Quarterly Report (10-q)

Date : 11/08/2019 @ 11:04AM
Source : Edgar (US Regulatory)
Stock : Farmer Brothers Company (FARM)
Quote : 15.33  -0.05 (-0.33%) @ 4:10PM
Farmer Brothers share price Chart

Quarterly Report (10-q)


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2019
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                     to                     
Commission file number: 001-34249
FARMER BROS. CO.
(Exact Name of Registrant as Specified in Its Charter)
Delaware
 
95-0725980
(State of Incorporation)
 
(I.R.S. Employer Identification No.)
1912 Farmer Brothers Drive, Northlake, Texas 76262
(Address of Principal Executive Offices; Zip Code)
 
888-998-2468
(Registrant’s Telephone Number, Including Area Code)
 
Securities registered pursuant to Section 12(b) of the Act:
 
 
 
Title of Each Class
Trading Symbol(s)
Name of Each Exchange on Which Registered
Common Stock, $1.00 par value
FARM
NASDAQ Global Select Market
 
 
 
None
(Former Address, if Changed Since Last Report)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  ý    NO  ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    YES  ý    NO  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. 
Large accelerated filer
¨
 
  
Accelerated filer
 
ý
Non-accelerated filer
¨
 
  
Smaller reporting company
 
¨
 
 
 
 
Emerging growth company
 
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the
 
 
Exchange Act.
¨
 
 
 
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    
YES ¨ NO  ý
As of October 31, 2019, the registrant had 17,151,510 shares outstanding of its common stock, par value $1.00 per share, which is the registrant’s only class of common stock.



TABLE OF CONTENTS
 
 
Page
 
 
 
1
 
 
1
 
 
2
 
 
3
 
 
4
 
 
6
 
 
8
 
 
32
 
 
44
 
 
45
 
 
 
 
 
46
 
 
46
 
 
46
 
 
46
 
 
46
 
 
46
 
 
     Item 6. Exhibits
47
 
 
48






PART I - FINANCIAL INFORMATION (UNAUDITED)
Item 1. Financial Statements
FARMER BROS. CO.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands, except share and per share data)
 
September 30, 2019
 
June 30, 2019
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
7,425

 
$
6,983

Accounts receivable, net
57,465

 
55,155

Inventories
91,730

 
87,910

Income tax receivable
1,741

 
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

Goodwill
36,224

 
36,224

Intangible assets, net
28,275

 
28,878

Other assets
9,485

 
9,468

Long-term derivatives assets
215

 
674

Right-of-use operating lease assets
16,349

 

Total assets
$
439,598

 
$
424,610

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
71,800

 
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 liabilities
102,726

 
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 - noncurrent
12,084

 

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, respectively
15

 
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, respectively
17,095

 
17,042

Additional paid-in capital
58,718

 
57,912

Retained earnings
150,694

 
146,177

Accumulated other comprehensive loss
(64,953
)
 
(63,652
)
Total stockholders’ equity
$
161,569

 
$
157,494

Total liabilities and stockholders’ equity
$
439,598

 
$
424,610

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

1



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 sold
97,959

 
99,205

Gross profit
40,641

 
48,235

Selling expenses
33,614

 
37,310

General and administrative expenses
12,740

 
8,617

Restructuring and other transition expenses

 
4,467

Net gains from sales of assets
(12,605
)
 
(81
)
Operating expenses
33,749

 
50,313

Income (loss) from operations
6,892

 
(2,078
)
Other (expense) income:
 
 
 
Interest expense
(2,548
)
 
(2,852
)
Other, net
203

 
657

Total other expense
(2,345
)
 
(2,195
)
Income (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


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


2



FARMER BROS. CO.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (UNAUDITED)
(In thousands)
 
Three Months Ended September 30,
 
2019
 
2018
Net income (loss)
$
4,654

 
$
(2,986
)
Other comprehensive (loss) income, net of tax:
 
 
 
Unrealized losses on derivative instruments designated as cash flow hedges, net of tax
(3,889
)
 
(6,097
)
Gains (losses) on derivative instruments designated as cash flow hedges reclassified to cost of goods sold, net of tax
2,588

 
1,460

Total comprehensive income (loss), net of tax
$
3,353

 
$
(7,623
)

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




3




FARMER BROS. CO.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)
(In thousands, except share and per share data) 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Preferred Shares
 
Preferred Stock Amount
 
Common
Shares
 
Common Stock
Amount
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
Balance at June 30, 2019
14,700

 
$
15

 
17,042,132

 
$
17,042

 
$
57,912

 
$
146,177

 
$
(63,652
)
 
$
157,494

Net income

 

 

 

 

 
4,654

 

 
4,654

Net reclassification of unrealized losses on cash flow hedges, net of taxes

 

 

 

 

 

 
(1,301
)
 
(1,301
)
Pension settlement loss, net of taxes

 

 

 

 

 

 

 

Change in the funded status of retiree benefit obligations, net of taxes

 

 

 

 

 

 

 

ESOP compensation expense, including reclassifications

 

 
52,534

 
53

 
807

 

 

 
860

Share-based compensation

 

 

 

 
(1
)
 

 

 
(1
)
Stock option exercises

 

