FARM Farmer Brothers Company

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.

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TABLE OF CONTENTS

 

	Page
PART I – FINANCIAL INFORMATION (UNAUDITED)
Item 1. Financial Statements	1
Condensed Consolidated Balance Sheets at September 30, 2019 and June 30, 2019	1
Condensed Consolidated Statements of Operations for the Three Months Ended September 30, 2019 and 2018	2
Condensed Consolidated Statements of Comprehensive Loss for the Three Months Ended September 30, 2019 and 2018	3
Condensed Consolidated Statements of Stockholders’ Equity for the Three Months Ended September 30, 2019 and 2018	4
Condensed Consolidated Statements of Cash Flows for the Three Months Ended September 30, 2019 and 2018	6
Notes to Condensed Consolidated Financial Statements	8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	32
Item 3. Quantitative and Qualitative Disclosures About Market Risk	44
Item 4. Controls and Procedures	45
PART II – OTHER INFORMATION
Item 1. Legal Proceedings	46
Item 1A. Risk Factors	46
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	46
Item 3. Defaults Upon Senior Securities	46
Item 4. Mine Safety Disclosures	46
Item 5. Other Information	46
Item 6. Exhibits	47
SIGNATURES	48

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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Farmer Bros. Co.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

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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.

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Farmer Bros. Co.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

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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.

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Farmer Bros. Co.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

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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.

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Farmer Bros. Co.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

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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

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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

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Farmer Bros. Co.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

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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

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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

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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

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Farmer Bros. Co.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

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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

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Farmer Bros. Co.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

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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

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Farmer Bros. Co.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

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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

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Farmer Bros. Co.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

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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

__________

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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	)

		Fiscal
		2020		2019
Retiree Medical Plan discount rate		3.62%		4.25%
Death Benefit discount rate		3.64%		4.25%

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Farmer Bros. Co.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

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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

%

		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

---

		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		%

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Farmer Bros. Co.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

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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		—

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

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Farmer Bros. Co.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

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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		—			—

_____________

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)		354				354
Other (3)		4,004				3,392
Other current liabilities		$	7,024			$	7,309

___________

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Farmer Bros. Co.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

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Note 15. Other Long-Term Liabilities

Other long-term liabilities include the following:

(In thousands)		September 30, 2019				June 30, 2019
Finance lease liabilities		$	48			$	32
Derivative liabilities—noncurrent		2,029				1,612
Cumulative preferred dividends, undeclared and unpaid—noncurrent		687				618
Deferred income taxes and other liabilities(1)		1,667				1,795
Other long-term liabilities		$	4,431			$	4,057

___________

Note 16. Income Taxes

The income tax expense (benefit) and the related effective tax rates are as follows (in thousands, except effective tax rate):

		Three Months Ended September 30,
		2019				2018
Income tax benefit		$	(107	)		$	(1,287	)
Effective tax rate		(2.3		)%		30.1		%

---

		Three Months Ended September 30,
(In thousands, except share and per share amounts)		2019				2018
Undistributed net earnings (loss) available to common stockholders		$	4,507			$	(3,115	)
Undistributed net earnings (loss) available to nonvested restricted stockholders and holders of convertible preferred stock		10				(3		)
Net earnings (loss) available to common stockholders—basic		$	4,517			$	(3,118	)
Weighted average common shares outstanding—basic		17,099,851				16,886,718
Effect of dilutive securities:
Shares issuable under stock options		2,390				—
Shares issuable under PBRSUs		4,871				—
Shares issuable under convertible preferred stock		411,301				—
Weighted average common shares outstanding—diluted		17,518,413				16,886,718
Net earnings (loss) per common share available to common stockholders—basic		$	0.26			$	(0.18	)
Net earnings (loss) per common share available to common stockholders—diluted		$	0.26			$	(0.18	)

		Three Months Ended September 30,
		2019			2018
Shares issuable under stock options		—			51,177
Shares issuable under convertible preferred stock		—			397,215
Shares issuable under PBRSUs		—			—

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Farmer Bros. Co.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

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Note 18. 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.

