NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Introduction and Basis of Presentation
Description of Business
Farmer Bros. Co., a Delaware corporation (including its consolidated subsidiaries unless the context otherwise requires, the “Company,” or “Farmer Bros.”), is a national coffee roaster, wholesaler and distributor of coffee, tea and culinary products. The Company serves a wide variety of customers, from small independent restaurants and foodservice operators to large institutional buyers like restaurant, department and convenience store chains, hotels, casinos, healthcare facilities, and gourmet coffee houses, as well as grocery chains with private brand and consumer-branded coffee and tea products, and foodservice distributors. The Company’s product categories consist of roast and ground coffee, frozen liquid coffee; flavored and unflavored iced and hot teas; culinary products; spices; and other beverages including cappuccino, cocoa, granitas, and concentrated and ready-to-drink cold brew and iced coffee. The Company was founded in 1912, incorporated in California in 1923, and reincorporated in Delaware in 2004. The Company's principal office and product development lab is located in Northlake, Texas ("Northlake facility"). The Company operates in one business segment.
The Company operates production facilities in Northlake, Texas; Houston, Texas; Portland, Oregon; and Hillsboro, Oregon. Distribution takes place out of the Northlake facility, the Portland and Hillsboro facilities, as well as separate distribution centers in Northlake, Illinois; and Moonachie, New Jersey.
The Company’s products reach its customers primarily in the following ways: through the Company’s nationwide direct-store-delivery or DSD network of 186 delivery routes and 97 branch warehouses as of June 30, 2020, or direct-shipped via common carriers or third-party distributors. The Company operates a large fleet of trucks and other vehicles to distribute and deliver its products through its DSD network, and relies on third-party logistic (“3PL”) service providers for its long-haul distribution. DSD sales are primarily made “off-truck” by the Company to its customers at their places of business.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Note 2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements are prepared in accordance with the generally accepted accounting principles in the United States (“GAAP”).
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its direct and indirect wholly owned subsidiaries. All inter-company balances and transactions have been eliminated.
Use of Estimates
The preparation of financial statements in accordance with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and the accompanying notes. The Company reviews its estimates on an ongoing basis using currently available information. Changes in facts and circumstances may result in revised estimates and actual results may differ from those estimates.
Cash Equivalents
The Company considers all highly liquid investments with original maturity dates of 90 days or less to be cash equivalents. Fair values of cash equivalents approximate cost due to the short period of time to maturity.
Allowance for doubtful accounts
A portion of our accounts receivable is not expected to be collected due to non-payment, bankruptcies and deductions. Our accounting policy for the allowance for doubtful accounts requires us to reserve an amount based on the evaluation of the aging of accounts receivable, detailed analysis of high-risk customers’ accounts, and the overall market and economic conditions of our customers. This evaluation considers the customer demographic, such as large commercial customers as compared to small businesses or individual customers. We consider our accounts receivable delinquent or past due based on payment terms established with each customer. Accounts receivable are written off when the account are determined to be uncollectible.
Investments
The Company’s investments, from time to time, consist of money market instruments, marketable debt, equity and hybrid securities. Investments are held for trading purposes and stated at fair value. The cost of investments sold is determined on the specific identification method. Dividend and interest income are accrued as earned.
Fair Value Measurements
The Company groups its assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:
•Level 1—Valuation is based upon quoted prices for identical instruments traded in active markets.
•Level 2—Valuation is based upon inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly (i.e. interest rate and yield curves observable at commonly quoted intervals, default rates, etc.). Observable inputs include quoted prices for similar instruments in active and non-active markets. Level 2 includes those financial instruments that are valued with industry standard valuation models that incorporate inputs that are observable in the marketplace throughout the full term of the instrument, or can otherwise be derived from or supported by observable market data in the marketplace. Level 2 inputs may also include insignificant adjustments to market observable inputs.
•Level 3—Valuation is based upon one or more unobservable inputs that are significant in establishing a fair value estimate. These unobservable inputs are used to the extent relevant observable inputs are not available and are developed based on the best information available. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Securities with quotes that are based on actual trades or actionable bids and offers with a sufficient level of activity on or near the measurement date are classified as Level 1. Securities that are priced using quotes derived from implied values, indicative bids and offers, or a limited number of actual trades, or the same information for securities that are similar in many respects to those being valued, are classified as Level 2. If market information is not available for securities being valued, or materially-comparable securities, then those securities are classified as Level 3. In considering market information, management evaluates changes in liquidity, willingness of a broker to execute at the quoted price, the depth and consistency of prices from pricing services, and the existence of observable trades in the market.
Derivative Instruments
The Company executes various derivative instruments to hedge its commodity price and interest rate risks. These derivative instruments consist primarily of forward, option and swap contracts. The Company reports the fair value of derivative instruments on its consolidated balance sheets in “Short-term derivative assets,” “Long-term derivative assets,” “Short-term derivative liabilities,” or “Other long-term liabilities.” The Company determines the current and noncurrent classification based on the timing of expected future cash flows of individual trades and reports these amounts on a gross basis. Additionally, the Company reports, if any, cash held on deposit in margin accounts for coffee-related derivative instruments on a gross basis on its consolidated balance sheet in “Restricted cash.”
The accounting for the changes in fair value of the Company's derivative instruments can be summarized as follows:
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Derivative Treatment
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Accounting Method
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Normal purchases and normal sales exception
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Accrual accounting
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Designated in a qualifying hedging relationship
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Hedge accounting
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All other derivative instruments
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Mark-to-market accounting
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The Company enters into green coffee purchase commitments at a fixed price or at a price to be fixed (“PTF”). PTF contracts are purchase commitments whereby the quality, quantity, delivery period, price differential to the coffee “C” market price and other negotiated terms are agreed upon, but the date, and therefore the price at which the base “C” market price will be fixed has not yet been established. The coffee “C” market price is fixed at some point after the purchase contract date and before the futures market closes for the delivery month and may be fixed either at the direction of the Company to the vendor, or by the application of a derivative that was separately purchased as a hedge. For both fixed-price and PTF contracts, the Company expects to take delivery of and to utilize the coffee in a reasonable period of time and in the conduct of normal business. Accordingly, these purchase commitments qualify as normal purchases and are not recorded at fair value on the Company's consolidated balance sheets.
The Company follows the guidelines of Accounting Standards Codification (“ASC”) 815, “Derivatives and Hedging” (“ASC 815”), to account for certain coffee-related derivative instruments as accounting hedges, in order to minimize the volatility created in the Company's quarterly results from utilizing these derivative instruments and to improve comparability between reporting periods. For a derivative to qualify for designation in a hedging relationship, it must meet specific criteria and the Company must maintain appropriate documentation. The Company establishes hedging relationships pursuant to its risk management policies. The hedging relationships are evaluated at inception and on an ongoing basis to determine whether the hedging relationship is, and is expected to remain, highly effective in achieving offsetting changes in fair value or cash flows attributable to the underlying risk being hedged. The Company also regularly assesses whether the hedged forecasted transaction is probable of occurring. If a derivative ceases to be or is no longer expected to be highly effective, or if the Company believes the likelihood of occurrence of the hedged forecasted transaction is no longer probable, hedge accounting is discontinued for that derivative, and future changes in the fair value of that derivative are recognized in “Other, net.”
For coffee-related derivative instruments designated as cash flow hedges, the change in fair value of the derivative is reported as accumulated other comprehensive income (loss) (“AOCI”) and subsequently reclassified into cost of goods sold in the period or periods when the hedged transaction affects earnings. Gains or losses deferred in AOCI associated with terminated derivative instruments, derivative instruments that cease to be highly effective hedges, derivative instruments for which the forecasted transaction is reasonably possible but no longer probable of occurring, and cash flow hedges that have been otherwise discontinued remain in AOCI until the hedged item affects earnings. If it becomes probable that the forecasted transaction designated as the hedged item in a cash flow hedge will not occur, any gain or loss deferred in AOCI is recognized in “Other, net” at that time. For derivative instruments that are not designated in a hedging relationship, and for which the normal purchases and normal sales exception has not been elected, the changes in fair value are reported in “Other, net.” See Note 8.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
For interest rate swap derivative instrument designated as a cash flow hedge, the change in fair value of the derivative is reported as AOCI and subsequently reclassified into interest expense in the period or periods when the hedged transaction affects earnings.
Concentration of Credit Risk
At June 30, 2020, the financial instruments which potentially expose the Company to concentration of credit risk consist of cash in financial institutions (in excess of federally insured limits), derivative instruments and trade receivables.
The Company does not have any credit-risk related contingent features that would require it to post additional collateral in support of its net derivative liability positions. At June 30, 2020 and 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 39% and 28% of the Company’s trade accounts receivable balance was with five customers at June 30, 2020 and 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.
Inventories
Inventories are valued at the lower of cost or net realizable value. Effective June 30, 2018, the Company changed its method of accounting for coffee, tea and culinary products from the last in, first out (“LIFO”) basis to the first in, first out ("FIFO") basis. The impact of this change in accounting principle has been reflected through retrospective application to the financial statements for each period presented. The Company continues to account for coffee brewing equipment parts on a FIFO basis. The Company regularly evaluates these inventories to determine the provision for obsolete and slow-moving inventory. Inventory reserves are based on inventory obsolescence trends, historical experience and application of specific identification.
Property, Plant and Equipment
Property, plant and equipment is carried at cost, less accumulated depreciation. Depreciation is computed using the straight-line method. The following useful lives are used:
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Buildings and facilities
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10 to 30 years
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Machinery and equipment
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3 to 15 years
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Equipment under finance leases
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Shorter of term of lease or estimated useful life
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Office furniture and equipment
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5 to 7 years
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Capitalized software
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3 to 5 years
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Leasehold improvements are depreciated on a straight-line basis over the lesser of the estimated useful life of the asset or the remaining lease term. When assets are sold or retired, the asset and related accumulated depreciation are removed from the respective account balances and any gain or loss on disposal is included in operations. Maintenance and repairs are charged to expense, and enhancements are capitalized.
Coffee Brewing Equipment and Service
The Company capitalizes coffee brewing equipment and depreciates it over five years and reports the depreciation expense in cost of goods sold. Other non-depreciation expenses related to coffee brewing equipment provided to customers, such as the cost of servicing that equipment (including service employees’ salaries, cost of transportation and the cost of supplies and parts), are considered directly attributable to the generation of revenues from the customers. These non-depreciation expenses are also included in cost of goods sold. See Note 11 for details of the depreciation amounts and non-depreciation expenses.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
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 8 years, some of which have options to extend the lease for up to an additional 10 years. For purposes of calculating operating lease liabilities, lease terms are deemed not to include options to extend the lease renewals 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.
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.
Income Taxes
Deferred income taxes are determined based on the temporary differences between the financial reporting and tax bases of assets and liabilities using enacted tax rates in effect for the year in which differences are expected to reverse. Estimating the Company’s tax liabilities involves judgments related to uncertainties in the application of complex tax regulations. The Company makes certain estimates and judgments to determine tax expense for financial statement purposes as it evaluates the effect of tax credits, tax benefits and deductions, some of which result from differences in the timing of recognition of revenue or expense for tax and financial statement purposes. Changes to these estimates may result in significant changes to the Company’s tax provision in future periods. Each fiscal quarter the Company re-evaluates its tax provision and reconsiders its estimates and assumptions related to specific tax assets and liabilities, making adjustments as circumstances change.
