffee growing countries. The wet and dry seasons are becoming unpredictable in timing and duration, causing improper development of the coffee cherries. Decreased agricultural productivity in certain regions as a result of changing weather patterns may affect the quality, limit the availability or increase the cost of key agricultural commodities, which are important ingredients for our products. We have experienced storm-related damages and disruptions to our operations in the recent past related to both winter storms as well as heavy rainfall and flooding. Increased frequency or duration of extreme weather conditions could damage our facilities, impair production capabilities, disrupt our supply chain or impact demand for our products. As a result, the effects of climate change could have a long-term adverse impact on our business and results of operations.
Investment in acquisitions could disrupt our ongoing business, not result in the anticipated benefits and present risks not originally contemplated.
We have invested and in the future may invest in acquisitions which may involve significant risks and uncertainties. The success of any such acquisitions will depend, in part, on our ability to realize all or some of the anticipated benefits from integrating the acquired businesses with our existing businesses, and to achieve revenue and cost synergies. Additionally, any such acquisitions may result in potentially dilutive issuances of our equity securities, the incurrence of additional debt, restructuring charges, impairment charges, contingent liabilities, amortization expenses related to intangible assets, and increased operating expenses, which could adversely affect our results of operations and financial condition. There can be no assurance that any such acquisitions will be identified or that we will be able to consummate any such acquisitions on terms favorable to us or at all, or that the synergies from any such acquisitions will be achieved. If any such acquisitions are not successful, our business and results of operations could be adversely affected.
An increase in our debt leverage could adversely affect our liquidity and results of operations.
As of June 30, 2019 and 2018, we had outstanding borrowings under our credit facility of $92.0 million and $89.8 million, respectively, with excess availability of $55.7 million and $25.3 million, respectively. We may incur significant indebtedness in the future, including through additional borrowings under the credit facility, exercise of the accordion feature under the credit facility to increase the revolving commitment by up to an additional $75.0 million, through the issuance of debt securities, or otherwise.
Our present indebtedness and any future borrowings could have adverse consequences, including:
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requiring a substantial portion of our cash flow from operations to make payments on our indebtedness;
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reducing the cash flow available or limiting our ability to borrow additional funds, to pay dividends, to fund capital expenditures and other corporate purposes and to pursue our business strategies;
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limiting our flexibility in planning for, or reacting to, changes in our businesses and the industries in which we operate;
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increasing our vulnerability to general adverse economic and industry conditions; and
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placing us at a competitive disadvantage compared to our competitors that have less debt.
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To the extent we become more leveraged, we face an increased likelihood that one or more of the risks described above would materialize.
Our credit facility also contains financial covenants relating to the maintenance of a maximum total net leverage ratio and a minimum interest expense coverage ratio. Our ability to meet those covenants may be affected by events beyond our control, and there can be no assurance that we will meet those covenants. The breach of any of these covenants could result in a default under the credit facility.
In addition, if we are unable to make payments as they come due or comply with the restrictions and covenants under the credit facility or any other agreements governing our indebtedness, there could be a default under the terms of such
agreements. In such event, or if we are otherwise in default under the credit facility or any such other agreements, the lenders could terminate their commitments to lend and/or accelerate the loans and declare all amounts borrowed due and payable. Furthermore, our lenders under the credit facility could foreclose on their security interests in our assets. If any of those events occur, our assets might not be sufficient to repay in full all of our outstanding indebtedness and we may be unable to find alternative financing on acceptable terms or at all. Failure to maintain existing or secure new financing could have a material adverse effect on our liquidity and financial position.
Our liquidity has been adversely affected as a result of our operating performance in recent periods and may be further materially adversely affected by constraints in the capital and credit markets and limitations under our financing arrangements.
We need sufficient sources of liquidity to fund our working capital requirements, service our outstanding indebtedness and finance business opportunities. Without sufficient liquidity, we could be forced to curtail our operations, or we may not be able to pursue business opportunities. The principal sources of our liquidity are funds generated from operating activities, available cash, and our credit facility. In recent periods, significant acquisition costs, large capital investments along with the underperformance of our business has resulted in a decrease in funds from operating activities, which has weakened our liquidity position. Should our operating performance continue to deteriorate, we will have less cash inflows from operations available to meet our financial obligations or to fund our other liquidity needs. In addition, if such deterioration were to lead to the closure of leased facilities, we would need to fund the costs of terminating those leases. If we are unable to generate sufficient cash flows from operations in the future to satisfy these financial obligations, we may be required to, among other things:
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seek additional financing in the debt or equity markets;
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refinance or restructure all or a portion of our indebtedness;
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reduce or delay planned capital or operating expenditures, strategic acquisitions or investments.
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Such measures might not be sufficient to enable us to satisfy our financial obligations or to fund our other liquidity needs, and could impede the implementation of our business strategy, prevent us from entering into transactions that would otherwise benefit our business and/or have a material adverse effect on our financial condition and results of operations. In addition, any such financing, refinancing or sale of assets might not be available on economically favorable terms or at all. Our ability to obtain additional financing or refinance our indebtedness would depend upon, among other things, our financial condition at the time, and the liquidity of the overall capital markets and the state of the economy. Furthermore, any refinancing of our existing debt could be at higher interest rates and may require compliance with more onerous covenants, which could further restrict our business operations. In addition, if our lenders experience difficulties that render them unable to fund future draws on the credit facility, we may not be able to access all or a portion of these funds, which could adversely affect our ability to operate our business and pursue our business strategies. In addition, covenants in our debt agreements could restrict or delay our ability to respond to business opportunities, or in the event of a failure to comply with such covenants, could result in an event of default, which if not cured or waived, could have a material adverse effect on us.
Our operating results may have significant fluctuations from period to period which could have a negative effect on the market price of our common stock.
Our operating results may fluctuate from period to period as a result of a number of factors, including variations in our operating performance or the performance of our competitors, changes in accounting principles, fluctuations in the price and supply of green coffee, fluctuations in the selling prices of our products, the success of our hedging strategy, research reports and changes in financial estimates by analysts about us, or competitors or our industry, our inability or the inability of our competitors to meet analysts’ projections or guidance, strategic decisions by us or our competitors, such as acquisitions, capital investments or changes in business strategy, the depth and liquidity of the market for our common stock, adverse outcomes of litigation, changes in or uncertainty about economic conditions, conditions or trends in our industry, geographies, or customers, activism by any large stockholder or group of stockholders, speculation by the investment community regarding our business, actual or anticipated growth rates relative to our competitors, terrorist acts, natural disasters, perceptions of the investment opportunity associated with our common stock relative to other investment alternatives, competition, changes in consumer preferences and market trends, seasonality, our ability to retain and attract customers, our ability to manage inventory and fulfillment operations and maintain gross margin, and other factors described elsewhere in this risk factors section. Fluctuations in our operating results due to these factors or for any other reason could cause the market price of our common stock to decline.
In addition, the stock markets have experienced price and volume fluctuations that have affected and continue to affect the market price of equity securities issued by many companies. In the past, some companies that have had volatile market prices for their securities have been subject to class action or derivative lawsuits. The filing of a lawsuit against us, regardless of the outcome, could have a negative effect on our business, financial condition and results of operations, as it could result in substantial legal costs, a diversion of management’s attention and resources, and require us to make substantial payments to satisfy judgments or to settle litigation. Accordingly, we believe that period-to-period comparisons of our operating results are not necessarily meaningful, and such comparisons should not be relied upon as indicators of future performance.
Concentration of ownership among our principal stockholders may dissuade potential investors from purchasing our stock, may prevent new investors from influencing significant corporate decisions, may result in activist actions and may result in a lower trading price for our common stock than if ownership of our common stock was less concentrated.
Based on statements and reports filed with the SEC pursuant to Sections 13(d) and 16(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), large stockholders beneficially own a significant portion of our outstanding common stock. As a result, these stockholders may be able to influence the outcome of stockholder votes, including votes concerning the election and removal of directors, activist campaigns, proxy contests, the amendment of our charter documents, and approval of significant corporate transactions. This level of concentrated ownership may have the effect of delaying or preventing a change in the management or voting control of the Company. If these stockholders engage in activist actions, responding to these actions can disrupt operations, be costly and time-consuming, and divert board and management attention, which could have an adverse effect on our results of operations and financial condition. In addition, this significant concentration of share ownership may adversely affect the trading price of our common stock if investors perceive disadvantages in owning stock in a company with such concentrated ownership. Sales of common stock by significant stockholders could have a material adverse effect on the market price of our common stock. In addition, the transfer of ownership of a significant portion of our outstanding shares of common stock within a three-year period could adversely affect our ability to use our net operating loss (“NOL”) carry forwards to offset future taxable net income.
Our outstanding Series A Preferred Stock or future equity offerings could adversely affect the holders of our common stock in some circumstances.
As of June 30, 2019, we had 14,700 shares of Series A Convertible Participating Cumulative Perpetual Preferred Stock, par value $1.00 per share (“Series A Preferred Stock”), outstanding. The Series A Preferred Stock could adversely affect the holders of our common stock in certain circumstances. On an as converted basis, holders of Series A Preferred Stock are entitled to vote together with the holders of our common stock and are entitled to share in the dividends on common stock, when declared. The Series A Preferred Stock pays a dividend, when, as and if declared by our Board of Directors, of 3.5% APR of the stated value per share payable in four quarterly installments in arrears, and has an initial stated value of $1,000 per share, adjustable up or down by the amount of undeclared and unpaid dividends or subsequent payment of accumulated dividends thereon, respectively, and a conversion premium of 22.5%. We may mandatorily convert all of the Series A Preferred Stock one year from the date of issue. The holder may convert 20%, 30% and 50% of the Series A Preferred Stock at the end of the first, second and third year, respectively, from the date of issue. In the future, we may offer additional equity, equity-linked or debt securities, which may have rights, preferences or privileges senior to our common stock. As a result, our common stocholders may experience dilution. Any of the foregoing could have a material adverse effect on the holders of our common stock.
Anti-takeover provisions or stockholder dilution could make it more difficult for a third party to acquire us.
Our Board of Directors has the authority to issue shares of preferred stock and to determine the price, rights, preferences, privileges and restrictions, including voting rights, of those shares without any further vote or action by stockholders. We currently have 479,000 authorized shares of preferred stock undesignated as to series, and we could cause shares currently designated as to series but not outstanding to become undesignated and available for issuance as a series of preferred stock to be designated in the future. The rights of the holders of our common stock may be subject to, and may be adversely affected by, the rights of the holders of any preferred stock that may be issued in the future. The issuance of preferred stock may have the effect of delaying, deterring or preventing a change in control of the Company without further action by stockholders and may adversely affect the voting and other rights of the holders of our common stock.
Further, certain provisions of our charter documents, including a classified board of directors, provisions eliminating the ability of stockholders to take action by written consent, and provisions limiting the ability of stockholders to raise matters
at a meeting of stockholders without giving advance notice, may have the effect of delaying or preventing changes in control or management of the Company, which could have an adverse effect on the market price of our common stock. In addition, our charter documents do not permit cumulative voting, which may make it more difficult for a third party to gain control of our Board of Directors. Further, we are subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law, which will prohibit us from engaging in a “business combination” with an “interested stockholder” for a period of three years after the date of the transaction in which the person became an interested stockholder, even if such combination is favored by a majority of stockholders, unless the business combination is approved in a prescribed manner. The application of Section 203 also could have the effect of delaying or preventing a change in control or management.
Volatility in the equity markets or interest rate fluctuations could substantially increase our pension funding requirements and negatively impact our financial position.
At June 30, 2019, the projected benefit obligation under our single employer defined benefit pension plans exceeded the fair value of plan assets. The difference between the projected benefit obligation and the fair value of plan assets, or the funded status of the plans, significantly affects the net periodic benefit cost and ongoing funding requirements of those plans. Among other factors, changes in interest rates, mortality rates, early retirement rates, mix of plan asset investments, investment returns and the market value of plan assets can affect the level of plan funding, cause volatility in the net periodic benefit cost, increase our future funding requirements and require payments to the Pension Benefit Guaranty Corporation. In addition, facility closings may trigger cash payments or previously unrecognized obligations under our defined benefit pension plans, and the cost of such liabilities may be significant or may compromise our ability to close facilities or otherwise conduct cost reduction initiatives on time and within budget. A significant increase in future funding requirements could have a negative impact on our financial condition and results of operations.
We rely on information technology and are dependent on software in our operations. Any material failure, inadequacy, interruption or security failure of that technology could affect our ability to effectively operate our business.
Our ability to effectively manage our business, maintain information accuracy and efficiency, comply with regulatory, financial reporting, legal and tax requirements, and coordinate the production, distribution and sale of our products depends significantly on the reliability, capacity and integrity of information technology systems, software and networks. We are also dependent on enterprise resource planning software for some of our information technology systems and support. The failure of these systems to operate effectively and continuously for any reason could result in delays in processing replenishment orders from our branch warehouses, an inability to record input costs or product sales accurately or at all, an impaired understanding of our operations and results, an increase in operating expenses, reduced operational efficiency, loss of customers or other business disruptions, all of which could negatively affect our business and results of operations. To date, we have not experienced a material breach of cyber security, however our computer systems have been, and will likely continue to be, subjected to unauthorized access or phishing attempts, computer viruses, malware, ransomware or other malicious codes. These threats are constantly evolving and this increases the difficulty of timely detection and successful defense. As a result, security, backup, disaster recovery, administrative and technical controls, and incident response measures may not be adequate or implemented properly to prevent cyber-attacks or other security breaches to our systems. Failure to effectively allocate and manage our resources to build, sustain, protect and upgrade our information technology infrastructure could result in transaction errors, processing inefficiencies, the loss of customers, reputational damage, litigation, business disruptions, or the loss of sensitive or confidential data through security breach or otherwise. Significant capital investments could be required to remediate any potential problems or to otherwise protect against security breaches or to address problems caused by breaches. In addition, if our customers or suppliers experience a security breach or system failure, their businesses could be disrupted or negatively affected, which may result in a reduction in customer orders or disruption in our supply chain, which would adversely affect our results of operations.
Failure to prevent the unauthorized access, use, theft or destruction of personal, financial and other confidential information relating to our customers, suppliers, employees or our Company, could damage our business reputation, negatively affect our results of operations, and expose us to potential liability.
The protection of our customer, supplier, employee, and Company data and confidential information is critical. We are subject to new and changing privacy and information security laws and standards that may require significant investments in technology and new operational processes. The use of electronic payment methods and collection of other personal information exposes us to increased risk of privacy and/or security breaches. We rely on commercially available systems, software, tools, and monitoring to provide security for processing, transmitting, and storing personal information from individuals, including
our customers, suppliers and employees, and our security measures may not effectively prohibit others from obtaining improper access to such information. We rely on third party, cloud based technologies which results in third party access and storage of Company data and confidential information. Employees or third parties with whom we do business or to whom we outsource certain information technology or administrative services may attempt to circumvent security measures in order to misappropriate such information, and may purposefully or inadvertently cause a breach involving such information. If we experience a data security breach of any kind or fail to respond appropriately to such incidents, we may experience a loss of or damage to critical data, suffer financial or reputational damage or penalties, or face exposure to negative publicity, government investigations and proceedings, private consumer or securities litigation, liability or costly response measures. In addition, our reputation within the business community and with our customers and suppliers may be affected, which could result in our customers and suppliers ceasing to do business with us which could adversely affect our business and results of operations. Our insurance policies do not cover losses caused by security breaches.
Our ability to use our NOL carryforwards to offset future taxable net income may be subject to certain limitations.
At June 30, 2019, we had approximately $146.8 million in federal and $113.4 million in state NOL carryforwards that will begin to expire in the years ending June 30, 2030 and June 30, 2020, respectively. If an ownership change as defined in Section 382 of the Internal Revenue Code (the "Code") occurs with respect to our capital stock, our ability to use NOLs to offset taxable income would be subject to certain limitations. Generally, an ownership change occurs under Section 382 of the Code if certain persons or groups increase their aggregate ownership by more than 50 percentage points of our total capital stock over a rolling three-year period. If an ownership change occurs, our ability to use NOLs to reduce taxable net income is generally limited to an annual amount based on the fair market value of our stock immediately prior to the ownership change multiplied by the long-term tax-exempt interest rate. If an ownership change were to occur, use of our NOLs to reduce payments of federal taxable net income may be deferred to later years within the 20-year carryover period; however, if the carryover period for any loss year expires, the use of the remaining NOLs for the loss year will be prohibited. Future changes in our stock ownership, some of which may be outside of our control, could result in an ownership change under Section 382 of the Code. There is also a risk that due to regulatory changes, such as suspensions on the use of NOLs, or other unforeseen reasons, our existing NOLs could expire, decrease in value or otherwise be unavailable to offset future income tax liabilities. As a result, we may be unable to realize a tax benefit from the use of our NOLs, even if we generate a sufficient level of taxable net income prior to the expiration of the NOL carry forward periods.
Future impairment charges could adversely affect our operating results.
At June 30, 2019, we had $28.9 million in long-lived intangible assets, including recipes, non-compete agreements, customer relationships, trade names, trademarks and a brand name, and goodwill of $36.2 million, associated with completed acquisitions. Acquisitions are based on certain target analysis and due diligence procedures designed to achieve a desired return or strategic objective. These procedures often involve certain assumptions and judgment in determining the acquisition price. After consummation of an acquisition, unforeseen issues could arise that adversely affect anticipated returns or that are otherwise not recoverable as an adjustment to the purchase price. Even after careful integration efforts, actual operating results may vary significantly from initial estimates. We perform an asset impairment analysis on an annual basis or whenever events occur that may indicate possible existence of impairment. Failure to achieve forecasted operating results, due to weakness in the economic environment or other factors, changes in market conditions, loss of or significant decline in sales to customers included in valuation of the intangible asset, changes in our imputed cost of capital, and declines in our market capitalization, among other things, could result in impairment of our intangible assets and goodwill and adversely affect our operating results.
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Item 1.B.
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Unresolved Staff Comments
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None.
Our current production and distribution facilities are as follows:
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Location
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Approximate Area
(Square Feet)
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Purpose
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Status
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Northlake, TX
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535,585
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Corporate headquarters, manufacturing, distribution, warehouse, product development lab
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Owned
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Houston, TX
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330,877
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Manufacturing and warehouse
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Owned
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Portland, OR
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114,000
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Manufacturing and distribution
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Leased
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Northlake, IL
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89,837
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Distribution and warehouse
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Leased
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Moonachie, NJ
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41,404
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Distribution and warehouse
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Leased
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Hillsboro, OR
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20,400
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Manufacturing, distribution and warehouse
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Leased
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Scottsdale, AZ
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17,400
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Distribution and warehouse
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Leased
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As of June 30, 2019, we stage our products in 104 branch warehouses throughout the contiguous United States. These branch warehouses and our distribution centers, taken together, represent a vital part of our business, but no individual branch warehouse is material to the business as a whole. Our stand-alone branch warehouses vary in size from approximately 1,000 to 34,000 square feet.
Approximately 53% of our facilities are leased with a variety of expiration dates within the range of 2020 through 2028. The lease on the Portland facility was renewed in fiscal 2018 and expires in 2028, subject to an option to renew up to an additional 10 years.
We calculate our utilization for all of our coffee roasting facilities on an aggregate basis based on the number of product pounds manufactured during the actual number of production shifts worked during an average week, compared to the number of product pounds that could be manufactured based on the maximum number of production shifts that could be operated during the week (assuming three shifts per day, five days per week), in each case, based on our current product mix. Utilization rates for our coffee roasting facilities were approximately 71%, 75% and 93% during the fiscal years ended June 30, 2019, 2018 and 2017, respectively. The utilization rate in fiscal 2019 includes the Northlake facility. The utilization rate in fiscal 2018 includes the Northlake facility and does not reflect the anticipated increase in capacity resulting from the production line expansion. The utilization rate in fiscal 2017 excludes the Northlake facility where we began roasting coffee in the fourth quarter of fiscal 2017.