On October 2, 2017, the Company issued 14,700 shares of Series A Preferred Stock in connection with the Boyd Coffee acquisition. At September 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			$	1,072			$	15,761			$	1,061			$	15,761

		Three Months Ended September 30,
		2019							2018
(In thousands)		$				% of total			$				% of total
Net Sales by Product Category:
Coffee (Roasted)		$	87,370			63.0	%		$	95,355			64.7	%
Coffee (Frozen Liquid)		7,928				5.7	%		8,556				5.8	%
Tea (Iced & Hot)		7,705				5.6	%		8,904				6.0	%
Culinary		14,203				10.2	%		15,994				10.8	%
Spice		6,206				4.5	%		6,157				4.2	%
Other beverages(1)		12,734				9.2	%		11,626				7.9	%
Other revenues(2)		1,755				1.3	%		—				—	%
Net sales by product category		137,901				99.5	%		146,592				99	%
Fuel surcharge		699				0.5	%		848				1	%
Net sales		$	138,600			100.0	%		$	147,440			100	%

____________

(1)	Includes all beverages other than roasted coffee, frozen liquid coffee, and iced and hot tea, including cappuccino, cocoa, granitas, and concentrated and ready-to drink cold brew and iced coffee.

(2)	Represents revenues for certain transition services related to the sale of the Company’s office coffee assets.

---

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(In thousands)		September 30, 2019
Buildings and facilities		$	982
Land		736
Assets held for sale		$	1,718

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Note 22. Subsequent Events

The Company evaluated all events or transactions that occurred after September 30, 2019 through the date the condensed consolidated financial statements were issued. During this period the Company had the following material subsequent events that require disclosure:

None.

    

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

Certain statements contained in this Quarterly Report on Form 10-Q are not based on historical fact and are forward-looking statements within the meaning of federal securities laws and regulations. These statements are based on management’s current expectations, assumptions, estimates and observations of future events and include any statements that do not directly relate to any historical or current fact; actual results may differ materially due in part to the risk factors set forth in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended June 30, 2019 filed with the Securities and Exchange Commission (the “SEC”) on September 11, 2019 (the “2019 Form 10-K”) and Part II, Item 1A of this report. These forward-looking statements can be identified by the use of words like “anticipates,” “estimates,” “projects,” “expects,” “plans,” “believes,” “intends,” “will,” “could,” “assumes” and other words of similar meaning. Owing to the uncertainties inherent in forward-looking statements, actual results could differ materially from those set forth in forward-looking statements. We intend these forward-looking statements to speak only at the time of this report and do not undertake to update or revise these statements as more information becomes available except as required under federal securities laws and the rules and regulations of the SEC. Factors that could cause actual results to differ materially from those in forward-looking statements include, but are not limited to, the impact of capital improvement projects, the adequacy and availability of capital resources to fund the Company’s existing and planned business operations and the Company’s capital expenditure requirements, the relative effectiveness of compensation-based employee incentives in causing improvements in Company performance, the capacity to meet the demands of our large national account customers, the extent of execution of plans for the growth of Company business and achievement of financial metrics related to those plans, the success of the Company to retain and/or attract qualified employees, the success of the Company’s adaptation to technology and new commerce channels, the effect of the capital markets as well as other external factors on stockholder value, fluctuations in availability and cost of green coffee, competition, organizational changes, the effectiveness of our hedging strategies in reducing price and interest rate risk, changes in consumer preferences, our ability to provide sustainability in ways that do not materially impair profitability, changes in the strength of the economy, business conditions in the coffee industry and food industry in general, our continued success in attracting new customers, variances from budgeted sales mix and growth rates, weather and special or unusual events, as well as other risks described in this report and other factors described from time to time in our filings with the SEC. The results of operations for the three months ended September 30, 2019 are not necessarily indicative of the results that may be expected for any future period.

Our Business

We are a national coffee roaster, wholesaler and distributor of coffee, tea and culinary products manufactured under supply agreements, under our owned brands, as well as under private labels on behalf of certain customers. We were founded in 1912, incorporated in California in 1923, and reincorporated in Delaware in 2004. In fiscal 2017, we completed the relocation of our corporate headquarters from Torrance, California to Northlake, Texas. We operate in one business segment.

We serve a wide variety of customers, from small independent restaurants and foodservice operators to large institutional buyers like restaurants, 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. Through our sustainability, stewardship, environmental efforts, and leadership we are not only committed to serving the finest products available, considering the cost needs of the customer, but also insist on their sustainable cultivation, manufacture and distribution whenever possible.

Our product categories consist of a robust line of roast and ground coffee, including organic, Direct Trade, Project D.I.R.E.C.T. and other sustainably-produced offerings; frozen liquid coffee; flavored and unflavored iced and hot teas; culinary products including gelatins and puddings, soup bases, dressings, gravy and sauce mixes, pancake and biscuit mixes, jellies and preserves, and coffee-related products such as coffee filters, sugar and creamers; spices; and other beverages including cappuccino, cocoa, granitas, and concentrated and ready-to-drink cold brew and iced coffee. We offer a comprehensive approach to our customers by providing not only a breadth of high-quality products, but also value added services such as market insight, beverage planning, and equipment placement and service.