Deferred Tax Asset Valuation Allowance
The Company evaluates its deferred tax assets quarterly to determine if a valuation allowance is required and considers whether a valuation allowance should be recorded against deferred tax assets based on the likelihood that the benefits of the deferred tax assets will or will not ultimately be realized in future periods. In making this assessment, significant weight is given to evidence that can be objectively verified, such as recent operating results, and less consideration is given to less objective indicators, such as future income projections. After consideration of positive and negative evidence, if the Company determines that it is more likely than not that it will generate future income sufficient to realize its deferred tax assets, the Company will record a reduction in the valuation allowance.
Revenue Recognition
The Company recognizes revenue in accordance with the way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. The Company performs the following steps to determine revenue recognition for an arrangement: (1) identify the contract(s) with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when (or as) the performance obligations are satisfied.
Net (Loss) Income Per Common Share
Net (loss) income per share (“EPS”) represents net (loss) income available to common stockholders divided by the weighted-average number of common shares outstanding for the period, excluding unallocated shares held by the Company's
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Employee Stock Ownership Plan (“ESOP”). Dividends on the Company's outstanding Series A Convertible Participating Cumulative Perpetual Preferred Stock, par value $1.00 per share ("Series A Preferred Stock"), that the Company has paid or intends to pay are deducted from net (loss) income in computing net (loss) income available to common stockholders.
Under the two-class method, net (loss) income available to nonvested restricted stockholders and holders of Series A Preferred Stock is excluded from net (loss) income available to common stockholders for purposes of calculating basic and diluted EPS.
Diluted EPS represents net income available to holders of common stock divided by the weighted-average number of common shares outstanding, inclusive of the dilutive impact of common equivalent shares outstanding during the period. Common equivalent shares include potentially dilutive shares from share-based compensation including stock options, unvested restricted stock, performance-based restricted stock units, and shares of Series A Preferred Stock, as converted, because they are deemed participating securities. In the absence of contrary information, the Company assumes 100% of the target shares are issuable under performance-based restricted stock units.
The dilutive effect of Series A Preferred Stock is reflected in diluted EPS by application of the if-converted method. In applying the if-converted method, conversion will not be assumed for purposes of computing diluted EPS if the effect would be anti-dilutive. The Series A Preferred Stock is antidilutive whenever the amount of the dividend declared or accumulated in the current period per common share obtainable upon conversion exceeds basic EPS.
Employee Stock Ownership Plan
Compensation cost for the ESOP is based on the fair market value of shares released or deemed to be released to employees in the period in which they are committed. As a leveraged ESOP with the Company as lender, a contra equity account is established to offset the Company’s note receivable. The contra account will change as compensation expense is recognized. The cost of shares purchased by the ESOP which have not been committed to be released or allocated to participants are shown as a contra-equity account “Unearned ESOP Shares” and are excluded from EPS calculations.
On December 31, 2018, the Company froze the ESOP such that (i) no employees of the Company may commence participation in the ESOP on or after December 31, 2018; (ii) no Company contributions will be made to the ESOP with respect to services performed or compensation received after December 31, 2018; and (iii) the ESOP accounts of all individuals who are actively employed by the Company and participating in the ESOP on December 31, 2018 will be fully vested as of such date. Additionally, the Administrative Committee, with the consent of the Board of Directors, designated certain employees who were terminated in connection with certain reductions-in-force in 2018 to be fully vested in their ESOP accounts as of their severance dates.
Effective January 1, 2019, the Company amended and restated its 401(k) Plan to, among other things, provide for annual contribution of shares of the Company’s common stock equal to 4% of each eligible participant’s annual plan compensation. See Note 13 for details.
Share-based Compensation
The Company measures all share-based compensation cost at the grant date, based on the fair values of the awards that are ultimately expected to vest, and recognizes that cost as an expense on a straight line-basis in its consolidated statements of operations over the requisite service period. Fair value of restricted stock and performance-based restricted stock units is the closing price of the Company's common stock on the date of grant. The Company estimates the fair value of option awards using the Black-Scholes option valuation model, which requires management to make certain assumptions for estimating the fair value of stock options at the date of grant.
In addition, the Company estimates the expected impact of forfeited awards and recognizes share-based compensation cost only for those awards ultimately expected to vest. If actual forfeiture rates differ materially from the Company’s estimates, share-based compensation expense could differ significantly from the amounts the Company has recorded in the current period. The Company periodically reviews actual forfeiture experience and will revise its estimates, as necessary. The Company will recognize as compensation cost the cumulative effect of the change in estimated forfeiture rates on current and prior periods in earnings of the period of revision. As a result, if the Company revises its assumptions and estimates, the Company’s share-based compensation expense could change materially in the future.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
The Company's outstanding share-based awards include performance-based non-qualified stock options ("PNQs") and performance-based restricted stock units ("PBRSUs") that have performance-based vesting conditions in addition to time-based vesting. Awards with performance-based vesting conditions require the achievement of certain financial and other performance criteria as a condition to the vesting. The Company recognizes the estimated fair value of performance-based awards, net of estimated forfeitures, as share-based compensation expense over the service period based upon the Company’s determination of whether it is probable that the performance targets will be achieved. At each reporting period, the Company reassesses the probability of achieving the performance criteria and the performance period required to meet those targets. Determining whether the performance criteria will be achieved involves judgment, and the estimate of share-based compensation expense may be revised periodically based on changes in the probability of achieving the performance criteria. Revisions are reflected in the period in which the estimate is changed. If performance goals are not met, no share-based compensation expense is recognized for the cancelled PNQs or PBRSUs, and, to the extent share-based compensation expense was previously recognized for those cancelled PNQs or PBRSUs, such share-based compensation expense is reversed. If performance goals are exceeded and the payout is more than 100% of the target shares in the case of PBRSUs, additional compensation expense is recorded in the period when that determination is certified by the Compensation Committee of the Board of Directors.
Impairment of Goodwill and Indefinite-lived Intangible Assets
The Company accounts for its goodwill and indefinite-lived intangible assets in accordance with Accounting Standards Codification ("ASC") 350, “Intangibles-Goodwill and Other” (“ASC 350”). Goodwill and other indefinite-lived intangible assets are not amortized but instead are reviewed for impairment annually, or more frequently if an event occurs or circumstances change which indicate that an asset might be impaired. Pursuant to ASC 350, the Company performs a qualitative assessment of goodwill and indefinite-lived intangible assets on its consolidated balance sheets, to determine if there is a more likely than not indication that its goodwill and indefinite-lived intangible assets are impaired as of January 31. If the indicators of impairment are present, the Company performs a quantitative assessment to determine the impairment of these assets as of the measurement date. See Note 12 for details of the goodwill and indefinite-lived intangible assets impairment test.
The Company test for impairment of goodwill by comparing the fair value of its reporting units to the carrying value of the reporting units. If the fair value of a reporting unit is less than its carrying value, an impairment loss is recognized equal to the excess of the carrying amount of the reporting unit over its fair value.
Indefinite-lived intangible assets consist of certain acquired trademarks, trade names and a brand name. Indefinite-lived intangible assets are tested for impairment by comparing their fair values to their carrying values. An impairment charge is recorded if the estimated fair value of such assets has decreased below their carrying values.
Other Intangible Assets
Other intangible assets consist of finite-lived intangible assets including acquired recipes, non-compete agreements, customer relationships, a trade name/brand name and certain trademarks. These assets are amortized over their estimated useful lives and are tested for impairment by grouping them with other assets at the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities. The estimated future cash flows are based upon, among other things, assumptions about expected future operating performance, and may differ from actual cash flows. If the sum of the projected undiscounted cash flows (excluding interest) is less than the carrying value of the assets, the assets will be written down to the estimated fair value in the period in which the determination is made. The Company reviews the recoverability of its finite-lived intangible assets whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable.
Shipping and Handling Costs
The Company’s shipping and handling costs are included in both cost of goods sold and selling expenses, depending on the nature of such costs. Shipping and handling costs included in cost of goods sold reflect inbound freight of raw materials and finished goods, and product loading and handling costs at the Company’s production facilities to the distribution centers and branches. Shipping and handling costs included in selling expenses consist primarily of those costs associated with moving finished goods to customers. Shipping and handling costs that were recorded as a component of the Company's selling expenses were $9.8 million, $11.4 million and $11.9 million, respectively, in the fiscal years ended June 30, 2020, 2019 and 2018.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Collective Bargaining Agreements
Certain Company employees are subject to collective bargaining agreements which expire on or before January 31, 2025. At June 30, 2020 approximately 19% of the Company's workforce was covered by such agreements.
Self-Insurance
The Company uses a combination of insurance and self-insurance mechanisms to provide for the potential liability of certain risks including workers’ compensation, health care benefits, general liability, product liability, property insurance and director and officers’ liability insurance. Liabilities associated with risks retained by the Company are not discounted and are estimated by considering historical claims experience, demographics, exposure and severity factors and other actuarial assumptions.
The Company's self-insurance for workers’ compensation liability includes estimated outstanding losses of unpaid claims, and allocated loss adjustment expenses (“ALAE”), case reserves, the development of known claims and incurred but not reported claims. ALAE are the direct expenses for settling specific claims. The amounts reflect per occurrence and annual aggregate limits maintained by the Company. The estimated liability analysis does not include estimating a provision for unallocated loss adjustment expenses.
The estimated gross undiscounted workers’ compensation liability relating to such claims was $5.2 million and $5.4 million, as of June 30, 2020 and 2019, respectively and the estimated recovery from reinsurance was $0.8 million for both periods. The short-term and long-term accrued liabilities for workers’ compensation claims are presented on the Company's consolidated balance sheets in “Other current liabilities” and in “Accrued workers' compensation liabilities,” respectively. The estimated insurance receivable is included in “Other assets” on the Company's consolidated balance sheets.
At June 30, 2020 the Company had posted $1.5 million in cash and a $2.3 million letter of credit, and at June 30, 2019 the Company had posted $1.4 million in cash and a $2.3 million letter of credit, as a security deposit for self-insuring workers’ compensation, general liability and auto insurance coverages.
The estimated liability related to the Company's self-insured group medical insurance was $0.9 million in each of the years ended June 30, 2020 and 2019, recorded on an incurred but not reported basis, within deductible limits, based on actual claims and the average lag time between the date insurance claims are filed and the date those claims are paid.
The Company accrues the cost for general liability, product liability and commercial auto liability insurance based on estimates of the aggregate liability claims incurred using certain actuarial assumptions and historical claims experience. The Company's liability reserve for such claims was $1.6 million and $1.8 million at June 30, 2020 and 2019, respectively. The estimated liability related to the Company's self-insured group medical insurance, general liability, product liability and commercial auto liability is included on the Company's consolidated balance sheets in “Other current liabilities.”
Pension Plans
The Company’s defined benefit pension plans are not admitting new participants, therefore, changes to pension liabilities are primarily due to market fluctuations of investments for existing participants and changes in interest rates. The Company’s defined benefit pension plans are accounted for using the guidance of ASC 710, “Compensation—General“ and ASC 715, “Compensation-Retirement Benefits“ and are measured as of the end of the fiscal year.