We believe that our existing facilities provide adequate capacity for our current operations.
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Item 3.
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Legal Proceedings
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For information regarding legal proceedings in which we are involved, see Note 22, Commitments and Contingencies, of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this report.
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Item 4.
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Mine Safety Disclosures
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Not applicable.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Introduction and Basis of Presentation
Description of Business
Farmer Bros. Co., a Delaware corporation (including its consolidated subsidiaries unless the context otherwise requires, the “Company,” or “Farmer Bros.”), is a national coffee roaster, wholesaler and distributor of coffee, tea and culinary products. The Company serves a wide variety of customers, from small independent restaurants and foodservice operators to large institutional buyers like restaurant, department and convenience store chains, hotels, casinos, healthcare facilities, and gourmet coffee houses, as well as grocery chains with private brand and consumer-branded coffee and tea products, and foodservice distributors. The Company’s product categories consist of roast and ground coffee, frozen liquid coffee; flavored and unflavored iced and hot teas; culinary products; spices; and other beverages including cappuccino, cocoa, granitas, and concentrated and ready-to-drink cold brew and iced coffee. The Company was founded in 1912, incorporated in California in 1923, and reincorporated in Delaware in 2004. In fiscal 2017, the Company completed the construction and relocation of its corporate headquarter from Torrance, California to Northlake, Texas ("Northlake facility"), and began roasting coffee in the Northlake facility in the fourth quarter of fiscal 2017. The Company operates in one business segment.
The Company operates production facilities in Northlake, Texas; Houston, Texas; Portland, Oregon; and Hillsboro, Oregon. Distribution takes place out of the Northlake facility, the Portland and Hillsboro facilities, as well as separate distribution centers in Northlake, Illinois; Moonachie, New Jersey; and Scottsdale, Arizona.
The Company’s products reach its customers primarily in the following ways: through the Company’s nationwide direct-store-delivery or DSD network of 380 delivery routes and 104 branch warehouses as of June 30, 2019, or direct-shipped via common carriers or third-party distributors. The Company operates a large fleet of trucks and other vehicles to distribute and deliver its products through its DSD network, and relies on third-party logistic (“3PL”) service providers for its long-haul distribution. DSD sales are primarily made “off-truck” by the Company to its customers at their places of business.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Note 2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements are prepared in accordance with the generally accepted accounting principles in the United States (“GAAP”).
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its direct and indirect wholly owned subsidiaries. All inter-company balances and transactions have been eliminated.
Use of Estimates
The preparation of financial statements in accordance with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and the accompanying notes. The Company reviews its estimates on an ongoing basis using currently available information. Changes in facts and circumstances may result in revised estimates and actual results may differ from those estimates.
Cash Equivalents
The Company considers all highly liquid investments with original maturity dates of 90 days or less to be cash equivalents. Fair values of cash equivalents approximate cost due to the short period of time to maturity.
Allowance for doubtful accounts
A portion of our accounts receivable is not expected to be collected due to non-payment, bankruptcies and deductions. Our accounting policy for the allowance for doubtful accounts requires us to reserve an amount based on the evaluation of the aging of accounts receivable, detailed analysis of high-risk customers’ accounts, and the overall market and economic conditions of our customers. This evaluation considers the customer demographic, such as large commercial customers as compared to small businesses or individual customers. We consider our accounts receivable delinquent or past due based on payment terms established with each customer. Accounts receivable are written off when the account are determined to be uncollectible.
Investments
The Company’s investments, from time to time, consist of money market instruments, marketable debt, equity and hybrid securities. Investments are held for trading purposes and stated at fair value. The cost of investments sold is determined on the specific identification method. Dividend and interest income are accrued as earned.
Fair Value Measurements
The Company groups its assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:
•Level 1—Valuation is based upon quoted prices for identical instruments traded in active markets.
•Level 2—Valuation is based upon inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly (i.e. interest rate and yield curves observable at commonly quoted intervals, default rates, etc.). Observable inputs include quoted prices for similar instruments in active and non-active markets. Level 2 includes those financial instruments that are valued with industry standard valuation models that incorporate inputs that are observable in the marketplace throughout the full term of the instrument, or can otherwise be derived from or supported by observable market data in the marketplace. Level 2 inputs may also include insignificant adjustments to market observable inputs.
•Level 3—Valuation is based upon one or more unobservable inputs that are significant in establishing a fair value estimate. These unobservable inputs are used to the extent relevant observable inputs are not available and are developed based on the best information available. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Securities with quotes that are based on actual trades or actionable bids and offers with a sufficient level of activity on or near the measurement date are classified as Level 1. Securities that are priced using quotes derived from implied values, indicative bids and offers, or a limited number of actual trades, or the same information for securities that are similar in many respects to those being valued, are classified as Level 2. If market information is not available for securities being valued, or materially-comparable securities, then those securities are classified as Level 3. In considering market information, management evaluates changes in liquidity, willingness of a broker to execute at the quoted price, the depth and consistency of prices from pricing services, and the existence of observable trades in the market.
Derivative Instruments
The Company executes various derivative instruments to hedge its commodity price and interest rate risks. These derivative instruments consist primarily of forward, option and swap contracts. The Company reports the fair value of derivative instruments on its consolidated balance sheets in “Short-term derivative assets,” “Long-term derivative assets,” “Short-term derivative liabilities,” or “Other long-term liabilities.” The Company determines the current and noncurrent classification based on the timing of expected future cash flows of individual trades and reports these amounts on a gross basis. Additionally, the Company reports, if any, cash held on deposit in margin accounts for coffee-related derivative instruments on a gross basis on its consolidated balance sheet in “Restricted cash.”
The accounting for the changes in fair value of the Company's derivative instruments can be summarized as follows:
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Derivative Treatment
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Accounting Method
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Normal purchases and normal sales exception
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Accrual accounting
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Designated in a qualifying hedging relationship
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Hedge accounting
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All other derivative instruments
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Mark-to-market accounting
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The Company enters into green coffee purchase commitments at a fixed price or at a price to be fixed (“PTF”). PTF contracts are purchase commitments whereby the quality, quantity, delivery period, price differential to the coffee “C” market price and other negotiated terms are agreed upon, but the date, and therefore the price at which the base “C” market price will be fixed has not yet been established. The coffee “C” market price is fixed at some point after the purchase contract date and before the futures market closes for the delivery month and may be fixed either at the direction of the Company to the vendor, or by the application of a derivative that was separately purchased as a hedge. For both fixed-price and PTF contracts, the Company expects to take delivery of and to utilize the coffee in a reasonable period of time and in the conduct of normal business. Accordingly, these purchase commitments qualify as normal purchases and are not recorded at fair value on the Company's consolidated balance sheets.
The Company follows the guidelines of Accounting Standards Codification (“ASC”) 815, “Derivatives and Hedging” (“ASC 815”), to account for certain coffee-related derivative instruments as accounting hedges, in order to minimize the volatility created in the Company's quarterly results from utilizing these derivative instruments and to improve comparability between reporting periods. For a derivative to qualify for designation in a hedging relationship, it must meet specific criteria and the Company must maintain appropriate documentation. The Company establishes hedging relationships pursuant to its risk management policies. The hedging relationships are evaluated at inception and on an ongoing basis to determine whether the hedging relationship is, and is expected to remain, highly effective in achieving offsetting changes in fair value or cash flows attributable to the underlying risk being hedged. The Company also regularly assesses whether the hedged forecasted transaction is probable of occurring. If a derivative ceases to be or is no longer expected to be highly effective, or if the Company believes the likelihood of occurrence of the hedged forecasted transaction is no longer probable, hedge accounting is discontinued for that derivative, and future changes in the fair value of that derivative are recognized in “Other, net.”
For coffee-related derivative instruments designated as cash flow hedges, the change in fair value of the derivative is reported as accumulated other comprehensive income (loss) (“AOCI”) and subsequently reclassified into cost of goods sold in the period or periods when the hedged transaction affects earnings. Gains or losses deferred in AOCI associated with terminated derivative instruments, derivative instruments that cease to be highly effective hedges, derivative instruments for which the forecasted transaction is reasonably possible but no longer probable of occurring, and cash flow hedges that have been otherwise discontinued remain in AOCI until the hedged item affects earnings. If it becomes probable that the forecasted transaction designated as the hedged item in a cash flow hedge will not occur, any gain or loss deferred in AOCI is recognized in “Other, net” at that time. For derivative instruments that are not designated in a hedging relationship, and for which the normal purchases and normal sales exception has not been elected, the changes in fair value are reported in “Other, net.” See Note 8.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
For interest rate swap derivative instruments designated as a cash flow hedge, the change in fair value of the derivative is reported as AOCI and subsequently reclassified into interest expense in the period or periods when the hedged transaction affects earnings.
Concentration of Credit Risk
At June 30, 2019, the financial instruments which potentially expose the Company to concentration of credit risk consist of cash in financial institutions (in excess of federally insured limits), derivative instruments and trade receivables.
The Company does not have any credit-risk related contingent features that would require it to post additional collateral in support of its net derivative liability positions. At June 30, 2019 and 2018, none of the cash in the Company’s coffee-related derivative margin accounts was restricted. Further changes in commodity prices and the number of coffee-related derivative instruments held, could have a significant impact on cash deposit requirements under certain of the Company's broker and counterparty agreements.
Approximately 28% and 20% of the Company’s trade accounts receivable balance was with five customers at June 30, 2019 and 2018, respectively. The Company estimates its maximum credit risk for accounts receivable at the amount recorded on the balance sheet. The trade accounts receivables are generally short-term and all probable bad debt losses have been appropriately considered in establishing the allowance for doubtful accounts.
Inventories
Inventories are valued at the lower of cost or net realizable value. Effective June 30, 2018, the Company changed its method of accounting for coffee, tea and culinary products from the last in, first out (“LIFO”) basis to the first in, first out ("FIFO") basis. The impact of this change in accounting principle has been reflected through retrospective application to the financial statements for each period presented. The Company continues to account for coffee brewing equipment parts on a FIFO basis. The Company regularly evaluates these inventories to determine the provision for obsolete and slow-moving inventory. Inventory reserves are based on inventory obsolescence trends, historical experience and application of specific identification.
Property, Plant and Equipment
Property, plant and equipment is carried at cost, less accumulated depreciation. Depreciation is computed using the straight-line method. The following useful lives are used:
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Buildings and facilities
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10 to 30 years
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Machinery and equipment
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3 to 10 years
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Equipment under capital leases
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Shorter of term of lease or estimated useful life
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Office furniture and equipment
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5 to 7 years
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Capitalized software
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3 to 5 years
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Leasehold improvements are depreciated on a straight-line basis over the lesser of the estimated useful life of the asset or the remaining lease term. When assets are sold or retired, the asset and related accumulated depreciation are removed from the respective account balances and any gain or loss on disposal is included in operations. Maintenance and repairs are charged to expense, and enhancements are capitalized.
Coffee Brewing Equipment and Service
The Company capitalizes coffee brewing equipment and depreciates it over five years and reports the depreciation expense in cost of goods sold. See Note 11 for details of the depreciation amounts. Other non-depreciation expenses related to coffee brewing equipment provided to customers, such as the cost of servicing that equipment (including service employees’ salaries, cost of transportation and the cost of supplies and parts), are considered directly attributable to the generation of revenues from the customers. These non-depreciation expenses are also included in cost of goods sold, and were $33.9 million, $30.2 million and $26.3 million, for the years ended June 30, 2019, 2018 and 2017, respectively.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
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.
Income Taxes
Deferred income taxes are determined based on the temporary differences between the financial reporting and tax bases of assets and liabilities using enacted tax rates in effect for the year in which differences are expected to reverse. Estimating the Company’s tax liabilities involves judgments related to uncertainties in the application of complex tax regulations. The Company makes certain estimates and judgments to determine tax expense for financial statement purposes as it evaluates the effect of tax credits, tax benefits and deductions, some of which result from differences in the timing of recognition of revenue or expense for tax and financial statement purposes. Changes to these estimates may result in significant changes to the Company’s tax provision in future periods. Each fiscal quarter the Company re-evaluates its tax provision and reconsiders its estimates and assumptions related to specific tax assets and liabilities, making adjustments as circumstances change.
Deferred Tax Asset Valuation Allowance
The Company evaluates its deferred tax assets quarterly to determine if a valuation allowance is required and considers whether a valuation allowance should be recorded against deferred tax assets based on the likelihood that the benefits of the deferred tax assets will or will not ultimately be realized in future periods. In making this assessment, significant weight is given to evidence that can be objectively verified, such as recent operating results, and less consideration is given to less objective indicators, such as future income projections. After consideration of positive and negative evidence, if the Company determines that it is more likely than not that it will generate future income sufficient to realize its deferred tax assets, the Company will record a reduction in the valuation allowance.
Revenue Recognition
The Company recognizes revenue in accordance with the way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. The Company performs the following steps to determine revenue recognition for an arrangement: (1) identify the contract(s) with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when (or as) the performance obligations are satisfied.
Net (Loss) Income Per Common Share
Net (loss) income per share (“EPS”) represents net (loss) income available to common stockholders divided by the weighted-average number of common shares outstanding for the 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 holders of Series A Preferred Stock is excluded from net (loss) income available to common stockholders for purposes of calculating basic and diluted EPS.
Diluted EPS represents net income available to holders of common stock divided by the weighted-average number of common shares outstanding, inclusive of the dilutive impact of common equivalent shares outstanding during the period. Common equivalent shares include potentially dilutive shares from share-based compensation including stock options, unvested restricted stock, performance-based restricted stock units, and shares of Series A Preferred Stock, as converted, because they are deemed participating securities. In the absence of contrary information, the Company assumes 100% of the target shares are issuable under performance-based restricted stock units.
The dilutive effect of Series A Preferred Stock is reflected in diluted EPS by application of the if-converted method. In applying the if-converted method, conversion will not be assumed for purposes of computing diluted EPS if the effect would
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
be anti-dilutive. The Series A Preferred Stock is antidilutive whenever the amount of the dividend declared or accumulated in the current period per common share obtainable upon conversion exceeds basic EPS.
Employee Stock Ownership Plan
Compensation cost for the ESOP is based on the fair market value of shares released or deemed to be released to employees in the period in which they are committed. As a leveraged ESOP with the Company as lender, a contra equity account is established to offset the Company’s note receivable. The contra account will change as compensation expense is recognized. The cost of shares purchased by the ESOP which have not been committed to be released or allocated to participants are shown as a contra-equity account “Unearned ESOP Shares” and are excluded from EPS calculations.
On December 31, 2018, the Company froze the ESOP such that (i) no employees of the Company may commence participation in the ESOP on or after December 31, 2018; (ii) no Company contributions will be made to the ESOP with respect to services performed or compensation received after December 31, 2018; and (iii) the ESOP accounts of all individuals who are actively employed by the Company and participating in the ESOP on December 31, 2018 will be fully vested as of such date. Additionally, the Administrative Committee, with the consent of the Board of Directors, designated certain employees who were terminated in connection with certain reductions-in-force in 2018 to be fully vested in their ESOP accounts as of their severance dates.
Effective January 1, 2019, the Company amended and restated its 401(k) Plan to, among other things, provide for annual contribution of shares of the Company’s common stock equal to 4% of each eligible participant’s annual plan compensation. See Note 13 for details.
Share-based Compensation
The Company measures all share-based compensation cost at the grant date, based on the fair values of the awards that are ultimately expected to vest, and recognizes that cost as an expense on a straight line-basis in its consolidated statements of operations over the requisite service period. Fair value of restricted stock and performance-based restricted stock units is the closing price of the Company's common stock on the date of grant. The Company estimates the fair value of option awards using the Black-Scholes option valuation model, which requires management to make certain assumptions for estimating the fair value of stock options at the date of grant.
In addition, the Company estimates the expected impact of forfeited awards and recognizes share-based compensation cost only for those awards ultimately expected to vest. If actual forfeiture rates differ materially from the Company’s estimates, share-based compensation expense could differ significantly from the amounts the Company has recorded in the current period. The Company periodically reviews actual forfeiture experience and will revise its estimates, as necessary. The Company will recognize as compensation cost the cumulative effect of the change in estimated forfeiture rates on current and prior periods in earnings of the period of revision. As a result, if the Company revises its assumptions and estimates, the Company’s share-based compensation expense could change materially in the future.
The Company's outstanding share-based awards include performance-based non-qualified stock options ("PNQs") and performance-based restricted stock units ("PBRSUs") that have performance-based vesting conditions in addition to time-based vesting. Awards with performance-based vesting conditions require the achievement of certain financial and other performance criteria as a condition to the vesting. The Company recognizes the estimated fair value of performance-based awards, net of estimated forfeitures, as share-based compensation expense over the service period based upon the Company’s determination of whether it is probable that the performance targets will be achieved. At each reporting period, the Company reassesses the probability of achieving the performance criteria and the performance period required to meet those targets. Determining whether the performance criteria will be achieved involves judgment, and the estimate of share-based compensation expense may be revised periodically based on changes in the probability of achieving the performance criteria. Revisions are reflected in the period in which the estimate is changed. If performance goals are not met, no share-based compensation expense is recognized for the cancelled PNQs or PBRSUs, and, to the extent share-based compensation expense was previously recognized for those cancelled PNQs or PBRSUs, such share-based compensation expense is reversed. If performance goals are exceeded and the payout is more than 100% of the target shares in the case of PBRSUs, additional compensation expense is recorded in the period when that determination is certified by the Compensation Committee of the Board of Directors.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Impairment of Goodwill and Indefinite-lived Intangible Assets
The Company accounts for its goodwill and indefinite-lived intangible assets in accordance with Accounting Standards Codification ("ASC") 350, “Intangibles-Goodwill and Other” (“ASC 350”). Goodwill and other indefinite-lived intangible assets are not amortized but instead are reviewed for impairment annually, or more frequently if an event occurs or circumstances change which indicate that an asset might be impaired. Pursuant to ASC 350, the Company performs a qualitative assessment of goodwill and indefinite-lived intangible assets on its consolidated balance sheets, to determine if there is a more likely than not indication that its goodwill and indefinite-lived intangible assets are impaired as of January 31. If the indicators of impairment are present, the Company performs a quantitative assessment to determine the impairment of these assets as of the measurement date.
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 consist of certain acquired trademarks, trade names and a brand name. Indefinite-lived intangible assets are tested for impairment by comparing their fair values to their carrying values. An impairment charge is recorded if the estimated fair value of such assets has decreased below their carrying values.
Other Intangible Assets
Other intangible assets consist of finite-lived intangible assets including acquired recipes, non-compete agreements, customer relationships, a trade name/brand name and certain trademarks. These assets are amortized over their estimated useful lives and are tested for impairment by grouping them with other assets at the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities. The estimated future cash flows are based upon, among other things, assumptions about expected future operating performance, and may differ from actual cash flows. If the sum of the projected undiscounted cash flows (excluding interest) is less than the carrying value of the assets, the assets will be written down to the estimated fair value in the period in which the determination is made. The Company reviews the recoverability of its finite-lived intangible assets whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable.
Shipping and Handling Costs
The Company’s shipping and handling costs are included in both cost of goods sold and selling expenses, depending on the nature of such costs. Shipping and handling costs included in cost of goods sold reflect inbound freight of raw materials and finished goods, and product loading and handling costs at the Company’s production facilities to the distribution centers and branches. Shipping and handling costs included in selling expenses consist primarily of those costs associated with moving finished goods to customers. Shipping and handling costs that were recorded as a component of the Company's selling expenses were $11.4 million, $11.9 million and $10.7 million, respectively, in the fiscal years ended June 30, 2019, 2018 and 2017.