 
532

 

 

 

 

 

Cumulative preferred dividends, undeclared and unpaid

 

 

 

 

 
(137
)
 

 
(137
)
Balance at September 30, 2019
14,700

 
$
15

 
17,095,198

 
$
17,095

 
$
58,718

 
$
150,694

 
$
(64,953
)
 
$
161,569




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




























4



FARMER BROS. CO.
CONDENSED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED) (Continued)
(In thousands, except share and per share data) 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Preferred Shares
 
Preferred Stock Amount
 
Common
Shares
 
Common Stock
Amount
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Unearned
ESOP
Shares
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
Balance at June 30, 2018
14,700

 
$
15

 
16,951,659

 
$
16,952

 
$
55,965

 
$
220,307

 
$
(2,145
)
 
$
(62,039
)
 
$
229,055

Net loss

 

 

 

 

 
(2,986
)
 

 

 
(2,986
)
Net reclassification of unrealized losses on cash flow hedges, net of taxes

 

 

 

 

 

 

 
(4,637
)
 
(4,637
)
ESOP compensation expense, including reclassifications

 

 

 

 
529

 

 

 

 
529

Share-based compensation

 

 

 

 
433

 

 

 

 
433

Stock option exercises

 

 
26,042

 
26

 
300

 

 

 

 
326

Cumulative preferred dividends, undeclared and unpaid

 

 

 

 

 
(132
)
 

 

 
(132
)
Balance at September 30, 2018
14,700

 
$
15

 
16,977,701

 
$
16,978

 
$
57,227

 
$
217,189

 
$
(2,145
)
 
$
(66,676
)
 
$
222,588



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

5



 
FARMER BROS. CO.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
 
Three Months Ended September 30,
 
2019
 
2018
Cash flows from operating activities:
 
 
 
Net income (loss)
$
4,654

 
$
(2,986
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
Depreciation and amortization
7,617

 
7,728

Restructuring and other transition expenses, net of payments

 
3,712

Deferred income taxes

 
(1,334
)
Net gains from sales of assets
(12,605
)
 
(81
)
Net losses on derivative instruments
4,514

 
3,068

Other adjustments
908

 
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 (used) 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 provided (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 (used) 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 period
6,983

 
2,438

Cash and cash equivalents at end of period
$
7,425

 
$
8,131


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

6




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


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


7




FARMER BROS. CO.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Introduction and Basis of Presentation
Farmer Bros. Co., a Delaware corporation (including its consolidated subsidiaries unless the context otherwise requires, the “Company”), is a national coffee roaster, wholesaler and distributor of coffee, tea, and culinary products.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States (“GAAP”) for complete consolidated financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation of the interim financial data have been included. Operating results for the three months ended September 30, 2019 are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2020. Events occurring subsequent to September 30, 2019 have been evaluated for potential recognition or disclosure in the unaudited condensed consolidated financial statements for the three months ended September 30, 2019.
The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2019, filed with the Securities and Exchange Commission (the “SEC”) on September 11, 2019 (the “2019 Form 10-K”).
Principles of Consolidation
The condensed consolidated financial statements include the accounts of the Company and its direct and indirect wholly owned subsidiaries FBC Finance Company, a California corporation, Coffee Bean Holding Co., Inc., a Delaware corporation, the parent company of Coffee Bean International, Inc., an Oregon corporation (“CBI”), CBI, China Mist Brands, Inc., a Delaware corporation, Boyd Assets Co., a Delaware corporation, and Coffee Bean International LLC, a Delaware limited liability company. All inter-company balances and transactions have been eliminated.
Use of Estimates
The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. The Company reviews its estimates on an ongoing basis using currently available information. Changes in facts and circumstances may result in revised estimates and actual results may differ from those estimates.

8


Farmer Bros. Co.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)


Note 2. Summary of Significant Accounting Policies
For a detailed discussion about the Company’s significant accounting policies, see Note 2, “Summary of Significant Accounting Policies,” in the Notes to Consolidated Financial Statements in the 2019 Form 10-K.
During the three months ended September 30, 2019, other than as set forth below and the adoption of Financial Accounting Standards Board Accounting (“FASB”) Standards Update (“ASU”) ASU No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”), there were no significant updates made to the Company’s significant accounting policies.
Concentration of Credit Risk
At September 30, 2019 and 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 September 30, 2019 and June 30, 2019, 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 24% and 28% of the Company’s trade accounts receivable balance was with five customers at September 30, 2019 and June 30, 2019, 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.

