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 Name, Former Address and Former Fiscal Year, 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 January 31, 2020, the registrant had 17,231,473 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 December 31, 2019 and June 30, 2019	1
Condensed Consolidated Statements of Operations for the Three and Six Months Ended December 31, 2019 and 2018	2
Condensed Consolidated Statements of Comprehensive Loss for the Three and Six Months Ended December 31, 2019 and 2018	3
Condensed Consolidated Statements of Stockholders’ Equity for the Three and Six Months Ended December 31, 2019 and 2018	4
Condensed Consolidated Statements of Cash Flows for the Six Months Ended December 31, 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	33
Item 3. Quantitative and Qualitative Disclosures About Market Risk	46
Item 4. Controls and Procedures	47
PART II – OTHER INFORMATION
Item 1. Legal Proceedings	48
Item 1A. Risk Factors	48
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	48
Item 3. Defaults Upon Senior Securities	48
Item 4. Mine Safety Disclosures	48
Item 5. Other Information	48
Item 6. Exhibits	49
SIGNATURES	50

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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)

	December 31, 2019				June 30, 2019
ASSETS
Current assets:
Cash and cash equivalents	$	9,130			$	6,983
Accounts receivable, net	60,404				55,155
Inventories	85,134				87,910
Income tax receivable	1,631				1,191
Short-term derivative assets	9,051				1,865
Prepaid expenses	5,820				6,804
Total current assets	171,170				159,908
Property, plant and equipment, net	171,983				189,458
Goodwill	36,224				36,224
Intangible assets, net	27,673				28,878
Other assets	9,520				9,468
Long-term derivatives assets	443				674
Right-of-use operating lease assets	19,696				—
Total assets	$	436,709			$	424,610
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	59,828				72,771
Accrued payroll expenses	16,021				14,518
Operating leases liabilities - current	5,571				—
Short-term derivative liabilities	368				1,474
Other current liabilities	7,982				7,309
Total current liabilities	89,770				96,072
Long-term borrowings under revolving credit facility	70,000				92,000
Accrued pension liabilities	45,717				47,216
Accrued postretirement benefits	22,597				23,024
Accrued workers’ compensation liabilities	5,000				4,747
Operating lease liabilities - noncurrent	14,318				—
Other long-term liabilities	3,147				4,057
Total liabilities	$	250,549			$	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 December 31, 2019 and June 30, 2019; liquidation preference of $15,899 and $15,624 as of December 31, 2019 and June 30, 2019, respectively	15				15
Common stock, $1.00 par value, 25,000,000 shares authorized; 17,177,448 and 17,042,132 shares issued and outstanding as of December 31, 2019 and June 30, 2019, respectively	17,180				17,042
Additional paid-in capital	59,663				57,912
Retained earnings	158,310				146,177
Accumulated other comprehensive loss	(49,008		)		(63,652		)
Total stockholders’ equity	$	186,160			$	157,494
Total liabilities and stockholders’ equity	$	436,709			$	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 December 31,								Six Months Ended December 31,
	2019				2018				2019				2018
Net sales	$	152,498			$	159,773			$	291,098			$	307,213
Cost of goods sold	108,513				106,529				206,472				205,734
Gross profit	43,985				53,244				84,626				101,479
Selling expenses	34,906				39,591				68,520				76,901
General and administrative expenses	11,266				12,140				24,006				20,757
Restructuring and other transition expenses	—				207				—				4,674
Net (gains) losses from sales of assets	(11,057		)		804				(23,662		)		723
Operating expenses	35,115				52,742				68,864				103,055
Income (loss) from operations	8,870				502				15,762				(1,576		)
Other (expense) income:
Interest expense	(2,859		)		(3,332		)		(5,407		)		(6,184		)
Pension settlement charge	—				(10,948		)		—				(10,948		)
Other, net	1,662				953				1,865				1,610
Total other expense	(1,197		)		(13,327		)		(3,542		)		(15,522		)
Income (loss) before taxes	7,673				(12,825		)		12,220				(17,098		)
Income tax benefit	(81		)		(2,725		)		(188		)		(4,012		)
Net income (loss)	7,754				(10,100		)		12,408				(13,086		)
Less: Cumulative preferred dividends, undeclared and unpaid	138				134				275				266
Net earnings (loss) available to common stockholders	$	7,616			$	(10,234	)		$	12,133			$	(13,352	)
Net earnings (loss) available to common stockholders per common share—basic	$	0.44			$	(0.60	)		$	0.71			$	(0.79	)
Net earnings (loss) available to common stockholders per common share—diluted	$	0.43			$	(0.60	)		$	0.69			$	(0.79	)
Weighted average common shares outstanding—basic	17,159,108				16,985,157				17,127,153				16,971,995
Weighted average common shares outstanding—diluted	17,583,335				16,985,157				17,550,144				16,971,995

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 December 31,								Six Months Ended December 31,
	2019				2018				2019				2018
Net income (loss)	$	7,754			$	(10,100	)		$	12,408			$	(13,086	)
Other comprehensive (loss) income, net of tax:
Unrealized gains (losses) on derivative instruments designated as cash flow hedges, net of tax	11,284				748				7,395				(5,349		)
Losses on derivative instruments designated as cash flow hedges reclassified to cost of goods sold and interest expense, net of tax	4,661				1,650				7,249				3,110
Change in funded status of retiree benefit obligations, net of tax	—				(5,651		)		—				(5,651		)
Pension settlement charge, net of tax	—				8,147				—				8,147
Total comprehensive income (loss), net of tax	$	23,699			$	(5,206	)		$	27,052			$	(12,829	)

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		)
ESOP compensation expense, including reclassifications	—			—				52,534			53				807				—				—				860
Share-based compensation	—			—				—			—				(1		)		—				—				(1		)
Issuance of common stock and 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
Net income	—			—				—			—				—				7,754				—				7,754
Net reclassification of unrealized losses on cash flow hedges, net of taxes	—			—				—			—				—				—				15,945				15,945
ESOP compensation expense, including reclassifications	—			—				55,623			56				525				—				—				581
Issuance of common stock and stock option exercises	—			—				—			—				319				—				—				319
Stock option exercises	—			—				26,627			29				101				—				—				130
Cumulative preferred dividends, undeclared and unpaid	—			—				—			—				—				(138		)		—				(138		)
Balance at December 31, 2019	14,700			$	15			17,177,448			$	17,180			$	59,663			$	158,310			$	(49,008	)		$	186,160

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
Issuance of common stock and 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
Net loss	—			—				—			—				—				(10,100		)		—				—				(10,100		)
Net reclassification of unrealized gains on cash flow hedges, net of taxes	—			—				—			—				—				—				—				2,398				2,398
Pension settlement charge, net of taxes	—			—				—			—				—				—				—				8,147				8,147
Change in the funded status of retiree benefit obligations, net of taxes	—			—				—			—				—				—				—				(5,651		)		(5,651		)
ESOP compensation expense, including reclassifications	—			—				—			—				(1,740		)		—				2,145				—				405
Share-based compensation	—			—				16,266			16				474				—				—				—				490
Issuance of common stock and stock option exercises	—			—				8,562			9				173				—				—				—				182
Cumulative preferred dividends, undeclared and unpaid	—			—				—			—				—				(134		)		—				—				(134		)
Balance at December 31, 2018	14,700			$	15			17,002,529			$	17,003			$	56,134			$	206,955			$	—			$	(61,782	)		$	218,325