Collective Bargaining Agreements
Certain Company employees are subject to collective bargaining agreements which expire on or before June 30, 2022. At June 30, 2019 approximately 28% of the Company's workforce was covered by such agreements.
Self-Insurance
The Company uses a combination of insurance and self-insurance mechanisms to provide for the potential liability of certain risks including workers’ compensation, health care benefits, general liability, product liability, property insurance and director and officers’ liability insurance. Liabilities associated with risks retained by the Company are not discounted and are estimated by considering historical claims experience, demographics, exposure and severity factors and other actuarial assumptions.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
The Company's self-insurance for workers’ compensation liability includes estimated outstanding losses of unpaid claims, and allocated loss adjustment expenses (“ALAE”), case reserves, the development of known claims and incurred but not reported claims. ALAE are the direct expenses for settling specific claims. The amounts reflect per occurrence and annual aggregate limits maintained by the Company. The estimated liability analysis does not include estimating a provision for unallocated loss adjustment expenses.
The estimated gross undiscounted workers’ compensation liability relating to such claims was $6.3 million and $7.1 million, as of June 30, 2019 and 2018, respectively and the estimated recovery from reinsurance was $0.9 million for both periods. The short-term and long-term accrued liabilities for workers’ compensation claims are presented on the Company's consolidated balance sheets in “Other current liabilities” and in “Accrued workers' compensation liabilities,” respectively. The estimated insurance receivable is included in “Other assets” on the Company's consolidated balance sheets.
At June 30, 2019 the Company had posted $1.4 million in cash and a $2.3 million letter of credit, and at June 30, 2018 the Company had posted $2.3 million in cash and a $2.0 million letter of credit, as a security deposit for self-insuring workers’ compensation, general liability and auto insurance coverages.
The estimated liability related to the Company's self-insured group medical insurance at June 30, 2019 and 2018 was $0.9 million and $1.6 million, respectively, recorded on an incurred but not reported basis, within deductible limits, based on actual claims and the average lag time between the date insurance claims are filed and the date those claims are paid.
The Company is self-insured for general liability, product liability and commercial auto liability and accrues the cost of the insurance based on estimates of the aggregate liability claims incurred using certain actuarial assumptions and historical claims experience. The Company's liability reserve for such claims was $1.0 million and $1.7 million at June 30, 2019 and 2018, respectively. The estimated liability related to the Company's self-insured group medical insurance, general liability, product liability and commercial auto liability is included on the Company's consolidated balance sheets in “Other current liabilities.”
Pension Plans
The Company’s defined benefit pension plans are not admitting new participants, therefore, changes to pension liabilities are primarily due to market fluctuations of investments for existing participants and changes in interest rates. The Company’s defined benefit pension plans are accounted for using the guidance of ASC 710, “Compensation—General“ and ASC 715, “Compensation-Retirement Benefits“ and are measured as of the end of the fiscal year.
The Company recognizes the overfunded or underfunded status of a defined benefit pension as an asset or liability on its consolidated balance sheets. Changes in the funded status are recognized through AOCI, in the year in which the changes occur. See Note 13.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Business Combinations
The Company accounts for business combinations under the acquisition method of accounting. The purchase price of each business acquired is allocated to the tangible and intangible assets acquired and the liabilities assumed based on information regarding their respective fair values on the date of acquisition. Any excess of the purchase price over the fair value of the separately identifiable assets acquired and the liabilities assumed is allocated to goodwill. Management determines the fair values used in purchase price allocations for intangible assets based on historical data, estimated discounted future cash flows, and expected royalty rates for trademarks and trade names, as well as certain other information. The valuation of assets acquired and liabilities assumed requires a number of judgments and is subject to revision as additional information about the fair value of assets and liabilities becomes available. Additional information, which existed as of the acquisition date but unknown to the Company at that time, may become known during the remainder of the measurement period, a period not to exceed twelve months from the acquisition date. Adjustments in the purchase price allocation may require a recasting of the amounts allocated to goodwill and intangible assets. If such an adjustment is required, the Company will recognize a measurement-period adjustment during the period in which it determines the amount of the adjustment, including the effect on earnings of any amounts it would have recorded in previous periods if the accounting had been completed at the acquisition date. Transaction costs, including legal, accounting and integration expenses, are expensed as incurred and are included in operating expenses in the Company's consolidated statements of operations. Contingent consideration, such as earnout, is deferred as a short-term or long-term liability based on an estimate of the timing of the future payment. These contingent consideration liabilities are recorded at fair value on the acquisition date and are re-measured quarterly based on the then assessed fair value and adjusted if necessary. The results of operations of businesses acquired are included in the Company's consolidated financial statements from their dates of acquisition.
Restructuring Plans
The Company accounts for exit or disposal of activities in accordance with ASC 420, “Exit or Disposal Cost Obligations.“ The Company defines a business restructuring as an exit or disposal activity that includes but is not limited to a program which is planned and controlled by management and materially changes either the scope of a business or the manner in which that business is conducted. Business restructuring charges may include (i) one-time termination benefits related to employee separations, (ii) contract termination costs and (iii) other related costs associated with exit or disposal activities.
A liability is recognized and measured at its fair value for one-time termination benefits once the plan of termination is communicated to affected employees and it meets all of the following criteria: (i) management commits to a plan of termination, (ii) the plan identifies the number of employees to be terminated and their job classifications or functions, locations and the expected completion date, (iii) the plan establishes the terms of the benefit arrangement and (iv) it is unlikely that significant changes to the plan will be made or the plan will be withdrawn. Contract termination costs include costs to terminate a contract or costs that will continue to be incurred under the contract without benefit to the Company. A liability is recognized and measured at its fair value when the Company either terminates the contract or ceases using the rights conveyed by the contract.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Recently Adopted Accounting Standards
In March 2018, the Financial Accounting Standards Board ("FASB") issued ASU 2018-05 which amends ASC 740, “Income Taxes,” to provide guidance on accounting for the tax effects of the Tax Cuts and Jobs Act enacted on December 22, 2017 (the “Tax Act”) pursuant to 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 impact 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. The Company finalized its assessment of the income tax effects of the Tax Act in the second quarter of fiscal 2019.
In March 2017, the FASB issued ASU 2017-07 to amend 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 updated the guidance on the presentation of net periodic pension cost and net periodic post-retirement pension cost, and requires the service cost component to be presented in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations. The amendments in this update also allow only the service cost component to be eligible for capitalization when applicable. The guidance in ASU 2017-07 is effective for annual periods beginning after December 15, 2017, including interim periods within those fiscal years. Entities are required to use a retrospective transition method to adopt the requirement for separate income statement presentation of the service cost and other components, and a prospective transition method to adopt the requirement to limit the capitalization of benefit cost to the service component. The Company adopted ASU 2017-07 beginning July 1, 2018 using a retrospective transition method. See the impact of the adoption of ASU 2017-07 in the table below.
In January 2017, the FASB issued ASU 2017-01 to clarify the definition of a business. The objective of adding the guidance is 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, and should be applied prospectively. The Company adopted ASU 2017-01 beginning July 1, 2018. The Company have applied the new guidance to all applicable transactions after the adoption date.
In November 2016, the FASB issued ASU 2016-18 that requires a statement of cash flows to 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. An entity with a material balance of restricted cash and restricted cash equivalents must disclose information about the nature of the restrictions. 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. The Company adopted ASU 2016-18 beginning July 1, 2018. Adoption of ASU 2016-18 did not have a material effect on the results of operations, financial position or cash flows of the Company.
In August 2016, the FASB issued ASU 2016-15 to address certain issues where diversity in practice was identified in classifying certain cash receipts and cash payments based on the guidance in ASC 230, “Statement of Cash Flows” (“ASC 230”). ASC 230 is principles based and often requires judgment to determine the appropriate classification of cash flows as operating, investing or financing activities. The application of judgment has resulted in diversity in how certain cash receipts and cash payments are classified. Certain cash receipts and cash payments may have aspects of more than one class of cash flows. ASU 2016-15 clarifies that an entity will first apply any relevant guidance in ASC 230 and in other applicable topics. If there is no guidance that addresses those cash receipts and cash payments, an entity will determine each separately identifiable source or use and classify the receipt or payment based on the nature of the cash flow. If a receipt or payment has aspects of more than one class of cash flows and cannot be separated, classification will depend on the predominant source or use. The guidance in ASU 2016-15 is effective for public business entities for annual periods beginning after December 15, 2017, including interim periods within those fiscal years. The Company adopted ASU 2016-15 beginning July 1, 2018. Adoption of ASU 2016-15 did not have a material effect on the results of operations, financial position or cash flows of the Company.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
In May 2014, the FASB issued ASU 2014-09 to amend the 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. ASU 2014-09 replaces most existing revenue recognition guidance in GAAP. The standard's core principle is that a company will recognize revenue when it transfers promised goods or services to a customer in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In 2015 and 2016, the FASB issued additional ASUs related to ASU 2014-09 that delayed the effective date of the guidance and clarified various aspects of the new revenue guidance, including principal versus agent considerations, identification of performance obligations, and accounting for licenses, and included other improvements and practical expedients. ASU 2014-09 is effective for public business entities for annual reporting periods beginning after December 15, 2017, including interim periods within those fiscal years. The Company adopted ASU 2014-09 beginning July 1, 2018 using the modified retrospective method for all contracts not completed as of the date of adoption. Adoption of ASU 2014-09 did not have a material effect on the results of operations, financial position or cash flows of the Company. The Company has included expanded disclosures in this report related to revenue recognition in order to comply with ASU 2014-09. See Note 23.
Adoption of ASU 2017-07
The Company adopted ASU 2017-07 on July 1, 2018 using the retrospective transition method.
The adoption of this accounting standard resulted in a change in certain previously reported amounts, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended June 30, 2018
|
|
(In thousands)
|
|
As Previously Reported
|
|
ASU 2017-07 Adjustments
|
|
As Adjusted
|
|
Cost of goods sold
|
|
$
|
399,502
|
|
|
$
|
(347
|
)
|
|
$
|
399,155
|
|
|
Gross profit
|
|
$
|
207,042
|
|
|
$
|
347
|
|
|
$
|
207,389
|
|
|
Selling expenses
|
|
$
|
154,539
|
|
|
$
|
(1,148
|
)
|
|
$
|
153,391
|
|
|
General and administrative expenses
|
|
$
|
47,863
|
|
|
$
|
1,566
|
|
|
$
|
49,429
|
|
|
Operating expenses
|
|
$
|
205,918
|
|
|
$
|
418
|
|
|
$
|
206,336
|
|
|
Income from operations
|
|
$
|
1,124
|
|
|
$
|
(71
|
)
|
|
$
|
1,053
|
|
|
Interest expense
|
|
$
|
(3,177
|
)
|
|
$
|
(6,580
|
)
|
|
$
|
(9,757
|
)
|
|
Other, net
|
|
$
|
1,071
|
|
|
$
|
6,651
|
|
|
$
|
7,722
|
|
|
Total other (expense) income
|
|
$
|
(2,092
|
)
|
|
$
|
71
|
|
|
$
|
(2,021
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended June 30, 2017
|
|
(In thousands)
|
|
As Previously Reported
|
|
ASU 2017-07 Adjustments
|
|
As Adjusted
|
|
Cost of goods sold
|
|
$
|
354,622
|
|
|
$
|
27
|
|
|
$
|
354,649
|
|
|
Gross profit
|
|
$
|
186,878
|
|
|
$
|
(27
|
)
|
|
$
|
186,851
|
|
|
Selling expenses
|
|
$
|
133,329
|
|
|
$
|
205
|
|
|
$
|
133,534
|
|
|
General and administrative expenses
|
|
$
|
42,933
|
|
|
$
|
12
|
|
|
$
|
42,945
|
|
|
Operating expenses
|
|
$
|
147,700
|
|
|
$
|
217
|
|
|
$
|
147,917
|
|
|
Income from operations
|
|
$
|
39,178
|
|
|
$
|
(244
|
)
|
|
$
|
38,934
|
|
|
Interest expense
|
|
$
|
(2,185
|
)
|
|
$
|
(6,416
|
)
|
|
$
|
(8,601
|
)
|
|
Other, net
|
|
$
|
(1,201
|
)
|
|
$
|
6,660
|
|
|
$
|
5,459
|
|
|
Total other (expense) income
|
|
$
|
(1,812
|
)
|
|
$
|
244
|
|
|
$
|
(1,568
|
)
|
New Accounting Pronouncements
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
In August 2018, the FASB issued ASU No. 2018-15, “Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract” (“ASU 2018-15”). ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The guidance in ASU 2018-15 is effective for public business entities for annual periods beginning after December 15, 2019, and interim periods within those fiscal years, and is effective for the Company beginning July 1, 2020. Early adoption is permitted, including adoption in any interim period. The Company is currently evaluating the impact ASU 2018-15 will have on its consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-14, “Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans” (“ASU 2018-14”). ASU 2018-14 modifies disclosure of other accounting and reporting requirements related to single-employer defined benefit pension or other postretirement benefit plans. The guidance in ASU 2018-14 is effective for public business entities for annual periods beginning after December 15, 2020, and is effective for the Company beginning July 1, 2021. Early adoption is permitted. The Company is currently evaluating the impact ASU 2018-14 will have on its consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement” (“ASU 2018-13”). ASU 2018-13 improves the effectiveness of fair value measurement disclosures and modifies the disclosure requirements on fair value measurements, including the consideration of costs and benefits. The guidance in ASU 2018-13 is effective for annual periods beginning after December 15, 2019, and interim periods within those fiscal years, and is effective for the Company beginning July 1, 2020. Early adoption is permitted. The Company is currently evaluating the impact ASU 2018-13 will have on its consolidated financial statements.
In February 2018, the FASB issued ASU No. 2018-02, “Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income” (“ASU 2018-02”). ASU 2018-02 allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Act and requires certain disclosures about stranded tax effects. The guidance in ASU 2018-02 is effective for annual periods beginning after December 15, 2018, and interim periods within those fiscal years, and is effective for the Company beginning July 1, 2019 and should be applied either in the period of adoption or retrospectively. Early adoption is permitted. The Company will adopt ASU 2018-02 beginning July 1, 2019. The adoption of ASU 2018-02 will not 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. 2017-04, “Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment” (“ASU 2017-04”). The amendments in ASU 2017-04 address concerns regarding the cost and complexity of the two-step goodwill impairment test, and remove the second step of the test. An entity will apply a one-step quantitative test and record the amount of goodwill impairment as the excess of a reporting unit’s carrying amount over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. ASU 2017-04 does not amend the optional qualitative assessment of goodwill impairment. The guidance in ASU 2017-04 is effective for annual and interim goodwill impairment tests in fiscal years beginning after December 15, 2019, and is effective for the Company beginning July 1, 2020. Adoption of ASU 2017-04 is not expected to have a material effect on the results of operations, financial position or cash flows of the Company.
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”), which introduces a new lessee model that brings substantially all leases onto the balance sheet. Under the new guidance, lessees are required to recognize a lease liability, which represents the discounted obligation to make lease payments and a related right-of-use asset. In July 2018, the FASB issued ASU No. 2018-10, “Codification Improvements to Topic 842, Leases,” and ASU No. 2018-11, “Leases (Topic 842): Targeted Improvements,” which provide additional guidance to consider when implementing ASU 2016-02. 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. The Company adopted the standard effective July 1, 2019, utilizing the modified retrospective transition method. The Company has completed its compilation of all leases and has preliminary concluded that the impact of the adoption of ASU 2016-02 is expected to be a recognition of right-of-use assets and lease liabilities of between $14 million and $19 million on its Consolidated Balance Sheets. The adoption is not expected to have a material impact on its Consolidated Statements of Operations or on other consolidated financial statements. The Company elected certain practical expedients provided in the guidance which allows it not to reassess whether
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
existing contracts are or contain leases, to not reassess the lease classification of any existing leases, to not reassess initial direct costs for any existing leases, and to not separate lease components for certain asset classes. The Company also made an accounting policy to exclude leases with a term of 12 months or less.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Note 3. Acquisitions
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, a coffee roaster and distributor with a focus on the convenience store, grocery and foodservice channels. As part of the transaction, the Company entered into a three-year lease on West Coast Coffee’s existing 20,400 square foot facility in Hillsboro, Oregon, which expires January 31, 2020, and assumed leases on six branch warehouses consisting of an aggregate of 24,150 square feet in Oregon, California and Nevada, expiring on various dates through November 2020. The Company acquired West Coast Coffee for aggregate purchase consideration of $15.5 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 was estimated to have a fair value of $1.0 million and was recorded in other current liabilities on the Company’s consolidated balance sheet at June 30, 2019 and June 30, 2018. Total earnout amount of $1.0 million was paid in July 2019.
In fiscal 2017, the Company incurred $0.3 million in transaction costs related to the West Coast Coffee acquisition, consisting primarily of legal and accounting expenses, which are included in general and administrative expenses in the Company's consolidated statements of operations for the fiscal year ended June 30, 2017. No transaction costs were incurred in fiscal 2019 and 2018 relating to the West Coast Coffee acquisition.
The financial effect of this acquisition was not material to the Company’s consolidated financial statements. The Company has not presented pro forma results of operations for the acquisition because it is not significant to the Company's consolidated results of operations.
The acquisition was accounted for as a business combination. The Company allocated $7.9 million of consideration transferred to tangible and intangible assets acquired and liabilities assumed based on their estimated fair values on the acquisition date, with the $7.6 million remaining unallocated amount recorded as goodwill. The purchase price allocation is final.
Boyd Coffee Company
On October 2, 2017 (“Closing Date”), the Company acquired substantially all of the assets and certain specified liabilities of Boyd Coffee, a coffee roaster and distributor with a focus on restaurants, hotels, and convenience stores on the West Coast of the United States. The acquired business of Boyd Coffee (the “Boyd Business”) is expected to add to the Company’s product portfolio, improve the Company's growth potential, deepen the Company’s distribution footprint and increase the Company's capacity utilization at its production facilities.
At closing, as consideration for the purchase, the Company paid the Seller $38.9 million in cash from borrowings under its senior secured revolving credit facility, and issued to Boyd Coffee 14,700 shares of the Company’s Series A Preferred Stock Convertible Participating Cumulative Perpetual Preferred Stock, par value $1.00 per share (“Series A Preferred Stock”), with a fair value of $11.8 million as of the Closing Date. Additionally, the Company held back $3.2 million in cash (“Holdback Cash Amount”) and 6,300 shares of Series A Preferred Stock (“Holdback Stock”) with a fair value of $4.8 million as of the Closing Date, for the satisfaction of any post-closing net working capital adjustment and to secure the Seller’s (and the other seller parties’) indemnification obligations under the purchase agreement.
In addition to the Holdback Cash, as part of the consideration for the purchase, at closing the Company held back $1.1 million in cash (the “Multiemployer Plan Holdback”) to pay, on behalf of the Seller, any assessment of withdrawal liability made against the Seller following the Closing Date in respect of the Seller’s multiemployer pension plan, which amount was recorded on the Company's consolidated balance sheet in "Other long-term liabilities" at June 30, 2018. On January 8, 2019, the Seller notified the Company of the assessment of $0.5 million in withdrawal liability against the Seller, which the Company timely paid from the Multiemployer Plan Holdback during the twelve months ended June 30, 2019. The Company has applied the remaining amount of the Multiemployer Plan Holdback of $0.5 million towards satisfaction of the Seller's post-closing net working capital deficiency under the Asset Purchase Agreement as of March 31, 2019 as described below.
The acquisition was accounted for as a business combination. The fair value of consideration transferred was allocated to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values on the acquisition
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
date, with the remaining unallocated amount recorded as goodwill. The fair value of consideration transferred reflected the Company’s best estimate of the post-closing net working capital adjustment of $8.1 million due to the Company at June 30, 2018 when the purchase price allocation was finalized. On January 23, 2019, PricewaterhouseCoopers LLP (“PwC”), as the “Independent Expert” designated under the Asset Purchase Agreement to resolve working capital disputes, issued its determination letter with respect to adjustments to working capital. The post-closing net working capital adjustment, as determined by the Independent Expert, was $6.3 million due to the Company.