Assets Held for Sale
The Company classifies long-lived assets or disposal groups to be sold as held for sale in the period in which all of the following criteria are met: (1) management, having the authority to approve the action, commits to a plan to sell the asset or disposal group; (2) the asset or disposal group is available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such assets or disposal groups; (3) an active program to locate a buyer and other actions required to complete the plan to sell the asset or disposal group have been initiated; (4) the sale of the asset or disposal group is probable, and transfer of the asset or disposal group is expected to qualify for recognition as a completed sale within one year, except if events or circumstances beyond the Company’s control extends the period of time required to sell the asset or disposal group beyond one year; (5) the asset or disposal group is being actively marketed for sale at a price that is reasonable in relation to its current fair value; and (6) actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.
The Company initially measures a long-lived asset or disposal group that is classified as held for sale at the lower of its carrying value or fair value less any costs to sell. Any loss resulting from this measurement is recognized in the period in which the held-for-sale criteria are met. Conversely, gains are not recognized on the sale of a long-lived asset or disposal group until the date of sale. The Company assesses the fair value of a long-lived asset or disposal group less any costs to sell in each reporting period it remains classified as held for sale and report any subsequent changes as an adjustment to the carrying value of the asset or disposal group, as long as the new carrying value does not exceed the carrying value of the asset at the time it was initially classified as held for sale.
Upon determining that a long-lived asset or disposal group meets the criteria to be classified as held for sale, the Company ceases depreciation and reports long-lived assets and/or the assets and liabilities of the disposal group, if material, in the line items assets held for sale and liabilities held for sale, respectively, in its condensed consolidated balance sheet. See Note 21 for detail discussion of assets held for sale.





9


Farmer Bros. Co.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)


Recent Accounting Pronouncements
The Company considers the applicability and impact of all ASUs issued. ASUs not listed below were assessed and either determined to be not applicable or expected to have minimal impact on its condensed consolidated financial statements.

The following table provides a brief description of the applicable recent ASUs issued by the FASB:

Standard
 
Description
 
Effective Date
 
Effect on the Financial Statements or Other Significant Matters
In 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.
 
Annual periods beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted, including adoption in any interim period.
 
Effective for the Company beginning July 1, 2020. 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 the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans by removing disclosures that no longer are considered cost beneficial, clarifying the specific requirements of disclosures and adding disclosure requirements identified as relevant.
 
Annual periods beginning after December 15, 2020.  Early adoption is permitted.
 
Effective for the Company beginning July 1, 2021. The Company is currently evaluating the impact ASU 2018-14 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 provides entities an option to reclassify certain stranded tax effects resulting from the tax reform from accumulated other comprehensive income to retained earnings.

 
The guidance in ASU 2018-02 is effective for annual periods beginning after December 15, 2018, and interim periods within those fiscal years, and should be applied either in the period of adoption or retrospectively.
 
The Company did not elect the option to reclassify certain stranded tax effects resulting from the tax reform from accumulated other comprehensive income to retained earnings.

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.
 
Annual and interim goodwill impairment tests in fiscal years beginning after December 15, 2019.
 
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 June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. Since that date, the FASB has issued additional ASUs clarifying certain aspects of ASU 2016-13.
 
The objective of the guidance in ASU 2016-13 is to allow entities to recognize estimated credit losses in the period that the change in valuation occurs. The amendments in ASU 2016-13 requires an entity to present financial assets measured on an amortized cost basis on the balance sheet net of an allowance for credit losses.
The model requires an estimate of the credit losses expected over the life of an exposure or pool of exposures. The income statement will reflect the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period.
 
Annual reporting periods beginning after December 15, 2019 and interim periods within those reporting periods.
 
Effective for the Company beginning July 1, 2020. The Company is currently evaluating the impact of adoption on its financial statements and related disclosures, but does not anticipate a material impact to the consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases. Since that date, the FASB has issued additional ASUs clarifying certain aspects of ASU 2016-02.
 
ASU 2016-02 requires a lessee to recognize in the statement of financial position a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term for both finance and operating leases. Subsequent guidance issued after February 2016 did not change the core principle of ASU 2016-02.
 
Annual periods beginning after December 15, 2018, and interim periods within those annual periods. Early application is permitted.
 
The Company adopted the new guidance effective July 1, 2019, using the modified retrospective transition method, which did not require the Company to adjust comparative periods. See the Adoption of ASU 2016-02 below for additional information.


10


Farmer Bros. Co.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)


Adoption of ASC 842 - Leases
Effective July 1, 2019, the Company adopted the FASB Topic 842 (“ASC 842”), Leases. The Company adopted ASC 842 under the modified retrospective approach using the practical expedient; therefore, the presentation of prior year periods has not been adjusted. No cumulative effect of initially adopting ASC 842 as an adjustment to the opening balance of components of equity as of July 1, 2019 was necessary. The adoption of ASC 842 resulted in the recording of Operating lease right-of-use assets and Operating lease liabilities of $16.3 million, as of July 1, 2019. The adoption of ASC 842 had no impact on retained earnings.
Right-of-use lease assets represent the Company's right to use an underlying asset for the lease term and lease liabilities represent the Company's obligation to make lease payments arising from the lease. Operating lease right-of-use assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of the Company's leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The Company uses the implicit rate when readily determinable. Lease terms may include options to extend or terminate the lease when it is reasonably certain that the company will exercise that option. Lease expense is primarily recognized on a straight-line basis over the lease term. The Company has lease agreements with lease and non-lease components, which are combined for certain assets classes.