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)
	Six Months Ended December 31,
	2019				2018
Cash flows from operating activities:
Net income (loss)	$	12,408			$	(13,086	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	15,211				15,630
Restructuring and other transition expenses, net of payments	—				2,457
Deferred income taxes	—				(3,265		)
Pension settlement charge	—				10,948
Net (gains) losses from sales of assets	(23,662		)		723
Net losses on derivative instruments	4,075				6,205
Other adjustments	1,794				3,494
Change in operating assets and liabilities:
Accounts receivable	(5,285		)		(21,299		)
Inventories	1,804				(11,326		)
Derivative assets (liabilities), net	1,965				(9,234		)
Other assets	361				1,194
Accounts payable	(10,608		)		21,534
Accrued expenses and other liabilities	(258		)		(9,621		)
Net cash used in operating activities	$	(2,195	)		$	(5,646	)
Cash flows from investing activities:
Purchases of property, plant and equipment	(9,007		)		(23,120		)
Proceeds from sales of property, plant and equipment	35,247				105
Net cash provided (used) in investing activities	$	26,240			$	(23,015	)
Cash flows from financing activities:
Proceeds from revolving credit facility	$	38,000			$	40,642
Repayments on revolving credit facility	(60,000		)		(429		)
Payments of finance lease obligations	(27		)		(137		)
Payment of financing costs	—				(1,027		)
Proceeds from stock option exercises	129				507
Net cash (used) provided by financing activities	$	(21,898	)		$	39,556
Net increase in cash and cash equivalents	$	2,147			$	10,895
Cash and cash equivalents at beginning of period	6,983				2,438
Cash and cash equivalents at end of period	$	9,130			$	13,333

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)
	Six Months Ended December 31,
	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	$	14,644			$	(2,239	)
Non-cash additions to property, plant and equipment	$	284			$	2,928
Non-cash portion of earnout receivable recognized—spice assets sale	$	—			$	390
Non-cash portion of earnout payable recognized—West Coast Coffee acquisition	$	—			$	840
Non-cash issuance of 401-K common stock	$	109			$	—
Cumulative preferred dividends, undeclared and unpaid	$	275			$	266

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 and six months ended December 31, 2019 are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2020. Events occurring subsequent to December 31, 2019 have been evaluated for potential recognition or disclosure in the unaudited condensed consolidated financial statements for the three and six months ended December 31, 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 and six months ended December 31, 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 December 31, 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 December 31, 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 34% and 28% of the Company’s trade accounts receivable balance was with five customers at December 31, 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.

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. See Note 3 for detail discussions on the adoption of ASC 842.

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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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 Note 3 for the applicable disclosure of ASU 2016-02 adoption. .

10

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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 equipment. 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		December 31, 2019
(In thousands)
Operating lease assets		Right-of-use operating lease assets		$	19,696
Finance lease assets		Property, plant and equipment, net		34
Total lease assets				$	19,730
Operating lease liabilities - current		Operating lease liabilities - current		$	5,571
Operating lease liabilities - noncurrent		Operating lease liabilities - noncurrent		14,318
Finance lease liabilities		Other long-term liabilities		35
Total lease liabilities				$	19,924

The components of lease expense are as follows:

				Three Months Ended December 31,				Six Months Ended December 31,
		Classification		2019				2019
(In thousands)
Operating lease expense		General and administrative expenses and cost of goods sold		$	1,253			$	2,363
Finance lease expense:
Amortization of finance lease assets		General and administrative expenses		13				26
Interest on finance lease liabilities		Interest expense		—				1
Total lease expense				$	1,266			$	2,390

11

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Farmer Bros. Co.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

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		December 31, 2019
(In thousands)		Operating Leases				Finance Leases
Maturities of lease liabilities are as follows:
2020		$	2,826			$	27
2021		5,102				9
2022		3,631				—
2023		2,995				—
2024		2,699				—
Thereafter		5,375				—
Total lease payments		22,628				36
Less: interest		(2,739		)		(1		)
Total lease obligations		$	19,889			$	35

Lease term and discount rate:

		December 31, 2019
Weighted-average remaining lease terms (in years):
Operating lease		8.8
Finance lease		0.7
Weighted-average discount rate:
Operating lease		4.50	%
Finance lease		4.50	%

Other Information:

		Six Months Ended   December 31, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases		$	2,165
Operating cash flows from finance leases		$	1
Financing cash flows from finance leases		$	25
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 expense paid for the fiscal year 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: 

12

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Farmer Bros. Co.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

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(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 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 December 31, 2019 and June 30, 2019:

(In thousands)		December 31, 2019			June 30, 2019
Derivative instruments designated as cash flow hedges:
Long coffee pounds		40,725			42,113
Derivative instruments not designated as cash flow hedges:
Long coffee pounds		1,238			6,070
Total		41,963			48,183

Coffee-related derivative instruments designated as cash flow hedges outstanding as of December 31, 2019 will expire within 17 months. At December 31, 2019 and June 30, 2019 approximately 97% 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”). In December 2019, the Company amended the notional amount to $65.0 million. 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)

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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
		December 31, 2019				June 30, 2019				December 31, 2019				June 30, 2019
(In thousands)
Financial Statement Location:
Short-term derivative assets:
Coffee-related derivative instruments(1)		$	8,718			$	1,254			$	333			$	611
Long-term derivative assets:
Coffee-related derivative instruments (2)		$	443			$	671			$	—			$	3
Short-term derivative liabilities:
Coffee-related derivative instruments (3)		$	1			$	1,114			$	7			$	114
Interest rate swap derivative instruments (3)		$	360			$	246			$	—			$	—
Long-term derivative liabilities:
Coffee-related derivative instruments (4)		$	—			$	13			$	—			$	—
Interest rate swap derivative instruments (4)		$	1,069			$	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 December 31,								Six Months Ended December 31,								Financial Statement Classification
(In thousands)		2019				2018				2019				2018
Net gains (losses) recognized in AOCI - Interest rate swap		$	448			$	—			$	(48	)		$	—			AOCI
Net losses recognized from AOCI to earnings - Interest rate swap		$	(52	)		$	—			$	(32	)		$	—			Interest Expense
Net losses reclassified from AOCI to earnings for partial unwind of our interest swap - Interest rate swap (1)		$	(407	)		$	—			$	(407	)		$	—			Interest Expense
Net gains (losses) recognized in AOCI - Coffee-related		$	12,130			$	1,005			$	7,431			$	(7,188	)		AOCI
Net losses recognized in earnings - Coffee - related		$	(3,451	)		$	(2,217	)		$	(6,922	)		$	(4,179	)		Cost of goods sold

________________

(1)	The $407 thousand of realized loss was due to partial unwinding of interest rate swap resulting from the amendment of the notional amount from $80 million to $65 million.