During the year ended June 30, 2019 the Company satisfied the $6.3 million amount by applying the remaining amount of the Multiemployer Plan Holdback of $0.5 million, retaining all of the Holdback Cash Amount of $3.2 million and canceling 4,630 shares of Holdback Stock with a fair value of $2.3 million based on the stated value and deemed conversion price under the Asset Purchase Agreement. The Company has retained the remaining 1,670 shares of the Holdback Stock pending satisfaction of certain indemnification claims against the Seller following which the remaining Holdback Stock, if any, will be released to the Seller.
The following table summarizes the final allocation of consideration transferred as of the acquisition date:
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Fair Value
|
|
Estimated
Useful Life
(years)
|
|
|
|
|
|
|
Cash paid
|
$
|
38,871
|
|
|
|
|
Holdback Cash Amount
|
3,150
|
|
|
|
|
Multiemployer Plan Holdback
|
1,056
|
|
|
|
|
Fair value of Series A Preferred Stock (14,700 shares)(1)
|
11,756
|
|
|
|
|
Fair value of Holdback Stock (6,300 shares)(1)
|
4,825
|
|
|
|
|
Estimated post-closing net working capital adjustment
|
(8,059
|
)
|
|
|
|
Total consideration
|
$
|
51,599
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
$
|
7,503
|
|
|
|
|
Inventory
|
9,415
|
|
|
|
|
Prepaid expense and other assets
|
1,951
|
|
|
|
|
Property, plant and equipment
|
4,936
|
|
|
|
|
Goodwill
|
25,395
|
|
|
|
|
Intangible assets:
|
|
|
|
|
Customer relationships
|
16,000
|
|
|
10
|
|
Trade name/trademark—indefinite-lived
|
3,100
|
|
|
|
|
Accounts payable
|
(15,080
|
)
|
|
|
|
Other liabilities
|
(1,621
|
)
|
|
|
|
Total consideration
|
$
|
51,599
|
|
|
|
______________
(1) Fair value of Series A Preferred Stock and Holdback Stock as of the Closing Date, estimated as the sum of (a) the present value of the dividends payable thereon and (b) the stated value of the Series A Preferred Stock or Holdback Stock, as the case may be, adjusted for both the conversion premium and the discount for lack of marketability arising from conversion restrictions.
In connection with this acquisition, the Company recorded goodwill of $25.4 million, which is deductible for tax purposes. The Company also recorded $16.0 million in finite-lived intangible assets that included customer relationships and $3.1 million in indefinite-lived intangible assets that included a trade name/trademark. The amortization period for the finite-lived intangible
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
assets is 10.0 years.
The determination of the fair value of intangible assets acquired was primarily based on significant inputs not observable in an active market and thus represent Level 3 fair value measurements as defined under GAAP.
The fair value assigned to the 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 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.
The following table presents the net sales and income before taxes from the Boyd Business operations that are included in the Company’s consolidated statements of operations for the fiscal year ended June 30, 2019 and 2018:
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
For the Year Ended June 30,
|
|
|
|
2018
|
|
Net sales
|
|
$
|
67,385
|
|
|
Income before taxes
|
|
$
|
1,572
|
|
The Company considers the acquisition to be material to the Company’s consolidated financial statements and has provided certain pro forma disclosures pursuant to ASC 805, “Business Combinations.”
The following table sets forth certain unaudited pro forma financial results for the Company for the fiscal years ended June 30, 2019, 2018 and 2017, as if the acquisition of the Boyd Business was consummated on the same terms as of the first day of the applicable fiscal year.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended June 30,
|
|
(In thousands)
|
|
|
2018
|
|
2017
|
|
Net sales
|
|
|
$
|
628,526
|
|
|
$
|
636,969
|
|
|
(Loss) income before taxes
|
|
|
$
|
(642
|
)
|
|
$
|
36,969
|
|
The unaudited pro forma financial results for the Company are based on estimates and assumptions, which the Company believes are reasonable. These results are not necessarily indicative of the Company’s consolidated statements of operations in future periods or the results that actually would have been realized had the Company acquired the Boyd Business during the periods presented.
At closing, the parties entered into a transition services agreement where the Seller agreed to provide certain accounting, marketing, human resources, information technology, sales and distribution and other administrative 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 transitions manufacturing into its production facilities. Amounts paid by the Company to the Seller for these services totaled $3.7 million and $25.4 million in the fiscal year ended June 30, 2019 and 2018, respectively.
The Company has incurred acquisition and integration costs related to the Boyd Business acquisition, consisting primarily of inventory mark downs, legal expenses, Boyd Coffee plant decommissioning and equipment relocation costs, and one-time payroll and benefit expenses, of $6.1 million and $7.6 million during the fiscal years ended June 30, 2019 and 2018, respectively, which are included in operating expenses in the Company's consolidated statements of operations.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Note 4. Restructuring Plans
Corporate Relocation Plan
On February 5, 2015, the Company announced the Corporate Relocation Plan to close its Torrance, California facility and relocate its corporate headquarters, product development lab, and manufacturing and distribution operations from Torrance, California to the Northlake 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.
During fiscal year ended June 30, 2019, the Company incurred $3.4 million in restructuring and other transition expenses associated with the assessment by the Western Conference of Teamsters Pension Trust (the “WCT Pension Trust”) of the Company’s share of the Western Conference of Teamsters Pension Plan (the “WCTPP”) unfunded benefits due to the Company’s partial withdrawal from the WCTPP as a result of employment actions taken by the Company in 2016 in connection with the Corporate Relocation Plan, of which the Company has paid $1.9 million and has outstanding contractual obligations of $1.5 million as of June 30, 2019.
Since the adoption of the Corporate Relocation Plan through June 30, 2019, the Company has recognized a total of $35.2 million in aggregate costs including $17.4 million in employee retention and separation benefits, $3.4 million in pension withdrawal liability, $7.0 million in facility-related costs related to the temporary office space, costs associated with the move of the Company’s headquarters, relocation of the Company’s Torrance operations and certain distribution operations and $7.4 million in other related costs. The Company also recognized from inception through June 30, 2019 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.
DSD Restructuring Plan
On February 21, 2017, the Company announced the DSD Restructuring Plan to reorganize its DSD operations in an effort to realign functions into a channel-based selling organization, streamline operations, acquire certain channel specific expertise, and improve selling effectiveness and financial results. The strategic decision to undertake the DSD Restructuring Plan resulted from an ongoing operational review of various initiatives within the DSD selling organization. The Company had revised its estimated time of completion of the DSD Restructuring Plan from the end of calendar 2018 to the end of fiscal 2019.
The Company recognized approximately $4.5 million of pre-tax restructuring charges by the end of fiscal 2019 consisting of approximately $2.3 million in employee-related costs and contractual termination payments, including severance, prorated bonuses for bonus eligible employees and outplacement services, and $2.2 million in other related costs, including legal, recruiting, consulting, other professional services, and travel.
The following table sets forth the activity in liabilities associated with the DSD Restructuring Plan from the time of adoption through the fiscal year ended June 30, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Balances as of
June 30, 2017
|
|
Additions
|
|
Payments
|
|
Non-Cash Settled
|
|
Adjustments
|
|
Balances as of
June 30, 2019
|
|
Employee-related costs
|
$
|
—
|
|
|
$
|
2,634
|
|
|
$
|
2,605
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
29
|
|
|
Other
|
—
|
|
|
1,949
|
|
|
1,918
|
|
|
—
|
|
|
(31
|
)
|
|
—
|
|
|
Total
|
$
|
—
|
|
|
$
|
4,583
|
|
|
$
|
4,523
|
|
|
$
|
—
|
|
|
$
|
(31
|
)
|
|
$
|
29
|
|
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
The following table sets forth the expenses associated with the DSD Restructuring Plan for the fiscal year ended June 30, 2019, 2018 and 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
(In thousands)
|
2019
|
|
2018
|
|
2017
|
|
Employee-related costs
|
$
|
1,487
|
|
|
$
|
612
|
|
|
$
|
506
|
|
|
Other
|
284
|
|
|
429
|
|
|
1,205
|
|
|
Total
|
$
|
1,771
|
|
|
$
|
1,041
|
|
|
$
|
1,711
|
|
Note 5. 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. The sale included 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, trade names and other intellectual property assets; contract rights under sales and purchase orders and certain other agreements; and a list of certain customers, other than the Company’s DSD customers, and assumed certain liabilities relating to the Spice Assets. The Company received $6.0 million in cash at closing, and was eligible to receive an earnout amount of up to $5.0 million over a three year period based upon a percentage of certain institutional spice sales by Harris following the closing. Gain from the earnout on the sale was recognized when earned and when realization was assured beyond a reasonable doubt. The Company recognized $0.6 million, $0.8 million and $1.0 million in earnout during the fiscal years ended June 30, 2019, 2018 and 2017, respectively, which is included in “Net gains from sale of Spice Assets” in the Company's consolidated statements of operations. The sale of the Spice Assets did not represent a strategic shift for the Company and did not have a material impact on the Company's results of operations because the Company continues to sell a complete portfolio of spice and other culinary products purchased from Harris under a supply agreement to its DSD customers.
Sale of Torrance Facility
On July 15, 2016, the Company completed the sale of the Torrance Facility, consisting of approximately 665,000 square feet of buildings located on approximately 20.3 acres of land, for an aggregate cash sale price of $43.0 million, which sale price was subject to customary adjustments for closing costs and documentary transfer taxes. Cash proceeds from the sale of the Torrance Facility were $42.5 million.
Following the closing of the sale, the Company leased back the Torrance Facility on a triple net basis through October 31, 2016 at zero base rent, and exercised two one-month extensions at a base rent of $100,000 per month. In accordance with ASC 840, “Leases,” due to the Company’s continuing involvement with the property, the Company accounted for the transaction as a financing transaction, deferred the gain on sale of the Torrance Facility and recorded the net sale proceeds of $42.5 million and accrued non-cash interest expense on the financing transaction in “Sale-leaseback financing obligation” on the Company's consolidated balance sheet at September 30, 2016. The Company vacated the Torrance Facility in December 2016 and concluded the leaseback transaction. As a result, at December 31, 2016, the financing transaction qualified for sales recognition under ASC 840. Accordingly, in the fiscal year ended June 30, 2017, the Company recognized the net gain from sale of the Torrance Facility in the amount of $37.4 million, including non-cash interest expense of $0.7 million and non-cash rent expense of $1.4 million, representing the rent for the zero base rent period previously recorded in “Other current liabilities” and removed the amounts recorded in “Assets held for sale” and the “Sale-leaseback financing obligation” on its consolidated balance sheet.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Note 6. Derivative Instruments
Derivative Instruments Held
Coffee-Related Derivative Instruments
The Company is exposed to commodity price risk associated with its PTF green coffee purchase contracts, which are described further in Note 2. The Company utilizes forward and option contracts to manage exposure to the variability in expected future cash flows from forecasted purchases of green coffee attributable to commodity price risk. Certain of these coffee-related derivative instruments utilized for risk management purposes have been designated as cash flow hedges, while other coffee-related derivative instruments have not been designated as cash flow hedges or do not qualify for hedge accounting despite hedging the Company's future cash flows on an economic basis.
The following table summarizes the notional volumes for the coffee-related derivative instruments held by the Company at June 30, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30,
|
|
(In thousands)
|
|
2019
|
|
2018
|
|
Derivative instruments designated as cash flow hedges:
|
|
|
|
|
|
Long coffee pounds
|
|
42,113
|
|
|
40,913
|
|
|
Derivative instruments not designated as cash flow hedges:
|
|
|
|
|
|
Long coffee pounds
|
|
6,070
|
|
|
2,546
|
|
|
Total
|
|
48,183
|
|
|
43,459
|
|
Coffee-related derivative instruments designated as cash flow hedges outstanding as of June 30, 2019 will expire within 18 months. At June 30, 2019 and 2018 approximately 87% and 94%, respectively, of the Company's outstanding coffee-related derivative instruments were designated as cash flow hedges.
Interest Rate Swap Derivative Instruments
Pursuant to an International Swap Dealers Association, Inc. Master Agreement (“ISDA”) effective March 20, 2019, the Company on March 27, 2019, entered into a swap transaction utilizing a notional amount of $80.0 million, with an effective date of April 11, 2019 and a maturity date of October 11, 2023 (the “Rate Swap”). The Rate Swap is intended to manage the Company’s interest rate risk on its floating-rate indebtedness under the Company’s revolving credit facility. Under the terms of the Rate Swap, the Company receives 1-month LIBOR, subject to a 0% floor, and makes payments based on a fixed rate of 2.1975%. The Company’s obligations under the ISDA are secured by the collateral which secures the loans under the revolving credit facility on a pari passu and pro rata basis with the principal of such loans. The Company has designated the Rate Swap derivative instruments as a cash flow hedge.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Effect of Derivative Instruments on the Financial Statements
Balance Sheets
Fair values of derivative instruments on the Company's consolidated balance sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Instruments
Designated as Cash Flow Hedges
|
|
Derivative Instruments Not Designated as Accounting Hedges
|
|
|
|
As of June 30,
|
|
As of June 30,
|
|
(In thousands)
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Financial Statement Location:
|
|
|
|
|
|
|
|
|
|
Short-term derivative assets:
|
|
|
|
|
|
|
|
|
|
Coffee-related derivative instruments(1)
|
|
$
|
1,254
|
|
|
$
|
—
|
|
|
$
|
611
|
|
|
$
|
—
|
|
|
Long-term derivative assets:
|
|
|
|
|
|
|
|
|
|
Coffee-related derivative instruments(2)
|
|
$
|
671
|
|
|
$
|
—
|
|
|
$
|
3
|
|
|
$
|
—
|
|
|
Short-term derivative liabilities:
|
|
|
|
|
|
|
|
|
|
Coffee-related derivative instruments(3)
|
|
$
|
1,114
|
|
|
$
|
3,081
|
|
|
$
|
114
|
|
|
$
|
219
|
|
|
Interest rate swap derivative instruments(3)
|
|
$
|
246
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Long-term derivative liabilities:
|
|
|
|
|
|
|
|
|
|
Coffee-related derivative instruments(4)
|
|
$
|
13
|
|
|
$
|
386
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Interest rate swap derivative instruments(4)
|
|
$
|
1,599
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
________________
(1) Included in “Short-term derivative assets” on the Company's consolidated balance sheets.
(2) Included in “Long-term derivative assets” on the Company's consolidated balance sheets.
(3) Included in “Short-term liabilities” on the Company's consolidated balance sheets.
(4) Included in “Other long-term liabilities” on the Company's consolidated balance sheets.
Statements of Operations
The following table presents pretax net gains and losses for the Company's derivative instruments designated as cash flow hedges, as recognized in “AOCI,” “Cost of goods sold” and “Other, net”.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
Financial Statement Classification
|
|
(In thousands)
|
|
2019
|
|
2018
|
|
2017
|
|
|
|
Net losses recognized in AOCI - Interest rate swap
|
|
$
|
(1,791
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
AOCI
|
|
Net gains recognized from AOCI to earnings - Interest rate swap
|
|
$
|
46
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
Interest Expense
|
|
Net losses recognized in AOCI - Coffee-related
|
|
$
|
(7,407
|
)
|
|
$
|
(8,420
|
)
|
|
$
|
(4,746
|
)
|
|
|
AOCI
|
|
Net losses recognized in earnings - Coffee-related
|
|
$
|
(9,242
|
)
|
|
$
|
(1,179
|
)
|
|
$
|
(835
|
)
|
|
|
Costs of goods sold
|
|
Net gains (losses) recognized in earnings (ineffective portion)
|
|
$
|
—
|
|
|
$
|
48
|
|
|
$
|
(456
|
)
|
|
|
Other, net
|
For the fiscal years ended June 30, 2019, 2018 and 2017, there were no gains or losses recognized in earnings as a result of excluding amounts from the assessment of hedge effectiveness or as a result of reclassifications to earnings following the discontinuance of any cash flow hedges.
Net losses (gains) on derivative instruments in the Company's consolidated statements of cash flows also includes net losses (gains) on coffee-related derivative instruments designated as cash flow hedges reclassified to cost of goods sold from AOCI in the fiscal years ended June 30, 2019, 2018 and 2017. Gains and losses on derivative instruments not designated as accounting hedges are included in “Other, net” in the Company's consolidated statements of operations and in “Net losses (gains) on derivative instruments and investments” in the Company's consolidated statements of cash flows.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Net gains and losses recorded in “Other, net” are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
(In thousands)
|
|
2019
|
|
2018
|
|
2017
|
|
Net losses on coffee-related derivative instruments
|
|
$
|
(2,252
|
)
|
|
$
|
(469
|
)
|
|
$
|
(1,812
|
)
|
|
Net gains on investments
|
|
—
|
|
|
7
|
|
|
286
|
|
|
Net losses on derivative instruments and investments(1)
|
|
(2,252
|
)
|
|
(462
|
)
|
|
(1,526
|
)
|
|
Non-operating pension and other postretirement benefit plans cost(2)
|
|
6,315
|
|
|
6,651
|
|
|
6,660
|
|
|
Other gains, net
|
|
103
|
|
|
1,533
|
|
|
325
|
|
|
Other, net
|
|
$
|
4,166
|
|
|
$
|
7,722
|
|
|
$
|
5,459
|
|
___________
(1) Excludes net losses and net gains on coffee-related derivative instruments designated as cash flow hedges recorded in cost of goods sold in the fiscal years ended June 30, 2019, 2018 and 2017.
(2) Presented in accordance with implementation of ASU 2017-07.
Offsetting of Derivative Assets and Liabilities
The Company has agreements in place that allow for the financial right of offset for derivative assets and liabilities at settlement or in the event of default under the agreements. Additionally, under certain coffee derivative agreements, the Company maintains accounts with its counterparties to facilitate financial derivative transactions in support of its risk management activities.
The following table presents the Company’s net exposure from its offsetting derivative asset and liability positions, as well as cash collateral on deposit with its counterparty as of the reporting dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
Gross Amount Reported on Balance Sheet
|
|
Netting Adjustments
|
|
Cash Collateral Posted
|
|
Net Exposure
|
|
June 30, 2019
|
|
Derivative Assets
|
|
$
|
2,539
|
|
|
$
|
(698
|
)
|
|
$
|
—
|
|
|
$
|
1,841
|
|
|
|
|
Derivative Liabilities
|
|
$
|
3,086
|
|
|
$
|
(698
|
)
|
|
$
|
—
|
|
|
$
|
2,388
|
|
|
June 30, 2018
|
|
Derivative Assets
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
Derivative Liabilities
|
|
$
|
3,686
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,686
|
|
Cash Flow Hedges
Changes in the fair value of the Company’s coffee-related derivative instruments designated as cash flow hedges are deferred in AOCI and subsequently reclassified into cost of goods sold in the same period or periods in which the hedged forecasted purchases affect earnings, or when it is probable that the hedged forecasted transaction will not occur by the end of the originally specified time period. Based on recorded values at June 30, 2019, $7.4 million of net losses on coffee-related derivative instruments designated as cash flow hedge are expected to be reclassified into cost of goods sold within the next twelve months. These recorded values are based on market prices of the commodities as of June 30, 2019.