11


Farmer Bros. Co.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)


Note 3. Leases
The Company makes a determination if an arrangement constitutes a lease at inception; and categorizes the lease as either an operating or finance lease. Operating leases are included in right-of-use operating lease assets and operating lease liabilities in the Company's Condensed Consolidated Balance Sheets. Finance leases are included in property, plant and equipment, net and other long-term liabilities in the Condensed Consolidated Balance Sheets. Leases with an initial term of 12 months or less are not recorded on the Condensed Consolidated Balance Sheets.
The Company has entered into leases for building facilities, vehicles and other equipments. The Company’s leases have remaining contractual terms of up to 10 years, some of which have options to extend the lease for up to 20 years. For purposes of calculating operating lease liabilities, lease terms are deemed not to include options to extend the lease termination until it is reasonably certain that the Company will exercise that option. The Company's lease agreements do not contain any material residual value guarantees or material restrictive covenants.
Supplemental unaudited consolidated balance sheet information related to leases is as follows:
 
 
Classification
 
September 30, 2019
(In thousands)
 
 
 
 
Operating lease assets
 
Right-of-use operating lease assets
 
$
16,349

Finance lease assets
 
Property, plant and equipment, net
 
47

Total lease assets
 
 
 
$
16,396

 
 
 
 
 
Operating lease liabilities - current
 
Operating lease liabilities - current
 
$
4,332

Operating lease liabilities - noncurrent
 
Operating lease liabilities - noncurrent
 
12,084

Finance lease liabilities
 
Other long-term liabilities
 
48

Total lease liabilities
 
 
 
$
16,464

The components of lease expense are as follows:
 
 
 
 
Three Months Ended September 30,
 
 
Classification
 
2019
(In thousands)
 
 
 
 
Operating lease expense
 
General and administrative expenses and cost of goods sold
 
$
1,109

Finance lease expense:
 
 
 
 
Amortization of finance lease assets
 
General and administrative expenses
 
13

Interest on finance lease liabilities
 
Interest expense
 
1

Total lease expense
 
 
 
$
1,123

 
 
September 30, 2019
(In thousands)
 
Operating Leases
 
Finance Leases
Maturities of lease liabilities are as follows:
 
 
 
 
2020
 
$
3,266

 
$
40

2021
 
3,802

 
9

2022
 
2,812

 

2023
 
2,268

 

2024
 
2,095

 

Thereafter
 
4,591

 

Total lease payments
 
18,834

 
49

Less: interest
 
(2,418
)
 
(1
)
Total lease obligations
 
$
16,416

 
$
48


12


Farmer Bros. Co.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)


Lease term and discount rate:
 
 
September 30, 2019
Weighted-average remaining lease terms (in years):
 
 
Operating lease
 
9.0

Finance lease
 
0.9

 
 
 
Weighted-average discount rate:
 
 
Operating lease
 
4.50
%
Finance lease
 
4.50
%

Other Information:
 
 
Three Months Ended 
 September 30, 2019
Cash paid for amounts included in the measurement of lease liabilities:
 
 
Operating cash flows from operating leases
 
$
1,041

Operating cash flows from finance leases
 
$
1

Financing cash flows from finance leases
 
$
13

 
 
 
Leased assets obtained in exchange for new finance lease liabilities
 
$

Leased assets obtained in exchange for new operating lease liabilities
 
$


Disclosures related to periods prior to adoption of ASU 2016-02
Rent expenses paid for the fiscal years ended June 30, 2019, was $6.4 million.
The minimum annual payments under operating and capital leases as of June 30, 2019 are as follows: 
(In thousands)
 
Operating
 Lease
Obligations
 
Capital 
Lease
Obligations
Year Ended June 30,
 
 
 
 
2020
 
$
4,434

 
$
36

2021
 
3,238

 
1

2022
 
2,472

 

2023
 
2,131

 

2024
 
2,025

 

Thereafter
 
4,389

 

Total minimum lease payments
 
$
18,689

 
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






13


Farmer Bros. Co.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)


Note 4. Derivative Instruments
Derivative Instruments Held
Coffee-Related Derivative Instruments
The Company is exposed to commodity price risk associated with its price to be fixed green coffee purchase contracts, which are described further in Note 2 to the consolidated financial statements in the 2019 Form 10-K. The Company utilizes forward and option contracts to manage exposure to the variability in expected future cash flows from forecasted purchases of green coffee attributable to commodity price risk. Certain of these coffee-related derivative instruments utilized for risk management purposes have been designated as cash flow hedges, while other coffee-related derivative instruments have not been designated as cash flow hedges or do not qualify for hedge accounting despite hedging the Company’s future cash flows on an economic basis.
The following table summarizes the notional volumes for the coffee-related derivative instruments held by the Company at September 30, 2019 and June 30, 2019:
(In thousands)
 
September 30, 2019
 
June 30, 2019
Derivative instruments designated as cash flow hedges:
 
 
 
 
  Long coffee pounds
 
51,563

 
42,113

Derivative instruments not designated as cash flow hedges:
 
 
 
 
  Long coffee pounds
 
1,880

 
6,070

      Total
 
53,443

 
48,183


Coffee-related derivative instruments designated as cash flow hedges outstanding as of September 30, 2019 will expire within 20 months. At September 30, 2019 and June 30, 2019 approximately 96% and 87%, 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”) which was effective March 20, 2019, the Company on March 27, 2019, entered into an interest rate 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.