For the three and six months ended December 31, 2019 and 2018, there were no gains or losses recognized in earnings as a result of excluding amounts from the assessment of hedge effectiveness.

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 and six months ended December 31, 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

15

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Farmer Bros. Co.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

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operations and in “Net losses (gains) on derivative instruments and investments” in the Company’s condensed consolidated statements of cash flows.

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

		Three Months Ended December 31,								Six Months Ended December 31,
(In thousands)		2019				2018				2019				2018
Net losses on coffee-related derivative instruments(1)		$	419			$	(920	)		$	(624	)		$	(2,025	)
Non-operating pension and other postretirement benefit plans cost (2)		1,248				1,763				2,496				3,526
Other (losses) gains, net		(5		)		110				(7		)		109
Other, net		$	1,662			$	953			$	1,865			$	1,610

___________

(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 and six months ended December 31, 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
December 31, 2019		Derivative Assets		$	9,494			$	(8	)		$	—			$	9,486
		Derivative Liabilities		$	(1,437	)		$	(8	)		$	—			$	(1,445	)
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 December 31, 2019, $5.2 million of net gains 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 December 31, 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 December 31, 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.

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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
December 31, 2019
Derivative instruments designated as cash flow hedges:
Coffee-related derivative assets (1)		$	9,161			$	—			$	9,161			$	—
Coffee-related derivative liabilities (1)		$	1			$	—			$	1			$	—
Interest rate swap derivative liabilities (2)		$	1,429			$	—			$	1,429			$	—
Derivative instruments not designated as accounting hedges:
Coffee-related derivative assets(1)		$	333			$	—			$	333			$	—
Coffee-related derivative liabilities(1)		$	7			$	—			$	7			$	—
(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)		December 31, 2019				June 30, 2019
Trade receivables		$	57,652			$	53,593
Other receivables(1)		3,293				2,886
Allowance for doubtful accounts		(541		)		(1,324		)
Accounts receivable, net		$	60,404			$	55,155

__________

(1) Includes vendor rebates and other non-trade receivables.

The $0.8 million decrease in the allowance for doubtful accounts during the six months ended December 31, 2019 was due to improvement of the Company’s accounts receivable aging balance.

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Farmer Bros. Co.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

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Note 7. Inventories

(In thousands)		December 31, 2019				June 30, 2019
Coffee
Processed		$	27,492			$	25,769
Unprocessed		30,337				33,259
Total		$	57,829			$	59,028
Tea and culinary products
Processed		$	19,385			$	21,767
Unprocessed		94				74
Total		$	19,479			$	21,841
Coffee brewing equipment parts		$	7,826			$	7,041
Total inventories		$	85,134			$	87,910

In addition to product cost, inventory costs include expenditures such as direct labor and certain supply, freight, warehousing, overhead variances, purchase price variance (“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)		December 31, 2019				June 30, 2019
Buildings and facilities (1)		$	100,316			$	107,915
Machinery and equipment (1)		243,397				249,477
Capitalized software		28,770				27,666
Office furniture and equipment		13,858				14,035
		$	386,341			$	399,093
Accumulated depreciation		(227,671		)		(225,826		)
Land		13,313				16,191
Property, plant and equipment, net		$	171,983			$	189,458

__________

(1) Decrease as of December 31, 2019 is due to the sale of assets. See Note 21 for details.

Coffee Brewing Equipment (“CBE”) and Service

Capitalized CBE included in machinery and equipment above are:

(In thousands)		December 31, 2019				June 30, 2019
Coffee Brewing Equipment		$	103,520			$	106,593
Accumulated depreciation		(69,581		)		$	(70,202	)
Coffee Brewing Equipment, net		$	33,939			$	36,391

 

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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 December 31,								Six Months Ended December 31,
(In thousands)		2019				2018				2019				2018
Depreciation expense		$	2,327			$	2,201			$	4,666			$	4,396
Other CBE expenses		$	8,446			$	8,410			$	16,171			$	16,916

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 six months ended December 31, 2019. The carrying value of goodwill at December 31, 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:

 

				December 31, 2019												June 30, 2019
(In thousands)		Weighted Average Amortization Period as of December 31, 2019		Gross Carrying Amount				Accumulated Amortization				Net				Gross Carrying Amount				Accumulated Amortization				Net
Amortized intangible assets:
Customer relationships		7.3		$	33,003			$	(16,391	)		$	16,612			$	33,003			$	(15,291	)		$	17,712
Non-compete agreements		2.2		220				(142		)		78				220				(122		)		98
Recipes		3.8		930				(420		)		510				930				(354		)		576
Trade name/brand name		4.5		510				(365		)		145				510				(346		)		164
Total amortized intangible assets				$	34,663			$	(17,318	)		$	17,345			$	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			$	(17,318	)		$	27,673			$	44,991			$	(16,113	)		$	28,878

Aggregate amortization expense for the three months ended December 31, 2019 and 2018 was $0.6 million and $0.7 million, respectively. Aggregate amortization expense for the six months ended December 31, 2019 and 2018 was $1.2 million and $1.3 million, respectively.

The Company tests goodwill and intangible assets for impairment annually, as of January 31, or when events or changes in circumstances would indicate that the carrying amounts of the assets may not be recoverable. The Company is currently undergoing its annual testing. Events and circumstances have occurred, including those during the current fiscal year, such as declining operating results, that may have a negative impact on the fair value of these assets.

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 December 31,								Six Months Ended December 31,
		2019				2018				2019				2018
(In thousands)
Service cost		$	—			$	—			$	—			$	—
Interest cost		1,059				1,426				2,118				2,852
Expected return on plan assets		(1,102		)		(1,485		)		(2,203		)		(2,970		)
Amortization of net loss(1)		370				370				740				740
Pension settlement charge		—				10,948				—				10,948
Net periodic benefit cost		$	327			$	11,259			$	655			$	11,570

___________

(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

		December 31, 2019		June 30, 2019
Discount rate		3.45%		4.05%
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 December 31,								Six Months Ended December 31,
		2019				2018				2019				2018
(In thousands)
Contributions		$	452			$	283			$	880			$	778

Outstanding balance of settlement obligations of the Company to certain multiemployer pension plans are as follows:

(In thousands)		December 31, 2019				June 30, 2019
WCT Pension Trust (1)		$	344			$	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 and six months ended December 31, 2019 and 2018. Net periodic postretirement benefit cost was based on employee census information and asset information as of June 30, 2019. 