Changes in the fair value of the Company's interest rate swap derivative instruments designated as a cash flow hedge are deferred in AOCI and subsequently reclassified into interest expense in the period or periods when the hedged transaction affects earnings or when it is probable that the hedged forecasted transaction will not occur by the end of the originally specified time period. As of June 30, 2019, $0.2 million of net losses on interest rate swap derivative instruments designated as a cash flow hedge are expected to be reclassified into interest expense within the next twelve months assuming no significant changes in the LIBOR rates. Due to LIBOR volatility, actual gains or losses realized within the next twelve months will likely differ from these values.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Note 7. Investments
In fiscal 2017, the Company liquidated substantially all of its trading securities to fund expenditures associated with its New Facility in Northlake, Texas. In fiscal 2018, the Company liquidated the remaining security and closed its preferred stock portfolio. The Company had no short-term investments at June 30, 2019 and 2018 and $0.4 million in short-term investments at June 30, 2017.
The following table shows gains and losses on trading securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
(In thousands)
|
|
|
2018
|
|
2017
|
|
Total gains recognized from trading securities
|
|
|
$
|
7
|
|
|
$
|
286
|
|
|
Less: Realized gains from sales of trading securities
|
|
|
7
|
|
|
1,909
|
|
|
Unrealized (losses) gains from trading securities
|
|
|
$
|
—
|
|
|
$
|
(1,623
|
)
|
Note 8. Fair Value Measurements
Assets and liabilities measured and recorded at fair value on a recurring basis were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
As of June 30, 2019
|
|
|
|
|
|
|
|
|
|
Derivative instruments designated as cash flow hedges:
|
|
|
|
|
|
|
|
|
|
Coffee-related derivative assets(1)
|
|
$
|
1,925
|
|
|
$
|
—
|
|
|
$
|
1,925
|
|
|
$
|
—
|
|
|
Coffee-related derivative liabilities(1)
|
|
$
|
1,127
|
|
|
$
|
—
|
|
|
$
|
1,127
|
|
|
$
|
—
|
|
|
Interest rate swap derivative liabilities(2)
|
|
$
|
1,845
|
|
|
$
|
—
|
|
|
$
|
1,845
|
|
|
$
|
—
|
|
|
Derivative instruments not designated as accounting hedges:
|
|
|
|
|
|
|
|
|
|
|
|
Coffee-related derivative assets(1)
|
|
$
|
614
|
|
|
$
|
—
|
|
|
$
|
614
|
|
|
$
|
—
|
|
|
Coffee-related derivative liabilities(1)
|
|
$
|
114
|
|
|
$
|
—
|
|
|
$
|
114
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
As of June 30, 2018
|
|
|
|
|
|
|
|
|
|
Derivative instruments designated as cash flow hedges:
|
|
|
|
|
|
|
|
|
|
Coffee-related derivative liabilities(1)
|
|
$
|
3,467
|
|
|
$
|
—
|
|
|
$
|
3,467
|
|
|
$
|
—
|
|
|
Derivative instruments not designated as accounting hedges:
|
|
|
|
|
|
|
|
|
|
Coffee-related derivative liabilities(1)
|
|
$
|
219
|
|
|
$
|
—
|
|
|
219
|
|
|
$
|
—
|
|
____________________
|
|
|
|
(1)
|
The Company's coffee-related derivative instruments are traded over-the-counter and, therefore, classified as Level 2.
|
|
|
|
|
(2)
|
The Company's interest rate swap derivative instrument are model-derived valuations with directly or indirectly observable significant inputs such as interest rate and, therefore, classified as Level 2.
|
During the fiscal years ended June 30, 2019 and 2018, there were no transfers between the levels.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Note 9. Accounts Receivable, Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30,
|
|
(In thousands)
|
|
2019
|
|
2018
|
|
Trade receivables
|
|
$
|
53,593
|
|
|
$
|
54,547
|
|
|
Other receivables(1)
|
|
2,886
|
|
|
4,446
|
|
|
Allowance for doubtful accounts
|
|
(1,324
|
)
|
|
(495
|
)
|
|
Accounts receivable, net
|
|
$
|
55,155
|
|
|
$
|
58,498
|
|
__________
(1)Includes vendor rebates and other non-trade receivables.
Allowance for doubtful accounts:
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
Balance at June 30, 2016
|
$
|
(714
|
)
|
|
Provision
|
(325
|
)
|
|
Write-off
|
318
|
|
|
Balance at June 30, 2017
|
$
|
(721
|
)
|
|
Provision
|
(909
|
)
|
|
Write-off
|
1,530
|
|
|
Recoveries
|
(395
|
)
|
|
Balance at June 30, 2018
|
$
|
(495
|
)
|
|
Provision
|
(1,761
|
)
|
|
Write-off
|
533
|
|
|
Recoveries
|
399
|
|
|
Balance at June 30, 2019
|
$
|
(1,324
|
)
|
Note 10. Inventories
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30,
|
|
(In thousands)
|
|
2019
|
|
2018
|
|
Coffee
|
|
|
|
|
|
Processed
|
|
$
|
25,769
|
|
|
$
|
26,882
|
|
|
Unprocessed
|
|
33,259
|
|
|
37,097
|
|
|
Total
|
|
$
|
59,028
|
|
|
$
|
63,979
|
|
|
Tea and culinary products
|
|
|
|
|
|
Processed
|
|
$
|
21,767
|
|
|
$
|
32,406
|
|
|
Unprocessed
|
|
74
|
|
|
1,161
|
|
|
Total
|
|
$
|
21,841
|
|
|
$
|
33,567
|
|
|
Coffee brewing equipment parts
|
|
$
|
7,041
|
|
|
$
|
6,885
|
|
|
Total inventories
|
|
$
|
87,910
|
|
|
$
|
104,431
|
|
In addition to product cost, inventory costs include expenditures such as direct labor and certain supply, freight, warehousing, overhead variances, PPVs and other expenses incurred in bringing the inventory to its existing condition and location. The “Unprocessed” inventory values as stated in the above table represent the value of raw materials and the “Processed” inventory values represent all other products consisting primarily of finished goods.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Note 11. Property, Plant and Equipment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30,
|
|
(In thousands)
|
|
2019
|
|
2018
|
|
Buildings and facilities
|
|
$
|
107,915
|
|
|
$
|
108,590
|
|
|
Machinery and equipment
|
|
248,539
|
|
|
231,581
|
|
|
Equipment under capital leases
|
|
938
|
|
|
1,408
|
|
|
Capitalized software
|
|
27,666
|
|
|
24,569
|
|
|
Office furniture and equipment
|
|
14,035
|
|
|
13,721
|
|
|
|
|
$
|
399,093
|
|
|
$
|
379,869
|
|
|
Accumulated depreciation
|
|
(225,826
|
)
|
|
(209,498
|
)
|
|
Land
|
|
16,191
|
|
|
16,218
|
|
|
Property, plant and equipment, net
|
|
$
|
189,458
|
|
|
$
|
186,589
|
|
Capital leases consisted mainly of vehicle leases at June 30, 2019 and 2018. Depreciation expense, which includes amortization expense recorded for assets under capital leases, was $31.1 million, $30.5 million, and $23.0 million, for the years ended June 30, 2019, 2018, and 2017, respectively.
The Company capitalized coffee brewing equipment (included in machinery and equipment) in the amounts of $14.9 million and $12.1 million in fiscal 2019 and 2018, respectively. Depreciation expense related to the capitalized coffee brewing equipment reported as cost of goods sold was $9.1 million, $8.6 million and $9.1 million in fiscal 2019, 2018 and 2017, respectively.
Maintenance and repairs to property, plant and equipment charged to expense for the years ended June 30, 2019, 2018, and 2017 were $10.3 million, $9.6 million and $8.0 million, respectively.
Northlake Facility Costs
In fiscal 2017, the Company completed the construction of, and exercised the purchase option to acquire, the Northlake facility. The Company commenced distribution activities at the Northlake facility during the second quarter of fiscal 2017 and initial production activities late in the third quarter of fiscal 2017. The Company began roasting coffee in the Northlake facility in the fourth quarter of fiscal 2017. The Northlake facility received Safe Quality Food (SQF) certification in the third quarter of fiscal 2018.
As of completion of the Northlake facility construction, the Company has incurred and paid an aggregate of $60.8 million in construction costs, including $42.5 million to exercise the purchase option under the lease agreement to acquire the land and construction of the Northlake facility.
Northlake Facility Expansion
In the third quarter of fiscal 2018, the Company commenced a project to expand its production lines (the “Expansion Project”) in the Northlake facility, including expanding capacity to support the transition of acquired business. The Expansion Project includes (i) pre-construction services to define the Company’s criteria for the industrial capacity Expansion Project, (ii) specialized industrial design services for the Expansion Project, (iii) specialty industrial equipment procurement and installation, and (iv) all construction services necessary to complete any modifications to the facility in order to accommodate the production line expansion, and to provide power to that expanded production capability. As of the fiscal year ended June 30, 2019, the Company has paid a total of $24.9 million associated with the expansion project.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Note 12. Goodwill and Intangible Assets
The following is a summary of changes in the carrying value of goodwill (in thousands):
|
|
|
|
|
|
|
|
|
Balance at June 30, 2017
|
|
$
|
10,996
|
|
|
Final Purchase Price Allocation Adjustment (West Coast Coffee)
|
|
(167
|
)
|
|
Additions (Boyd Coffee)
|
|
25,395
|
|
|
Balance at June 30, 2018
|
|
$
|
36,224
|
|
|
Additions
|
|
—
|
|
|
Balance at June 30, 2019
|
|
$
|
36,224
|
|
There was no impairment of goodwill recorded during the years ended June 30, 2019, 2018 and 2017.
The following is a summary of the Company’s amortized and unamortized intangible assets other than goodwill:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30,
|
|
|
|
Weighted
Average
Amortization
Period as of
June 30, 2019
|
|
2019
|
|
2018
|
|
(In thousands)
|
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
|
|
Amortized intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
7.7
|
|
$
|
33,003
|
|
|
$
|
(15,291
|
)
|
|
$
|
17,712
|
|
|
$
|
33,003
|
|
|
$
|
(12,903
|
)
|
|
$
|
20,100
|
|
|
Non-compete agreements
|
|
2.7
|
|
220
|
|
|
(122
|
)
|
|
98
|
|
|
220
|
|
|
(81
|
)
|
|
139
|
|
|
Recipes
|
|
4.3
|
|
930
|
|
|
(354
|
)
|
|
576
|
|
|
930
|
|
|
(221
|
)
|
|
709
|
|
|
Trade name/brand name
|
|
5.3
|
|
510
|
|
|
(346
|
)
|
|
164
|
|
|
510
|
|
|
(271
|
)
|
|
239
|
|
|
Total amortized intangible assets
|
|
|
|
$
|
34,663
|
|
|
$
|
(16,113
|
)
|
|
$
|
18,550
|
|
|
$
|
34,663
|
|
|
$
|
(13,476
|
)
|
|
$
|
21,187
|
|
|
Unamortized intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks, trade names and brand name with indefinite lives
|
|
|
|
$
|
10,328
|
|
|
$
|
—
|
|
|
$
|
10,328
|
|
|
$
|
10,328
|
|
|
$
|
—
|
|
|
$
|
10,328
|
|
|
Total unamortized intangible assets
|
|
|
|
$
|
10,328
|
|
|
$
|
—
|
|
|
$
|
10,328
|
|
|
$
|
10,328
|
|
|
$
|
—
|
|
|
$
|
10,328
|
|
|
Total intangible assets
|
|
|
|
$
|
44,991
|
|
|
$
|
(16,113
|
)
|
|
$
|
28,878
|
|
|
$
|
44,991
|
|
|
$
|
(13,476
|
)
|
|
$
|
31,515
|
|
In fiscal 2018, the Company recorded an impairment charge related to indefinite-lived intangible assets and other intangible assets of $3.5 million and $0.3 million, respectively. There were no indefinite-lived intangible asset and other intangible assets impairment charges recorded in the fiscal years ended June 30, 2019 or 2017.
Amortization expense for the years ended June 30, 2019, 2018, and 2017 were $2.6 million, $2.4 million, and $0.7 million, respectively.
At June 30, 2019, future annual amortization of finite-lived intangible assets for the years 2020 through 2024 and thereafter is estimated to be (in thousands):
|
|
|
|
|
|
|
|
|
For the fiscal year ending:
|
|
|
|
June 30, 2020
|
|
$
|
2,390
|
|
|
June 30, 2021
|
|
2,390
|
|
|
June 30, 2022
|
|
2,376
|
|
|
June 30, 2023
|
|
2,356
|
|
|
June 30, 2024
|
|
2,268
|
|
|
Thereafter
|
|
6,770
|
|
|
Total
|
|
$
|
18,550
|
|
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Note 13. Employee Benefit Plans
The Company provides benefit plans for full-time employees who work 30 hours or more per week, including 401(k), health and other welfare benefit plans and, in certain circumstances, pension benefits. Generally, the plans provide health benefits after 30 days and other retirement 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 nine multiemployer defined contribution plans other than pension plans that provide medical, vision, dental and disability benefits for active, union-represented employees subject to collective bargaining agreements. 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 (loss) (“OCI”) certain gains and losses that arise during the period but are deferred under pension accounting rules.
Single Employer Pension Plans
The Company has a defined benefit pension plan, the Farmer Bros. Co. Pension Plan for Salaried Employees (the “Farmer Bros. Plan”), for Company employees hired prior to January 1, 2010 who are not covered under a collective bargaining agreement. The Company amended the Farmer Bros. Plan, freezing the benefit for all participants effective June 30, 2011. After the plan freeze, participants do not accrue any benefits under the Farmer Bros. Plan, and new hires are not eligible to participate in the Farmer Bros. Plan. As all plan participants became inactive following this pension curtailment, net (gain) loss is now amortized based on the remaining life expectancy of these participants instead of the remaining service period of these participants.
As of June 30, 2019, the Company also has two defined benefit pension plans for certain hourly employees covered under collective bargaining agreements (the “Brewmatic Plan” and the “Hourly Employees' Plan”). Effective October 1, 2016, the Company froze benefit accruals and participation in the Hourly Employees' Plan. After the plan freeze, participants do not accrue any benefits under the plan, and new hires are not eligible to participate in the plan. After the freeze the participants in the plan are eligible to receive the Company's matching contributions to their 401(k).
Effective December 1, 2018 the Company amended and terminated the Farmer Bros. Co. Pension Plan for Salaried Employees (the “Farmer Bros. Plan”), a defined benefit pension plan for Company employees hired prior to January 1, 2010 who were not covered under a collective bargaining agreement. The Company previously amended the Farmer Bros. Plan, freezing the benefit for all participants effective June 30, 2011.
Immediately prior to the termination of the Farmer Bros. Plan, the Company spun off the benefit liability and obligations, and all allocable assets for all retirement plan benefits of certain active employees with accrued benefits in excess of $25,000, retirees and beneficiaries currently receiving benefit payments under the Farmer Bros. Plan, and former employees who have deferred vested benefits under the Farmer Bros. Plan, to the Brewmatic Plan. Upon termination of the Farmer Bros. Plan, all remaining plan participants elected to receive a distribution of his/her entire accrued benefit under the Farmer Bros. Plan in a single cash lump sum or an individual insurance company annuity contract, in either case, funded directly by Farmer Bros. Plan assets.
Termination of the Farmer Bros. Plan triggered re-measurement and settlement of the Farmer Bros. Plan and re-measurement of the Brewmatic Plan. As a result of the distributions to the remaining plan participants of the Farmer Bros. Plan, the Company recognized a non-cash pension settlement charge of $10.9 million for the year ended June 30, 2019.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Obligations and Funded Status
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Farmer Bros. Plan
As of June 30,
|
|
Brewmatic Plan
As of June 30,
|
|
Hourly Employees’ Plan
As of June 30,
|
|
Total
|
|
($ in thousands)
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Change in projected benefit obligation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at the beginning of the year
|
|
$
|
137,175
|
|
|
$
|
146,291
|
|
|
$
|
3,724
|
|
|
$
|
4,079
|
|
|
$
|
4,040
|
|
|
$
|
4,329
|
|
|
$
|
144,939
|
|
|
$
|
154,699
|
|
|
Interest cost
|
|
2,722
|
|
|
5,417
|
|
|
2,339
|
|
|
149
|
|
|
161
|
|
|
163
|
|
|
5,222
|
|
|
5,729
|
|
|
Actuarial (gain) loss
|
|
(1,571
|
)
|
|
(5,956
|
)
|
|
8,482
|
|
|
(227
|
)
|
|
349
|
|
|
(370
|
)
|
|
7,260
|
|
|
(6,553
|
)
|
|
Benefits paid
|
|
(3,574
|
)
|
|
(8,577
|
)
|
|
(3,097
|
)
|
|
(277
|
)
|
|
(75
|
)
|
|
(82
|
)
|
|
(6,746
|
)
|
|
(8,936
|
)
|
|
Pension settlement
|
|
(3,162
|
)
|
|
—
|
|
|
(21,286
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(24,448
|
)
|
|
—
|
|
|
Other - Plan merger
|
|
$
|
(131,590
|
)
|
|
—
|
|
|
131,590
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Projected benefit obligation at the end of the year
|
|
$
|
—
|
|
|
$
|
137,175
|
|
|
$
|
121,752
|
|
|
$
|
3,724
|
|
|
$
|
4,475
|
|
|
$
|
4,040
|
|
|
$
|
126,227
|
|
|
$
|
144,939
|
|
|
Change in plan assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at the beginning of the year
|
|
$
|
97,211
|
|
|
$
|
97,304
|
|
|
$
|
3,719
|
|
|
$
|
3,115
|
|
|
$
|
3,629
|
|
|
$
|
2,999
|
|
|
$
|
104,559
|
|
|
$
|
103,418
|
|
|
Actual return on plan assets
|
|
(6,236
|
)
|
|
5,874
|
|
|
9,325
|
|
|
201
|
|
|
224
|
|
|
198
|
|
|
3,313
|
|
|
6,273
|
|
|
Employer contributions
|
|
1,525
|
|
|
2,610
|
|
|
1,800
|
|
|
680
|
|
|
—
|
|
|
514
|
|
|
3,325
|
|
|
3,804
|
|
|
Benefits paid
|
|
(3,574
|
)
|
|
(8,577
|
)
|
|
(3,097
|
)
|
|
(277
|
)
|
|
(75
|
)
|
|
(82
|
)
|
|
(6,746
|
)
|
|
(8,936
|
)
|
|
Pension settlement
|
|
(3,162
|
)
|
|
—
|
|
|
(22,100
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(25,262
|
)
|
|
—
|
|
|
Other - Plan merger
|
|
(85,764
|
)
|
|
—
|
|
|
85,764
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Fair value of plan assets at the end of the year
|
|
$
|
—
|
|
|
$
|
97,211
|
|
|
$
|
75,411
|
|
|
$
|
3,719
|
|
|
$
|
3,778
|
|
|
$
|
3,629
|
|
|
$
|
79,189
|
|
|
$
|
104,559
|
|
|
Funded status at end of year (underfunded) overfunded
|
|
$
|
—
|
|
|
$
|
(39,964
|
)
|
|
$
|
(46,341
|
)
|
|
$
|
(5
|
)
|
|
$
|
(697
|
)
|
|
$
|
(411
|
)
|
|
$
|
(47,038
|
)
|
|
$
|
(40,380
|
)
|
|
Amounts recognized in consolidated balance sheets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current liabilities
|
|
—
|
|
|
(39,964
|
)
|
|
(46,341
|
)
|
|
(5
|
)
|
|
(697
|
)
|
|
(411
|
)
|
|
(47,038
|
)
|
|
(40,380
|
)
|
|
Total
|
|
$
|
—
|
|
|
$
|
(39,964
|
)
|
|
$
|
(46,341
|
)
|
|
$
|
(5
|
)
|
|
$
|
(697
|
)
|
|
$
|
(411
|
)
|
|
$
|
(47,038
|
)
|
|
$
|
(40,380
|
)
|
|
Amounts recognized in AOCI
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
—
|
|
|
51,079
|
|
|
50,080
|
|
|
1,788
|
|
|
565
|
|
|
218
|
|
|
50,645
|
|
|
53,085
|
|
|
Total AOCI (not adjusted for applicable tax)
|
|
$
|
—
|
|
|
$
|
51,079
|
|
|
$
|
50,080
|
|
|
$
|
1,788
|
|
|
$
|
565
|
|
|
$
|
218
|
|
|
$
|
50,645
|
|
|
$
|
53,085
|
|
|
Weighted average assumptions used to determine benefit obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
4.10
|
%
|
|
4.05
|
%
|
|
3.45
|
%
|
|
4.05
|
%
|
|
3.45
|
%
|
|
4.05
|
%
|
|
4.05
|
%
|
|
4.05
|
%
|
|
Rate of compensation increase
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Components of Net Periodic Benefit Cost and
Other Changes Recognized in Other Comprehensive Income (Loss) (OCI)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Farmer Bros. Plan
June 30,
|
|
Brewmatic Plan
June 30,
|
|
Hourly Employees’ Plan
June 30,
|
|
Total
|
|
($ in thousands)
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Components of net periodic benefit cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest cost
|
|
2,722
|
|
|
5,417
|
|
|
2,339
|
|
|
149
|
|
|
161
|
|
|
163
|
|
|
5,222
|
|
|
5,729
|
|
|
Expected return on plan assets
|
|
(2,767
|
)
|
|
(5,490
|
)
|
|
(2,257
|
)
|
|
(161
|
)
|
|
(222
|
)
|
|
(173
|
)
|
|
(5,246
|
)
|
|
(5,824
|
)
|
|
Amortization of net loss
|
|
710
|
|
|
1,588
|
|
|
796
|
|
|
80
|
|
|
—
|
|
|
6
|
|
|
1,506
|
|
|
1,674
|
|
|
Pension settlement charge
|
|
1,356
|
|
|
—
|
|
|
9,586
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
10,942
|
|
|
—
|
|
|
Net periodic benefit cost
|
|
$
|
2,021
|
|
|
$
|
1,515
|
|
|
$
|
10,464
|
|
|
$
|
68
|
|
|
$
|
(61
|
)
|
|
$
|
(4
|
)
|
|
$
|
12,424
|
|
|
$
|
1,579
|
|
|
Other changes recognized in OCI
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
7,433
|
|
|
$
|
(6,340
|
)
|
|
$
|
1,413
|
|
|
$
|
(267
|
)
|
|
$
|
347
|
|
|
$
|
(394
|
)
|
|
$
|
9,193
|
|
|
$
|
(7,001
|
)
|
|
Prior service cost (credit)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Amortization of net loss
|
|
(710
|
)
|
|
(1,588
|
)
|
|
(796
|
)
|
|
(80
|
)
|
|
—
|
|
|
(6
|
)
|
|
(1,506
|
)
|
|
(1,674
|
)
|
|
Pension settlement charge
|
|
(1,356
|
)
|
|
—
|
|
|
(9,586
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(10,942
|
)
|
|
—
|
|
|
Allocation of net Loss - Plan merger
|
|
(56,446
|
)
|
|
—
|
|
|
56,446
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Net loss due to annuity purchase
|
|
—
|
|
|
—
|
|
|
814
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
814
|
|
|
—
|
|
|
Total recognized in OCI
|
|
$
|
(51,079
|
)
|
|
$
|
(7,928
|
)
|
|
$
|
48,291
|
|
|
$
|
(347
|
)
|
|
$
|
347
|
|
|
$
|
(400
|
)
|
|
$
|
(2,441
|
)
|
|
$
|
(8,675
|
)
|
|
Total recognized in net periodic benefit cost and OCI
|
|
$
|
(49,058
|
)
|
|
$
|
(6,413
|
)
|
|
$
|
58,755
|
|
|
$
|
(279
|
)
|
|
$
|
286
|
|
|
$
|
(404
|
)
|
|
$
|
9,983
|
|
|
$
|
(7,096
|
)
|
|
Weighted-average assumptions used to determine net periodic benefit cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
4.05
|
%
|
|
3.80
|
%
|
|
4.10
|
%
|
|
3.80
|
%
|
|
4.05
|
%
|
|
3.80
|
%
|
|
4.05
|
%
|
|
3.80
|
%
|
|
Expected long-term return on plan assets
|
|
—
|
%
|
|
6.75
|
%
|
|
6.75
|
%
|
|
6.75
|
%
|
|
6.75
|
%
|
|
6.75
|
%
|
|
6.75
|
%
|
|
6.75
|
%
|
|
Rate of compensation increase
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
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) 2018. 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 2018 is 20 to 30 years. In addition to forward-looking models, historical analysis of market data and trends was reflected, as well as the outlook of recognized economists, organizations and consensus CMA from other credible studies.