14


Farmer Bros. Co.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)


Effect of Derivative Instruments on the Financial Statements
Balance Sheets
Fair values of derivative instruments on the Company’s condensed consolidated balance sheets:
 
 
Derivative Instruments
Designated as Cash Flow Hedges
 
Derivative Instruments Not Designated as Accounting Hedges
 
 
September 30, 2019
 
June 30, 2019
 
September 30, 2019
 
June 30, 2019
(In thousands)
 
 
 
 
 
 
 
 
Financial Statement Location:
 
 
 
 
 
 
 
 
Short-term derivative assets:
 
 
 
 
 
 
 
 
Coffee-related derivative instruments(1)
 
$
303

 
$
1,254

 
$
13

 
$
611

Long-term derivative assets:
 
 
 
 
 
 
 
 
    Coffee-related derivative instruments (2)
 
$
215

 
$
671

 
$

 
$
3

Short-term derivative liabilities:
 
 
 
 
 
 
 
 
Coffee-related derivative instruments (3)
 
$
2,760

 
$
1,114

 
$
300

 
$
114

Interest rate swap derivative instruments (3)
 
$
401

 
$
246

 
$

 
$

Long-term derivative liabilities:
 
 
 
 
 
 
 
 
Coffee-related derivative instruments (4)
 
$
82

 
$
13

 
$
2

 
$

Interest rate swap derivative instruments (4)
 
$
1,945

 
$
1,599

 
$

 
$

________________
(1) Included in “Short-term derivative assets” on the Company’s condensed consolidated balance sheets.
(2) Included in “Long-term derivative assets” on the Company's condensed consolidated balance sheets.
(3) Included in “Short-term liabilities” on the Company's condensed consolidated balance sheets.
(4) Included in “Other long-term liabilities” on the Company's condensed 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”.
 
 
Three Months Ended September 30,
 
Financial Statement Classification
(In thousands)
 
2019
 
2018
 
Net loss recognized in AOCI - Interest rate swap
 
$
(496
)
 
$

 
AOCI
Net gain recognized from AOCI to earnings - Interest rate swap
 
$
20

 
$

 
Interest Expense
Net losses recognized in AOCI - Coffee-related
 
$
(4,699
)
 
$
(8,193
)
 
AOCI
Net loss recognized in earnings - Coffee - related
 
$
(3,471
)
 
$
(1,962
)
 
Cost of goods sold
For the three months ended September 30, 2019 and 2018, 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 condensed consolidated statements of cash flows also include net losses (gains) on coffee-related derivative instruments designated as cash flow hedges reclassified to cost of goods sold from AOCI in the three months ended September 30, 2019 and 2018. Gains and losses on derivative instruments not designated as accounting hedges are included in “Other, net” in the Company’s condensed consolidated statements of operations and in “Net losses (gains) on derivative instruments and investments” in the Company’s condensed consolidated statements of cash flows.

15


Farmer Bros. Co.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)


Net gains and losses recorded in “Other, net” are as follows:
 
 
Three Months Ended September 30,
(In thousands)
 
2019
 
2018
Net losses on coffee-related derivative instruments(1)
 
$
(1,043
)
 
$
(1,105
)
Non-operating pension and other postretirement benefit plans cost (2)
 
1,248

 
1,763

Other (losses) gains, net
 
(2
)
 
(1
)
             Other, net
 
$
203

 
$
657

___________
(1) Excludes net gains and losses on coffee-related derivative instruments designated as cash flow hedges recorded in cost of goods sold in the three months ended September 30, 2019 and 2018.
(2) Presented in accordance with 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 counterparties as of the reporting dates indicated:
(In thousands)
 
 
 
Gross Amount Reported on Balance Sheet
 
Netting Adjustments
 
Cash Collateral Posted
 
Net Exposure
September 30, 2019
 
Derivative Assets
 
$
531

 
$
(546
)
 
$

 
$
(15
)
 
 
Derivative Liabilities
 
$
5,490

 
$
(546
)
 
$

 
$
4,944

June 30, 2019
 
Derivative Assets
 
$
2,539

 
$
(698
)
 
$

 
$
1,841

 
 
Derivative Liabilities
 
$
3,086

 
$
(698
)
 
$

 
$
2,388

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 September 30, 2019, $7.5 million of net losses on coffee-related derivative instruments designated as a 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 September 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 September 30, 2019, $0.4 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.


16


Farmer Bros. Co.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)


Note 5. 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
September 30, 2019
 
 
 
 
 
 
 
 
Derivative instruments designated as cash flow hedges:
 
 
 
 
 
 
 
 
Coffee-related derivative assets (1)
 
$
518

 
$

 
$
518

 
$

Coffee-related derivative liabilities (1)
 
$
2,842

 
$

 
$
2,842

 
$

Interest rate swap derivative liabilities (2)
 
$
2,346

 
$

 
$
2,346

 
$

Derivative instruments not designated as accounting hedges:
 
 
 
 
 
 
 
 
Coffee-related derivative assets(1)
 
$
13

 
$

 
$
13

 
$

Coffee-related derivative liabilities(1)
 
$
302

 
$

 
$
302

 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(In thousands)
 
Total
 
Level 1
 
Level 2
 
Level 3
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

 
$

____________________ 
(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.

Note 6. Accounts Receivable, Net
(In thousands)
 
September 30, 2019
 
June 30, 2019
Trade receivables
 
$
54,689

 
$
53,593

Other receivables(1)
 
3,806

 
2,886

Allowance for doubtful accounts
 
(1,030
)
 
(1,324
)
    Accounts receivable, net
 
$
57,465

 
$
55,155

__________
(1) Includes vendor rebates and other non-trade receivables.
The $0.3 million decrease in the allowance for doubtful accounts during the three months ended September 30, 2019 was due to bad debt expense of $0.2 million associated with a decrease in aging receivables offset by net accounts receivable write-offs of $0.5 million.