The Company recognizes the overfunded or underfunded status of a defined benefit pension as an asset or liability on its consolidated balance sheets. Changes in the funded status are recognized through AOCI, in the year in which the changes occur. See Note 13.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Business Combinations
The Company accounts for business combinations under the acquisition method of accounting. The purchase price of each business acquired is allocated to the tangible and intangible assets acquired and the liabilities assumed based on information regarding their respective fair values on the date of acquisition. Any excess of the purchase price over the fair value of the separately identifiable assets acquired and the liabilities assumed is allocated to goodwill. Management determines the fair values used in purchase price allocations for intangible assets based on historical data, estimated discounted future cash flows, and expected royalty rates for trademarks and trade names, as well as certain other information. The valuation of assets acquired and liabilities assumed requires a number of judgments and is subject to revision as additional information about the fair value of assets and liabilities becomes available. Additional information, which existed as of the acquisition date but unknown to the Company at that time, may become known during the remainder of the measurement period, a period not to exceed twelve months from the acquisition date. Adjustments in the purchase price allocation may require a recasting of the amounts allocated to goodwill and intangible assets. If such an adjustment is required, the Company will recognize a measurement-period adjustment during the period in which it determines the amount of the adjustment, including the effect on earnings of any amounts it would have recorded in previous periods if the accounting had been completed at the acquisition date. Transaction costs, including legal, accounting and integration expenses, are expensed as incurred and are included in operating expenses in the Company's consolidated statements of operations. Contingent consideration, such as earnout, is deferred as a short-term or long-term liability based on an estimate of the timing of the future payment. These contingent consideration liabilities are recorded at fair value on the acquisition date and are re-measured quarterly based on the then assessed fair value and adjusted if necessary. The results of operations of businesses acquired are included in the Company's consolidated financial statements from their dates of acquisition.
Restructuring Plans
The Company accounts for exit or disposal of activities in accordance with ASC 420, “Exit or Disposal Cost Obligations.“ The Company defines a business restructuring as an exit or disposal activity that includes but is not limited to a program which is planned and controlled by management and materially changes either the scope of a business or the manner in which that business is conducted. Business restructuring charges may include (i) one-time termination benefits related to employee separations, (ii) contract termination costs and (iii) other related costs associated with exit or disposal activities.
A liability is recognized and measured at its fair value for one-time termination benefits once the plan of termination is communicated to affected employees and it meets all of the following criteria: (i) management commits to a plan of termination, (ii) the plan identifies the number of employees to be terminated and their job classifications or functions, locations and the expected completion date, (iii) the plan establishes the terms of the benefit arrangement and (iv) it is unlikely that significant changes to the plan will be made or the plan will be withdrawn. Contract termination costs include costs to terminate a contract or costs that will continue to be incurred under the contract without benefit to the Company. A liability is recognized and measured at its fair value when the Company either terminates the contract or ceases using the rights conveyed by the contract.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
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:
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Standard
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Description
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Effective Date
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Effect on the Financial Statements or Other Significant Matters
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In March 2020, the FASB issued ASU No. 2020-04, “Facilitation of the Effect of Reference Rate Reform on Financial Reporting” (“ASU 2020-04”).
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The London Interbank Offered Rate (LIBOR) is set to expire at the end of 2021. Contracts affected by the rate change would be required to be modified. Under current U.S. GAAP, those modifications would have to be evaluated to determine whether they result in new contracts or continuation of the existing contracts. ASU 2020-04 provides temporary optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships, and other transactions affected by the transition from LIBOR to alternative reference rate.
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Issuance date of March 12, 2020 through December 31, 2022.
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The Company is currently evaluating the impact ASU 2020-04 will have on its consolidated financial statements.
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In December 2019, the FASB issued ASU 2019-12, "Simplifying the Accounting for Income Taxes" ("ASU 2019-12").
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ASU 2019-12 guidance simplifies the accounting for income taxes by removing the exception to the incremental approach for intraperiod tax allocation when there is a loss from continuing operations and income or a gain from other items (for example, discontinued operations or other comprehensive income). With the removal of this exception, entities will determine the tax effect of pre-tax income or loss from continuing operations without consideration of the tax effects of other items that are not included in continuing operations.
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Annual periods beginning after December 15, 2020, and interim periods within those fiscal years. Early adoption is permitted, including adoption in any interim period.
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The Company is currently evaluating the impact ASU 2019-12 will have on its consolidated financial statements.
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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.
|
|
The Company will adopt the new guidance effective July 1, 2020, on a prospective basis, which will not require the Company to adjust comparative periods. Adoption of ASU 2018-15 will not have a material impact on the results of operations, financial position or cash flows of the Company.
|
|
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.
|
|
|
|
|
|
|
|
|
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
|
|
|
|
|
|
|
|
|
|
|
Standard
|
|
Description
|
|
Effective Date
|
|
Effect on the Financial Statements or Other Significant Matters
|
|
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.
|
|
The Company adopted the new guidance effective January 1, 2020, on a prospective basis, which did not require the Company to adjust comparative periods. Adoption of ASU 2017-04 did not have a material impact 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.
|
|
The Company will adopt the guidance effective beginning July 1, 2020. The Company has completed its assessment of the guidance and has concluded that it will not have a material impact on its 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 7 for the applicable disclosure of ASU 2016-02 adoption. .
|
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 expedients; 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 7 for detail disclosure.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Note 3. Acquisitions
Boyd Coffee Company
On October 2, 2017 (“Closing Date”), the Company acquired substantially all of the assets and certain specified liabilities of Boyd Coffee, a coffee roaster and distributor with a focus on restaurants, hotels, and convenience stores on the West Coast of the United States. The acquired business of Boyd Coffee (the “Boyd Business”) is expected to add to the Company’s product portfolio, improve the Company's growth potential, deepen the Company’s distribution footprint and increase the Company's capacity utilization at its production facilities.
At closing, as consideration for the purchase, the Company paid the Seller $38.9 million in cash from borrowings under its senior secured revolving credit facility, and issued to Boyd Coffee 14,700 shares of the Company’s Series A Preferred Stock Convertible Participating Cumulative Perpetual Preferred Stock, par value $1.00 per share (“Series A Preferred Stock”), with a fair value of $11.8 million as of the Closing Date. Additionally, the Company held back $3.2 million in cash (“Holdback Cash Amount”) and 6,300 shares of Series A Preferred Stock (“Holdback Stock”) with a fair value of $4.8 million as of the Closing Date, for the satisfaction of any post-closing net working capital adjustment and to secure the Seller’s (and the other seller parties’) indemnification obligations under the purchase agreement.
In addition to the Holdback Cash, as part of the consideration for the purchase, at closing the Company held back $1.1 million in cash (the “Multiemployer Plan Holdback”) to pay, on behalf of the Seller, any assessment of withdrawal liability made against the Seller following the Closing Date in respect of the Seller’s multiemployer pension plan, which amount was recorded on the Company's consolidated balance sheet in "Other long-term liabilities" at June 30, 2018. On January 8, 2019, the Seller notified the Company of the assessment of $0.5 million in withdrawal liability against the Seller, which the Company timely paid from the Multiemployer Plan Holdback during the twelve months ended June 30, 2019. The Company has applied the remaining amount of the Multiemployer Plan Holdback of $0.5 million towards satisfaction of the Seller's post-closing net working capital deficiency under the Asset Purchase Agreement as of March 31, 2019 as described below.
The acquisition was accounted for as a business combination. The fair value of consideration transferred was allocated to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values on the acquisition date, with the remaining unallocated amount recorded as goodwill. The fair value of consideration transferred reflected the Company’s best estimate of the post-closing net working capital adjustment of $8.1 million due to the Company at June 30, 2018 when the purchase price allocation was finalized. On January 23, 2019, PricewaterhouseCoopers LLP (“PwC”), as the “Independent Expert” designated under the Asset Purchase Agreement to resolve working capital disputes, issued its determination letter with respect to adjustments to working capital. The post-closing net working capital adjustment, as determined by the Independent Expert, was $6.3 million due to the Company.
During the year ended June 30, 2019 and updated as of June 30, 2020, the Company satisfied the $6.3 million amount by applying the remaining amount of the Multiemployer Plan Holdback of $0.5 million, retaining all of the Holdback Cash Amount of $3.2 million and canceling 5,386 shares of Holdback Stock with a fair value of $2.6 million based on the stated value and deemed conversion price under the Asset Purchase Agreement. The Company has retained the remaining 914 shares of the Holdback Stock pending satisfaction of certain indemnification claims against the Seller following which the remaining Holdback Stock, if any, will be released to the Seller.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
The following table summarizes the final allocation of consideration transferred as of the acquisition date:
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Fair Value
|
|
Estimated
Useful Life
(years)
|
|
|
|
|
|
|
Cash paid
|
$
|
38,871
|
|
|
|
|
Holdback Cash Amount
|
3,150
|
|
|
|
|
Multiemployer Plan Holdback
|
1,056
|
|
|
|
|
Fair value of Series A Preferred Stock (14,700 shares)(1)
|
11,756
|
|
|
|
|
Fair value of Holdback Stock (6,300 shares)(1)
|
4,825
|
|
|
|
|
Estimated post-closing net working capital adjustment
|
(8,059
|
)
|
|
|
|
Total consideration
|
$
|
51,599
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
$
|
7,503
|
|
|
|
|
Inventory
|
9,415
|
|
|
|
|
Prepaid expense and other assets
|
1,951
|
|
|
|
|
Property, plant and equipment
|
4,936
|
|
|
|
|
Goodwill
|
25,395
|
|
|
|
|
Intangible assets:
|
|
|
|
|
Customer relationships
|
16,000
|
|
|
10
|
|
Trade name/trademark—indefinite-lived
|
3,100
|
|
|
|
|
Accounts payable
|
(15,080
|
)
|
|
|
|
Other liabilities
|
(1,621
|
)
|
|
|
|
Total consideration
|
$
|
51,599
|
|
|
|
______________
(1) Fair value of Series A Preferred Stock and Holdback Stock as of the Closing Date, estimated as the sum of (a) the present value of the dividends payable thereon and (b) the stated value of the Series A Preferred Stock or Holdback Stock, as the case may be, adjusted for both the conversion premium and the discount for lack of marketability arising from conversion restrictions.
In connection with this acquisition, the Company recorded goodwill of $25.4 million, which is deductible for tax purposes. The Company also recorded $16.0 million in finite-lived intangible assets that included customer relationships and $3.1 million in indefinite-lived intangible assets that included a trade name/trademark. The amortization period for the finite-lived intangible assets is 10.0 years. The purchase price allocation is final. The goodwill amount was impaired and written-off in fiscal year ended June 30, 2020. See Note 12 for further details.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
The following table presents the net sales and income before taxes from the Boyd Business operations that are included in the Company’s consolidated statements of operations for the fiscal year ended June 30, 2018:
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
For the Year Ended June 30,
|
|
|
|
2018
|
|
Net sales
|
|
$
|
67,385
|
|
|
Income before taxes
|
|
$
|
1,572
|
|
The Company considers the acquisition to be material to the Company’s consolidated financial statements and has provided certain pro forma disclosures pursuant to ASC 805, “Business Combinations.”
The following table sets forth certain unaudited pro forma financial results for the Company for the fiscal years ended June 30, 2018, as if the acquisition of the Boyd Business was consummated on the same terms as of the first day of the applicable fiscal year.
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended June 30,
|
|
(In thousands)
|
|
|
2018
|
|
Net sales
|
|
|
$
|
628,526
|
|
|
(Loss) income before taxes
|
|
|
$
|
(642
|
)
|
The unaudited pro forma financial results for the Company are based on estimates and assumptions, which the Company believes are reasonable. These results are not necessarily indicative of the Company’s consolidated statements of operations in future periods or the results that actually would have been realized had the Company acquired the Boyd Business during the periods presented.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Note 4. Restructuring Plans
DSD Restructuring Plan
On February 21, 2017, the Company announced the DSD Restructuring Plan to reorganize its DSD operations in an effort to realign functions into a channel-based selling organization, streamline operations, acquire certain channel specific expertise, and improve selling effectiveness and financial results. The strategic decision to undertake the DSD Restructuring Plan resulted from an ongoing operational review of various initiatives within the DSD selling organization. The Company had revised its estimated time of completion of the DSD Restructuring Plan from the end of calendar 2018 to the end of fiscal 2019.