Description of Investment Policy
The Company’s investment strategy is to build an efficient, well-diversified portfolio based on a long-term, strategic outlook of the investment markets. The investment markets outlook utilizes both the historical-based and forward-looking return forecasts to establish future return expectations for various asset classes. These return expectations are used to develop a core asset allocation based on the specific needs of each plan. The core asset allocation utilizes investment portfolios of various asset classes and multiple investment managers in order to maximize the plan’s return while providing multiple layers of diversification to help minimize risk.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Additional Disclosures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Farmer Bros. Plan
June 30,
|
|
Brewmatic Plan
June 30,
|
|
Hourly Employees’ Plan
June 30,
|
|
Total
|
|
($ in thousands)
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Comparison of obligations to plan assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected benefit obligation
|
|
$
|
—
|
|
|
$
|
137,175
|
|
|
$
|
121,752
|
|
|
$
|
3,724
|
|
|
$
|
4,475
|
|
|
$
|
4,040
|
|
|
$
|
126,227
|
|
|
$
|
144,939
|
|
|
Accumulated benefit obligation
|
|
$
|
—
|
|
|
$
|
137,175
|
|
|
$
|
121,752
|
|
|
$
|
3,724
|
|
|
$
|
4,475
|
|
|
$
|
4,040
|
|
|
$
|
126,227
|
|
|
$
|
144,939
|
|
|
Fair value of plan assets at measurement date
|
|
$
|
—
|
|
|
$
|
97,211
|
|
|
$
|
75,411
|
|
|
$
|
3,719
|
|
|
$
|
3,778
|
|
|
$
|
3,629
|
|
|
$
|
79,189
|
|
|
$
|
104,559
|
|
|
Plan assets by category
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
$
|
—
|
|
|
$
|
63,547
|
|
|
$
|
48,464
|
|
|
$
|
2,431
|
|
|
$
|
2,440
|
|
|
$
|
2,341
|
|
|
$
|
50,904
|
|
|
$
|
68,319
|
|
|
Debt securities
|
|
—
|
|
|
27,608
|
|
|
22,461
|
|
|
1,056
|
|
|
1,100
|
|
|
1,065
|
|
|
23,561
|
|
|
29,729
|
|
|
Real estate
|
|
—
|
|
|
6,056
|
|
|
4,486
|
|
|
232
|
|
|
238
|
|
|
223
|
|
|
4,724
|
|
|
6,511
|
|
|
Total
|
|
$
|
—
|
|
|
$
|
97,211
|
|
|
$
|
75,411
|
|
|
$
|
3,719
|
|
|
$
|
3,778
|
|
|
$
|
3,629
|
|
|
$
|
79,189
|
|
|
$
|
104,559
|
|
|
Plan assets by category
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
—
|
%
|
|
66
|
%
|
|
64
|
%
|
|
66
|
%
|
|
65
|
%
|
|
65
|
%
|
|
64
|
%
|
|
65
|
%
|
|
Debt securities
|
|
—
|
%
|
|
28
|
%
|
|
30
|
%
|
|
28
|
%
|
|
29
|
%
|
|
29
|
%
|
|
30
|
%
|
|
29
|
%
|
|
Real estate
|
|
—
|
%
|
|
6
|
%
|
|
6
|
%
|
|
6
|
%
|
|
6
|
%
|
|
6
|
%
|
|
6
|
%
|
|
6
|
%
|
|
Total
|
|
—
|
%
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
Fair values of plan assets were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2019
|
|
(In thousands)
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Investments measured at NAV
|
|
Brewmatic Plan
|
|
$
|
75,411
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
75,411
|
|
|
Hourly Employees’ Plan
|
|
$
|
3,778
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,778
|
|
|
|
|
As of June 30, 2018
|
|
(In thousands)
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Investments measured at NAV
|
|
Farmer Bros. Plan
|
|
$
|
97,211
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
97,211
|
|
|
Brewmatic Plan
|
|
$
|
3,719
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,719
|
|
|
Hourly Employees’ Plan
|
|
$
|
3,629
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,629
|
|
The following is the target asset allocation for the Company's single employer pension plans— Brewmatic Plan and Hourly Employees' Plan—for fiscal 2020:
|
|
|
|
|
|
|
|
Fiscal 2020
|
|
U.S. large cap equity securities
|
37.0
|
%
|
|
U.S. small cap equity securities
|
4.6
|
%
|
|
International equity securities
|
22.4
|
%
|
|
Debt securities
|
30.0
|
%
|
|
Real estate
|
6.0
|
%
|
|
Total
|
100.0
|
%
|
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Estimated Amounts in OCI Expected To Be Recognized
In fiscal 2020, the Company expects to recognize net periodic benefit costs of $1.4 million for the Brewmatic Plan and recognize net periodic benefit credit of $75,000 for the Hourly Employees’ Plan.
Estimated Future Contributions and Refunds
In fiscal 2020, the Company expects to contribute $4.0 million to the Brewmatic Plan and does not expect to contribute to the Hourly Employees’ Plan. The Company is not aware of any refunds expected from single employer pension plans.
Estimated Future Benefit Payments
The following benefit payments are expected to be paid over the next 10 fiscal years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
Brewmatic Plan
|
|
Hourly Employees’
Plan
|
|
Year Ending:
|
|
|
|
June 30, 2020
|
|
|
$
|
6,720
|
|
|
$
|
130
|
|
|
June 30, 2021
|
|
|
$
|
6,550
|
|
|
$
|
150
|
|
|
June 30, 2022
|
|
|
$
|
6,770
|
|
|
$
|
160
|
|
|
June 30, 2023
|
|
|
$
|
6,940
|
|
|
$
|
180
|
|
|
June 30, 2024
|
|
|
$
|
7,060
|
|
|
$
|
190
|
|
|
June 30, 2025 to June 30, 2029
|
|
|
$
|
35,450
|
|
|
$
|
1,100
|
|
These amounts are based on current data and assumptions and reflect expected future service, as appropriate.
Multiemployer Pension Plans
The Company participates in two multiemployer defined benefit pension plans that are union sponsored and collectively bargained for the benefit of certain employees subject to collective bargaining agreements, of which the 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.
The Company received a letter dated July 10, 2018 from the WCT Pension Trust assessing withdrawal liability against the Company for a share of the WCTPP unfunded vested benefits, on the basis claimed by the WCT Pension Trust that employment actions by the Company in 2016 in connection with the Corporate Relocation Plan constituted a partial withdrawal from the WCTPP. The Company agreed with the WCT Pension Trust’s assessment of pension withdrawal liability in the amount of $3.4 million, including interest, which is payable in 17 monthly installments of $190,507 followed by a final monthly installment of $153,822, commencing September 10, 2018. At June 30, 2019 the Company had $1.5 million on its consolidated balance sheet relating to this obligation in “Accrued payroll expenses.”
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. In December 2018, the parties agreed to settle the Company’s remaining withdrawal liability to the Local 807 Pension Fund for a lump sum cash settlement payment of $3.0 million plus two remaining installment payments of $91,000 due on or before October 1, 2034 and on or before January 1, 2035. At June 30, 2019, the Company has paid the Local 807 Pension Fund $3.0 million and has accrued $0.2 million within “Accrued pension liabilities” on the Company’s condensed consolidated balance sheet.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Future collective bargaining negotiations may result in the Company withdrawing from the remaining multiemployer pension plans in which it participates and, if successful, the Company may incur a withdrawal liability, the amount of which could be material to the Company's results of operations and cash flows.
Contributions made by the Company to the multiemployer pension plans are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
WCTPP(1)(2)(3)
|
|
All Other Plans(4)
|
|
Year Ended:
|
|
|
|
|
|
June 30, 2019
|
|
$
|
3,634
|
|
|
$
|
39
|
|
|
June 30, 2018
|
|
$
|
1,605
|
|
|
$
|
35
|
|
|
June 30, 2017
|
|
$
|
2,114
|
|
|
$
|
39
|
|
____________
|
|
|
|
(1)
|
Individually significant plan.
|
|
|
|
|
(2)
|
Less than 5% of total contribution to WCTPP based on WCTPP's FASB Disclosure Statement for the calendar year ended December 31, 2018.
|
|
|
|
|
(3)
|
The Company guarantees that one hundred seventy-three (173) hours will be contributed upon for all employees who are compensated for all available straight time hours for each calendar month. An additional 6.5% of the basic contribution must be paid for PEER or the Program for Enhanced Early Retirement.
|
|
|
|
|
(4)
|
Includes one plan that is not individually significant.
|
Multiemployer Plans Other Than Pension Plans
The Company participates in nine multiemployer defined contribution plans other than pension plans that provide medical, vision, dental and disability benefits for active, union-represented employees subject to collective bargaining agreements. The plans are subject to the provisions of the Employee Retirement Income Security Act of 1974, and provide that participating employers make monthly contributions to the plans in an amount as specified in the collective bargaining agreements. Also, the plans provide that participants make self-payments to the plans, the amounts of which are negotiated through the collective bargaining process. The Company's participation in these plans is governed by collective bargaining agreements which expires on or before June 30, 2022. The Company's aggregate contributions to multiemployer plans other than pension plans in the fiscal years ended June 30, 2019, 2018 and 2017 were $5.2 million, $4.8 million and $5.3 million, respectively. The Company expects to contribute an aggregate of $5.8 million towards multiemployer plans other than pension plans in fiscal 2020.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
401(k) Plan
The Company's 401(k) Plan is available to all eligible employees. The Company's 401(k) match portion is available to all eligible employees who have worked more than 1,000 hours during a calendar year and were employed at the end of the calendar year. Participants in the 401(k) Plan may choose to contribute a percentage of their annual pay subject to the maximum contribution allowed by the Internal Revenue Service. The Company's matching contribution is discretionary, based on approval by the Company's Board of Directors. The Company matching contribution for the calendar years 2019, 2018 and 2017, was 50% of an employee's annual contribution to the 401(k) Plan, up to 6% of the employee's eligible income. The Company recorded matching contributions of $2.2 million, $2.0 million and $1.6 million in operating expenses for the fiscal years ended June 30, 2019, 2018 and 2017, respectively.
Effective January 1, 2019, the Company amended and restated the 401(k) Plan to, among other things, provide for: (i) an annual safe harbor non-elective contribution of shares of the Company’s common stock equal to 4% of each eligible participant’s annual plan compensation; (ii) an elective matching contribution for non-collectively bargained employees and certain union-represented employees equal to 100% of the first 3% of such eligible participant’s tax-deferred contributions to the 401(k) Plan; and (iii) profit-sharing contributions at the Company’s discretion. Participants are immediately vested in their contributions, the safe harbor non-elective contributions, the employer’s elective matching contributions, and the employer’s discretionary contributions. For the fiscal year ended June 30, 2019, the Company contributed a total of 90,105 shares of the Company’s common stock with a value of $1.6 million to eligible participants’ annual plan compensation. In July 2019, 52,534 shares of the 90,105 shares were issued.
Postretirement Benefits
The Company sponsors a postretirement defined benefit plan that covers qualified non-union retirees and certain qualified union retirees (“Retiree Medical Plan”). The plan provides medical, dental and vision coverage for retirees under age 65 and medical coverage only for retirees age 65 and above. Under this postretirement plan, the Company’s contributions toward premiums for retiree medical, dental and vision coverage for participants and dependents are scaled based on length of service, with greater Company contributions for retirees with greater length of service, subject to a maximum monthly Company contribution. The Company's retiree medical, dental and vision plan is unfunded, and its liability was calculated using an assumed discount rate of 3.6% at June 30, 2019. The Company projects an initial medical trend rate of 8.1% in fiscal 2020, ultimately reducing to 4.5% in 10 years.
The Company also provides a postretirement death benefit (“Death Benefit”) to certain of its employees and retirees, subject, in the case of current employees, to continued employment with the Company until retirement and certain other conditions related to the manner of employment termination and manner of death. The Company records the actuarially determined liability for the present value of the postretirement death benefit. The Company has purchased life insurance policies to fund the postretirement death benefit wherein the Company owns the policy but the postretirement death benefit is paid to the employee's or retiree's beneficiary. The Company records an asset for the fair value of the life insurance policies which equates to the cash surrender value of the policies.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Retiree Medical Plan and Death Benefit
The following table shows the components of net periodic postretirement benefit cost for the Retiree Medical Plan and Death Benefit for the fiscal years ended June 30, 2019, 2018 and 2017. Net periodic postretirement benefit cost for fiscal 2019 was based on employee census information as of June 30, 2019.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
(In thousands)
|
|
2019
|
|
2018
|
|
2017
|
|
Components of Net Periodic Postretirement Benefit Cost (Credit):
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
530
|
|
|
$
|
609
|
|
|
$
|
760
|
|
|
Interest cost
|
|
887
|
|
|
835
|
|
|
829
|
|
|
Amortization of net gain
|
|
(834
|
)
|
|
(841
|
)
|
|
(630
|
)
|
|
Amortization of prior service credit
|
|
(1,757
|
)
|
|
(1,757
|
)
|
|
(1,757
|
)
|
|
Net periodic postretirement benefit (credit) cost
|
|
$
|
(1,174
|
)
|
|
$
|
(1,154
|
)
|
|
$
|
(798
|
)
|
The difference between the assets and the Accumulated Postretirement Benefit Obligation (APBO) at the adoption of ASC 715-60 was established as a transition (asset) obligation and is amortized over the average expected future service for active employees as measured at the date of adoption. Any plan amendments that retroactively increase benefits create prior service cost. The increase in the APBO due to any plan amendment is established as a base and amortized over the average remaining years of service to the full eligibility date of active participants who are not yet fully eligible for benefits at the plan amendment date. Gains and losses due to experience different than that assumed or from changes in actuarial assumptions are not immediately recognized.