		Three Months Ended December 31,								Six Months Ended December 31,
		2019				2018				2019				2018
(In thousands)
Components of Net Periodic Postretirement Benefit Cost (Credit):
Service cost		$	147			$	133			$	294			$	266
Interest cost		214				222				428				444
Amortization of net gain		(125		)		(209		)		(250		)		(418		)
Amortization of prior service credit		(392		)		(439		)		(784		)		(878		)
Net periodic postretirement benefit credit		$	(156	)		$	(293	)		$	(312	)		$	(586	)

		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:

December 31, 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

$

70,000

4.05

%

$

92,000

3.98

%

		December 31, 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		$	20,987			$	22,812

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		Six Months Ended December 31, 2019
Weighted average fair value of NQOs		$	4.65
Risk-free interest rate		1.7		%
Dividend yield		—		%
Average expected term		4.6 years
Expected stock price volatility		35.4		%

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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 six months ended December 31, 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		(202,753	)		25.67			—		—
Outstanding at December 31, 2019		20,996			29.39			1.92		—
Exercisable at December 31, 2019		12,730			27.95			1.78		—

Restricted Stock

The following table summarizes restricted stock activity for the six months ended December 31, 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		48,654			15.05
Vested/Released		(18,298	)		23.98
Cancelled/Forfeited		(1,704	)		31.70
Outstanding and nonvested at December 31, 2019		60,708			15.66

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Farmer Bros. Co.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

---

Performance-Based Restricted Stock Units (“PBRSUs”)

The following table summarizes PBRSU activity for the six months ended December 31, 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)		76,256			14.42
Vested/Released		—			—
Cancelled/Forfeited		(36,049	)		27.92
Outstanding and nonvested at December 31, 2019		91,444			16.54

_____________

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Farmer Bros. Co.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

---

Note 14. Other Current Liabilities

Other current liabilities consist of the following:

(In thousands)		December 31, 2019				June 30, 2019
Accrued postretirement benefits		$	1,068			$	1,068
Accrued workers’ compensation liabilities		1,681				1,495
Cumulative preferred dividends, undeclared and unpaid (4)		1,198				305
Earnout payable (1)		—				1,000
Working capital dispute payable(2)		354				354
Other (3)		3,681				3,087
Other current liabilities		$	7,982			$	7,309

___________

Note 15. Other Long-Term Liabilities

Other long-term liabilities include the following:

(In thousands)		December 31, 2019				June 30, 2019
Finance lease liabilities		$	35			$	32
Derivative liabilities—noncurrent		1,068				1,612
Performance Cash Awards Liability		17				—
Cumulative preferred dividends, undeclared and unpaid—noncurrent		—				618
Deferred income taxes and other liabilities(1)		2,027				1,795
Other long-term liabilities		$	3,147			$	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 December 31,								Six Months Ended December 31,
		2019				2018				2019				2018
Income tax benefit		$	(81	)		$	(2,725	)		$	(188	)		$	(4,012	)
Effective tax rate		(1.1		)%		21.0		%		(1.5		)%		23.3		%

---

		Three Months Ended December 31,								Six Months Ended December 31,
(In thousands, except share and per share amounts)		2019				2018				2019				2018
Undistributed net earnings (loss) available to common stockholders		$	7,595			$	(10,225	)		$	12,104			$	(13,341	)
Undistributed net earnings (loss) available to nonvested restricted stockholders and holders of convertible preferred stock		21				(9		)		29				(11		)
Net earnings (loss) available to common stockholders—basic		$	7,616			$	(10,234	)		$	12,133			$	(13,352	)
Weighted average common shares outstanding—basic		17,159,108				16,985,157				17,127,153				16,971,995
Effect of dilutive securities:
Shares issuable under stock options		1,236				—				1,819				—
Shares issuable under PBRSUs		8,091				—				6,272				—
Shares issuable under convertible preferred stock		414,900				—				414,900				—
Weighted average common shares outstanding—diluted		17,583,335				16,985,157				17,550,144				16,971,995
Net earnings (loss) per common share available to common stockholders—basic		$	0.44			$	(0.60	)		$	0.71			$	(0.79	)
Net earnings (loss) per common share available to common stockholders—diluted		$	0.43			$	(0.60	)		$	0.69			$	(0.79	)

		Three Months Ended December 31,						Six Months Ended December 31,
		2019			2018			2019			2018
Shares issuable under stock options		190,117			201,543			121,113			165,013
Shares issuable under convertible preferred stock		—			400,691			—			400,691
Shares issuable under PBRSUs		16,195			64,991			8,097			52,890

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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 December 31, 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			$	1,082			$	15,899			$	1,199			$	15,899

		Three Months Ended December 31,
		2019							2018
(In thousands)		$				% of total			$				% of total
Net Sales by Product Category:
Coffee (Roasted)		$	96,177			63.1	%		$	99,286			62.1	%
Coffee (Frozen Liquid)		8,556				5.6	%		9,318				5.8	%
Tea (Iced & Hot)		7,563				5.0	%		8,651				5.4	%
Culinary		15,158				10.0	%		16,795				10.5	%
Spice		6,126				4.0	%		6,002				3.8	%
Other beverages(1)		17,299				11.3	%		18,915				11.8	%
Other revenues(2)		946				0.6	%		—				—	%
Net sales by product category		151,825				99.6	%		158,967				99	%
Fuel surcharge		673				0.4	%		806				0.6	%
Net sales		$	152,498			100.0	%		$	159,773			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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Farmer Bros. Co.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

---

		Six Months Ended December 31,
		2019							2018
(In thousands)		$				% of total			$				% of total
Net Sales by Product Category:
Coffee (Roasted)		$	183,547			63.1	%		$	194,640			63.4	%
Coffee (Frozen Liquid)		16,484				5.7	%		17,874				5.8	%
Tea (Iced & Hot)		15,268				5.2	%		17,555				5.7	%
Culinary		29,361				10.1	%		32,789				10.7	%
Spice		12,332				4.2	%		12,160				4.0	%
Other beverages(1)		30,032				10.3	%		30,541				9.9	%
Other revenues(2)		2,701				0.9	%		—				—	%
Net sales by product category		289,725				99.5	%		305,559				99.5	%
Fuel surcharge		1,373				0.5	%		1,654				0.5	%
Net sales		$	291,098			100.0	%		$	307,213			100.0	%

___________

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

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Note 22. Subsequent Events

The Company evaluated all events or transactions that occurred after December 31, 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.

    

32

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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 and six months ended December 31, 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, Texas, 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 365 delivery routes and 101 branch warehouses as of December 31, 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.

33

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Summary Overview of Three Months Ended December 31, 2019 Results of Operations

During the three months ended December 31, 2019, we experienced sales declines in our DSD sales channel while our direct ship sales channel were comparable to the prior year period.

Similar to what we experienced in fiscal 2019, our DSD network continued to be negatively impacted by higher customer attrition, partially offset by sales to new customers. In addition, our DSD sales network was impacted by the sale of our office coffee business in July 2019. While our direct ship channel sales grew in terms of coffee pounds, unfavorable customer mix shift and the impact of coffee prices for our cost plus customers caused revenues to be comparable to the prior period.

During the three months ended December 31, 2019, gross margins declined by 4.5% to 28.8% from 33.3% mostly due to unfavorable customer mix shift and higher write-down of slow moving inventories. These declines were partially offset by lower freight costs, the impact of coffee prices and the start of our key initiative to rebalance production across our plant network.