The Company recognized approximately $4.5 million of pre-tax restructuring charges by the end of fiscal 2020 consisting of approximately $2.6 million in employee-related costs and contractual termination payments, including severance, prorated bonuses for bonus eligible employees and outplacement services, and $1.9 million in other related costs, including legal, recruiting, consulting, other professional services, and travel.
The following table sets forth the activity in liabilities associated with the DSD Restructuring Plan from the time of adoption through the fiscal year ended June 30, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Balances as of
June 30, 2017
|
|
Additions
|
|
Payments
|
|
Non-Cash Settled
|
|
Adjustments
|
|
Balances as of
June 30, 2020
|
|
Employee-related costs
|
$
|
—
|
|
|
$
|
2,634
|
|
|
$
|
2,634
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Other
|
—
|
|
|
1,949
|
|
|
1,949
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Total
|
$
|
—
|
|
|
$
|
4,583
|
|
|
$
|
4,583
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
The following table sets forth the expenses associated with the DSD Restructuring Plan for the fiscal years ended June 30, 2020, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
(In thousands)
|
2020
|
|
2019
|
|
2018
|
|
Employee-related costs
|
$
|
30
|
|
|
$
|
1,487
|
|
|
$
|
612
|
|
|
Other
|
—
|
|
|
284
|
|
|
429
|
|
|
Total
|
$
|
30
|
|
|
$
|
1,771
|
|
|
$
|
1,041
|
|
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Note 5. Sales of Assets
Sale of Office Coffee Assets
In order to focus on its core product offerings, in July 2019, the Company completed the sale of certain assets associated with its office coffee customers for $9.3 million in cash paid at the time of closing plus an earnout of up to an additional $2.3 million if revenue expectations were achieved during test periods scheduled to occur at various branches at various times and concluded by early third quarter of fiscal year 2020. The earnout of up to an additional $2.3 million was not paid to the Company because the revenue expectations were not achieved. The Company recognized a net gain on the asset sales of $7.2 million during the fiscal year ended June 30, 2020. The sale of office coffee assets did not represent a strategic shift for the Company and did not have a material impact on the Company's results of operations because the Company signed a supply agreement to provide certain coffee products to the assets purchaser.
Sale of Branch Properties
During the fiscal year ended June 30, 2020, the Company completed the sale of nine branch properties and entered into two operating lease agreements with the purchasers of two of the branch properties as detailed in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name of Branch Property
|
|
Date Sold
|
|
Sales Price
|
|
Net Proceed
|
|
Gain (loss)
|
|
Long-Term Leaseback
|
|
Lease Term
|
|
Monthly Base Rent
|
|
Seattle, Washington
|
|
8/28/2019
|
|
$
|
7,900
|
|
|
$
|
7,300
|
|
|
$
|
6,800
|
|
|
No
|
|
N/A
|
|
N/A
|
|
Indianapolis, Indiana
|
|
11/19/2019
|
|
$
|
250
|
|
|
$
|
186
|
|
|
$
|
(173
|
)
|
|
No
|
|
N/A
|
|
N/A
|
|
Hayward, California(1)
|
|
12/23/2019
|
|
$
|
7,050
|
|
|
$
|
6,569
|
|
|
$
|
2,016
|
|
|
Yes
|
|
5 years
|
|
$
|
28
|
|
|
Denver, Colorado(1)
|
|
12/31/2019
|
|
$
|
2,300
|
|
|
$
|
2,075
|
|
|
$
|
1,989
|
|
|
Yes
|
|
7 years
|
|
$
|
17
|
|
|
Casper, Wyoming
|
|
12/31/2019
|
|
$
|
385
|
|
|
$
|
355
|
|
|
$
|
304
|
|
|
No
|
|
N/A
|
|
N/A
|
|
Tempe, Arizona
|
|
1/28/2020
|
|
$
|
1,150
|
|
|
$
|
1,077
|
|
|
$
|
841
|
|
|
No
|
|
N/A
|
|
N/A
|
|
Great Falls, Montana
|
|
2/28/2020
|
|
$
|
385
|
|
|
$
|
356
|
|
|
$
|
283
|
|
|
No
|
|
N/A
|
|
N/A
|
|
Fort Collins, Colorado
|
|
6/24/2020
|
|
$
|
1,275
|
|
|
$
|
1,179
|
|
|
$
|
1,112
|
|
|
No
|
|
N/A
|
|
N/A
|
|
Oxnard, California
|
|
6/25/2020
|
|
$
|
1,650
|
|
|
$
|
1,545
|
|
|
$
|
1,390
|
|
|
No
|
|
N/A
|
|
N/A
|
___________
(1) Has an option to renew the lease for additional five years.
Sale leaseback of Houston Facility
In November 2019, the Company completed the sale of its Houston, Texas manufacturing facility and warehouse (the “Property”) for an aggregate purchase price, exclusive of closing costs, of $10.0 million. Cash proceeds from the sale of the Property were $9.0 million. The Company recognized a net gain on the Property sale of $7.3 million during the fiscal year ended June 30, 2020. The Property did not meet the accounting guidance criteria to be classified as discontinued operations.
Following the close of the sale of the Property, the Company and the purchaser of the Property entered into a three-year leaseback agreement with respect to the Property for a base rent of $50,000 per month. The Company may terminate the leaseback no earlier than the first day of the eighteenth full calendar month of the term providing at least nine months’ notice. The purchaser of the Property does not have any material relationship with the Company or its subsidiaries.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Note 6. Derivative Instruments
Derivative Instruments Held
Coffee-Related Derivative Instruments
The Company is exposed to commodity price risk associated with its PTF green coffee purchase contracts, which are described further in Note 2. The Company utilizes forward and option contracts to manage exposure to the variability in expected future cash flows from forecasted purchases of green coffee attributable to commodity price risk. Certain of these coffee-related derivative instruments utilized for risk management purposes have been designated as cash flow hedges, while other coffee-related derivative instruments have not been designated as cash flow hedges or do not qualify for hedge accounting despite hedging the Company's future cash flows on an economic basis.
The following table summarizes the notional volumes for the coffee-related derivative instruments held by the Company at June 30, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30,
|
|
(In thousands)
|
|
2020
|
|
2019
|
|
Derivative instruments designated as cash flow hedges:
|
|
|
|
|
|
Long coffee pounds
|
|
36,413
|
|
|
42,113
|
|
|
Derivative instruments not designated as cash flow hedges:
|
|
|
|
|
|
Long coffee pounds
|
|
8,348
|
|
|
6,070
|
|
|
Total
|
|
44,761
|
|
|
48,183
|
|
Coffee-related derivative instruments designated as cash flow hedges outstanding as of June 30, 2020 will expire within 18 months. At June 30, 2020 and 2019 approximately 81% 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”) effective March 20, 2019, the Company on March 27, 2019, entered into a swap transaction utilizing a notional amount of $80.0 million, with an effective date of April 11, 2019 and a maturity date of October 11, 2023 (the “Rate Swap”). 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.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Effect of Derivative Instruments on the Financial Statements
Balance Sheets
Fair values of derivative instruments on the Company's consolidated balance sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Instruments
Designated as Cash Flow Hedges
|
|
Derivative Instruments Not Designated as Accounting Hedges
|
|
|
|
As of June 30,
|
|
As of June 30,
|
|
(In thousands)
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Financial Statement Location:
|
|
|
|
|
|
|
|
|
|
Short-term derivative assets:
|
|
|
|
|
|
|
|
|
|
Coffee-related derivative instruments(1)
|
|
$
|
35
|
|
|
$
|
1,254
|
|
|
$
|
130
|
|
|
$
|
611
|
|
|
Long-term derivative assets:
|
|
|
|
|
|
|
|
|
|
Coffee-related derivative instruments(2)
|
|
$
|
10
|
|
|
$
|
671
|
|
|
$
|
—
|
|
|
$
|
3
|
|
|
Short-term derivative liabilities:
|
|
|
|
|
|
|
|
|
|
Coffee-related derivative instruments(3)
|
|
$
|
3,322
|
|
|
$
|
1,114
|
|
|
$
|
706
|
|
|
$
|
114
|
|
|
Interest rate swap derivative instruments(3)
|
|
$
|
1,228
|
|
|
$
|
246
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Long-term derivative liabilities:
|
|
|
|
|
|
|
|
|
|
Coffee-related derivative instruments(4)
|
|
$
|
246
|
|
|
$
|
13
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Interest rate swap derivative instruments(4)
|
|
$
|
2,613
|
|
|
$
|
1,599
|
|
|
$
|
—
|
|
|
$
|
—
|
|
________________
(1) Included in “Short-term derivative assets” on the Company's consolidated balance sheets.
(2) Included in “Long-term derivative assets” on the Company's consolidated balance sheets.
(3) Included in “Short-term liabilities” on the Company's consolidated balance sheets.
(4) Included in “Other long-term liabilities” on the Company's consolidated balance sheets.
Statements of Operations
The following table presents pretax net gains and losses for the Company's derivative instruments designated as cash flow hedges, as recognized in “AOCI,” “Cost of goods sold” and “Other, net”.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
Financial Statement Classification
|
|
(In thousands)
|
|
2020
|
|
2019
|
|
2018
|
|
|
|
Net losses recognized in AOCI - Interest rate swap
|
|
$
|
(2,863
|
)
|
|
$
|
(1,791
|
)
|
|
$
|
—
|
|
|
|
AOCI
|
|
Net (losses) gains recognized from AOCI to earnings - Interest rate swap
|
|
$
|
(383
|
)
|
|
$
|
45
|
|
|
$
|
—
|
|
|
|
Interest Expense
|
|
Net losses reclassified from AOCI to earnings for partial unwind of interest swap - Interest rate swap (1)
|
|
$
|
(407
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
Interest Expense
|
|
Net losses recognized in AOCI - Coffee-related
|
|
$
|
(4,655
|
)
|
|
$
|
(7,407
|
)
|
|
$
|
(8,420
|
)
|
|
|
AOCI
|
|
Net losses recognized in earnings - Coffee-related
|
|
$
|
(8,073
|
)
|
|
$
|
(9,242
|
)
|
|
$
|
(1,179
|
)
|
|
|
Costs of goods sold
|
|
Net gains (losses) recognized in earnings (ineffective portion)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
48
|
|
|
|
Other, net
|
________________
|
|
|
|
(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 $80.0 million to $65.0 million.
|
For the fiscal years ended June 30, 2020, 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 consolidated statements of cash flows also includes net losses (gains) on coffee-related derivative instruments designated as cash flow hedges reclassified to cost of goods sold from AOCI in the fiscal years ended June 30, 2020, 2019 and 2018. Gains and losses on derivative instruments not designated as accounting
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
hedges are included in “Other, net” in the Company's consolidated statements of operations and in “Net losses (gains) on derivative instruments and investments” in the Company's consolidated statements of cash flows.
