Farmer Bros. Co. Reports First Quarter Fiscal 2020 Financial Results

Date : 11/07/2019 @ 9:06PM
Source : GlobeNewswire Inc.
Stock : Farmer Brothers Company (FARM)
Quote : 15.35  -0.03 (-0.20%) @ 4:21PM
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Farmer Bros. Co. Reports First Quarter Fiscal 2020 Financial Results

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Farmer Bros. Co. (NASDAQ: FARM) (the "Company") today reported financial results for its first fiscal quarter ended September 30, 2019.

First Quarter Fiscal 2020 Highlights:

  • Volume of green coffee processed and sold increased by 0.5 million to 26.0 million pounds, a 2.0% increase over the prior year period;
    • Green coffee pounds processed and sold through our DSD network were 8.3 million, or 32.0% of total green coffee pounds processed and sold
    • Direct ship customers represented 17.4 million, or 67.0%, of total green coffee pounds processed and sold
    • Distributor customers represented 0.3 million pounds, or 1.0%, of total green coffee pounds processed and sold
  • Net sales were $138.6 million, a decrease of $8.8 million, or 6.0%, from the prior year period;
  • Gross margin decreased to 29.3% from 32.7% in the prior year period, while operating expenses as percentage of sales improved to 24.3% from 34.1% in the prior year period;
  • Net income was $4.7 million compared to net loss of $3.0 million in the prior year period; and
  • Adjusted EBITDA was $4.0 million compared to $11.0 million in the prior year period.*

(*Adjusted EBITDA, a non-GAAP financial measure, is reconciled to its corresponding GAAP measure at the end of this press release.)

“After my first weeks as CEO, I remain excited about joining Farmer Brothers at this critical moment in the Company’s history,” said Deverl Maserang, President and CEO. “I recognize and understand the challenges and the opportunities we face, and I believe we have the assets, the platform, as well as a talented and dedicated employee base to return the Company to growth and profitability.”

Mr. Maserang continued, “Under the leadership of Chris Mottern, solid progress was made towards identifying key priorities aimed at improving and evolving our business for the future. As CEO, I have refined these and am committed to focusing on: optimizing our supply chain, elevating our execution, enhancing our service capability, differentiating our product portfolio through innovation, and engaging our talent. I look forward to working with all our employees to execute with purpose and urgency on our strategic initiatives in order to best position Farmer Brothers to deliver enhanced value for our stakeholders.”

First Quarter Fiscal 2020 Results:

Selected Financial Data

The selected financial data presented below under the captions “Income statement data,” “Operating data” and “Other data” summarizes certain performance measures for the three months ended September 30, 2019 and 2018 (unaudited).

  Three Months Ended September 30,
  2019 2018
(In thousands, except per share data)    
Income statement data:    
Net sales $138,600  $147,440 
Gross margin 29.3% 32.7%
Income (loss) from operations $6,892  $(2,078)
Net income (loss) $4,654  $(2,986)
Net income (loss) available to common stockholders per common share—diluted $0.26  $(0.18)
     
Operating data:    
Coffee pounds 25,958  25,449 
EBITDA $13,440  $4,658 
EBITDA Margin 9.7% 3.2%
Adjusted EBITDA $4,016  $10,967 
Adjusted EBITDA Margin 2.9% 7.4%
     
Other data:    
Capital expenditures related to maintenance $4,352  $5,462 
Total capital expenditures $5,276  $7,787 
Depreciation and amortization expense $7,617  $7,728 

EBITDA, EBITDA Margin, Adjusted EBITDA and Adjusted EBITDA Margin are non-GAAP financial measures; a reconciliation of these non-GAAP measures to their corresponding GAAP measures is included at the end of this press release.

Net sales in the first quarter of fiscal 2020 were $138.6 million, a decrease of $8.8 million, or 6.0%, from the prior year period. The decrease in net sales was driven primarily by lower sales of coffee and allied products sold through our DSD network, unfavorable customer mix within our direct sales channel, non-recurring sales of industrial soup based products associated with the Boyd’s acquisition which we stopped selling last year and the impact of lower coffee prices for our cost plus customers. Sales through our DSD network was impacted by the sale of our office coffee business in July of this year, higher customer attrition and lower inventory fill rates associated with downtime at our Houston plant.