Operating expenses declined by $17.6 million over the prior year quarter driven mostly by gains realized from several key near-term strategic priorities. During the three months ended December 31, 2019, we completed the sale of our Houston, Texas manufacturing facility and warehouse and four branch properties for an aggregate sale price of $20.0 million. Net cash proceeds from these assets sales were $18.3 million. We recognized a net gain on these asset sales of $11.4 million during three months ended December 31, 2019. The proceeds from the sales gave us increased liquidity and flexibility. Operating expenses also benefited from several cost saving initiatives implemented during the current fiscal year. These savings were slightly offset by proxy contest expenses and one-time executive severance costs associated with a corporate reorganization during the period.

Our capital expenditures for the six months ended December 31, 2019 were $9.0 million, representing lower maintenance capital spend of $7.5 million, a 61.0% reduction compared to the prior year period. These spending reductions were driven by several key initiatives put in place, including a focus on improving our coffee brewing equipment (“CBE”) program to drive cost savings.

As of December 31, 2019, the outstanding debt on our revolver was $70.0 million, a decline of $15.0 million since September 30, 2019 and $22.0 million since June 30, 2019. Additionally, our cash increased to $9.1 million as of December 31, 2019, compared to $7.0 million as of June 30, 2019. These improvements in our liquidity provide additional financial and operational flexibility.

 

34

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Results of Operations

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

	Three Months Ended December 31,								Favorable (Unfavorable)							Six Months Ended December 31,								Favorable (Unfavorable)
	2019				2018				Change				% Change			2019				2018				Change				% Change
Income Statement Data:
Net sales	$	152,498			$	159,773			$	(7,275	)		(4.6	)%		$	291,098			$	307,213			$	(16,115	)		(5.2	)%
Gross margin	28.8		%		33.3		%		(4.5		)%		NM			29.1		%		33.0		%		(3.9		)%		NM
Operating expenses as a % of sales	23.0		%		33.0		%		10.0		%		NM			23.7		%		33.5		%		9.8		%		NM
Income (loss) from operations	$	8,870			$	502			$	8,368			NM			$	15,762			$	(1,576	)		$	17,338			NM
Net income (loss)	$	7,754			$	(10,100	)		$	17,854			NM			$	12,408			$	(13,086	)		$	25,494			194.8	%
Net earnings (loss) available to common stockholders per common share—basic	$	0.44			$	(0.60	)		$	1.04			NM			$	0.71			$	(0.79	)		$	1.50			NM
Net earnings (loss) available to common stockholders per common share—diluted	$	0.43			$	(0.60	)		$	1.03			NM			$	0.69			$	(0.79	)		$	1.48			NM
Operating Data:
Coffee pounds	29,360				27,398				1,962				7.2	%		55,318				52,845				2,473				4.7	%
EBITDA(1)	$	16,852			$	(3,188	)		$	20,040			NM			$	30,292			$	1,470			$	28,822			NM
EBITDA Margin(1)	11.1		%		(2.0		)%		13.1		%		NM			10.4		%		0.5		%		9.9		%		NM
Adjusted EBITDA(1)	$	7,448			$	12,443			$	(4,995	)		(40.1	)%		$	11,464			$	23,410			$	(11,946	)		(51.0	)%
Adjusted EBITDA Margin(1)	4.9		%		7.8		%		(2.9		)%		NM			3.9		%		7.6		%		(3.7		)%		NM
Percentage of Total Net Sales By Product Category
Coffee (Roasted)	63.1		%		62.1		%		1.0		%		1.6	%		63.1		%		63.4		%		(0.3		)%		(0.5	)%
Coffee (Frozen Liquid)	5.6		%		5.8		%		(0.2		)%		(3.4	)%		5.7		%		5.8		%		(0.1		)%		(1.7	)%
Tea (Iced & Hot)	5.0		%		5.4		%		(0.4		)%		(7.4	)%		5.2		%		5.7		%		(0.5		)%		(8.8	)%
Culinary	10.0		%		10.5		%		(0.5		)%		(4.8	)%		10.1		%		10.7		%		(0.6		)%		(5.6	)%
Spice	4.0		%		3.8		%		0.2		%		5.3	%		4.2		%		4.0		%		0.2		%		5.0	%
Other beverages(2)	11.3		%		11.8		%		(0.5		)%		(4.2	)%		10.3		%		9.9		%		0.4		%		4.0	%
Other revenues(3)	0.6		%		—		%		0.6		%		NM			0.9		%		—		%		0.9		%		NM
Net sales by product category	99.6		%		99.4		%		0.2		%		NM			99.5		%		99.5		%		(0.9		)%		NM
Fuel Surcharge	0.4		%		0.6		%		(0.2		)%		NM			0.5		%		0.5		%		—		%		NM
Total	100.0		%		100.0		%		—		%		NM			100.0		%		100.0		%		(0.9		)%		—	%
Other data:
Capital expenditures related to maintenance	$	3,107			$	7,105			$	(3,998	)		(56.3	)%		$	7,459			$	12,567			$	(5,108	)		(40.6	)%
Total capital expenditures	$	3,730			$	15,333			$	(11,603	)		(75.7	)%		$	9,007			$	23,120			$	(14,113	)		(61.0	)%
Depreciation and amortization expense	$	7,594			$	7,902			$	(308	)		(3.9	)%		$	15,211			$	15,630			$	(419	)		(2.7	)%

________________

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.

    

35

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The following table sets forth information regarding our condensed consolidated results of operations for the three and six months ended December 31, 2019 and 2018 (in thousands, except percentages):

	Three Months Ended December 31,								Favorable (Unfavorable)							Six Months Ended December 31,								Favorable (Unfavorable)
	2019				2018				Change				% Change			2019				2018				Change				% Change
Net sales	$	152,498			$	159,773			$	(7,275	)		(4.6	)%		$	291,098			$	307,213			$	(16,115	)		(5.2	)%
Cost of goods sold	108,513				106,529				(1,984		)		(1.9	)%		206,472				205,734				(738		)		(.4	)%
Gross profit	43,985				53,244				(9,259		)		(17.4	)%		84,626				101,479				(16,853		)		(16.6	)%
Selling expenses	34,906				39,591				4,685				11.8	%		68,520				76,901				8,381				10.9	%
General and administrative expenses	11,266				12,140				874				7.2	%		24,006				20,757				(3,249		)		(15.7	)%
Restructuring and other transition expenses	—				207				207				100.0	%		—				4,674				4,674				100.0	%
Net (gains) losses from sales of assets	(11,057		)		804				11,861				NM			(23,662		)		723				24,385				NM
Operating expenses	35,115				52,742				17,627				33.4	%		68,864				103,055				34,191				33.2	%
Income (loss) from operations	8,870				502				8,368				NM			15,762				(1,576		)		17,338				NM
Other (expense) income:
Interest expense	(2,859		)		(3,332		)		473				14.2	%		(5,407		)		(6,184		)		777				12.6	%
Pension settlement charge	—				(10,948		)		10,948				(100.0	)%		—				(10,948		)		10,948				(100.0	)%
Other, net	1,662				953				709				74.4	%		1,865				1,610				255				15.8	%
Total other expense	(1,197		)		(13,327		)		12,130				91.0	%		(3,542		)		(15,522		)		11,980				(77.2	)%
Income (loss) before taxes	7,673				(12,825		)		20,498				159.8	%		12,220				(17,098		)		29,318				171.5	%
Income tax benefit	(81		)		(2,725		)		(2,644		)		(97.0	)%		(188		)		(4,012		)		(3,824		)		95.3	%
Net income (loss)	$	7,754			$	(10,100	)		17,854				176.8	%		$	12,408			$	(13,086	)		25,494				194.8	%
Less: Cumulative preferred dividends, undeclared and unpaid	138				134				(4		)		(3.0	)%		275				266				(9		)		(3.4	)%
Net earnings (loss) available to common stockholders	$	7,616			$	(10,234	)		17,850				174.4	%		$	12,133			$	(13,352	)		25,485				190.9	%