Net gains and losses recorded in “Other, net” are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
(In thousands)
|
|
2020
|
|
2019
|
|
2018
|
|
Net losses on coffee-related derivative instruments
|
|
$
|
(1,362
|
)
|
|
$
|
(2,252
|
)
|
|
$
|
(469
|
)
|
|
Net gains on investments
|
|
—
|
|
|
—
|
|
|
7
|
|
|
Net losses on derivative instruments and investments(1)
|
|
(1,362
|
)
|
|
(2,252
|
)
|
|
(462
|
)
|
|
Non-operating pension and other postretirement benefit plans cost(2)
|
|
11,651
|
|
|
6,315
|
|
|
6,651
|
|
|
Other gains, net
|
|
154
|
|
|
103
|
|
|
1,533
|
|
|
Other, net
|
|
$
|
10,443
|
|
|
$
|
4,166
|
|
|
$
|
7,722
|
|
___________
(1) Excludes net losses and net gains on coffee-related derivative instruments designated as cash flow hedges recorded in cost of goods sold in the fiscal years ended June 30, 2020, 2019 and 2018.
(2) Presented in accordance with implementation of ASU 2017-07. Includes amortized gains on postretirement medical benefit plan due to the curtailment announced in March 2020.
Offsetting of Derivative Assets and Liabilities
The Company has agreements in place that allow for the financial right of offset for derivative assets and liabilities at settlement or in the event of default under the agreements. Additionally, under certain coffee derivative agreements, the Company maintains accounts with its counterparties to facilitate financial derivative transactions in support of its risk management activities.
The following table presents the Company’s net exposure from its offsetting derivative asset and liability positions, as well as cash collateral on deposit with its counterparty as of the reporting dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
Gross Amount Reported on Balance Sheet
|
|
Netting Adjustments
|
|
Cash Collateral Posted
|
|
Net Exposure
|
|
As of June 30, 2020
|
|
Derivative Assets
|
|
$
|
175
|
|
|
$
|
(175
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
Derivative Liabilities
|
|
$
|
8,115
|
|
|
$
|
(176
|
)
|
|
$
|
—
|
|
|
$
|
7,939
|
|
|
As of 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 June 30, 2020, $2.6 million of net losses on coffee-related derivative instruments designated as cash flow hedge are expected to be reclassified into cost of goods sold within the next twelve months. These recorded values are based on market prices of the commodities as of June 30, 2020.
Changes in the fair value of the Company's interest rate swap derivative instruments designated as a cash flow hedge are deferred in AOCI and subsequently reclassified into interest expense in the period or periods when the hedged transaction affects earnings or when it is probable that the hedged forecasted transaction will not occur by the end of the originally specified time period. As of June 30, 2020, $1.2 million of net losses on interest rate swap derivative instruments designated as a cash flow hedge are expected to be reclassified into interest expense within the next twelve months assuming no significant changes in the LIBOR rates. Due to LIBOR volatility, actual gains or losses realized within the next twelve months will likely differ from these values.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Note 7. Leases
See Note 2 for additional information regarding the adoption of ASU 2016-02, Leases.
Supplemental consolidated balance sheet information related to leases is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Classification
|
|
As of June 30, 2020
|
|
(In thousands)
|
|
|
|
|
|
Operating lease assets
|
|
Right-of-use operating lease assets
|
|
$
|
21,117
|
|
|
Finance lease assets
|
|
Property, plant and equipment, net
|
|
9
|
|
|
Total lease assets
|
|
|
|
$
|
21,126
|
|
|
|
|
|
|
|
|
Operating lease liabilities - current
|
|
Operating lease liabilities - current
|
|
$
|
5,854
|
|
|
Operating lease liabilities - noncurrent
|
|
Operating lease liabilities - noncurrent
|
|
15,628
|
|
|
Finance lease liabilities
|
|
Other long-term liabilities
|
|
9
|
|
|
Total lease liabilities
|
|
|
|
$
|
21,491
|
|
The components of lease expense are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Classification
|
|
For the Year Ended June 30, 2020
|
|
|
(In thousands)
|
|
|
|
|
|
|
Operating lease expense
|
|
General and administrative expenses and cost of goods sold
|
|
$
|
5,354
|
|
|
|
Finance lease expense:
|
|
|
|
|
|
|
Amortization of finance lease assets
|
|
General and administrative expenses
|
|
52
|
|
|
|
Interest on finance lease liabilities
|
|
Interest expense
|
|
2
|
|
|
|
Total lease expense
|
|
|
|
$
|
5,408
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended June 30,
|
|
(In thousands)
|
|
Operating Leases
|
|
Finance Leases
|
|
Maturities of lease liabilities are as follows:
|
|
|
|
|
|
2021
|
|
$
|
5,854
|
|
|
$
|
9
|
|
|
2022
|
|
4,454
|
|
|
—
|
|
|
2023
|
|
3,894
|
|
|
—
|
|
|
2024
|
|
3,654
|
|
|
—
|
|
|
2025
|
|
2,503
|
|
|
—
|
|
|
Thereafter
|
|
3,954
|
|
|
—
|
|
|
Total lease payments
|
|
24,313
|
|
|
9
|
|
|
Less: interest
|
|
(2,831
|
)
|
|
—
|
|
|
Total lease obligations
|
|
$
|
21,482
|
|
|
$
|
9
|
|
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Lease term and discount rate:
|
|
|
|
|
|
|
|
|
|
As of June 30, 2020
|
|
Weighted-average remaining lease terms (in years):
|
|
|
|
Operating lease
|
|
8.3
|
|
|
Finance lease
|
|
0.2
|
|
|
|
|
|
|
Weighted-average discount rate:
|
|
|
|
Operating lease
|
|
4.50
|
%
|
|
Finance lease
|
|
4.50
|
%
|
Other Information:
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended June 30, 2020
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
Operating cash flows from operating leases
|
|
$
|
5,000
|
|
|
Operating cash flows from finance leases
|
|
$
|
2
|
|
|
Financing cash flows from finance leases
|
|
$
|
51
|
|
|
|
|
|
|
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 years ended June 30, 2019 and 2018 were $6.4 million and $5.5 million, respectively.
The minimum annual payments under operating and capital leases as of June 30, 2019 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Operating
Lease
Obligations
|
|
Capital
Lease
Obligations
|
|
Year Ended June 30,
|
|
|
|
|
|
2020
|
|
$
|
4,434
|
|
|
$
|
36
|
|
|
2021
|
|
3,238
|
|
|
1
|
|
|
2022
|
|
2,472
|
|
|
—
|
|
|
2023
|
|
2,131
|
|
|
—
|
|
|
2024
|
|
2,025
|
|
|
—
|
|
|
Thereafter
|
|
4,389
|
|
|
—
|
|
|
Total minimum lease payments
|
|
$
|
18,689
|
|
|
37
|
|
|
Less: imputed interest
(0.82% to 10.66%)
|
|
|
|
(2
|
)
|
|
Present value of future minimum lease payments
|
|
|
|
35
|
|
|
Less: current portion
|
|
|
|
(34
|
)
|
|
Long-term capital lease obligations
|
|
|
|
$
|
1
|
|
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Note 8. Fair Value Measurements
Assets and liabilities measured and recorded at fair value on a recurring basis were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
As of June 30, 2020
|
|
|
|
|
|
|
|
|
|
Derivative instruments designated as cash flow hedges:
|
|
|
|
|
|
|
|
|
|
Coffee-related derivative assets(1)
|
|
$
|
45
|
|
|
$
|
—
|
|
|
$
|
45
|
|
|
$
|
—
|
|
|
Coffee-related derivative liabilities(1)
|
|
$
|
3,568
|
|
|
$
|
—
|
|
|
$
|
3,568
|
|
|
$
|
—
|
|
|
Interest rate swap derivative liabilities(2)
|
|
$
|
3,841
|
|
|
$
|
—
|
|
|
$
|
3,841
|
|
|
$
|
—
|
|
|
Derivative instruments not designated as accounting hedges:
|
|
|
|
|
|
|
|
|
|
|
|
Coffee-related derivative assets(1)
|
|
$
|
130
|
|
|
$
|
—
|
|
|
$
|
130
|
|
|
$
|
—
|
|
|
Coffee-related derivative liabilities(1)
|
|
$
|
706
|
|
|
$
|
—
|
|
|
$
|
706
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
As of June 30, 2019
|
|
|
|
|
|
|
|
|
|
Derivative instruments designated as cash flow hedges:
|
|
|
|
|
|
|
|
|
|
Coffee-related derivative assets(1)
|
|
$
|
1,925
|
|
|
$
|
—
|
|
|
$
|
1,925
|
|
|
$
|
—
|
|
|
Coffee-related derivative liabilities(1)
|
|
$
|
1,127
|
|
|
$
|
—
|
|
|
$
|
1,127
|
|
|
$
|
—
|
|
|
Interest rate swap derivative liabilities(2)
|
|
$
|
1,845
|
|
|
$
|
—
|
|
|
$
|
1,845
|
|
|
$
|
—
|
|
|
Derivative instruments not designated as accounting hedges:
|
|
|
|
|
|
|
|
|
|
Coffee-related derivative assets(1)
|
|
$
|
614
|
|
|
$
|
—
|
|
|
$
|
614
|
|
|
$
|
—
|
|
|
Coffee-related derivative liabilities(1)
|
|
$
|
114
|
|
|
$
|
—
|
|
|
114
|
|
|
$
|
—
|
|
____________________
|
|
|
|
(1)
|
The Company's coffee-related derivative instruments are traded over-the-counter and, therefore, classified as Level 2.
|
|
|
|
|
(2)
|
The Company's interest rate swap derivative instrument are model-derived valuations with directly or indirectly observable significant inputs such as interest rate and, therefore, classified as Level 2.
|
During the fiscal years ended June 30, 2020 and 2019, there were no transfers between the levels.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Note 9. Accounts Receivable, Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30,
|
|
(In thousands)
|
|
2020
|
|
2019
|
|
Trade receivables
|
|
$
|
40,695
|
|
|
$
|
53,593
|
|
|
Other receivables(1)
|
|
1,983
|
|
|
2,886
|
|
|
Allowance for doubtful accounts
|
|
(1,796
|
)
|
|
(1,324
|
)
|
|
Accounts receivable, net
|
|
$
|
40,882
|
|
|
$
|
55,155
|
|
__________
(1)Includes vendor rebates and other non-trade receivables.
Allowance for doubtful accounts:
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
Balance at June 30, 2017
|
$
|
(721
|
)
|
|
Provision
|
(909
|
)
|
|
Write-off
|
1,530
|
|
|
Recoveries
|
(395
|
)
|
|
Balance at June 30, 2018
|
$
|
(495
|
)
|
|
Provision
|
(1,761
|
)
|
|
Write-off
|
533
|
|
|
Recoveries
|
399
|
|
|
Balance at June 30, 2019
|
$
|
(1,324
|
)
|
|
Provision
|
(1,872
|
)
|
|
Write-off
|
1,196
|
|
|
Recoveries
|
204
|
|
|
Balance at June 30, 2020
|
$
|
(1,796
|
)
|
Note 10. Inventories
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30,
|
|
(In thousands)
|
|
2020
|
|
2019
|
|
Coffee
|
|
|
|
|
|
Processed
|
|
$
|
17,840
|
|
|
$
|
25,769
|
|
|
Unprocessed
|
|
32,913
|
|
|
33,259
|
|
|
Total
|
|
$
|
50,753
|
|
|
$
|
59,028
|
|
|
Tea and culinary products
|
|
|
|
|
|
Processed
|
|
$
|
10,627
|
|
|
$
|
21,767
|
|
|
Unprocessed
|
|
45
|
|
|
74
|
|
|
Total
|
|
$
|
10,672
|
|
|
$
|
21,841
|
|
|
Coffee brewing equipment parts
|
|
$
|
5,983
|
|
|
$
|
7,041
|
|
|
Total inventories
|
|
$
|
67,408
|
|
|
$
|
87,910
|
|
In addition to product cost, inventory costs include expenditures such as direct labor and certain supply, freight, warehousing, overhead variances, PPVs and other expenses incurred in bringing the inventory to its existing condition and location. The “Unprocessed” inventory values as stated in the above table represent the value of raw materials and the “Processed” inventory values represent all other products consisting primarily of finished goods.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Note 11. Property, Plant and Equipment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30,
|
|
(In thousands)
|
|
2020
|
|
2019
|
|
Buildings and facilities (1)
|
|
$
|
98,293
|
|
|
$
|
107,915
|
|
|
Machinery and equipment (2)
|
|
240,431
|
|
|
249,477
|
|
|
Capitalized software
|
|
29,765
|
|
|
27,666
|
|
|
Office furniture and equipment
|
|
14,042
|
|
|
14,035
|
|
|
|
|
$
|
382,531
|
|
|
$
|
399,093
|
|
|
Accumulated depreciation
|
|
(229,829
|
)
|
|
(225,826
|
)
|
|
Land (1)
|
|
12,931
|
|
|
16,191
|
|
|
Property, plant and equipment, net
|
|
$
|
165,633
|
|
|
$
|
189,458
|
|
__________
(1) Decrease as of June 30, 2020 is due to the sale of assets. See Note 5 for details.