We operate production facilities in Northlake, Texas; 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; and Moonachie, New Jersey. Our products reach our customers primarily in the following ways: through our nationwide DSD network of 377 delivery routes and 104 branch warehouses as of September 30, 2019, or direct-shipped via common carriers or third-party distributors. DSD sales are made “off-truck” to our customers at their places of business. We operate a large fleet of trucks and other vehicles to distribute and deliver our products, and we rely on third-party logistics service providers for our long-haul distribution.

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Summary Overview of Three Months Ended September 30, 2019 Results

During the quarter ended September 30, 2019, we experienced sales declines in our DSD sales channel and, to a lesser extent, our direct ship sales channel compared to the prior year period. In addition, sales were lower this quarter due to non-recurring sales from last year associated with the Boyd’s acquisition.

Similar to what we experienced in fiscal 2019, our DSD network continued to be negatively impacted by higher customer attrition and lower inventory fill rates associated with downtime at our Houston plant, partially offset by sales from new customers. While our direct ship sales channel grew in terms of coffee pounds, sales were negatively impacted by lower coffee commodity prices and unfavorable customer mix shift.

During the quarter ended September 30, 2019, gross margins declined by 3.4% to 29.3% from 32.7% mostly due to unfavorable customer mix shift and higher production costs at our Houston plant. However, we did realize favorable reductions in our coffee brewing equipment expenses as a result of several cost saving initiatives we implemented last year.

Operating expenses declined by $16.6 million over the prior year quarter driven mostly by gains realized from several key near-term strategic priorities. In July 2019, we completed the sale of certain assets associated with office coffee customers for $9.3 million in cash plus the potential for a future earnout of up to an additional $2.3 million. In August 2019, we successfully completed the sale of our Seattle branch property for $7.9 million in cash. Operating expenses also benefited from several cost saving initiatives implemented during the current quarter. However, these savings were offset by one-time severance costs associated with a corporate reorganization during the period.

As part on our ongoing manufacturing optimization efforts, in September we signed a purchase and sale agreement for the sale of our Houston manufacturing facility for an aggregate purchase price of $10.0 million, exclusive of closing costs. The future proceeds from the sale will give us increased liquidity and flexibility.

Our capital expenditures in cash for the first quarter were $5.3 million, with a reduced maintenance capital spend of $4.4 million, a 20 percent reduction over the prior year quarter. Additionally, we reduced our debt levels to $85.0 million as of September 30, 2019 compared to $92.0 million as of June 30, 2019.

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Results of Operations

Financial Data Highlights (in thousands, except per share data and percentages)

	Three Months Ended September 30,								Favorable (Unfavorable)
	2019				2018				Change				% Change
Income Statement Data:
Net sales	$	138,600			$	147,440			$	(8,840	)		(6.0	)%
Gross margin	29.3		%		32.7		%		(3.4		)%		NM
Operating expenses as a % of sales	24.3		%		34.1		%		9.8		%		NM
Income (loss) from operations	$	6,892			$	(2,078	)		$	8,970			431.7	%
Net income (loss)	$	4,654			$	(2,986	)		$	7,640			NM
Net earnings (loss) available to common stockholders per common share—basic	$	0.26			$	(0.18	)		$	0.44			NM
Net earnings (loss) available to common stockholders per common share—diluted	$	0.26			$	(0.18	)		$	0.44			NM
Operating Data:
Coffee pounds	25,958				25,449				509				2.0	%
EBITDA(1)	$	13,440			$	4,658			$	8,782			188.5	%
EBITDA Margin(1)	9.7		%		3.2		%		6.5		%		NM
Adjusted EBITDA(1)	$	4,016			$	10,967			$	(6,951	)		(63.4	)%
Adjusted EBITDA Margin(1)	2.9		%		7.4		%		(4.5		)%		NM
Percentage of Total Net Sales By Product Category
Coffee (Roasted)	63.0		%		64.7		%		(1.7		)%		(2.6	)%
Coffee (Frozen Liquid)	5.7		%		5.8		%		(0.1		)%		(1.7	)%
Tea (Iced & Hot)	5.6		%		6.0		%		(0.4		)%		(6.7	)%
Culinary	10.2		%		10.8		%		(0.6		)%		(5.6	)%
Spice	4.5		%		4.2		%		0.3		%		7.1	%
Other beverages(2)	9.2		%		7.9		%		1.3		%		16.5	%
Other revenues(3)	1.3		%		—		%		1.3		%		NM
Net sales by product category	99.5		%		99.4		%		0.1		%		NM
Fuel Surcharge	0.5		%		0.6		%		(0.1		)%		NM
Total	100.0		%		100.0		%		—		%		NM
Other data:
Capital expenditures related to maintenance	$	4,352			$	5,462			$	(1,110	)		(20.3	)%
Total capital expenditures	$	5,276			$	7,787			$	(2,511	)		(32.2	)%
Depreciation and amortization expense	$	7,617			$	7,728			$	(111	)		(1.4	)%