Gross profit in the first quarter of fiscal 2020 was $40.6 million, a decrease of $7.6 million, or 15.7% from the prior year period and gross margin decreased to 29.3% from 32.7%. The decrease in gross profit was primarily driven by lower net sales of $8.8 million between the periods, unfavorable customer mix, higher production costs associated with certain aging production infrastructure and higher scrap expense, partially offset by lower coffee brewing equipment and labor costs and lower green coffee prices.

Operating expenses in the first quarter of fiscal 2020 decreased $16.6 million, or 32.9%, to $33.7 million, from $50.3 million, and as a percentage of net sales declined to 24.3%  compared to 34.1% of net sales, in the prior year period. The decrease in operating expenses was primarily due to increase in net gains from sales of assets, the absence of restructuring and other transition expenses, the conclusion of Boyd Coffee integration at the beginning of October 2018, headcount reductions and other efficiencies realized from DSD route optimization, partially offset by increased severance costs associated with a reduction in force which occurred during the current quarter.

Net gains from sales of assets are primarily associated with the sales of the office coffee assets and the Seattle office branch property of $7.2 million and $6.8 million, respectively.

Interest expense in the first quarter of fiscal 2020 decreased $0.3 million to $2.6 million as compared to $2.9 million in the prior year period principally due to lower pension interest expense.

Other, net in the first quarter of fiscal 2020 decreased by $0.5 million to $0.2 million in the quarter compared to $0.7 million in the prior year period primarily due to reduced employee post retirement benefit gains partially offset by lower mark-to-market losses on coffee-related derivative instruments not designated as accounting hedges.

Income tax benefit was $0.1 million in the first quarter of fiscal 2020 as compared to income tax benefit of $1.3 million in the prior year period. The lower tax benefit is primarily due to the previously recorded valuation allowance and reduction of our estimated deferred tax liability during the three months ended September 30, 2019 as compared to the prior year period.

As a result of the foregoing factors, net income was $4.7 million in the first quarter of fiscal 2020 as compared to net loss of $3.0 million in the prior year period. Net income available to common stockholders was $4.5 million, or $0.26 per common share available to common stockholders-diluted, in the first quarter of fiscal 2019, compared to net loss available to common stockholders of $3.1 million, or $0.18 per common share available to common stockholders-diluted, in the prior year period.

Non-GAAP Financial Measures:

EBITDA, EBITDA Margin, Adjusted EBITDA and Adjusted EBITDA Margin are non-GAAP financial measures; a reconciliation of these non-GAAP measures to their corresponding GAAP measures is included at the end of this press release.

Adjusted EBITDA was $4.0 million in the first quarter of fiscal 2020, as compared to Adjusted EBITDA of $11.0 million in the prior year period, and Adjusted EBITDA Margin was 2.9% in the first quarter of fiscal 2019, as compared to Adjusted EBITDA Margin of 7.4% in the prior year period.

About Farmer Bros. Co.

Founded in 1912, Farmer Bros. Co. is a national coffee roaster, wholesaler and distributor of coffee, tea and culinary products. The Company’s product lines include organic, Direct Trade and sustainably-produced coffee. With a robust line of coffee, hot and iced teas, cappuccino mixes, spices, and baking/biscuit mixes, the Company delivers extensive beverage planning services and culinary products to its U.S. based customers. The Company serves a wide variety of customers, from small independent restaurants and foodservice operators to large institutional buyers like restaurant and convenience store chains, hotels, casinos, healthcare facilities, and gourmet coffee houses, as well as grocery chains with private brand coffee and consumer branded coffee and tea products, and foodservice distributors.

Headquartered in Northlake, Texas, Farmer Bros. Co. generated net sales of $595.9 million in fiscal 2019 and has approximately 1,521 employees nationwide. The Company’s primary brands include Farmer Brothers®, Artisan Collection by Farmer Brothers™, Superior®, Metropolitan™, China Mist® and Boyds®.