17


Farmer Bros. Co.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)


Note 7. Inventories
(In thousands)
 
September 30, 2019
 
June 30, 2019
Coffee
 
 
 
 
   Processed
 
$
28,284

 
$
25,769

   Unprocessed
 
36,946

 
33,259

         Total
 
$
65,230

 
$
59,028

Tea and culinary products
 
 
 
 
   Processed
 
$
19,229

 
$
21,767

   Unprocessed
 
80

 
74

         Total
 
$
19,309

 
$
21,841

Coffee brewing equipment parts
 
$
7,191

 
$
7,041

              Total inventories
 
$
91,730

 
$
87,910


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.

Note 8. Property, Plant and Equipment
(In thousands)
 
September 30, 2019
 
June 30, 2019
Buildings and facilities
 
$
105,188

 
$
107,915

Machinery and equipment
 
244,774

 
249,477

Capitalized software
 
28,250

 
27,666

Office furniture and equipment
 
13,882

 
14,035

 
 
$
392,094

 
$
399,093

Accumulated depreciation
 
(225,970
)
 
(225,826
)
Land
 
15,030

 
16,191

Property, plant and equipment, net
 
$
181,154

 
$
189,458


Coffee Brewing Equipment (“CBE”) and Service
Capitalized CBE included in machinery and equipment above are:
(In thousands)
 
September 30, 2019
 
June 30, 2019
Coffee Brewing Equipment
 
$
104,481

 
$
106,593

Accumulated depreciation
 
(69,444
)
 
$
(70,202
)
  Coffee Brewing Equipment, net
 
$
35,037

 
$
36,391

 

18


Farmer Bros. Co.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)


Depreciation expense related to capitalized CBE and other CBE related expenses (excluding CBE depreciation) provided to customers and reported in cost of goods sold were as follows:
 
 
Three Months Ended September 30,
(In thousands)
 
2019
 
2018
Depreciation expense
 
$
2,339

 
$
2,195

 
 
 
 
 
Other CBE expenses
 
$
7,725

 
$
8,507

Other expenses related to CBE provided to customers, such as the cost of servicing that equipment (including service employees’ salaries, cost of transportation and the cost of supplies and parts), are considered directly attributable to the generation of revenues from the customers. Therefore, these costs are included in cost of goods sold.

Note 9. Goodwill and Intangible Assets
There were no changes to the carrying value of goodwill in the three months ended September 30, 2019. The carrying value of goodwill at September 30, 2019 and June 30, 2019 was $36.2 million.

The following is a summary of the Company’s amortized and unamortized intangible assets other than goodwill:
 
 
 
 
 
September 30, 2019
 
June 30, 2019
 
 
(In thousands)
 
Weighted
Average
Amortization
Period as of
September 30, 2019
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Net
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Net
Amortized intangible assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Customer relationships
 
7.6

 
$
33,003

 
$
(15,842
)
 
$
17,161

 
$
33,003

 
$
(15,291
)
 
$
17,712

Non-compete agreements
 
2.4

 
220

 
(132
)
 
88

 
220

 
(122
)
 
98

Recipes
 
4.1

 
930

 
(387
)
 
543

 
930

 
(354
)
 
576

Trade name/brand name
 
4.8

 
510

 
(355
)
 
155

 
510

 
(346
)
 
164

Total amortized intangible assets
 
 
 
$
34,663

 
$
(16,716
)
 
$
17,947

 
$
34,663

 
$
(16,113
)
 
$
18,550

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

 
$
(16,716
)
 
$
28,275

 
$
44,991

 
$
(16,113
)
 
$
28,878


Aggregate amortization expense for the three months ended September 30, 2019 and 2018 was $0.6 million and $0.7 million, respectively.