(2) Decrease as of June 30, 2020 is due to retirements and sale of assets.
Depreciation expense was $29.9 million, $31.1 million, and $30.5 million, for the years ended June 30, 2020, 2019, and 2018, respectively.
Maintenance and repairs to property, plant and equipment charged to expense for the years ended June 30, 2020, 2019, and 2018 were $8.6 million, $10.3 million and $9.6 million, respectively.
Coffee Brewing Equipment (“CBE”) and Service
Capitalized CBE included in machinery and equipment above are:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30,
|
|
(In thousands)
|
|
2020
|
|
2019
|
|
Coffee Brewing Equipment (1)
|
|
$
|
98,734
|
|
|
$
|
106,593
|
|
|
Accumulated depreciation (1)
|
|
(67,800
|
)
|
|
(70,202
|
)
|
|
Coffee Brewing Equipment, net
|
|
$
|
30,934
|
|
|
$
|
36,391
|
|
__________
(1) Decrease as of June 30, 2020 is due to retirement of assets.
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended June 30,
|
|
(In thousands)
|
|
2020
|
|
2019
|
|
2018
|
|
Depreciation expense
|
|
$
|
9,572
|
|
|
$
|
9,109
|
|
|
$
|
8,629
|
|
|
|
|
|
|
|
|
|
|
Other CBE expenses
|
|
$
|
27,906
|
|
|
$
|
33,855
|
|
|
$
|
30,172
|
|
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.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Note 12. Goodwill and Intangible Assets
The following is a summary of changes in the carrying value of goodwill (in thousands):
|
|
|
|
|
|
|
|
|
Balance at June 30, 2017
|
|
$
|
10,996
|
|
|
Final Purchase Price Allocation Adjustment (West Coast Coffee)
|
|
(167
|
)
|
|
Additions (Boyd Coffee)
|
|
25,395
|
|
|
Balance at June 30, 2018
|
|
$
|
36,224
|
|
|
Additions
|
|
—
|
|
|
Balance at June 30, 2019
|
|
36,224
|
|
|
Additions
|
|
—
|
|
|
Impairment
|
|
(36,224
|
)
|
|
Balance at June 30, 2020
|
|
$
|
—
|
|
The carrying value of goodwill was fully impaired and written down to zero at June 30, 2020. There was no impairment of goodwill recorded during the years ended June 30, 2019 and 2018.
The Company tests goodwill and indefinite-lived intangible assets for impairment annually, as of January 31, or when events or changes in circumstances would indicate that more likely than not the fair values may be below the carrying amounts of the assets. Additionally, because of the COVID-19 pandemic during the second half of the Company's fiscal year ended June 30, 2020, and the resulting deterioration in the business environment and the general economic outlook, the fair value of these assets were negatively impacted. As a result of the test for impairment, the Company recorded $36.2 million of impairment to goodwill during the year ended June 30, 2020.
The following is a summary of the Company’s amortized and unamortized intangible assets other than goodwill:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30,
|
|
|
|
Weighted
Average
Amortization
Period as of
June 30, 2020
|
|
2020
|
|
2019
|
|
(In thousands)
|
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Impairment
|
|
Net
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
|
|
Amortized intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
6.7
|
|
$
|
33,003
|
|
|
$
|
(17,492
|
)
|
|
$
|
—
|
|
|
$
|
15,511
|
|
|
$
|
33,003
|
|
|
$
|
(15,291
|
)
|
|
$
|
17,712
|
|
|
Non-compete agreements
|
|
1.5
|
|
220
|
|
|
(161
|
)
|
|
—
|
|
|
59
|
|
|
220
|
|
|
(122
|
)
|
|
98
|
|
|
Recipes
|
|
3.3
|
|
930
|
|
|
(487
|
)
|
|
—
|
|
|
443
|
|
|
930
|
|
|
(354
|
)
|
|
576
|
|
|
Trade name/brand name
|
|
3.4
|
|
510
|
|
|
(383
|
)
|
|
—
|
|
|
127
|
|
|
510
|
|
|
(346
|
)
|
|
164
|
|
|
Total amortized intangible assets
|
|
|
|
$
|
34,663
|
|
|
$
|
(18,523
|
)
|
|
$
|
—
|
|
|
$
|
16,140
|
|
|
$
|
34,663
|
|
|
$
|
(16,113
|
)
|
|
$
|
18,550
|
|
|
Unamortized intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks, trade names and brand name with indefinite lives
|
|
|
|
$
|
10,328
|
|
|
$
|
—
|
|
|
$
|
(5,806
|
)
|
|
$
|
4,522
|
|
|
$
|
10,328
|
|
|
$
|
—
|
|
|
$
|
10,328
|
|
|
Total unamortized intangible assets
|
|
|
|
$
|
10,328
|
|
|
$
|
—
|
|
|
$
|
(5,806
|
)
|
|
$
|
4,522
|
|
|
$
|
10,328
|
|
|
$
|
—
|
|
|
$
|
10,328
|
|
|
Total intangible assets
|
|
|
|
$
|
44,991
|
|
|
$
|
(18,523
|
)
|
|
$
|
(5,806
|
)
|
|
$
|
20,662
|
|
|
$
|
44,991
|
|
|
$
|
(16,113
|
)
|
|
$
|
28,878
|
|
As a result of the test for impairment, the Company recorded $5.8 million and $3.5 million, respectively, of impairment to indefinite-lived intangibles during the year ended June 30, 2020 and 2018. There were no indefinite-lived intangible asset impairment charges recorded in the fiscal year ended June 30, 2019.
The Company also assessed the recoverability of certain finite-lived intangible assets. No impairment was recorded for the finite-lived intangibles for the years ended June 30, 2020 and 2019. In fiscal year ended June 30, 2018, the Company recorded an impairment charge related to finite-lived intangibles of $0.3 million.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Amortization expense for the years ended June 30, 2020, 2019, and 2018 were $2.4 million, $2.6 million, and $2.4 million, respectively.
At June 30, 2020, future annual amortization of finite-lived intangible assets for the years 2021 through 2025 and thereafter is estimated to be (in thousands):
|
|
|
|
|
|
|
|
|
For the fiscal year ending:
|
|
|
|
June 30, 2021
|
|
$
|
2,412
|
|
|
June 30, 2022
|
|
2,388
|
|
|
June 30, 2023
|
|
2,370
|
|
|
June 30, 2024
|
|
2,260
|
|
|
June 30, 2025
|
|
2,200
|
|
|
Thereafter
|
|
4,510
|
|
|
Total
|
|
$
|
16,140
|
|
Note 13. Employee Benefit Plans
The Company provides the following benefit plans for full-time employees who work 30 hours or more per week:
•401(k);
•health and other welfare benefit plans; and
•in certain circumstances, pension and postretirement benefits.
See below for detail description of each benefit plan. Generally, the plans provide health benefits after 30 days of employment and other retirement benefits based on years of service and/or a combination of years of service and earnings.
Single Employer Pension Plans
As of June 30, 2020, the Company has two defined benefit pension plans for certain hourly employees covered under collective bargaining agreements (the “Brewmatic Plan” and the “Hourly Employees' Plan”). Effective October 1, 2016, the Company froze benefit accruals and participation in the Hourly Employees' Plan. After the plan freeze, participants do not accrue any benefits under the plan, and new hires are not eligible to participate in the plan. After the freeze the participants in the plan are eligible to receive the Company's matching contributions to their 401(k).
Effective December 1, 2018 the Company amended and terminated the Farmer Bros. Co. Pension Plan for Salaried Employees (the “Farmer Bros. Plan”), a defined benefit pension plan for Company employees hired prior to January 1, 2010 who were not covered under a collective bargaining agreement. The Company previously amended the Farmer Bros. Plan, freezing the benefit for all participants effective June 30, 2011.
Prior to the termination of the Farmer Bros. Plan, the Company spun off the benefit liability and obligations, and all allocable assets for all retirement plan benefits of certain active employees with accrued benefits in excess of $25,000, retirees and beneficiaries currently receiving benefit payments under the Farmer Bros. Plan, and former employees who have deferred vested benefits under the Farmer Bros. Plan, to the Brewmatic Plan. Upon termination of the Farmer Bros. Plan, all remaining plan participants elected to receive a distribution of his/her entire accrued benefit under the Farmer Bros. Plan in a single cash lump sum or an individual insurance company annuity contract, in either case, funded directly by Farmer Bros. Plan assets.