Investor Conference Call

Deverl Maserang, CEO, and Scott Lyon, Corporate Controller and Interim Principal Financial and Accounting Officer, will host an audio-only investor conference call today, November 7, 2019, at 5:00 p.m. Eastern time (4:00 p.m. Central time) to review the Company’s financial results for the first quarter ended September 30, 2019. The Company’s earnings press release will be available on the Company’s website at www.farmerbros.com under “Investor Relations.”

The call will be open to all interested investors through a live audio web broadcast via the Internet at https://edge.media-server.com/mmc/p/tqecqeee and at the Company’s website www.farmerbros.com under “Investor Relations.”  The call also will be available to investors and analysts by dialing Toll Free: 1-(844) 423-9890 or international: 1-(716) 247-5805. The passcode/ID is 4967166.

The audio-only webcast will be archived for at least 30 days on the Investor Relations section of the Farmer Bros. Co. website, and will be available approximately two hours after the end of the live webcast.

Forward-Looking Statements

Certain statements contained in this press release are not based on historical fact and are forward-looking statements within the meaning of federal securities laws and regulations. These statements are based on management's current expectations, assumptions, estimates and observations of future events and include any statements that do not directly relate to any historical or current fact. These forward-looking statements can be identified by the use of words like “anticipates,” “estimates,” “projects,” “expects,” “plans,” “believes,” “intends,” “will,” “could,” “assumes” and other words of similar meaning. Owing to the uncertainties inherent in forward-looking statements, actual results could differ materially from those set forth in forward-looking statements. The Company intends these forward-looking statements to speak only at the time of this press release and does not undertake to update or revise these statements as more information becomes available except as required under federal securities laws and the rules and regulations of the Securities and Exchange Commission (“SEC”). Factors that could cause actual results to differ materially from those in forward-looking statements include, but are not limited to, the success of our corporate relocation plan, the timing and success of implementation of our direct-store-delivery restructuring plan, our success in consummating acquisitions and integrating acquired businesses, the impact of capital improvement projects, the adequacy and availability of capital resources to fund our existing and planned business operations and our capital expenditure requirements, the capacity to meet the demands of the Company’s large national account customers, the extent of execution of plans for the growth of Company business and achievement of financial metrics related to those plans, the success of the Company to retain and/or attract qualified employees, the effect of the capital markets, stockholder activity and fluctuations in availability and cost of  green coffee, competition, organizational changes, the effectiveness of our hedging strategies in reducing price risk, our ability to provide sustainability in ways that do not materially impair profitability, changes in the strength of the economy, business conditions in the coffee industry and food industry in general, the Company's continued success in attracting new customers, variances from budgeted sales mix and growth rates, weather and special or unusual events, as well as other risks described in this press release and other factors described from time to time in the Company's filings with the SEC. The results of operations for the three months ended September 30, 2019 are not necessarily indicative of the results that may be expected for any future period.

FARMER BROS. CO.CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)(In thousands, except share and per share data)

 Three Months Ended September 30,
 2019 2018
Net sales$138,600  $147,440 
Cost of goods sold97,959  99,205 
Gross profit 40,641  48,235 
Selling expenses33,614  37,310 
General and administrative expenses12,740  8,617 
Restructuring and other transition expenses  4,467 
Net gains from sales of assets(12,605) (81)
Operating expenses33,749  50,313 
Income (loss) from operations .6,892  (2,078)
Other (expense) income:   
Interest expense(2,548) (2,852)
Other, net203  657 
Total other expense .(2,345) (2,195)
Loss before taxes 4,547  (4,273)
Income tax benefit (107) (1,287)
Net income (loss) $4,654  $(2,986)
Less: Cumulative preferred dividends, undeclared and unpaid 137  132 
Net earnings (loss) available to common stockholders$4,517  $(3,118)
Net earnings (loss) available to common stockholders per common share—basic$0.26  $(0.18)
Net earnings (loss) available to common stockholders per common share—diluted$0.26  $(0.18)
Weighted average common shares outstanding—basic 17,099,851  16,886,718 
Weighted average common shares outstanding—diluted 17,518,413  16,886,718 