________________

NM - Not Meaningful

(1) EBITDA, EBITDA Margin, Adjusted EBITDA and Adjusted EBITDA Margin are non-GAAP financial measures. See “Non-GAAP Financial Measures” below for a reconciliation of these non-GAAP measures to their corresponding GAAP measures.

(2) Includes all beverages other than roasted coffee, frozen liquid coffee, and iced and hot tea, including cappuccino, cocoa, granitas, and concentrated and ready-to-drink cold brew and iced coffee.

(3) Represents revenues for certain transition services related to the sale of our office coffee assets.

    

34

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The following table sets forth information regarding our condensed consolidated results of operations for the three and three months ended September 30, 2019 and 2018 (in thousands, except percentages):

.

	Three Months Ended September 30,								Favorable (Unfavorable)
	2019				2018				Change				% Change
Net sales	$	138,600			$	147,440			$	(8,840	)		(6.0	)%
Cost of goods sold	97,959				99,205				1,246				1.3	%
Gross profit	40,641				48,235				(7,594		)		(15.7	)%
Selling expenses	33,614				37,310				3,696				9.9	%
General and administrative expenses	12,740				8,617				(4,123		)		(47.8	)%
Restructuring and other transition expenses	—				4,467				4,467				100.0	%
Net gains from sales of assets	(12,605		)		(81		)		12,524				NM
Operating expenses	33,749				50,313				16,564				32.9	%
Income (loss) from operations	6,892				(2,078		)		8,970				431.7	%
Other (expense) income:
Interest expense	(2,548		)		(2,852		)		304				10.7	%
Other, net	203				657				(454		)		(69.1	)%
Total other expense	(2,345		)		(2,195		)		(150		)		(6.8	)%
Income (loss) before taxes	4,547				(4,273		)		8,820				206.4	%
Income tax benefit	(107		)		(1,287		)		(1,180		)		(91.7	)%
Net income (loss)	$	4,654			$	(2,986	)		7,640				255.9	%
Less: Cumulative preferred dividends, undeclared and unpaid	137				132				(5		)		(3.8	)%
Net earnings (loss) available to common stockholders	$	4,517			$	(3,118	)		7,635				244.9	%

_____________

NM - Not Meaningful

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Three Months Ended September 30, 2019 Compared to Three Months Ended September 30, 2018

Net Sales

The following table presents changes in units sold, unit price and net sales by product category in the three months ended September 30, 2019 compared to the same periods in the prior fiscal year (in thousands, except unit price and percentages):

	Three Months Ended September 30,								Favorable (Unfavorable)
	2019				2018				Change				% Change
Units sold
Coffee (Roasted)	20,766				20,359				407				2.0	%
Coffee (Frozen Liquid)	98				125				(27		)		(21.6	)%
Tea (Iced & Hot)	625				634				(9		)		(1.4	)%
Culinary	1,858				2,088				(230		)		(11.0	)%
Spice	167				215				(48		)		(22.3	)%
Other beverages(1)	939				1,054				(115		)		(10.9	)%
Total	24,453				24,475				(22		)		(.1	)%
Unit Price
Coffee (Roasted)	$	4.26			$	4.68			$	(0.44	)		(9.4	)%
Coffee (Frozen Liquid)	$	80.72			$	68.49			$	12.22			17.8	%
Tea (Iced & Hot)	$	12.33			$	14.04			$	(1.67	)		(11.9	)%
Culinary	$	7.92			$	7.66			$	0.22			2.9	%
Spice	$	37.08			$	28.64			$	8.48			29.7	%
Other beverages(1)	$	13.80			$	11.04			$	2.80			25.5	%
Average unit price	$	5.67			$	6.02			$	(0.33	)		(5.5	)%
Total Net Sales By Product Category(2)
Coffee (Roasted)	$	88,375			$	95,355			$	(6,980	)		(7.3	)%
Coffee (Frozen Liquid)	7,928				8,556				(628		)		(7.3	)%
Tea (Iced & Hot)	7,705				8,904				(1,199		)		(13.5	)%
Culinary	14,710				15,994				(1,284		)		(8.0	)%
Spice	6,206				6,157				49				.8	%
Other beverages(1)	12,952				11,626				1,326				11.4	%
Net sales by product category	$	137,876			$	146,592			$	(8,716	)		(5.9	)%
Fuel Surcharge	724				848				(124		)		(14.6	)%
Total	$	138,600			$	147,440			$	(8,840	)		(6.0	)%