The tables below show the remaining bases for the transition (asset) obligation, prior service cost (credit), and the calculation of the amortizable gain or loss.
|
|
|
|
|
|
|
Amortization Schedule
|
|
|
|
Transition (Asset) Obligation: The transition (asset) obligations have been fully amortized.
|
Prior service cost (credit)-Medical only ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Date Established
|
|
Balance at
July 1, 2019
|
|
Annual
Amortization
|
|
Years Remaining
|
|
|
January 1, 2008
|
|
$
|
(41
|
)
|
|
$
|
41
|
|
|
0.2
|
|
|
July 1, 2012
|
|
(6,895
|
)
|
|
1,527
|
|
|
4.5
|
|
|
|
|
$
|
(6,936
|
)
|
|
$
|
1,568
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retiree Medical Plan
|
|
Death Benefit
|
|
|
|
Year Ended June 30,
|
|
Year Ended June 30,
|
|
($ in thousands)
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Amortization of Net (Gain) Loss:
|
|
|
|
|
|
|
|
|
|
Net (gain) loss as of July 1
|
|
$
|
(7,039
|
)
|
|
$
|
(9,206
|
)
|
|
$
|
1,878
|
|
|
$
|
1,201
|
|
|
Net (gain) loss subject to amortization
|
|
(7,039
|
)
|
|
(9,206
|
)
|
|
1,878
|
|
|
1,201
|
|
|
Corridor (10% of greater of APBO or assets)
|
|
1,490
|
|
|
1,280
|
|
|
919
|
|
|
(848
|
)
|
|
Net (gain) loss in excess of corridor
|
|
$
|
(5,549
|
)
|
|
$
|
(7,926
|
)
|
|
$
|
2,797
|
|
|
$
|
353
|
|
|
Amortization years
|
|
8.6
|
|
|
8.9
|
|
|
6.5
|
|
|
6.4
|
|
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
The following tables provide a reconciliation of the benefit obligation and plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30,
|
|
(In thousands)
|
|
2019
|
|
2018
|
|
Change in Benefit Obligation:
|
|
|
|
|
|
Projected postretirement benefit obligation at beginning of year
|
|
$
|
21,283
|
|
|
$
|
20,680
|
|
|
Service cost
|
|
530
|
|
|
609
|
|
|
Interest cost
|
|
887
|
|
|
835
|
|
|
Participant contributions
|
|
605
|
|
|
699
|
|
|
Actuarial gains (losses)
|
|
2,010
|
|
|
(70
|
)
|
|
Benefits paid
|
|
(1,223
|
)
|
|
(1,470
|
)
|
|
Projected postretirement benefit obligation at end of year
|
|
$
|
24,092
|
|
|
$
|
21,283
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
(In thousands)
|
|
2019
|
|
2018
|
|
Change in Plan Assets:
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Employer contributions
|
|
618
|
|
|
771
|
|
|
Participant contributions
|
|
605
|
|
|
699
|
|
|
Benefits paid
|
|
(1,223
|
)
|
|
(1,470
|
)
|
|
Fair value of plan assets at end of year
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Projected postretirement benefit obligation at end of year
|
|
24,092
|
|
|
21,283
|
|
|
Funded status of plan
|
|
$
|
(24,092
|
)
|
|
$
|
(21,283
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
(In thousands)
|
|
2019
|
|
2018
|
|
Amounts Recognized in the Consolidated Balance Sheets Consist of:
|
|
|
|
|
|
Current liabilities
|
|
$
|
(1,068
|
)
|
|
$
|
(810
|
)
|
|
Non-current liabilities
|
|
(23,024
|
)
|
|
(20,473
|
)
|
|
Total
|
|
$
|
(24,092
|
)
|
|
$
|
(21,283
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
(In thousands)
|
|
2019
|
|
2018
|
|
Amounts Recognized in AOCI Consist of:
|
|
|
|
|
|
Net gain
|
|
$
|
(5,160
|
)
|
|
$
|
(8,005
|
)
|
|
Prior service credit
|
|
(6,936
|
)
|
|
(8,693
|
)
|
|
Total AOCI
|
|
$
|
(12,096
|
)
|
|
$
|
(16,698
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
(In thousands)
|
|
2019
|
|
2018
|
|
Other Changes in Plan Assets and Benefit Obligations Recognized in OCI:
|
|
|
|
|
|
Unrecognized actuarial gains (loss)
|
|
$
|
2,010
|
|
|
$
|
(70
|
)
|
|
Amortization of net loss
|
|
835
|
|
|
840
|
|
|
Amortization of prior service cost
|
|
1,757
|
|
|
1,757
|
|
|
Total recognized in OCI
|
|
4,602
|
|
|
2,527
|
|
|
Net periodic benefit cost
|
|
(1,174
|
)
|
|
(1,154
|
)
|
|
Total recognized in net periodic benefit credit and OCI
|
|
$
|
3,428
|
|
|
$
|
1,373
|
|
The estimated net gain and prior service credit that will be amortized from AOCI into net periodic benefit cost in fiscal 2020 are $0.6 million and $1.6 million, respectively.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
Estimated Future Benefit Payments:
|
|
|
Year Ending:
|
|
|
June 30, 2020
|
$
|
1,087
|
|
|
June 30, 2021
|
$
|
1,138
|
|
|
June 30, 2022
|
$
|
1,173
|
|
|
June 30, 2023
|
$
|
1,220
|
|
|
June 30, 2024
|
$
|
1,248
|
|
|
June 30, 2025 to June 30, 2029
|
$
|
7,116
|
|
|
|
|
|
Expected Contributions:
|
|
|
June 30, 2020
|
$
|
1,087
|
|
Sensitivity in Fiscal 2020 Results
Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plan. A one percentage point change in assumed health care cost trend rates would have the following effects in fiscal 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-Percentage Point
|
|
(In thousands)
|
|
Increase
|
|
Decrease
|
|
Effect on total of service and interest cost components
|
|
$
|
67
|
|
|
$
|
(58
|
)
|
|
Effect on accumulated postretirement benefit obligation
|
|
$
|
814
|
|
|
$
|
(745
|
)
|
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Note 14. Revolving Credit Facility
On November 6, 2018, the Company entered into a new $150.0 million senior secured revolving credit facility (the “New Revolving Facility”) with Bank of America, N.A, Citibank, N.A., JPMorgan Chase Bank, N.A., PNC Bank, National Association, Regions Bank, and SunTrust Bank, with a sublimit on letters of credit and swingline loans of $15.0 million each. The New Revolving Facility includes an accordion feature whereby the Company may increase the revolving commitments or enter into one or more tranches of incremental term loans, up to an additional $75.0 million in aggregate of increased commitments and incremental term loans, subject to certain conditions. The commitment fee is based on a leverage grid and ranges from 0.20% to 0.40%. Borrowings under the New Revolving Facility bear interest based on a leverage grid with a range of PRIME + 0.25% to PRIME + 0.875% or Adjusted LIBO Rate + 1.25% to Adjusted LIBO Rate + 1.875%. Effective March 27, 2019, the Company entered into a Rate Swap utilizing a notional amount of $80.0 million, with an effective date of April 11, 2019 and a maturity date of October 11, 2023. Under the terms of the Rate Swap, the Company receives 1-month LIBOR, subject to a 0% floor, and makes payments based on a fixed rate of 2.1975%. The Company’s obligations under the ISDA are secured by the collateral which secures the loans under the New Revolving Facility on a pari passu and pro rata basis with the principal of such loans. The Company has designated the Rate Swap derivative instruments as a cash flow hedge.
Under the New Revolving Facility, the Company is subject to a variety of affirmative and negative covenants of types customary in a senior secured lending facility, including financial covenants relating to leverage and interest expense coverage. The Company is allowed to pay dividends, provided, among other things, a total net leverage ratio is met, and no default exists or has occurred and is continuing as of the date of any such payment and after giving effect thereto. The New Revolving Facility matures on November 6, 2023, subject to the ability for the Company (subject to certain conditions) to agree with lenders who so consent to extend the maturity date of the commitments of such consenting lenders for a period of one year, such option being exercisable not more than two times during the term of the facility.
The New Revolving Facility replaced, by way of amendment and restatement, the Company’s senior secured revolving credit facility (the “Prior Revolving Facility”) with JPMorgan Chase Bank, N.A. and SunTrust Bank, with revolving commitments of $125.0 million as of September 30, 2018 and $135.0 million as of October 18, 2018 (the “Third Amendment Effective Date”), subject to an accordion feature. Under the Prior Revolving Facility, as amended, advances were based on the Company’s eligible accounts receivable, inventory and equipment, the value of certain real property and trademarks, and an amount based on the lesser of $10.0 million (subject to monthly reduction) and the sum of certain eligible accounts receivable and inventory, less required reserves. The commitment fee was a flat fee of 0.25% per annum. Outstanding obligations were collateralized by all of the Company’s assets, excluding, amongst other things, certain real property not included in the borrowing base. Borrowings under the Prior Revolving Facility bore 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%; provided, that, after the Third Amendment Effective Date, (i) the applicable rate was PRIME + 0.25% or Adjusted LIBO Rate + 1.75%; and (ii) loans up to certain formula amounts were subject to an additional margin ranging from 0.375% to 0.50%. The Prior Revolving Facility included a variety of affirmative and negative covenants of types customary in an asset-based lending facility, including a financial covenant relating to the maintenance of a fixed charge coverage ratio, and provided for customary events of default.
At June 30, 2019, the Company was eligible to borrow up to a total of $150.0 million under the New Revolving Facility and had outstanding borrowings of $92.0 million and had utilized $2.3 million of the letters of credit sublimit. At June 30, 2019 and 2018, the weighted average interest rate on the Company’s outstanding borrowings subject to interest rate variability under the New Revolving Facility was 3.98% and 4.10%, respectively, and the Company was in compliance with all of the covenants under the New Revolving Facility.
The Company classifies borrowings contractually due to be settled one year or less as short-term and more than one year as long-term. Outstanding borrowings under the Company’s revolving credit facility were classified on the Company’s consolidated balance sheets as “Long-term borrowings under revolving credit facility” at June 30, 2019 and “Short-Term borrowings under revolving credit facility” at June 30, 2018.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Note 15. Employee Stock Ownership Plan
As of December 31, 2018, the Company froze the ESOP such that (i) no employees of the Company may commence participation in the ESOP on or after December 31, 2018; (ii) no Company contributions will be made to the ESOP with respect to services performed or compensation received after December 31, 2018; and (iii) the ESOP accounts of all individuals who are actively employed by the Company and participating in the ESOP on December 31, 2018 will be fully vested as of such date. Additionally, the Administrative Committee, with the consent of the Board of Directors, designated certain employees who were terminated in connection with certain reductions-in-force in 2018 to be fully vested in their ESOP accounts as of their severance dates.
The Company’s ESOP was established in 2000. The plan was a leveraged ESOP in which the Company was the lender. One of the two loans established to fund the ESOP matured in fiscal 2016 and the remaining loan was scheduled to mature in December 2018. The loan was repaid from the Company’s discretionary plan contributions over the original 15 year term with a variable rate of interest. The annual interest rate was 3.71% at December 31, 2018 when the plan was frozen.
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30,
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
Loan amount (in thousands)
|
|
$—
|
|
$2,145
|
|
$4,289
|
Shares were held by the plan trustee for allocation among participants as the loan was repaid. The unencumbered shares were allocated to participants using a compensation-based formula. Subject to vesting requirements, allocated shares are owned by participants and shares are held by the plan trustee until the participant retires.
Historically, the Company used the dividends, if any, on ESOP shares to pay down the loans, and allocated to the ESOP participant shares equivalent to the fair market value of the dividends they would have received. No dividends were paid in fiscal 2019, 2018 or 2017.
During the fiscal years ended June 30, 2019, 2018 and 2017, the Company charged $0.9 million, $2.3 million and $2.5 million, respectively, to compensation expense related to the ESOP. The difference between cost and fair market value of committed to be released shares was recorded as additional paid-in-capital.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30,
|
|
|
|
2019
|
|
2018
|
|
Allocated shares
|
|
1,393,530
|
|
|
1,502,323
|
|
|
Committed to be released shares
|
|
—
|
|
|
73,826
|
|
|
Unallocated shares
|
|
—
|
|
|
72,114
|
|
|
Total ESOP shares
|
|
1,393,530
|
|
|
1,648,263
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Fair value of ESOP shares
|
|
$
|
22,812
|
|
|
$
|
50,354
|
|
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Note 16. Share-based Compensation
Farmer Bros. Co. 2017 Long-Term Incentive Plan
On June 20, 2017 (the “Effective Date“), the Company’s stockholders approved the Farmer Bros. Co. 2017 Long-Term Incentive Plan (the “2017 Plan”). The 2017 Plan succeeded the Company's prior long-term incentive plans, the Farmer Bros. Co. Amended and Restated 2007 Long-Term Incentive Plan (the “Amended Equity Plan“) and the Farmer Bros. Co. 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 the terms of the applicable Prior Plan.
The 2017 Plan provides for the grant of stock options (including incentive stock options and non-qualified stock options), stock appreciation rights, restricted stock, restricted stock units, dividend equivalents, performance shares and other stock- or cash-based awards to eligible participants. Non-employee directors of the Company and employees of the Company or any of its subsidiaries are eligible to receive awards under the 2017 Plan. The 2017 Plan authorizes the issuance of (i) 900,000 shares of common stock plus (ii) the number of shares of common stock subject to awards under the Company’s Prior Plans that are outstanding as of the Effective Date and that expire or are forfeited, cancelled or similarly lapse following the Effective Date. Subject to certain limitations, shares of common stock covered by awards granted under the 2017 Plan that are forfeited, expire or lapse, or are repurchased for or paid in cash, may be used again for new grants under the 2017 Plan. As of June 30, 2019, there were 1,021,771 maximum shares available under the 2017 Plan including shares that were forfeited under the Prior Plans of which 740,429 shares remain available for future issuance. Shares of common stock granted under the 2017 Plan may be authorized but unissued shares, shares purchased on the open market or treasury shares. In no event will more than 900,000 shares of common stock be issuable pursuant to the exercise of incentive stock options under the 2017 Plan.
The 2017 Plan includes annual limits on certain awards that may be granted to any individual participant. The maximum aggregate number of shares of common stock with respect to all stock options and stock appreciation rights that may be granted to any one person during any calendar year is 250,000 shares. The 2017 Plan also includes limits on the maximum aggregate amount that may become payable pursuant to all performance bonus awards that may be granted to any one person during any calendar year and the maximum amount that may become payable pursuant to all cash-based awards granted under the 2017 Plan and the aggregate grant date fair value of all equity-based awards granted under the 2017 Plan to any non-employee director during any calendar year for services as a member of the Board.
The 2017 Plan contains a minimum vesting requirement, subject to limited exceptions, that awards made under the 2017 Plan may not vest earlier than the date that is one year following the grant date of the award. The 2017 Plan also contains provisions with respect to payment of exercise or purchase prices, vesting and expiration of awards, adjustments and treatment of awards upon certain corporate transactions, including stock splits, recapitalizations and mergers, transferability of awards and tax withholding requirements.
The 2017 Plan may be amended or terminated by the Board at any time, subject to certain limitations requiring stockholder consent or the consent of the applicable participant. In addition, the administrator may not, without the approval of the Company’s stockholders, authorize certain re-pricings of any outstanding stock options or stock appreciation rights granted under the 2017 Plan. The 2017 Plan will expire on June 20, 2027.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Non-qualified stock options with time-based vesting (“NQOs”)
One-third of the total number of NQO vest ratably on each of the first three anniversaries of the grant date, contingent on continued employment, and subject to accelerated vesting in certain circumstances.
Following are the assumptions used in the Black-Scholes valuation model for NQOs granted on the date of the grant during the fiscal years ended June 30, 2019, 2018 and 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
Weighted average fair value of NQOs
|
|
$
|
7.78
|
|
|
$
|
10.41
|
|
|
$
|
—
|
|
|
Risk-free interest rate
|
|
3.0
|
%
|
|
2.0
|
%
|
|
—
|
%
|
|
Dividend yield
|
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
|
Average expected term
|
|
4.6 years
|
|
|
4.6 years
|
|
|
0
|
|
|
Expected stock price volatility
|
|
29.6
|
%
|
|
35.4
|
%
|
|
—
|
%
|
The Company’s assumption regarding expected stock price volatility is based on the historical volatility of the Company’s stock price. The risk-free interest rate is based on U.S. Treasury zero-coupon issues at the date of grant with a remaining term equal to the expected life of the stock options. The average expected term is based on historical weighted time outstanding and the expected weighted time outstanding calculated by assuming the settlement of outstanding awards at the midpoint between the vesting date and the end of the contractual term of the award. Currently, management estimates an annual forfeiture rate of 13.0% based on actual forfeiture experience. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
The following table summarizes NQO activity for the year ended June 30, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding NQOs:
|
|
Number
of NQOs
|
|
Weighted
Average
Exercise
Price ($)
|
|
Weighted
Average
Remaining
Life
(Years)
|
|
Aggregate
Intrinsic
Value
($ in thousands)
|
|
Outstanding at June 30, 2018
|
|
161,324
|
|
|
26.82
|
|
5.1
|
|
741
|
|
|
Granted
|
|
154,263
|
|
|
25.04
|
|
—
|
|
—
|
|
|
Exercised
|
|
(28,798
|
)
|
|
11.32
|
|
—
|
|
466
|
|
|
Forfeited
|
|
(87,861
|
)
|
|
27.53
|
|
—
|
|
—
|
|
|
Expired
|
|
(879
|
)
|
|
31.70
|
|
—
|
|
—
|
|
|
Outstanding at June 30, 2019
|
|
198,049
|
|
|
27.35
|
|
5.25
|
|
40
|
|
|
Exercisable at June 30, 2019
|
|
50,229
|
|
|
27.72
|
|
2.93
|
|
40
|
|
The weighted-average grant-date fair value of options granted during the year ended June 30, 2019 was $8.66.
The aggregate intrinsic values outstanding at the end of each fiscal period in the table above represent the total pretax intrinsic value, based on the Company’s closing stock price of $16.37 at June 28, 2019 and $30.55 at June 29, 2018, representing the last trading day of the respective fiscal years, which would have been received by NQO holders had all award holders exercised their NQOs that were in-the-money as of those dates. The aggregate intrinsic value of NQO exercises in each fiscal period above represents the difference between the exercise price and the value of the Company’s common stock at the time of exercise. NQOs outstanding that are expected to vest are net of estimated forfeitures.
The Company received $0.3 million, $1.1 million and $0.5 million in proceeds from exercises of vested NQOs in fiscal 2019, 2018 and 2017, respectively.
As of June 30, 2019 and 2018, respectively, there was $1.1 million and $1.0 million of unrecognized compensation cost related to NQOs. The unrecognized compensation cost related to NQOs at June 30, 2019 is expected to be recognized over the weighted average period of 2.03 years. Total compensation expense for NQOs was $0.5 million, $0.3 million and $0.1 million in fiscal 2019, 2018 and 2017, respectively.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Non-qualified stock options with performance-based and time-based vesting (“PNQs”)
PNQ shares granted for each fiscal year are subject to forfeiture if a target modified net income goal is not attained. For this purpose, “Modified Net Income” is defined as net income (GAAP) before taxes and excluding any gains or losses from sales of assets, and excluding the effect of restructuring and other transition expenses. These PNQs have an exercise price equal the closing price of the Company’s common stock on the date of grant. One-third of the total number of shares subject to each such stock option vest ratably on each of the first three anniversaries of the grant date, contingent on continued employment, and subject to accelerated vesting in certain circumstances.
Following are the assumptions used in the Black-Scholes valuation model for PNQs granted during the fiscal year ended, June 30, 2017, (PNQ shares were not granted during the fiscal years ended June 30, 2019 and 2018):
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
|
|
2017
|
|
Weighted average fair value of PNQs
|
|
$
|
11.42
|
|
|
Risk-free interest rate
|
|
1.5
|
%
|
|
Dividend yield
|
|
—
|
%
|
|
Average expected term
|
|
4.9 years
|
|
|
Expected stock price volatility
|
|
37.7
|
%
|
The following table summarizes PNQ activity for the year ended June 30, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding PNQs:
|
|
Number
of
PNQs
|
|
Weighted
Average
Exercise
Price ($)
|
|
Weighted
Average
Remaining
Life
(Years)
|
|
Aggregate
Intrinsic
Value
($ in
thousands)
|
|
Outstanding at June 30, 2018
|
|
300,708
|
|
|
27.08
|
|
4.0
|
|
1,207
|
|
|
Granted
|
|
—
|
|
|
—
|
|
—
|
|
—
|
|
|
Exercised
|
|
(5,806
|
)
|
|
22.70
|
|
—
|
|
—
|
|
|
Forfeited
|
|
(50,451
|
)
|
|
31.45
|
|
—
|
|
—
|
|
|
Expired
|
|
(14,490
|
)
|
|
27.50
|
|
—
|
|
—
|
|
|
Outstanding at June 30, 2019
|
|
229,961
|
|
|
26.21
|
|
1.23
|
|
—
|
|
|
Exercisable at June 30, 2019
|
|
203,021
|
|
|
25.48
|
|
0.86
|
|
—
|
|
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 $16.37 at June 28, 2019 and $30.55 at June 29, 2018, representing the last trading day of the respective fiscal years, which would have been received by PNQ holders had all award holders exercised their PNQs that were in-the-money as of those dates. The aggregate intrinsic value of PNQ exercises in each fiscal period represents the difference between the exercise price and the value of the Company’s common stock at the time of exercise. PNQs outstanding that are expected to vest are net of estimated forfeitures.