FARMER BROS. CO.CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)(In thousands, except share and per share data)

 September 30, 2019 June 30, 2019
ASSETS   
Current assets:   
Cash and cash equivalents $7,425  $6,983 
Accounts receivable, net57,465  55,155 
Inventories 91,730  87,910 
Income tax receivable1,741  1,191 
Short-term derivative assets 317  1,865 
Prepaid expenses 7,500  6,804 
Assets held for sale 1,718   
Total current assets 167,896  159,908 
Property, plant and equipment, net 181,154  189,458 
Goodwill36,224  36,224 
Intangible assets, net .28,275  28,878 
Other assets9,485  9,468 
Long-term derivatives assets215  674 
Right-of-use operating lease assets16,349   
Total assets $439,598  $424,610 
LIABILITIES AND STOCKHOLDERS’ EQUITY   
Current liabilities:   
Accounts payable71,800  72,771 
Accrued payroll expenses 16,109  14,518 
Operating leases liabilities - current 4,332   
Short-term derivative liabilities 3,461  1,474 
Other current liabilities 7,024  7,309 
Total current liabilities102,726  96,072 
Long-term borrowings under revolving credit facility 85,000  92,000 
Accrued pension liabilities 46,290  47,216 
Accrued postretirement benefits 22,751  23,024 
Accrued workers’ compensation liabilities 4,747  4,747 
Operating lease liabilities - noncurrent12,084   
Other long-term liabilities 4,431  4,057 
Total liabilities$278,029  $267,116 
Commitments and contingencies   
Stockholders’ equity:   
Preferred stock, $1.00 par value, 500,000 shares authorized; Series A Convertible Participating Cumulative Perpetual Preferred Stock, 21,000 shares authorized; 14,700 shares issued and outstanding as of September 30, 2019 and June 30, 2019; liquidation preference of $15,761 and $15,624 as of September 30, 2019 and June 30, 2019, respectively15  15 
Common stock, $1.00 par value, 25,000,000 shares authorized; 17,095,198 and 17,042,132 shares issued and outstanding as of September 30, 2019 and June 30, 2019, respectively17,095  17,042 
Additional paid-in capital 58,718  57,912 
Retained earnings 150,694  146,177 
Unearned ESOP shares   
Accumulated other comprehensive loss (64,953) (63,652)
Total stockholders’ equity $161,569  $157,494 
Total liabilities and stockholders’ equity $439,598  $424,610 

   
FARMER BROS. CO.       
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)       
 (In thousands)       
  Three Months Ended September 30,
Cash flows from operating activities: 2019   2018 
Net loss     
Adjustments to reconcile net loss to net cash provided by operating activities:       4,654    (2,986)
Depreciation and amortization 7,617  7,728 
Deferred income taxes   (1,334)
Restructuring and other transition expenses, net of payments   3,712 
Net gains from sales of assets (12,605) (81)
Net losses on derivative instruments4,514  3,068 
Other adjustments908  1,866 
Change in operating assets and liabilities:    
Accounts receivable (2,359) (4,658)
Inventories (4,792) (11,062)
Derivative assets (liabilities), net(1,403) (5,198)
Other assets (1,480) (61)
Accounts payable 1,399  13,049 
Accrued expenses and other liabilities (340) (2,963)
Net cash provided by operating activities $(3,887) $1,080 
Cash flows from investing activities   
Purchases of property, plant and equipment (5,276) (7,733)
Proceeds from sales of property, plant and equipment 16,618  53 
Net cash used in investing activities $11,342  $(7,680)
Cash flows from financing activities:   
Proceeds from revolving credit facility $23,000  $12,020 
Repayments on revolving credit facility (30,000)  
Payments of finance lease obligations (13) (53)
Proceeds from stock option exercises   326 
Net cash provided by financing activities $(7,013) $12,293 
Net increase in cash and cash equivalents$442  $5,693 
Cash and cash equivalents at beginning of period6,983  2,438 
Cash and cash equivalents at end of period$7,425  $8,131 

 
   