____________

(1) Includes all beverages other than roasted coffee, frozen liquid coffee, and iced and hot tea, including cappuccino, cocoa, granitas, and concentrated and ready-to-drink cold brew and iced coffee.

(2) Certain transition service revenues related to the sale of our office coffee assets are not separately presented. The amounts are included in each of the product categories.

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Net sales in the three months ended September 30, 2019 decreased $8.8 million, or 6.0%, to $138.6 million from $147.4 million in the three months ended September 30, 2018. The decline in net sales was primarily due to a decline in revenues and volume of green coffee processed and sold through our DSD network, a decrease in net sales from tea and spice products, 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. Net sales in the three months ended September 30, 2019 included $2.5 million in price decreases to customers utilizing commodity-based pricing arrangements, where the changes in the green coffee commodity costs are passed on to the customer, as compared to $2.0 million in price decreases to customers utilizing such arrangements in the three months ended September 30, 2018. Sales through our DSD network were 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.

The following table presents the effect of changes in unit sales, unit pricing and product mix in the three months ended September 30, 2019 compared to the same periods in the prior fiscal year (in millions):

	Three Months Ended September 30, 2019 vs. 2018				% of Total Mix Change
Effect of change in unit sales	$	(0.1	)		(1.1	)%
Effect of pricing and product mix changes	(8.7		)		(98.9	)%
Total decrease in net sales	$	(8.8	)		(100.0	)%

Unit sales decreased 0.1% and average unit price decreased by 5.5% in the three months ended September 30, 2019 as compared to the same period in the prior fiscal year, resulting in a decrease in net sales of 6.0%. Average unit price decreased during the quarter due to a higher mix of product sold via direct ship versus DSD network, as direct ship has a lower average unit price. There were no new product category introductions in the three months ended September 30, 2019 or 2018, which had a material impact on our net sales.

Gross Profit

Gross profit in the three months ended September 30, 2019 decreased $7.6 million, or 15.7%, to $40.6 million from $48.2 million in the three months ended September 30, 2018. Gross margin decreased to 29.3% in the three months ended September 30, 2019 from 32.7% in the three months ended September 30, 2018. The decrease in gross profit for the three months ended September 30, 2019 was primarily driven by lower net sales of $8.8 million and higher production costs. Cost of goods sold in the three months ended September 30, 2019 was 70.7% of net sales as compared 67.3% of net sales, in the three months ended September 30, 2018. Margin was negatively impacted by higher manufacturing costs driven by downtime associated with certain aging production infrastructure and higher write-down of slow moving inventories. The negative margin impact was partially offset by lower coffee brewing equipment and labor costs during the period and by lower green coffee prices as the average Arabica “C” market price of green coffee decreased 4.5% in the three months ended September 30, 2019 as compared to the prior year period.

Operating Expenses

In the three months ended September 30, 2019, operating expenses decreased $16.6 million, or 32.9%, to $33.7 million, or 24.3% of net sales, from $50.3 million, or 34.1% of net sales, in the three months ended September 30, 2018, primarily due to a $12.5 million increase in net gains from sales of assets, a $3.7 million decrease in selling expenses and the absence of $4.5 million in restructuring and other transition expenses, partially offset by a $4.1 million increase in general and administrative expenses.

The decrease in selling expenses was primarily due to headcount reductions, the conclusion of Boyd Coffee integration at the beginning of October 2018 and other efficiencies realized from DSD route optimization. The increase in general and administrative expenses was associated primarily with employee incentive and benefit costs and executive severance costs incurred during the three months ended September 30, 2019.

Net gains from sales of assets in the three months ended September 30, 2019 were primarily associated with the sales of the office coffee assets and the Seattle office branch property for $7.2 million and $6.8 million, respectively.

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Total Other Expense

Total other expense in the three months ended September 30, 2019 was $2.3 million compared to $2.2 million in the three months ended September 30, 2018. The change in total other expense in the three months ended September 30, 2019 was primarily a result of reduced employee post retirement benefit gains, lower interest expense and lower net losses on coffee-related derivative instruments.