_____________

NM - Not Meaningful

36

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Three and Six Months Ended December 31, 2019 Compared to Three and Six Months Ended December 31, 2018

Net Sales

The following table presents changes in units sold, unit price and net sales by product category in the three and six months ended December 31, 2019 compared to the same periods in the prior fiscal year (in thousands, except unit price and percentages):

	Three Months Ended December 31,								Favorable (Unfavorable)							Six Months Ended December 31,								Favorable (Unfavorable)
	2019				2018				Change				% Change			2019				2018				Change				% Change
Units sold
Coffee (Roasted)	23,488				21,918				1,570				7.2	%		44,254				42,276				1,978				4.7	%
Coffee (Frozen Liquid)	100				110				(10		)		(9.1	)%		198				235				(37		)		(15.7	)%
Tea (Iced & Hot)	723				723				—				—	%		1,348				1,358				(10		)		(0.7	)%
Culinary	1,934				2,112				(178		)		(8.4	)%		3,792				4,200				(408		)		(9.7	)%
Spice	171				175				(4		)		(2.3	)%		339				390				(51		)		(13.1	)%
Other beverages(1)	1,459				1,855				(396		)		(21.3	)%		2,397				2,908				(511		)		(17.6	)%
Total	27,875				26,893				982				3.7	%		52,328				51,367				961				1.9	%
Unit Price
Coffee (Roasted)	$	4.12			$	4.53			$	(0.41	)		(9.1	)%		$	4.18			$	4.60			$	(0.42	)		(9.1	)%
Coffee (Frozen Liquid)	$	85.65			$	84.47			$	1.18			1.4	%		$	83.21			$	75.98			$	7.23			9.5	%
Tea (Iced & Hot)	$	10.46			$	11.96			$	(1.50	)		(12.5	)%		$	11.33			$	12.93			$	(1.60	)		(12.4	)%
Culinary	$	7.98			$	7.95			$	0.03			.4	%		$	7.95			$	7.81			$	0.14			1.8	%
Spice	$	35.73			$	34.32			$	1.41			4.1	%		$	36.40			$	31.19			$	5.21			16.7	%
Other beverages(1)	$	11.95			$	10.20			$	1.75			17.2	%		$	12.68			$	10.50			$	2.18			20.8	%
Average unit price	$	5.47			$	5.94			$	(0.47	)		(7.9	)%		$	5.56			$	5.98			$	(0.42	)		(7.0	)%
Total Net Sales By Product Category(2)
Coffee (Roasted)	$	96,692			$	99,286			$	(2,594	)		(2.6	)%		$	185,067			$	194,640			$	(9,573	)		(4.9	)%
Coffee (Frozen Liquid)	8,556				9,318				(762		)		(8.2	)%		16,484				17,874				(1,390		)		(7.8	)%
Tea (Iced & Hot)	7,563				8,651				(1,088		)		(12.6	)%		15,268				17,555				(2,287		)		(13.0	)%
Culinary	15,435				16,795				(1,360		)		(8.1	)%		30,145				32,789				(2,644		)		(8.1	)%
Spice	6,126				6,002				124				2.1	%		12,332				12,160				172				1.4	%
Other beverages(1)	17,440				18,915				(1,475		)		(7.8	)%		30,391				30,541				(150		)		(.5	)%
Net sales by product category	$	151,812			$	158,967			$	(7,155	)		(4.5	)%		$	289,687			$	305,559			$	(15,872	)		(5.2	)%
Fuel Surcharge	686				806				(120		)		(14.9	)%		1,411				1,654				(243		)		(14.7	)%
Total	$	152,498			$	159,773			$	(7,275	)		(4.6	)%		$	291,098			$	307,213			$	(16,115	)		(5.2	)%

____________

(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 December 31, 2019 decreased $7.3 million, or 4.6%, to $152.5 million from $159.8 million in the three months ended December 31, 2018. The decline in net sales was primarily due to a decline in volume of green coffee processed and sold through our DSD network, a decrease in net sales from tea and culinary products, and the impact of coffee prices for our cost plus customers. Sales through our DSD network were impacted by the sale of our office coffee business in July of 2019 and net customer attrition. Our direct ship sales were comparable to the prior year period because the increase in direct ship volume was offset by unfavorable customer mix shift and the impact of coffee prices for our cost plus customers. Net sales in the three months ended December 31, 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 $1.0 million in price decreases to customers utilizing such arrangements in the three months ended December 31, 2018.

Net sales in the six months ended December 31, 2019 decreased $16.1 million, or 5.2%, to $291.1 million from $307.2 million in the six months ended December 31, 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 culinary products, unfavorable customer mix within our direct sales, non-recurring sales of industrial soup based products associated with the Boyd’s acquisition which we stopped selling last year, and the impact of coffee prices for our cost plus customers. Sales through our DSD network were impacted by the sale of our office coffee business in July of 2019, higher customer attrition and lower inventory fill rates associated with downtime at our Houston plant during the earlier part of the current period. Net sales in the six months ended December 31, 2019 included $5.1 million in price decreases to customers utilizing commodity-based pricing arrangements, where the changes in the green coffee commodity costs are passed on to the customer, as compared to $3.0 million in price decreases to customers utilizing such arrangements in the six months ended December 31, 2018.

The following table presents the effect of changes in unit sales, unit pricing and product mix in the three and six months ended December 31, 2019 compared to the same periods in the prior fiscal year (in millions):

	Three Months Ended December 31, 2019 vs. 2018				% of Total Mix Change			Six Months Ended December 31, 2019 vs. 2018				% of Total Mix Change
Effect of change in unit sales	$	5.4			74.0	%		$	5.3			32.9	%
Effect of pricing and product mix changes	(12.7		)		(174.0	)%		(21.4		)		(132.9	)%
Total decrease in net sales	$	(7.3	)		(100.0	)%		$	(16.1	)		(100.0	)%

Unit sales increased 3.7% and average unit price decreased by 7.9% in the three months ended December 31, 2019 as compared to the same period in the prior fiscal year, resulting in a decrease in net sales of 4.6%. Unit sales increased 1.9% and average unit price decreased by 7.0% in the six months ended December 31, 2019 as compared to the same period in the prior fiscal year, resulting in a decrease in net sales of 5.2%. Average unit price decreased during three and six months ended December 31, 2019 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 and six months ended December 31, 2019 or 2018, which had a material impact on our net sales.