19


Farmer Bros. Co.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)


Note 10. Employee Benefit Plans
Single Employer Pension Plans
Effective June 30, 2011, the Company amended its defined benefit pension plans, freezing the benefit for all participants. As of the effective date, participants do not accrue any benefits under the plans, and new hires are not eligible to participate in the plans.
The net periodic benefit cost for the defined benefit pension plans is as follows:
 
 
Three Months Ended September 30,
 
 
2019
 
2018
(In thousands)
 
 
Service cost
 
$

 
$

Interest cost
 
1,059

 
1,426

Expected return on plan assets
 
(1,102
)
 
(1,485
)
Amortization of net loss(1)
 
370

 
370

Net periodic benefit cost
 
$
327

 
$
311

___________
(1) These amounts represent the estimated portion of the net loss in AOCI that is expected to be recognized as a component of net periodic benefit cost over the current fiscal year. 
Weighted-Average Assumptions Used to Determine Net Periodic Benefit Cost
 
 
September 30, 2019
 
June 30, 2019
Discount rate
 
3.45%
 
3.45%
Expected long-term return on plan assets
 
6.75%
 
6.75%
 

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.
Contributions made by the Company to the multiemployer pension plans were as follows:
 
 
Three Months Ended September 30,
 
 
2019
 
2018
(In thousands)
 
 
Contributions
 
$
428

 
$
495


Outstanding balance of settlement obligations of the Company to certain multiemployer pension plans are as follows:
(In thousands)
 
September 30, 2019
 
June 30, 2019
WCT Pension Trust (1)
 
$
916

 
$
1,487

Local 807 Pension Fund (2)
 
$
182

 
$
182

__________
(1) Initial liability 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.
(2) 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. As of September 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.


20


Farmer Bros. Co.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)


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 expire on or before June 30, 2022.
401(k) Plan
The Company’s 401(k) Plan is available to all eligible employees. 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 recorded matching contributions of $0.7 million and $0.5 million in operating expenses in the three months ended September 30, 2019 and 2018.

Additionally, the Company makes 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. During the three months September 30, 2019, the Company contributed a total of 55,624 shares of the Company’s common stock with a value of $0.9 million to eligible participants’ annual plan compensation.

Postretirement Benefits
Retiree Medical Plan and Death Benefit
The following table shows the components of net periodic postretirement benefit cost for the Retiree Medical Plan and Death Benefit for the three months ended September 30, 2019 and 2018. Net periodic postretirement benefit cost was based on employee census information and asset information as of June 30, 2018. 
 
 
Three Months Ended September 30,
 
 
2019
 
2018
(In thousands)
 
 
 
 
Components of Net Periodic Postretirement Benefit Cost (Credit):
 
 
 
 
Service cost
 
$
147

 
$
133

Interest cost
 
214

 
222

Amortization of net gain
 
(125
)
 
(209
)
Amortization of prior service credit
 
(392
)
 
(439
)
Net periodic postretirement benefit credit
 
$
(156
)
 
$
(293
)

Weighted-Average Assumptions Used to Determine Net Periodic Postretirement Benefit Cost 
 
 
Fiscal
 
 
2020
 
2019
Retiree Medical Plan discount rate
 
3.62%
 
4.25%
Death Benefit discount rate
 
3.64%
 
4.25%


21


Farmer Bros. Co.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)


Note 11. Debt Obligations
The following table summarizes the Company’s debt obligations:
 
 
 
 
 
 
 
 
September 30, 2019
 
June 30, 2019
(In thousands)
 
Debt Origination Date
 
Maturity
 
Original Borrowing Amount
 
Carrying Value
 
Weighted Average Interest Rate
 
Carrying Value
 
Weighted Average Interest Rate
Credit Facility
 
Revolver
 
11/6/2023
 
N/A
 
$
85,000

 
4.06
%
 
$
92,000

 
3.98
%
On November 6, 2018, the Company entered into a new $150.0 million senior secured revolving credit facility (the “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 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. See Note 4 for details.
Under the 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.
At September 30, 2019, the Company was in compliance with all of the covenants under the Revolving Facility.
 
Note 12. Employee Stock Ownership Plan
The Company’s ESOP was established in 2000. 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.
Shares are held by the plan trustee for allocation among 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.
 
 
September 30, 2019
 
June 30, 2019
Allocated shares
 
1,393,530

 
1,393,530

Committed to be released shares
 

 

Unallocated shares
 

 

Total ESOP shares
 
1,393,530

 
1,393,530

 
 
 
 
 
(In thousands)
 
 
 
 
Fair value of ESOP shares
 
$
18,046

 
$
22,812





22


Farmer Bros. Co.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)


Note 13. Share-based Compensation
Farmer Bros. Co. 2017 Long-Term Incentive Plan
As of September 30, 2019, there were 616,166 shares available under the 2017 Plan including shares that were forfeited under the Prior Plans for future issuance.
Non-qualified stock options with time-based vesting (“NQOs”)
One-third of the total number of shares subject to each 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 NQOs granted during the three months ended September 30, 2019:

 
 
Three Months Ended September 30, 2019
Weighted average fair value of NQOs
 
$
4.47

Risk-free interest rate
 
1.8
%
Dividend yield
 
%
Average expected term
 
4.7 years

Expected stock price volatility
 
37.0
%

The following table summarizes NQO activity for the three months ended September 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, 2019
 
198,049

 
27.35
 
5.25
 
40

Granted
 
223,713

 
13.13
 
 

Exercised
 

 
 
 

Forfeited
 
(68,842
)
 
27.40
 
 

Expired
 
(12,946
)
 
31.70
 
 