Interest expense in the three months ended September 30, 2019 decreased $0.3 million to $2.6 million from $2.9 million in the prior year period. The decrease in interest expense was principally due to lower pension interest expense.

Other, net in the three months ended September 30, 2019 decreased by $0.5 million to $0.2 million compared to $0.7 million in the prior year period. The decrease in Other, net in the three months ended September 30, 2019 was primarily a result of 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 Taxes

In the three months ended September 30, 2019, we recorded income tax benefit of $0.1 million compared to $1.3 million in the three months ended September 30, 2018. 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. See Note 16, Income Taxes, of the Notes to Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this report.

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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.

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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 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 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.

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Liquidity, Capital Resources and Financial Condition

The following table summarizes our 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

%

Revolving Credit Facility

On November 6, 2018, we 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 we 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 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, we entered into an interest rate swap to manage our interest rate risk on our floating-rate indebtedness. See Note 4 for details.

Under the Revolving Facility, we are 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. We are 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, we were in compliance with all of the covenants under the Revolving Facility.

At October 31, 2019, we were eligible to borrow up to a total of $150.0 million under the Revolving Facility and had outstanding borrowings of $100.0 million and utilized $2.0 million of the letters of credit sublimit.

Liquidity

We generally finance our operations through cash flows from operations and borrowings under our revolving credit facility described above. In fiscal 2018, we filed a shelf registration statement with the SEC which allows us to issue unspecified amounts of common stock, preferred stock, depository shares, warrants for the purchase of shares of common stock or preferred stock, purchase contracts for the purchase of equity securities, currencies or commodities, and units consisting of any combination of any of the foregoing securities, in one or more series, from time to time and in one or more offerings up to a total dollar amount of $250.0 million. We believe our Revolving Facility, to the extent available, in addition to our cash flows from operations, collectively, will be sufficient to fund our working capital and capital expenditure requirements for the next 12 months.

Our Revolving Facility includes financial covenants that are tested each fiscal quarter. The ratio of consolidated total indebtedness (net of unrestricted cash up to $7.5 million) to adjusted EBITDA must not exceed 3.5 to 1.0. The ratio of adjusted EBITDA to consolidated interest expense must not be less than 3.0 to 1.0. As of September 30, 2019, we were in compliance with both financial covenants.

 

At September 30, 2019, we had $7.4 million in cash and cash equivalents. At September 30, 2019, none of the cash in our coffee-related derivative margin accounts was restricted.

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Cash Flows

The significant captions and amounts from our condensed consolidated statements of cash flows are summarized below:

	Three Months Ended September 30,
	2019				2018
Condensed Consolidated Statements of cash flows data (in thousands)
Net cash (used) provided by operating activities	$	(3,887	)		$	1,080
Net cash provided (used) in investing activities	11,342				(7,680		)
Net cash (used) provided by financing activities	(7,013		)		12,293
Net increase in cash and cash equivalents	$	442			$	5,693

Operating Activities

Net cash used in operating activities was $3.9 million in the three months ended September 30, 2019 compared to net cash provided by operating activities of $1.1 million in the three months ended September 30, 2018. The increase in cash used was primarily attributable to a higher use of cash for working capital during the current fiscal period. Working capital during the three months ended September 30, 2019 was impacted by, among other items, cash purchases to fund higher inventory levels and a decline in revenues. These were partially offset by improved vendor terms and timing of accrued liabilities compared to cash settlement of such items.

Investing Activities

Net cash provided by investing activities during the three months ended September 30, 2019 was $11.3 million as compared to net cash used of $7.7 million in the three months ended September 30, 2018. Investment activities were elevated in the three months ended September 30, 2019 principally due to the sales of assets for cash proceeds $16.6 million. For the three months ended September 30, 2019, we had purchases of property, plant and equipment of $5.3 million, which included $0.9 million for new machinery and equipment, and $4.4 million in maintenance capital expenditures. Maintenance capital expenditures included lower coffee brewing equipment purchases compared to the prior year period.

Financing Activities

Net cash used in financing activities in three months ended September 30, 2019 was $7.0 million as compared to net cash provided of $12.3 million in three months ended September 30, 2018, a decrease of $19.3 million. Net cash used in financing activities in three months ended September 30, 2019 included $7.0 million in net payments under our Revolving Facility compared to $12.0 million in net borrowings in the three months ended September 30, 2018.