Termination of the Farmer Bros. Plan triggered re-measurement and settlement of the Farmer Bros. Plan and re-measurement of the Brewmatic Plan. As a result of the distributions to the remaining plan participants of the Farmer Bros. Plan, the Company recognized a non-cash pension settlement charge of $10.9 million for the year ended June 30, 2019.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Obligations and Funded Status
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brewmatic Plan
As of June 30,
|
|
Hourly Employees’ Plan
As of June 30,
|
|
Farmer Bros. Plan
As of June 30,
|
|
Total
|
|
($ in thousands)
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
2019
|
|
2020
|
|
2019
|
|
Change in projected benefit obligation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at the beginning of the year
|
|
$
|
121,752
|
|
|
$
|
3,724
|
|
|
$
|
4,475
|
|
|
$
|
4,040
|
|
|
$
|
137,175
|
|
|
$
|
126,227
|
|
|
$
|
144,939
|
|
|
Interest cost
|
|
4,084
|
|
|
2,339
|
|
|
152
|
|
|
161
|
|
|
2,722
|
|
|
4,236
|
|
|
5,222
|
|
|
Actuarial (gain) loss
|
|
13,433
|
|
|
8,482
|
|
|
561
|
|
|
349
|
|
|
(1,571
|
)
|
|
13,994
|
|
|
7,260
|
|
|
Benefits paid
|
|
(5,943
|
)
|
|
(3,097
|
)
|
|
(102
|
)
|
|
(75
|
)
|
|
(3,574
|
)
|
|
(6,045
|
)
|
|
(6,746
|
)
|
|
Pension settlement
|
|
—
|
|
|
(21,286
|
)
|
|
—
|
|
|
—
|
|
|
(3,162
|
)
|
|
—
|
|
|
(24,448
|
)
|
|
Other - Plan merger
|
|
—
|
|
|
131,590
|
|
|
—
|
|
|
—
|
|
|
(131,590
|
)
|
|
—
|
|
|
—
|
|
|
Projected benefit obligation at the end of the year
|
|
$
|
133,326
|
|
|
$
|
121,752
|
|
|
$
|
5,086
|
|
|
$
|
4,475
|
|
|
$
|
—
|
|
|
$
|
138,412
|
|
|
$
|
126,227
|
|
|
Change in plan assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at the beginning of the year
|
|
$
|
75,411
|
|
|
$
|
3,719
|
|
|
$
|
3,778
|
|
|
$
|
3,629
|
|
|
$
|
97,211
|
|
|
$
|
79,189
|
|
|
$
|
104,559
|
|
|
Actual return on plan assets
|
|
3,382
|
|
|
9,325
|
|
|
239
|
|
|
224
|
|
|
(6,236
|
)
|
|
3,621
|
|
|
3,313
|
|
|
Employer contributions
|
|
3,054
|
|
|
1,800
|
|
|
—
|
|
|
—
|
|
|
1,525
|
|
|
3,054
|
|
|
3,325
|
|
|
Benefits paid
|
|
(5,943
|
)
|
|
(3,097
|
)
|
|
(102
|
)
|
|
(75
|
)
|
|
(3,574
|
)
|
|
(6,045
|
)
|
|
(6,746
|
)
|
|
Pension settlement
|
|
—
|
|
|
(22,100
|
)
|
|
—
|
|
|
—
|
|
|
$
|
(3,162
|
)
|
|
—
|
|
|
(25,262
|
)
|
|
Other - Plan merger
|
|
—
|
|
|
85,764
|
|
|
—
|
|
|
—
|
|
|
$
|
(85,764
|
)
|
|
—
|
|
|
—
|
|
|
Fair value of plan assets at the end of the year
|
|
$
|
75,904
|
|
|
$
|
75,411
|
|
|
$
|
3,915
|
|
|
$
|
3,778
|
|
|
$
|
—
|
|
|
$
|
79,819
|
|
|
$
|
79,189
|
|
|
Funded status at end of year (underfunded) overfunded
|
|
$
|
(57,422
|
)
|
|
$
|
(46,341
|
)
|
|
$
|
(1,171
|
)
|
|
$
|
(697
|
)
|
|
$
|
—
|
|
|
$
|
(58,593
|
)
|
|
$
|
(47,038
|
)
|
|
Amounts recognized in consolidated balance sheets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current liabilities
|
|
(57,422
|
)
|
|
(46,341
|
)
|
|
(1,171
|
)
|
|
(697
|
)
|
|
—
|
|
|
(58,593
|
)
|
|
(47,038
|
)
|
|
Total
|
|
$
|
(57,422
|
)
|
|
$
|
(46,341
|
)
|
|
$
|
(1,171
|
)
|
|
$
|
(697
|
)
|
|
$
|
—
|
|
|
$
|
(58,593
|
)
|
|
$
|
(47,038
|
)
|
|
Amounts recognized in AOCI
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
62,830
|
|
|
50,080
|
|
|
1,115
|
|
|
565
|
|
|
—
|
|
|
63,945
|
|
|
50,645
|
|
|
Total AOCI (not adjusted for applicable tax)
|
|
$
|
62,830
|
|
|
$
|
50,080
|
|
|
$
|
1,115
|
|
|
$
|
565
|
|
|
$
|
—
|
|
|
$
|
63,945
|
|
|
$
|
50,645
|
|
|
Weighted average assumptions used to determine benefit obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
2.55
|
%
|
|
3.45
|
%
|
|
2.55
|
%
|
|
3.45
|
%
|
|
4.10
|
%
|
|
2.55
|
%
|
|
4.05
|
%
|
|
Rate of compensation increase
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Components of Net Periodic Benefit Cost and
Other Changes Recognized in Other Comprehensive Income (Loss) (OCI)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brewmatic Plan
June 30,
|
|
Hourly Employees’ Plan
June 30,
|
|
Farmer Bros. Plan
June 30,
|
|
Total
|
|
($ in thousands)
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
2019
|
|
2020
|
|
2019
|
|
Components of net periodic benefit cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest cost
|
|
4,084
|
|
|
2,339
|
|
|
152
|
|
|
161
|
|
|
2,722
|
|
|
4,236
|
|
|
5,222
|
|
|
Expected return on plan assets
|
|
(4,174
|
)
|
|
(2,257
|
)
|
|
(232
|
)
|
|
(222
|
)
|
|
(2,767
|
)
|
|
(4,406
|
)
|
|
(5,246
|
)
|
|
Amortization of net loss
|
|
1,475
|
|
|
796
|
|
|
4
|
|
|
—
|
|
|
710
|
|
|
1,479
|
|
|
1,506
|
|
|
Pension settlement charge
|
|
—
|
|
|
9,586
|
|
|
—
|
|
|
—
|
|
|
1,356
|
|
|
—
|
|
|
10,942
|
|
|
Net periodic benefit cost
|
|
$
|
1,385
|
|
|
$
|
10,464
|
|
|
$
|
(76
|
)
|
|
$
|
(61
|
)
|
|
$
|
2,021
|
|
|
$
|
1,309
|
|
|
$
|
12,424
|
|
|
Other changes recognized in OCI
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss (1)
|
|
$
|
14,225
|
|
|
$
|
1,413
|
|
|
$
|
554
|
|
|
$
|
347
|
|
|
$
|
7,433
|
|
|
$
|
14,779
|
|
|
$
|
9,193
|
|
|
Prior service cost (credit)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Amortization of net loss
|
|
(1,475
|
)
|
|
(796
|
)
|
|
(4
|
)
|
|
—
|
|
|
(710
|
)
|
|
(1,479
|
)
|
|
(1,506
|
)
|
|
Pension settlement charge
|
|
—
|
|
|
(9,586
|
)
|
|
—
|
|
|
—
|
|
|
(1,356
|
)
|
|
—
|
|
|
(10,942
|
)
|
|
Allocation of net Loss - Plan merger
|
|
—
|
|
|
56,446
|
|
|
—
|
|
|
—
|
|
|
(56,446
|
)
|
|
—
|
|
|
—
|
|
|
Net loss due to annuity purchase
|
|
—
|
|
|
814
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
814
|
|
|
Total recognized in OCI
|
|
$
|
12,750
|
|
|
$
|
48,291
|
|
|
$
|
550
|
|
|
$
|
347
|
|
|
$
|
(51,079
|
)
|
|
$
|
13,300
|
|
|
$
|
(2,441
|
)
|
|
Total recognized in net periodic benefit cost and OCI
|
|
$
|
14,135
|
|
|
$
|
58,755
|
|
|
$
|
474
|
|
|
$
|
286
|
|
|
$
|
(49,058
|
)
|
|
$
|
14,609
|
|
|
$
|
9,983
|
|
|
Weighted-average assumptions used to determine net periodic benefit cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
3.45
|
%
|
|
4.10
|
%
|
|
3.45
|
%
|
|
4.05
|
%
|
|
4.05
|
%
|
|
3.45
|
%
|
|
4.05
|
%
|
|
Expected long-term return on plan assets
|
|
6.75
|
%
|
|
6.75
|
%
|
|
6.75
|
%
|
|
6.75
|
%
|
|
—
|
%
|
|
6.75
|
%
|
|
6.75
|
%
|
|
Rate of compensation increase
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
__________
(1) Net loss for fiscal year ended June 30, 2020 was primarily due to decline in interest rate, and to a less extent decline in plan assets returns.
Basis Used to Determine Expected Long-term Return on Plan Assets
The expected long-term return on plan assets assumption was developed as a weighted average rate based on the target asset allocation of the plan and the Long-Term Capital Market Assumptions (CMA) 2020. The capital market assumptions were developed with a primary focus on forward-looking valuation models and market indicators. The key fundamental economic inputs for these models are future inflation, economic growth, and interest rate environment. Due to the long-term nature of the pension obligations, the investment horizon for the CMA 2020 is 20 to 30 years. In addition to forward-looking models, historical analysis of market data and trends was reflected, as well as the outlook of recognized economists, organizations and consensus CMA from other credible studies.
Description of Investment Policy
The Company’s investment strategy is to build an efficient, well-diversified portfolio based on a long-term, strategic outlook of the investment markets. The investment markets outlook utilizes both the historical-based and forward-looking return forecasts to establish future return expectations for various asset classes. These return expectations are used to develop a core asset allocation based on the specific needs of each plan. The core asset allocation utilizes investment portfolios of various asset classes and multiple investment managers in order to maximize the plan’s return while providing multiple layers of diversification to help minimize risk.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Additional Disclosures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brewmatic Plan
June 30,
|
|
Hourly Employees’ Plan
June 30,
|
|
Total
|
|
($ in thousands)
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Comparison of obligations to plan assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected benefit obligation
|
$
|
133,326
|
|
|
$
|
121,752
|
|
|
$
|
5,086
|
|
|
$
|
4,475
|
|
|
$
|
138,412
|
|
|
$
|
126,227
|
|
|
Accumulated benefit obligation
|
$
|
133,326
|
|
|
$
|
121,752
|
|
|
$
|
5,086
|
|
|
$
|
4,475
|
|
|
$
|
138,412
|
|
|
$
|
126,227
|
|
|
Fair value of plan assets at measurement date
|
$
|
75,904
|
|
|
$
|
75,411
|
|
|
$
|
3,915
|
|
|
$
|
3,778
|
|
|
$
|
79,819
|
|
|
$
|
79,189
|
|
|
Plan assets by category
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
$
|
49,744
|
|
|
$
|
48,464
|
|
|
$
|
2,572
|
|
|
$
|
2,440
|
|
|
$
|
52,316
|
|
|
$
|
50,904
|
|
|
Debt securities
|
21,439
|
|
|
22,461
|
|
|
1,111
|
|
|
1,100
|
|
|
22,550
|
|
|
23,561
|
|
|
Real estate
|
4,721
|
|
|
4,486
|
|
|
232
|
|
|
238
|
|
|
4,953
|
|
|
4,724
|
|
|
Total
|
$
|
75,904
|
|
|
$
|
75,411
|
|
|
$
|
3,915
|
|
|
$
|
3,778
|
|
|
$
|
79,819
|
|
|
$
|
79,189
|
|
|
Plan assets by category
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
66
|
%
|
|
64
|
%
|
|
66
|
%
|
|
65
|
%
|
|
66
|
%
|
|
64
|
%
|
|
Debt securities
|
28
|
%
|
|
30
|
%
|
|
28
|
%
|
|
29
|
%
|
|
28
|
%
|
|
30
|
%
|
|
Real estate
|
6
|
%
|
|
6
|
%
|
|
6
|
%
|
|
6
|
%
|
|
6
|
%
|
|
6
|
%
|
|
Total
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
Fair values of plan assets were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2020
|
|
(In thousands)
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Investments measured at NAV
|
|
Brewmatic Plan
|
|
$
|
75,904
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
75,904
|
|
|
Hourly Employees’ Plan
|
|
$
|
3,915
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,915
|
|
|
|
|
As of June 30, 2019
|
|
(In thousands)
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Investments measured at NAV
|
|
Brewmatic Plan
|
|
$
|
75,411
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
75,411
|
|
|
Hourly Employees’ Plan
|
|
$
|
3,778
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,778
|
|
The following is the target asset allocation for the Company's single employer pension plans— Brewmatic Plan and Hourly Employees' Plan—for fiscal 2021:
|
|
|
|
|
|
|
|
Fiscal 2021
|
|
U.S. large cap equity securities
|
37.7
|
%
|
|
U.S. small cap equity securities
|
4.6
|
%
|
|
International equity securities
|
23.2
|
%
|
|
Debt securities
|
28.3
|
%
|
|
Real estate
|
6.2
|
%
|
|
Total
|
100.0
|
%
|
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Estimated Amounts in OCI Expected To Be Recognized
In fiscal 2021, the Company expects to recognize net periodic benefit costs of $1.3 million for the Brewmatic Plan and recognize net periodic benefit credit of $41,000 for the Hourly Employees’ Plan.