The Company received $0.1 million, $0.3 million and $0.2 million in proceeds from exercises of vested PNQs in fiscal 2019, 2018 and 2017, respectively.
As of June 30, 2019 and 2018, there was $39.7 thousand and $0.5 million, respectively, of unrecognized compensation cost related to PNQs. The unrecognized compensation cost related to PNQs at June 30, 2019 is expected to be recognized over the weighted average period of 0.36 years. Total compensation expense related to PNQs in fiscal 2019, 2018 and 2017 was $0.3 million, $0.8 million and $1.1 million, respectively.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Restricted Stock
Restricted stock awards cliff vest on the earlier of the one year anniversary of the grant date or the date of the first annual meeting of the Company’s stockholders immediately following the grant date, in the case of non-employee directors, and the third anniversary of the grant date, in the case of eligible employees, in each case subject to continued service to the Company through the vesting date and the acceleration provisions of the 2017 Plan and restricted stock agreement. Restricted stock is expected to vest net of estimated forfeitures.
The following table summarizes restricted stock activity for the year ended June 30, 2019:
|
|
|
|
|
|
|
|
|
|
Outstanding and Nonvested Restricted Stock Awards:
|
|
Shares
Awarded
|
|
Weighted
Average
Grant Date
Fair Value
($)
|
|
Outstanding at June 30, 2018
|
|
14,958
|
|
|
33.48
|
|
Granted
|
|
30,352
|
|
|
20.8
|
|
Exercised/Released
|
|
(13,254
|
)
|
|
33.7
|
|
Cancelled/Forfeited
|
|
—
|
|
|
—
|
|
Outstanding and nonvested at June 30, 2019
|
|
32,056
|
|
|
21.1
|
The total grant-date fair value of restricted stock granted during the year ended June 30, 2019 was $0.7 million.
As of June 30, 2019 and 2018, there was 0.4 million and $0.3 million, respectively, of unrecognized compensation cost related to restricted stock. The unrecognized compensation cost related to restricted stock at June 30, 2019 is expected to be recognized over the weighted average period of 0.74 years. Total compensation expense for restricted stock was $23.0 thousand, $0.3 million and $0.2 million, for the fiscal years ended June 30, 2019, 2018 and 2017, respectively.
Performance-Based Restricted Stock Units (“PBRSUs”)
The PBRSU awards cliff vest on the third anniversary of the date of grant based on the Company’s achievement of certain financial performance goals during the performance periods, subject to certain continued employment conditions and subject to acceleration provisions of the 2017 Plan and restricted stock unit agreement. At the end of the three-year performance period, the number of PBRSUs that actually vest will be 0% to 150% of the target amount, depending on the extent to which the Company meets or exceeds the achievement of those financial performance goals measured over the full three-year performance period. PBRSUs are expected to vest net of estimated forfeitures.
The following table summarizes PBRSU activity for the year ended June 30, 2019:
|
|
|
|
|
|
|
|
|
|
Outstanding and Nonvested PBRSUs:
|
|
PBRSUs
Awarded
|
|
Weighted
Average
Grant Date
Fair Value
($)
|
|
Outstanding and nonvested at June 30, 2018
|
|
35,732
|
|
|
31.70
|
|
Granted(1)
|
|
47,928
|
|
|
25.04
|
|
Vested/Released
|
|
—
|
|
|
—
|
|
Cancelled/Forfeited
|
|
(32,423
|
)
|
|
28.19
|
|
Outstanding and nonvested at June 30, 2019
|
|
51,237
|
|
|
27.69
|
|
Expected to vest at June 30, 2019
|
|
—
|
|
|
—
|
The total grant-date fair value of PBRSUs granted during the year ended June 30, 2019 was $1.2 million.
As of June 30, 2019 and 2018, there was $0.3 million and $0.9 million, respectively, of unrecognized compensation cost related to PBRSUs. The unrecognized compensation cost related to PBRSUs at June 30, 2019 is expected to be recognized over the weighted average period of 2.04 years. Total compensation expense for PBRSUs was $0.2 million for the year ended June 30, 2018. There was no compensation expense for PBRSUs for the fiscal years ended June 30, 2019 and 2017.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Note 17. Other Current Liabilities
Other current liabilities consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30,
|
|
(In thousands)
|
|
2019
|
|
2018
|
|
Accrued postretirement benefits
|
|
$
|
1,068
|
|
|
$
|
810
|
|
|
Accrued workers’ compensation liabilities
|
|
1,495
|
|
|
1,698
|
|
|
Short-term pension liabilities(1)
|
|
—
|
|
|
3,761
|
|
|
Earnout payable(2)
|
|
1,000
|
|
|
600
|
|
|
Working capital dispute payable(3)
|
|
354
|
|
|
—
|
|
|
Other(4)
|
|
3,392
|
|
|
3,790
|
|
|
Other current liabilities
|
|
$
|
7,309
|
|
|
$
|
10,659
|
|
___________
(1) Amount recorded at June 30, 2018 represents the present value of the Company’s estimated withdrawal liability under the Local 807 Pension Fund, which was settled as of December 31, 2018.
(2) Represents the estimated fair value of earnout payable in connection with the Company’s acquisition of substantially all of the assets of West Coast Coffee completed on February 7, 2017.
(3) Represents accrued expenses related to working capital disputes in connection with the Company's acquisition of Boyd Coffee on October 2, 2017.
(4) Includes accrued property taxes, sales and use taxes, insurance liabilities and the current portion of cumulative preferred dividends, undeclared and unpaid.
Note 18. Other Long-Term Liabilities
Other long-term liabilities include the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30,
|
|
(In thousands)
|
|
2019
|
|
2018
|
|
Long-term obligations under capital leases
|
|
$
|
(2
|
)
|
|
$
|
58
|
|
|
Derivative liabilities—noncurrent
|
|
1,612
|
|
|
386
|
|
|
Multiemployer Plan Holdback—Boyd Coffee (1)
|
|
—
|
|
|
1,056
|
|
|
Cumulative preferred dividends, undeclared and unpaid—noncurrent
|
|
618
|
|
|
312
|
|
|
Deferred income taxes (2)
|
|
1,795
|
|
|
—
|
|
|
Other long-term liabilities
|
|
$
|
4,023
|
|
|
$
|
1,812
|
|
___________
(1) On January 8, 2019, Boyd Coffee notified the Company of the assessment of $0.5 million in withdrawal liability against the Seller, which the Company timely paid from the Multiemployer Plan Holdback during the three months ended March 31, 2019. The Company has applied the remaining amount of the Multiemployer Plan Holdback of $0.5 million towards satisfaction of the Seller’s post-closing net working capital deficiency under the Asset Purchase Agreement as of June 30, 2019.
(2) Represents deferred tax liabilities that have an indefinite reversal pattern.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Note 19. Income Taxes
The current and deferred components of the provision for income taxes consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended June 30,
|
|
(In thousands)
|
|
2019
|
|
2018
|
|
2017
|
|
Current:
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(1,774
|
)
|
|
$
|
101
|
|
|
$
|
132
|
|
|
State
|
|
231
|
|
|
56
|
|
|
340
|
|
|
Total current income tax (benefit) expense
|
|
(1,543
|
)
|
|
157
|
|
|
472
|
|
|
Deferred:
|
|
|
|
|
|
|
|
Federal
|
|
30,618
|
|
|
17,090
|
|
|
12,120
|
|
|
State
|
|
11,036
|
|
|
65
|
|
|
2,223
|
|
|
Total deferred income tax expense
|
|
41,654
|
|
|
17,155
|
|
|
14,343
|
|
|
Income tax expense
|
|
$
|
40,111
|
|
|
$
|
17,312
|
|
|
$
|
14,815
|
|
A reconciliation of income tax expense to the federal statutory tax rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended June 30,
|
|
(In thousands)
|
|
2019
|
|
2018
|
|
|
2017
|
|
Statutory tax rate
|
|
21
|
%
|
|
28
|
%
|
|
35
|
%
|
|
Income tax (benefit) expense at statutory rate
|
|
$
|
(7,032
|
)
|
|
$
|
(272
|
)
|
|
$
|
13,078
|
|
|
State income tax (benefit) expense, net of federal tax benefit
|
|
(1,295
|
)
|
|
12
|
|
|
1,707
|
|
|
Dividend income exclusion
|
|
—
|
|
|
—
|
|
|
(134
|
)
|
|
Valuation allowance
|
|
50,123
|
|
|
283
|
|
|
(14
|
)
|
|
Change in tax rate
|
|
124
|
|
|
18,022
|
|
|
(54
|
)
|
|
Retiree life insurance
|
|
—
|
|
|
19
|
|
|
1
|
|
|
Other (net)
|
|
(1,809
|
)
|
|
(752
|
)
|
|
231
|
|
|
Income tax expense
|
|
$
|
40,111
|
|
|
$
|
17,312
|
|
|
$
|
14,815
|
|
|
|
|
|
|
|
|
|
On December 22, 2017, the President of the United States signed into law the Tax Act. The SEC subsequently issued 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. The incremental net tax impact recorded upon completion of the analysis of the income tax effects of the U.S. tax law changes was not material to our Consolidated Condensed Financial Statements.
Pursuant to the Tax Act, the federal corporate tax rate was reduced to 21.0%, effective for the tax years beginning on or after January 1, 2018. Deferred tax amounts are calculated based on the rates at which they are expected to reverse in the future. The provisional amount recorded in fiscal 2018 relating to the re-measurement of the Company’s deferred tax balances as a result of the reduction in the corporate tax rate was $18.0 million. The Company finalized its assessment of the income tax effects of the Tax Act in the second quarter of fiscal years ended June 30, 2019.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
The primary components of the temporary differences which give rise to the Company’s net deferred tax assets (liabilities) are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30,
|
|
(In thousands)
|
|
2019
|
|
2018
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
Postretirement benefits
|
|
$
|
20,775
|
|
|
$
|
18,862
|
|
|
|
Accrued liabilities
|
|
5,042
|
|
|
4,754
|
|
|
|
Net operating loss carryforwards
|
|
37,768
|
|
|
32,552
|
|
|
|
Other
|
|
5,950
|
|
|
6,728
|
|
|
|
Total deferred tax assets
|
|
69,535
|
|
|
62,896
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
Fixed assets
|
|
(15,562
|
)
|
|
(16,156
|
)
|
|
|
Other
|
|
(3,749
|
)
|
|
(5,536
|
)
|
|
|
Total deferred tax liabilities
|
|
(19,311
|
)
|
|
(21,692
|
)
|
|
|
Valuation allowance
|
|
(52,019
|
)
|
|
(1,896
|
)
|
|
|
Net deferred tax assets (liabilities)
|
|
$
|
(1,795
|
)
|
|
$
|
39,308
|
|
|
As a result of adopting ASU 2016-09 in fiscal 2018 on a modified retrospective basis, with a cumulative effect adjustment to opening retained earnings, the table of deferred tax assets and liabilities shown above includes deferred tax assets at June 30, 2017 that arose directly from tax deductions related to equity compensation in excess of compensation recognized for financial reporting.
At June 30, 2019, the Company had approximately $146.8 million in federal and $113.4 million in state net operating loss carryforwards that will expire from June 30, 2020 to June 30, 2030. Additionally, at June 30, 2019, the Company had $0.8 million of federal business tax credits that will expire from June 30, 2025 to June 30, 2038 and approximately $1.7 million of federal alternative minimum tax credits that do not expire, and of which $0.8 million is currently refundable.
At June 30, 2019, the Company had total deferred tax assets of $69.5 million and net deferred tax assets of $50.2 million before valuation allowance of $52.0 million. In assessing if the deferred tax assets will be realized, the Company considers whether it is probable that some or all of the deferred tax assets will not be realized. In determining whether the deferred taxes are realizable, the Company considers the period of expiration of the tax asset, historical and projected taxable income, and tax liabilities for the tax jurisdiction in which the tax asset is located. Valuation allowances are provided to reduce the amounts of deferred tax assets to an amount that is more likely than not to be realized based on an assessment of positive and negative evidence, including estimates of future taxable income necessary to realize future deductible amounts.
For the years ended June 30, 2019, 2018 and 2017, due to recent cumulative losses, the Company conclude that certain federal and state net operating loss carry forwards and tax credit carryovers will not be utilized before expiration. The amounts of valuation allowance recorded in the Consolidated Balance Sheets were $52.0 million, $1.9 million and $1.6 million to reduce deferred tax assets in fiscal 2019, 2018 and 2017, respectively. The Company's valuation allowance increased in fiscal 2019 and 2018 by $50.1 million and $0.3 million, respectively.
As of, and for the three years ended June 30, 2019, 2018 and 2017, the Company had no significant uncertain tax positions.
The Company files income tax returns in the U.S. and in various state jurisdictions with varying statutes of limitations. The Company is no longer subject to U.S. income tax examinations for the fiscal years prior to June 30, 2016. Although the outcome of tax audits is always uncertain, the Company does not believe the outcome of any future audit will have a material adverse effect on the Company’s consolidated financial statements.
The Company’s policy is to recognize interest expense and penalties related to income tax matters as a component of income tax expense. There were no amount of interest and penalties recognized in the Consolidated Balance Sheets in the fiscal years ended June 30, 2019 and 2018, associated with uncertain tax positions. Additionally, the Company did not record any income tax expense related to interest and penalties on uncertain tax positions in the fiscal years ended June 30, 2019, 2018 and 2017, respectively.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Note 20. Net (Loss) Income Per Common Share
Basic net income (loss) per common share is calculated by dividing net income (loss) attributable to the Company by the weighted average number of common shares outstanding during the periods presented. Diluted net income (loss) per common share is calculated by dividing diluted net income (loss) attributable to the Company by the weighted average number of common shares outstanding adjusted to include the effect, if dilutive, of the exercise of in-the-money stock options, unvested restricted stock, performance-based restricted stock units, and shares of Series A Preferred Stock, as converted, during the periods presented.
The following table presents the computation of basic and diluted earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended June 30,
|
|
(In thousands, except share and per share amounts)
|
|
2019
|
|
2018
|
|
2017
|
|
Undistributed net (loss) income available to common stockholders
|
|
$
|
(74,054
|
)
|
|
$
|
(18,652
|
)
|
|
$
|
22,524
|
|
|
Undistributed net (loss) income available to nonvested restricted stockholders and holders of convertible preferred stock
|
|
(76
|
)
|
|
(17
|
)
|
|
27
|
|
|
Net (loss) income available to common stockholders—basic
|
|
$
|
(74,130
|
)
|
|
$
|
(18,669
|
)
|
|
$
|
22,551
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding—basic
|
|
16,996,354
|
|
|
16,815,020
|
|
|
16,668,745
|
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
Shares issuable under stock options
|
|
—
|
|
|
—
|
|
|
117,007
|
|
|
Weighted average common shares outstanding—diluted
|
|
16,996,354
|
|
|
16,815,020
|
|
|
16,785,752
|
|
|
Net (loss) income per common share available to common stockholders—basic
|
|
$
|
(4.36
|
)
|
|
$
|
(1.11
|
)
|
|
$
|
1.35
|
|
|
Net (loss) income per common share available to common stockholders—diluted
|
|
$
|
(4.36
|
)
|
|
$
|
(1.11
|
)
|
|
$
|
1.34
|
|
The following table summarizes anti-dilutive securities excluded from the computation of diluted net income (loss) per common share for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended June 30,
|
|
(In thousands)
|
|
2019
|
|
2018
|
|
2017
|
|
Shares issuable under stock options
|
|
—
|
|
|
462,032
|
|
|
24,671
|
|
|
Shares issuable under convertible preferred stock
|
|
407,734
|
|
|
393,769
|
|
|
—
|
|
|
Shares issuable under PBRSUs
|
|
—
|
|
|
35,732
|
|
|
—
|
|
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Note 21. Preferred Stock
The Company is authorized to issue 500,000 shares of preferred stock at a par value of $1.00, including 21,000 authorized shares of Series A Preferred Stock.
Series A Convertible Participating Cumulative Perpetual Preferred Stock
The Series A Preferred Stock (a) pays a dividend, when, as and if declared by the Company’s Board of Directors, of 3.5% APR of the stated value per share, payable quarterly in arrears, (b) has an initial stated value of $1,000 per share, adjustable up or down by the amount of undeclared and unpaid dividends or subsequent payment of accumulated dividends thereon, respectively, and (c) has a conversion price of $38.32. Dividends may be paid in cash. The Company accrues for undeclared and unpaid dividends as they are payable in accordance with the terms of the Certificate of Designations filed with the Secretary of State of the State of Delaware. At June 30, 2019, the Company had undeclared and unpaid preferred dividends of $924,347 on 14,700 issued and outstanding shares of Series A Preferred Stock. Series A Preferred Stock is a participating security and has rights to earnings that otherwise would have been available to holders of the Company's common stock. On an as converted basis, holders of Series A Preferred Stock are entitled to vote together with the holders of the Company’s common stock and are entitled to share in the dividends on the Company's common stock, when declared. Each share of Series A Preferred Stock is convertible into the number of shares of the Company’s common stock (rounded down to the nearest whole share and subject to adjustment in accordance with the terms of the Certificate of Designations) equal to the stated value per share of Series A Preferred Stock divided by the conversion price of $38.32. Series A Preferred Stock is a perpetual stock and is not redeemable at the election of the Company or any holder. Based on its characteristics, the Company classified Series A Preferred Stock as permanent equity.
At June 30, 2019, Series A Preferred Stock consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except share and per share amounts)
|
|
|
|
|
|
|
|
Shares Authorized
|
|
Shares Issued and Outstanding
|
|
Stated Value per Share
|
|
Carrying Value
|
|
Cumulative Preferred Dividends, Undeclared and Unpaid
|
|
Liquidation Preference
|
|
21,000
|
|
|
14,700
|
|
|
$
|
1,063
|
|
|
15,624
|
|
|
$
|
924
|
|
|
$
|
15,624
|
|
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Note 22. Commitments and Contingencies
Operating Leases
The Company leases buildings, machinery and equipment, computer hardware and furniture and fixtures. All contractual increases and rent-free periods included in the lease contract are taken into account when calculating the minimum lease payment and are recognized on a straight-line basis over the lease term. Certain leases have renewal periods which are not included in the table below. The leases expire in various years ranging from 2020 to 2028.
Rent expenses paid for the fiscal years ended June 30, 2019, 2018 and 2017 were $6.4 million, $5.5 million and $5.1 million, respectively.
The minimum annual payments under operating leases are as follows:
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Operating
Lease
Obligations
|
|
Year Ended June 30,
|
|
|
|
2020
|
|
$
|
4,434
|
|
|
2021
|
|
3,238
|
|
|
2022
|
|
2,472
|
|
|
2023
|
|
2,131
|
|
|
2024
|
|
2,025
|
|
|
Thereafter
|
|
4,389
|
|
|
Total
|
|
$
|
18,689
|
|
Capital Leases
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Capital
Lease
Obligations
|
|
Year Ended June 30,
|
|
|
|
2020
|
|
$
|
36
|
|
|
2021
|
|
1
|
|
|
Total minimum lease payments
|
|
37
|
|
|
Less: imputed interest
(0.82% to 10.66%)
|
|
(2
|
)
|
|
Present value of future minimum lease payments
|
|
35
|
|
|
Less: current portion
|
|
34
|
|
|
Long-term capital lease obligations
|
|
$
|
1
|
|
Purchase Commitments
As of June 30, 2019, the Company had committed to purchase green coffee inventory totaling $48.6 million under fixed-price contracts, $9.4 million in other inventory under non-cancelable purchase orders and $3.3 million in other purchases under non-cancelable purchase orders.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)