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Capital Expenditures

For three months ended September 30, 2019 and 2018, our capital expenditures paid were as follows:

		Three Months Ended September 30,
(In thousands)		2019				2018
Maintenance:
Coffee brewing equipment		$	2,145			$	4,117
Building and facilities		75				—
Vehicles, machinery and equipment		687				570
IT, software, office furniture and equipment		1,445				775
Capital expenditures, maintenance		$	4,352			$	5,462
Expansion Project:
Machinery and equipment		$	924			$	2,325
Capital expenditures, Expansion Project		$	924			$	2,325
Total capital expenditures		$	5,276			$	7,787

In fiscal 2020, we anticipate paying between $17.0 million to $20.0 million in maintenance capital expenditures. We expect to finance these expenditures through cash flows from operations and borrowings under our Revolving Facility.

Depreciation and amortization expense was $7.6 million and $7.7 million in three months ended September 30, 2019 and 2018, respectively. We anticipate our depreciation and amortization expense will be approximately $7.5 million to $7.8 million per quarter in the remainder of fiscal 2020 based on our existing fixed asset commitments and the useful lives of our intangible assets.

Commitments and Contingencies

As of September 30, 2019, we had committed to purchase green coffee inventory totaling $40.3 million under fixed-price contracts, $9.9 million in other inventory under non-cancelable purchase orders and $7.9 million in other purchases under non-cancelable purchase orders.

Critical Accounting Policies and Estimates

We prepare our consolidated financial statements in accordance with GAAP. In applying many of these accounting principles, we need to make assumptions, estimates or judgments that affect the reported amounts of assets, liabilities, revenues and expenses in our consolidated financial statements. We base our estimates and judgments on historical experience and other assumptions that we believe are reasonable under the circumstances. These assumptions, estimates or judgments, however, are both subjective and subject to change, and actual results may differ from our assumptions and estimates. If actual amounts are ultimately different from our estimates, the revisions are included in our results of operations for the period in which the actual amounts become known. For a summary of our significant accounting policies, see Note 2, Summary of Significant Accounting Policies, of the Notes to Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this report and in our 2019 Form 10-K. For a summary of our critical accounting estimates, please see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates" in our 2019 Form 10-K.

Recent Accounting Pronouncements

See Note 2, Summary of Significant Accounting Policies, of the Notes to Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this report and in our 2019 Form 10-K. For a summary of our critical accounting estimates, please see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates" in our 2019 Form 10-K.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements. 

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Item 3.	Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk

At September 30, 2019, we were eligible to borrow up to a total of $150.0 million under the Revolving Facility and had outstanding borrowings of $85.0 million and utilized $2.0 million of the letters of credit sublimit. As a result of the interest rate swap, only $5.0 million is now subject to interest rate variability. The weighted average interest rate on our outstanding borrowings subject to interest rate variability under the Revolving Facility at September 30, 2019 was 4.06%.

The following table demonstrates the impact of interest rate changes on our annual interest expense on outstanding borrowings subject to interest rate variability under the Revolving Facility based on the weighted average interest rate on the outstanding borrowings as of September 30, 2019:

(In thousands)		Principal		Interest Rate			Annual Interest Expense
–150 basis points		$5,000		2.56	%		$	128
–100 basis points		$5,000		3.06	%		$	153
Unchanged		$5,000		4.06	%		$	203
+100 basis points		$5,000		5.06	%		$	253
+150 basis points		$5,000		5.56	%		$	278

Commodity Price Risk

We are exposed to commodity price risk arising from changes in the market price of green coffee. We value green coffee inventory on the FIFO basis. In the normal course of business we hold a large green coffee inventory and enter into forward commodity purchase agreements with suppliers. We are subject to price risk resulting from the volatility of green coffee prices. Due to competition and market conditions, volatile price increases cannot always be passed on to our customers. See Note 4, Derivative Instruments, of the Notes to the Unaudited Condensed Consolidated Financial Statements for further discussions of our derivative instruments.

The following table summarizes the potential impact as of September 30, 2019 to net loss and AOCI from a hypothetical 10% change in coffee commodity prices. The information provided below relates only to the coffee-related derivative instruments and does not include, when applicable, the corresponding changes in the underlying hedged items:

		Increase (Decrease) to Net Loss								Increase (Decrease) to AOCI
		10% Increase in Underlying Rate				10% Decrease in Underlying Rate				10% Increase in Underlying Rate				10% Decrease in Underlying Rate
(In thousands)
Coffee-related derivative instruments(1)		$	192			$	(192	)		$	5,574			$	(5,574	)

__________

(1) The Company’s purchase contracts that qualify as normal purchases include green coffee purchase commitments for which the price has been locked in as of September 30, 2019. These contracts are not included in the sensitivity analysis above as the underlying price has been fixed.