Gross Profit

Gross profit in the three months ended December 31, 2019 decreased $9.3 million, or 17.4%, to $44.0 million from $53.2 million in the three months ended December 31, 2018. Gross margin decreased to 28.8% in the three months ended December 31, 2019 from 33.3% in the three months ended December 31, 2018. Gross profit in the six months ended December 31, 2019 decreased $16.9 million, or 16.6%, to $84.6 million from $101.5 million in the six months ended December 31, 2018. Gross margin decreased to 29.1% in the six months ended December 31, 2019 from 33.0% in the six ended December 31, 2018.

The decrease in gross profit in the three and six months ended December 31, 2019 was primarily driven by lower net sales of $7.3 million and $16.1 million, respectively, and higher costs of goods sold. Cost of goods sold in the three months ended December 31, 2019 was 71.2% of net sales as compared 66.7% of net sales, in the three months ended December 31, 2018. Cost of goods sold in the six months ended December 31, 2019 was 70.9% of net sales as compared 67.0% of net sales,

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in the six months ended December 31, 2018. Margins were negatively impacted by unfavorable customer mix and higher write-down of slow moving inventories, partially offset by lower freight costs and the impact of coffee prices during the six months ended December 31, 2019.

Operating Expenses

In the three months ended December 31, 2019, operating expenses decreased $17.6 million, or 33.4%, to $35.1 million, or 23.0% of net sales, from $52.7 million, or 33.0% of net sales, in the three months ended December 31, 2018, primarily due to a $11.9 million increase in net gains from sales of assets, a $4.7 million decrease in selling expenses, $0.9 million decrease in general and administrative expenses and the absence of $0.2 million in restructuring and other transition expenses.

The decrease in selling expenses was primarily due to efficiencies realized from DSD route optimization. The decrease in general and administrative expenses was associated primarily with reductions in third party costs and the absence of Boyd Coffee integration costs, partially offset by higher employee incentive costs, proxy contest expenses and severance costs during the three months ended December 31, 2019. The three months ended December 31, 2018 includes a one–time credit for employees incentives costs.

Net gains from sales of assets in the three months ended December 31, 2019 were primarily associated with the sales of the Houston Property and four office branch properties for $7.3 million and $4.1 million, respectively.

In the six months ended December 31, 2019, operating expenses decreased $34.2 million, or 33.2%, to $68.9 million, or 23.7% of net sales, from $103.1 million, or 33.5% of net sales, in the six months ended December 31, 2018, primarily due to a $24.4 million increase in net gains from sales of assets, a $8.4 million decrease in selling expenses and the absence of $4.7 million in restructuring and other transition expenses, partially offset by a $3.2 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, proxy contest expenses and executive severance costs incurred during the six months ended December 31, 2019. The six months ended December 31, 2018 includes a one–time credit for employees incentives costs.

Net gains from sales of assets in the six months ended December 31, 2019 were primarily associated with the sales of the Houston Property, the office coffee assets and five office branch properties for $7.3 million, $7.2 million and $10.9 million, respectively.

Total Other Expense

Total other expense in the three months ended December 31, 2019 was $1.2 million compared to $13.3 million in the three months ended December 31, 2018. Total other expense in the six months ended December 31, 2019 was $3.5 million compared to $15.5 million in the six months ended December 31, 2018. The change in total other expense in the three and six months ended December 31, 2019 was primarily a result of;

•	the absence of pension settlement charge in the current period;

•	reduced employee post retirement benefit gains;

•	lower interest expense;

•	higher net gains on coffee-related derivative instruments in the three months ended December 31, 2019; and

•	lower net losses on coffee-related derivative instruments in the six months ended December 31, 2019.

The pension settlement charge incurred in the three and six months ended December 31, 2018 of $10.9 million was due to the termination of the Farmer Bros. Co. Pension Plan for Salaried Employees effective December 1, 2018.

Interest expense in the three months ended December 31, 2019 decreased $0.5 million to $2.9 million from $3.3 million in the prior year period. Interest expense in the six months ended December 31, 2019 decreased $0.8 million to $5.4 million from $6.2 million in the prior year period. The decrease in interest expense in the three and six months ended December 31, 2019 was principally due to lower pension interest expense and lower borrowings on our credit facility, partially offset by a $0.4 million of realized loss from the partial unwinding of our interest rate swap notional amount from $80.0 million to $65.0 million.

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Other, net in the three months ended December 31, 2019 increased by $0.7 million to $1.7 million compared to $1.0 million in the prior year period. Other, net in the six months ended December 31, 2019 increased by $0.3 million to $1.9 million compared to $1.6 million in the prior year period. The increase in Other, net was primarily a result of mark-to-market net gains on coffee-related derivative instruments not designated as accounting hedges in the three months ended December 31, 2019 compared same prior year period mark-to-market net losses. In the six months ended December 31, 2019, coffee-related derivative instruments not designated as accounting hedges was impacted by lower mark-to-market net losses compared same prior year period.

Income Taxes

In the three and six months ended December 31, 2019, we recorded income tax benefit of $0.1 million and $0.2 million, respectively, compared to $2.7 million and $4.0 million in the three and six months ended December 31, 2018, respectively. The lower tax benefit is primarily due to the previously recorded valuation allowance and change in our estimated deferred tax liability during the three and six months ended December 31, 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;

•	proxy related expenses;

•	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 income (loss) to EBITDA (unaudited): 

		Three Months Ended December 31,								Six Months Ended December 31,
(In thousands)		2019				2018				2019				2018
Net income (loss), as reported		$	7,754			$	(10,100	)		$	12,408			$	(13,086	)
Income tax expense (benefit)		(81		)		(2,725		)		(188		)		(4,012		)
Interest expense (1)		1,585				1,735				2,861				2,938
Depreciation and amortization expense		7,594				7,902				15,211				15,630
EBITDA		$	16,852			$	(3,188	)		$	30,292			$	1,470
EBITDA Margin		11.1		%		(2.0		)%		10.4		%		0.5		%

____________

(1) Excludes interest expense related to pension plans and postretirement benefits.