Outstanding at September 30, 2019
 
339,974

 
17.82
 
6.12
 
6

Exercisable at September 30, 2019
 
37,283

 
26.33
 
1.71
 
6

The weighted-average grant-date fair value of options granted during the three months ended September 30, 2019 was $4.60. The aggregate intrinsic values outstanding at the end of period in the table above represent the total pretax intrinsic values, based on the Company’s closing stock price of $12.95 at September 30, 2019 and $16.37 at June 29, 2019, representing the last trading day of the respective periods, which would have been received by NQO holders had all award holders exercised their NQOs that were in-the-money as of those dates. The aggregate intrinsic value of NQO exercises in the three months ended September 30, 2019 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.
There were no options exercised during the three months ended September 30, 2019. The Company received $0.3 million in proceeds from exercises of vested NQOs during the three months ended September 30, 2018.
At September 30, 2019 and June 30, 2019, respectively, there was $1.4 million and $1.1 million of unrecognized NQO compensation cost. The unrecognized NQO compensation cost at September 30, 2019 is expected to be recognized over the weighted average period of 2.6 years. Total compensation expense for NQOs were $0.1 million for each of the three months ended September 30, 2019 and 2018.

23


Farmer Bros. Co.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)


Non-qualified stock options with performance-based and time-based vesting (PNQs”)
The following table summarizes PNQ activity for the three months ended September 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, 2019
 
229,961

 
26.21
 
 
1.23
 

Granted
 

 
 
 
 

Exercised
 

 
 
 
 

Forfeited
 
(6,212
)
 
32.85
 
 
 

Expired
 
(149,031
)
 
25.05
 
 
 

Outstanding at September 30, 2019
 
74,718

 
27.95
 
 
1.00
 

Exercisable at September 30, 2019
 
53,990

 
26.65
 
 
0.78
 


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 $12.95 at September 30, 2019 and $16.37 at June 29, 2019, representing the last trading day of the respective fiscal periods, which would have been received by PNQ holders had all award holders exercised their PNQs that were in-the-money as of those dates. The aggregate intrinsic value of PNQ exercises in the three months ended September 30, 2019 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.
There were no options exercised during the three months ended September 30, 2019. The Company received $38,455 in proceeds from exercises of vested PNQs during the three months ended September 30, 2018.
At September 30, 2019 and June 30, 2019, there was $4.6 thousand and $39.7 thousand, respectively, of unrecognized PNQ compensation cost. The unrecognized PNQ compensation cost at September 30, 2019 is expected to be recognized over the weighted average period of 0.1 years. Total compensation expense related to PNQs in the three months ended September 30, 2019 and 2018 was $13.7 thousand and $0.1 million, respectively.

Restricted Stock
The following table summarizes restricted stock activity for the three months ended September 30, 2019:
Outstanding and Nonvested Restricted Stock Awards:
 
Shares
Awarded
 
Weighted
Average
Grant Date
Fair Value
($)
Outstanding and nonvested at June 30, 2019
 
32,056

 
21.10

Granted
 
7,370

 
13.56

Vested/Released
 

 

Cancelled/Forfeited
 
(757
)
 
31.70

Outstanding and nonvested at March 31, 2019
 
38,669

 
20.22


The total grant-date fair value of restricted stock granted during the three months ended September 30, 2019 was $0.1 million.

At September 30, 2019 and June 30, 2019, there were each $0.3 million of unrecognized compensation cost related to restricted stock. The unrecognized compensation cost related to restricted stock at September 30, 2019 is expected to be recognized over the weighted average period of 0.5 years. Total compensation expense for restricted stock were $0.2 million and $0.1 million, respectively, in the three months ended September 30, 2019 and 2018.



24


Farmer Bros. Co.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)


Performance-Based Restricted Stock Units (“PBRSUs”)
The following table summarizes PBRSU activity for the three months ended September 30, 2019:
Outstanding and Nonvested PBRSUs:
 
PBRSUs
Awarded(1)
 
Weighted
Average
Grant Date
Fair Value
($)
Outstanding and nonvested at June 30, 2019
 
51,237

 
27.69

Granted(1)
 
38,080

 
13.13

Vested/Released
 

 

Cancelled/Forfeited
 
(24,254
)
 
27.91

Outstanding and nonvested at September 30, 2019
 
65,063

 
27.57

Expected to vest at September 30, 2019
 

 

_____________
(1) The target number of PBRSUs is presented in the table. Under the terms of the awards, the recipient may earn between 0% and 150% of the target number of PBRSUs depending on the extent to which the Company meets or exceeds the achievement of the applicable financial performance goals.
The total grant-date fair value of PBRSUs granted during the three months ended September 30, 2019 was $0.5 million.

At September 30, 2019 and June 30, 2019, there was $0.7 million and $0.3 million, respectively, of unrecognized PBRSU compensation cost. The unrecognized PBRSU compensation cost at September 30, 2019 is expected to be recognized over the weighted average period of 2.5 years. Total compensation expense for PBRSUs were $32.9 thousand and $82.0 thousand, respectively, for the three months ended September 30, 2019 and 2018.

Note 14. Other Current Liabilities
Other current liabilities consist of the following:
(In thousands)
 
September 30, 2019
 
June 30, 2019
Accrued postretirement benefits
 
$
1,068

 
$
1,068

Accrued workers’ compensation liabilities
 
1,598

 
1,495

Earnout payable (1)
 

 
1,000

Working capital dispute payable(2)