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Item 4.	Controls and Procedures

Disclosure Controls and Procedures

Disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the rules and forms of the SEC. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information we are required to disclose in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosures.

As of September 30, 2019, our management, with the participation of our Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial and accounting officer), carried out an evaluation of the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15(e) promulgated under the Exchange Act. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective.

Changes in Internal Control Over Financial Reporting

Management has determined that there has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Exchange Act) during our fiscal quarter ended September 30, 2019 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II - OTHER INFORMATION

Item 1.	Legal Proceedings

The information set forth in Note 20, Commitments and Contingencies, of the Notes to Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q is incorporated herein by reference.

Item 1A.	Risk Factors

For a discussion of our other potential risks and uncertainties, see the information under “Item 1A. Risk Factors” in our Annual Report on Form 10‑K for the year ended June 30, 2019, which is accessible on the SEC’s website at www.sec.gov. During the three months ended September 30, 2019, other than the following, there have been no material changes to the risk factors disclosed in our 2019 Form 10‑K.

Our business could be negatively affected as a result of actions of Jeanne Farmer Grossman, which actions could adversely impact the trading value of the Company’s common stock.

Jeanne Farmer Grossman, individually and as the sole trustee of certain trusts (the “Grossman Group”), has notified the Company that she intends to nominate a slate of two nominees for election as directors in opposition to the nominees recommended by the Company’s Board of Directors at the 2019 Annual Meeting of Stockholders (the “Annual Meeting”), in addition to a proposal regarding the declassification of the board of directors. The Grossman Group has filed a definitive proxy statement with the SEC in connection with its solicitation of proxies from our stockholders to vote at the Annual Meeting. As of the record date for the Annual Meeting, the Grossman Group, together with its own nominees, owned collectively 834,980 shares of our common stock representing approximately 4.9% of our outstanding common stock. Responding to actions by stockholders like the Grossman Group can be costly and time-consuming, disruptive to operations and divert the attention of management and employees. Specifically, a proxy contest for the slate of two directors at the Annual Meeting will require us to incur significant proxy solicitation expenses and legal and other advisory expenses and require significant time and attention by management and our Board of Directors. In proxy contests, the range of potential outcomes may include a negotiated settlement prior to the vote of stockholders. The outcomes from any such negotiated settlement prior to the stockholder vote can involve a range of alternatives, both monetary and non-monetary, and an assessment of the potential impact from any such settlement is not determinable at this time. The Grossman Group has disclosed in its definitive proxy statement that it intends to seek reimbursement from the Company of all expenses it incurs in connection with its solicitation. As a result, if the Grossman Group is successful, we may also bear the costs of the Grossman Group’s proxy solicitation expenses.

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

None

Item 3.  Defaults Upon Senior Securities

None

Item 4.  Mine Safety Disclosures

Not applicable

Item 5.  Other Information

None

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Item 6.	Exhibits

 

Exhibit No.		Description
3.1		Amended and Restated Certificate of Incorporation of Farmer Bros. Co. (filed as Exhibit 3.1 to the Company’s Annual Report on Form 10-K filed with the SEC on September 11, 2019 and incorporated herein by reference).
3.2		Amended and Restated Bylaws, adopted as of October 14, 2018 (filed as Exhibit 3.3 to the Company’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2018, filed with the SEC on February 11, 2019 and incorporated herein by reference).
31.1*		Principal Executive Officer Certification Pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*		Principal Financial and Accounting Officer Certification Pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1**		Principal Executive Officer Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2**		Principal Financial and Accounting Officer Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101		The following financial statements from the Company’s Quarterly Report on Form 10-Q for the fiscal period ended September 30, 2019, formatted in eXtensible Business Reporting Language: (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations, (iii) Condensed Consolidated Statements of Comprehensive Loss, (iv) Condensed Consolidated Statements of Cash Flows, (v) Condensed Consolidated Statements of Stockholders’ Equity and (vi) Notes to Unaudited Condensed Consolidated Financial Statements (furnished herewith).

________________

*	Filed herewith
**	Furnished, not filed, herewith

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

	FARMER BROS. CO.
	By:		/s/ Deverl Maserang
			Deverl Maserang President and Chief Executive Officer (principal executive officer)
			November 7, 2019
	By:		/s/ Scott Lyon
			Scott Lyon Corporate Controller (interim principal financial and accounting officer)
			November 7, 2019

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