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

		Three Months Ended December 31,								Six Months Ended December 31,
(In thousands)		2019				2018				2019				2018
Net income (loss), as reported		$	7,754			$	(10,100	)		$	12,408			$	(13,086	)
Income tax expense (benefit)		(81		)		(2,725		)		(188		)		(4,012		)
Interest expense(1)		1,585				1,735				2,861				2,938
Depreciation and amortization expense		7,594				7,902				15,211				15,630
ESOP and share-based compensation expense		909				945				1,778				1,857
Restructuring and other transition expenses(2)		—				207				—				4,674
Net losses (gains) from sales of other assets		(11,057		)		804				(23,662		)		723
Proxy contest-related expenses		259				—				259				—
Acquisition and integration costs		—				2,727				—				3,738
Pension settlement charge		—				10,948				—				10,948
Severance		485				—				2,797				—
Adjusted EBITDA		$	7,448			$	12,443			$	11,464			$	23,410
Adjusted EBITDA Margin		4.9		%		7.8		%		3.9		%		7.6		%

____________

(1) Excludes interest expense related to pension plans and postretirement benefits.

(2) The six months ended December 31, 2018, includes $3.4 million, including interest, assessed by the WC Pension Trust representing the Company’s share of the Western Conference of Teamsters Pension Plan ("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:

December 31, 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

$

70,000

4.05

%

$

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 December 31, 2019, we were in compliance with all of the covenants under the Revolving Facility.

At January 31, 2020, we had outstanding borrowings of $80.0 million and utilized $2.0 million of the letters of credit sublimit under the Revolving Facility. The amount available to borrow is subject to a leverage covenant ratio as defined under the Revolving Facility agreement.

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 (as defined in the Revolving Credit Facility) must not exceed 3.5 to 1.0. The ratio of adjusted EBITDA (as defined in the Revolving Credit Facility) to consolidated interest expense must not be less than 3.0 to 1.0. As of December 31, 2019, we were in compliance with both financial covenants.

 

At December 31, 2019, we had $9.1 million in cash and cash equivalents. At December 31, 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:

	Six Months Ended December 31,
	2019				2018
Condensed Consolidated Statements of cash flows data (in thousands)
Net cash used in operating activities	$	(2,195	)		$	(5,646	)
Net cash provided (used) in investing activities	26,240				(23,015		)
Net cash (used) provided by financing activities	(21,898		)		39,556
Net increase in cash and cash equivalents	$	2,147			$	10,895

Operating Activities

Net cash used in operating activities was $2.2 million in the six months ended December 31, 2019 compared to net cash used in operating activities of $5.6 million in the six months ended December 31, 2018. The $3.5 million decrease in cash used was primarily attributable to a lower use of cash for working capital during the current fiscal period. Working capital during the six months ended December 31, 2019 was impacted by, among other items, lower inventory levels and improvement in trade accounts receivable collections, partially offset by decline in outstanding accounts payable balance.

Investing Activities

Net cash provided by investing activities during the six months ended December 31, 2019 was $26.2 million as compared to net cash used of $23.0 million in the six months ended December 31, 2018. The $49.3 million increase in cash provided from investment activities was principally due to the sales of assets during the current period resulting in net cash proceeds of $35.2 million. In addition, cash used for purchases of property, plant and equipment decreased $14.1 million primarily due to prior period including purchase of machinery and equipment for the Northlake, Texas plant expansion, and lower coffee brewing equipment purchases in the current year period.

Financing Activities

Net cash used in financing activities in the six months ended December 31, 2019 was $21.9 million as compared to net cash provided of $39.6 million in the six months ended December 31, 2018, a decrease of $61.5 million. Net cash used in financing activities in the six months ended December 31, 2019 included $22.0 million in net payments under our Revolving Facility compared to $40.2 million in net borrowings in the six months ended December 31, 2018.

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Capital Expenditures

For the three and six months ended December 31, 2019 and 2018, our capital expenditures paid were as follows:

		Three Months Ended December 31,								Six Months Ended December 31,
(In thousands)		2019				2018				2019				2018
Maintenance:
Coffee brewing equipment		$	1,990			$	4,805			$	4,135			$	8,922
Building and facilities		58				15				133				15
Vehicles, machinery and equipment		349				1,153				1,036				1,723
IT, software, office furniture and equipment		710				1,132				2,155				1,907
Capital expenditures, maintenance		$	3,107			$	7,105			$	7,459			$	12,567
Expansion Project:
Machinery and equipment		$	623			$	8,228			$	1,548			$	10,553
Capital expenditures, Expansion Project		$	623			$	8,228			$	1,548			$	10,553
Total capital expenditures		$	3,730			$	15,333			$	9,007			$	23,120

In fiscal year 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 expenses were $7.6 million and $7.9 million in the three months ended December 31, 2019 and 2018, respectively. Depreciation and amortization expense were $15.2 million and $15.6 million in the six months ended December 31, 2019 and 2018, respectively. We anticipate our depreciation and amortization expense will be approximately $7.3 million to $7.6 million per quarter in the remainder of fiscal year 2020 based on our existing fixed asset commitments and the useful lives of our intangible assets.

Commitments and Contingencies

As of December 31, 2019, we had committed to purchase green coffee inventory totaling $60.7 million under fixed-price contracts, $6.2 million in other inventory under non-cancelable purchase orders and $5.4 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 December 31, 2019, we were eligible to borrow up to a total of $150.0 million, subject to a leverage covenant ratio as defined under the Revolving Facility agreement and had outstanding borrowings of $70.0 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 December 31, 2019 was 4.05%.

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 December 31, 2019:

(In thousands)		Principal		Interest Rate			Annual Interest Expense
–150 basis points		$5,000		2.55	%		$	128
–100 basis points		$5,000		3.05	%		$	153
Unchanged		$5,000		4.05	%		$	203
+100 basis points		$5,000		5.05	%		$	253
+150 basis points		$5,000		5.55	%		$	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 December 31, 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)		$	161			$	(161	)		$	5,662			$	(5,662	)

__________

(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 December 31, 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 December 31, 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 December 31, 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 six months ended December 31, 2019, there have been no material changes to the risk factors disclosed in our 2019 Form 10‑K.

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).
10.58		Separation and Release Agreement by and between David Robson and Farmer Bros. Co. dated November 1, 2019 (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on November 7, 2019 and incorporated herein by reference).
10.59		Form of Indemnification Agreement for Directors and Officers of the Company, as adopted on December 8, 2017 (with updated schedule of indemnitees attached)(filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the SEC on November 7, 2019 and incorporated herein by reference).
10.60		Form of Change in Control Severance Agreement for Executive Officers of the Company (with updated schedule of executive officers attached). (filed as Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the SEC on November 7, 2019 and incorporated herein by reference).
10.61		Purchase and Sale Agreement, by and between Farmer Bros. Co., as Seller and Sage Interest, Inc., as Buyer (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on November 19, 2019 and incorporated herein by reference).
10.62*		Amendment No. 1 dated September 6, 2019 by and among Farmer Bros. Co., the Lenders party thereto and JPMorgan Chase Bank, N.A., as Administrative Agent, to that certain Amended and Restated Credit Agreement dated as of November 6, 2018.
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 December 31, 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)
			February 6, 2020
	By:		/s/ Scott Lyon
			Scott Lyon Corporate Controller (interim principal financial and accounting officer)
			February 6, 2020

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