FARMER BROS. CO.       
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (continued)       
(In thousands)       
  Three Months Ended September 30, 
 2019  2018
Supplemental disclosure of non-cash investing and financing activities:       
  Net change in derivative assets and liabilities   included in other comprehensive loss, net of tax$(1,301) $(4,637)
  Non-cash additions to property, plant and equipment$250  $6,976 
  Non-cash portion of earnout receivable recognized—spice assets sale$  $252 
  Non-cash issuance of 401-K common stock$53  $ 
  Cumulative preferred dividends, undeclared and unpaid$137  $132 

Non-GAAP Financial Measures

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

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

  • income taxes;
  • interest expense; and
  • depreciation and amortization expense.

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

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

  • income taxes;
  • interest expense;
  • (loss) income from short-term investments;
  • depreciation and amortization expense;
  • ESOP and share-based compensation expense;
  • non-cash impairment losses;
  • non-cash pension withdrawal expense;
  • restructuring and other transition expenses;
  • severance costs
  • net gains and losses from sales of assets;
  • non-cash pension settlement charges; and
  • acquisition and integration costs.

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

Restructuring and other transition expenses are expenses that are directly attributable to (i) employee retention and separation benefits, pension withdrawal expense, facility-related costs and other related costs such as travel, legal, consulting and other professional services; and (ii) severance, prorated bonuses for bonus eligible employees, contractual termination payments and outplacement services, and other related costs, including legal, recruiting, consulting, other professional services, and travel.

For purposes of calculating EBITDA and EBITDA Margin and Adjusted EBITDA and Adjusted EBITDA Margin, we have excluded the impact of interest expense resulting from the adoption of ASU 2017-07,  non-cash pretax pension settlement charge resulting from the amendment and termination of the Farmer Bros. Plan effective December 1, 2018 and severance because these items are not reflective of our ongoing operating results.

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

We believe that EBITDA facilitates operating performance comparisons from period to period by isolating the effects of certain items that vary from period to period without any correlation to core operating performance or that vary widely among similar companies. These potential differences may be caused by variations in capital structures (affecting interest expense), tax positions (such as the impact on periods or companies of changes in effective tax rates or net operating losses) and the age and book depreciation of facilities and equipment (affecting relative depreciation expense). We also present EBITDA and EBITDA Margin because (i) we believe that these measures are frequently used by securities analysts, investors and other interested parties to evaluate companies in our industry, (ii) we believe that investors will find these measures useful in assessing our ability to service or incur indebtedness, and (iii) we use these measures internally as benchmarks to compare our performance to that of our competitors.

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

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

       
  Three Months Ended September 30, 
(In thousands) 2019  2018 
Net income (loss), as reported $4,654 $(2,986)
Income tax expense (benefit)  (107) (1,287)
Interest expense (1) 1,276  1,203 
Depreciation and amortization expense  7,617  7,728 
EBITDA  $13,440  $4,658 
EBITDA Margin 9.7% 3.2%

____________

(1) Excludes interest expense related to pension plans and postretirement benefits of $1.3 million and $1.6 million in each of the three months ended September 30, 2019 and 2018, respectively.

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

  Three Months Ended September 30, 
(In thousands) 2019  2018 
Net income (loss), as reported$4,654 $(2,986)
Income tax expense (benefit) (107) (1,287)
Interest expense(1) 1,276  1,203 
Depreciation and amortization expense 7,617  7,728 
ESOP and share-based compensation expense 869  912 
Restructuring and other transition expenses(2)   4,467 
Net losses (gains) from sales of other assets (12,605) (81)
Acquisition and integration costs   1,011 
Severance 2,312   
Adjusted EBITDA $4,016  $10,967 
Adjusted EBITDA Margin 2.9% 7.4%

____________

(1)  Excludes interest expense related to pension plans and postretirement benefits of $1.3 million and $1.6 million in each of the three months ended September 30, 2019 and 2018, respectively.(2) The three months ended September 30, 2018, includes $3.4 million, including interest, assessed by the WC Pension Trust representing the Company’s share of 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.

Contact:                                  Joele Frank, Wilkinson Brimmer Katcher                                Leigh Parrish212-355-4449

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