Estimated Future Contributions and Refunds
In fiscal 2021, the Company expects to contribute $5.8 million to the Brewmatic Plan and does not expect to contribute to the Hourly Employees’ Plan. The Company is not aware of any refunds expected from single employer pension plans.
Estimated Future Benefit Payments
The following benefit payments are expected to be paid over the next 10 fiscal years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
Brewmatic Plan
|
|
Hourly Employees’
Plan
|
|
Year Ending:
|
|
|
|
June 30, 2021
|
|
|
$
|
7,100
|
|
|
$
|
160
|
|
|
June 30, 2022
|
|
|
$
|
6,820
|
|
|
$
|
160
|
|
|
June 30, 2023
|
|
|
$
|
7,010
|
|
|
$
|
180
|
|
|
June 30, 2024
|
|
|
$
|
7,110
|
|
|
$
|
190
|
|
|
June 30, 2025
|
|
|
$
|
7,200
|
|
|
$
|
200
|
|
|
June 30, 2026 to June 30, 2030
|
|
|
$
|
35,510
|
|
|
$
|
1,150
|
|
These amounts are based on current data and assumptions and reflect expected future service, as appropriate.
Multiemployer Pension Plans
The Company participates in two multiemployer defined benefit pension plans that are union sponsored and collectively bargained for the benefit of certain employees subject to collective bargaining agreements, of which the Western Conference of Teamsters Pension Plan ("WCTPP") is individually significant. The Company makes contributions to these plans generally based on the number of hours worked by the participants in accordance with the provisions of negotiated labor contracts.
Contributions made by the Company to the multiemployer pension plans are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
WCTPP(1)(2)(3)(5)
|
|
All Other Plans(4)
|
|
Year Ended:
|
|
|
|
|
|
June 30, 2020
|
|
$
|
1,685
|
|
|
$
|
34
|
|
|
June 30, 2019
|
|
$
|
3,634
|
|
|
$
|
39
|
|
|
June 30, 2018
|
|
$
|
1,605
|
|
|
$
|
35
|
|
____________
|
|
|
|
(1)
|
Individually significant plan.
|
|
|
|
|
(2)
|
Less than 5% of total contribution to WCTPP based on WCTPP's FASB Disclosure Statement for the calendar year ended December 31, 2019.
|
|
|
|
|
(3)
|
The Company guarantees that one hundred seventy-three (173) hours will be contributed upon for all employees who are compensated for all available straight time hours for each calendar month. An additional 6.5% of the basic contribution must be paid for PEER or the Program for Enhanced Early Retirement.
|
|
|
|
|
(4)
|
Includes one plan that is not individually significant.
|
|
|
|
|
(5)
|
June 30, 2019 includes WCT monthly settlement obligations of $190,507.
|
The risks of participating in multiemployer pension plans are different from single-employer plans in that: (i) assets contributed to a multiemployer plan by one employer may be used to provide benefits to employees of other participating employers; (ii) if a participating employer stops contributing to the plan, the unfunded obligations of the plan may be borne by the remaining participating employers; and (iii) if the Company stops participating in the multiemployer plan, the Company may be required to pay the plan an amount based on the underfunded status of the plan, referred to as a withdrawal liability.
The Company received a letter dated July 10, 2018 from the WCT Pension Trust assessing withdrawal liability against the Company for a share of the WCTPP unfunded vested benefits, on the basis claimed by the WCT Pension Trust that employment actions by the Company in 2016 in connection with the Corporate Relocation Plan constituted a partial withdrawal from the WCTPP. Additionally, in fiscal 2012, the Company withdrew from the Local 807 Labor-Management Pension Fund.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Outstanding balance of settlement obligations of the Company to WCT and Local 807 multiemployer pension plans are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
June 30, 2020
|
|
|
June 30, 2019
|
|
|
WCT Pension Trust (1)
|
|
—
|
|
|
$
|
1,487
|
|
|
Local 807 Pension Fund (2)
|
|
$
|
182
|
|
|
$
|
182
|
|
__________
(1) Initial liability amount of $3.4 million, including interest, commencing in September 10, 2018, payable in 17 monthly installments of $190,507 followed by a final monthly installment of $153,822 in February 2020.
(2) Lump sum cash settlement payment of $3.0 million in fiscal 2019 plus two remaining installment payments of $91,000 due on or before October 1, 2034 and on or before January 1, 2035. As of June 30, 2020, the Company has paid the Local 807 Pension Fund $3.0 million and has accrued $0.2 million within “Accrued pension liabilities” on the Company’s consolidated balance sheet.
Future collective bargaining negotiations may result in the Company withdrawing from the remaining multiemployer pension plans in which it participates and, if successful, the Company may incur a withdrawal liability, the amount of which could be material to the Company's results of operations and cash flows.
Multiemployer Plans Other Than Pension Plans
The Company participates in nine multiemployer defined contribution plans other than pension plans that provide medical, vision, dental and disability benefits for active, union-represented employees subject to collective bargaining agreements. The plans are subject to the provisions of the Employee Retirement Income Security Act of 1974, and provide that participating employers make monthly contributions to the plans in an amount as specified in the collective bargaining agreements. Also, the plans provide that participants make self-payments to the plans, the amounts of which are negotiated through the collective bargaining process. The Company's participation in these plans is governed by collective bargaining agreements which expires on or before January 31, 2025. The Company's aggregate contributions to multiemployer plans other than pension plans in the fiscal years ended June 30, 2020, 2019 and 2018 were $4.2 million, $5.2 million and $4.8 million, respectively. The Company expects to contribute an aggregate of approximately $4.5 million towards multiemployer plans other than pension plans in fiscal 2021.
401(k) Plan
The Company's 401(k) Plan is available to all eligible employees. The Company's 401(k) match portion is available to all eligible employees who have worked more than 1,000 hours during a calendar year and were employed at the end of the calendar year. Participants in the 401(k) Plan may choose to contribute a percentage of their annual pay subject to the maximum contribution allowed by the Internal Revenue Service. The Company's matching contribution is discretionary, based on approval by the Company's Board of Directors. The Company matching contribution for the calendar years 2020, 2019 and 2018, was 50% of an employee's annual contribution to the 401(k) Plan, up to 6% of the employee's eligible income. The Company recorded matching contributions of $1.8 million, $2.2 million and $2.0 million in operating expenses for the fiscal years ended June 30, 2020, 2019 and 2018, respectively. Effective March 31, 2020, the Company temporarily suspended its 401K matching program in response to the COVID-19 pandemic.
Effective January 1, 2019, the Company amended and restated the 401(k) Plan to, among other things, provide for: (i) an annual safe harbor non-elective contribution of shares of the Company’s common stock equal to 4% of each eligible participant’s annual plan compensation; (ii) an elective matching contribution for non-collectively bargained employees and certain union-represented employees equal to 100% of the first 3% of such eligible participant’s tax-deferred contributions to the 401(k) Plan; and (iii) profit-sharing contributions at the Company’s discretion. Participants are immediately vested in their contributions, the safe harbor non-elective contributions, the employer’s elective matching contributions, and the employer’s discretionary contributions. For the fiscal years ended June 30, 2020 and 2019, the Company contributed a total of 290,567 and 90,105 shares of the Company’s common stock with a value of $2.9 million and $1.6 million, respectively, to eligible participants’ annual plan compensation.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Postretirement Benefits
The Company sponsors a postretirement defined benefit plan that covers qualified non-union retirees and certain qualified union retirees (“Retiree Medical Plan”). On March 23, 2020, the Company announced a plan to amend and terminate the Retiree Medical Plan effective January 1, 2021. The plan provides medical, dental and vision coverage for retirees under age 65 and medical coverage only for retirees age 65 and above. Under this postretirement plan, the Company’s contributions toward premiums for retiree medical, dental and vision coverage for participants and dependents are scaled based on length of service, with greater Company contributions for retirees with greater length of service, subject to a maximum monthly Company contribution. The Company's retiree medical, dental and vision plan is unfunded, and its liability was calculated using an assumed discount rate of 0.06% at June 30, 2020. The Company projects an initial medical trend rate of 7.65% in fiscal 2021, ultimately reducing to 4.50% through the plan termination effective January 1, 2021.
The Company’s communication of its intention to amend and terminate the Retiree Medical Plan triggered re-measurement and curtailment of the plan. As a result, the re-measurement generated a prior service credit of $13.4 million to be amortized over the remaining months of the plan, and a revised net periodic postretirement benefit credit for fiscal 2021 of $14.6 million. Also, the Company recognized a one-time non-cash curtailment credit of $5.8 million for the year ended June 30, 2020.
The Company continues to provide a postretirement death benefit (“Death Benefit”) to certain of its employees and retirees, subject, in the case of current employees, to continued employment with the Company until retirement and certain other conditions related to the manner of employment termination and manner of death. The Company records the actuarially determined liability for the present value of the postretirement death benefit. The Company has purchased life insurance policies to fund the postretirement death benefit wherein the Company owns the policy but the postretirement death benefit is paid to the employee's or retiree's beneficiary. The Company records an asset for the fair value of the life insurance policies which equates to the cash surrender value of the policies.
The following table shows the components of net periodic postretirement benefit cost for the Retiree Medical Plan and Death Benefit for the fiscal years ended June 30, 2020, 2019 and 2018. Net periodic postretirement benefit cost for fiscal 2020 was based on employee census information as of June 30, 2020.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
(In thousands)
|
|
2020
|
|
2019
|
|
2018
|
|
Components of Net Periodic Postretirement Benefit Cost (Credit):
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
446
|
|
|
$
|
530
|
|
|
$
|
609
|
|
|
Interest cost
|
|
725
|
|
|
887
|
|
|
835
|
|
|
Amortization of net gain
|
|
(3,067
|
)
|
|
(834
|
)
|
|
(841
|
)
|
|
Curtailment credit - Retiree Medical
|
|
(5,750
|
)
|
|
—
|
|
|
—
|
|
|
Amortization of prior service credit
|
|
(5,666
|
)
|
|
(1,757
|
)
|
|
(1,757
|
)
|
|
Net periodic postretirement benefit (credit) cost
|
|
$
|
(13,312
|
)
|
|
$
|
(1,174
|
)
|
|
$
|
(1,154
|
)
|
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
The tables below show the remaining bases for the transition (asset) obligation, prior service cost (credit), and the calculation of the amortizable gain or loss.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retiree Medical Plan
|
|
Death Benefit
|
|
|
|
Year Ended June 30,
|
|
Year Ended June 30,
|
|
($ in thousands)
|
|
2020(1)
|
|
2019
|
|
2020
|
|
2019
|
|
Amortization of Net (Gain) Loss:
|
|
|
|
|
|
|
|
|
|
Net (gain) loss as of July 1
|
|
$
|
—
|
|
|
$
|
(7,039
|
)
|
|
$
|
2,903
|
|
|
$
|
1,878
|
|
|
Net (gain) loss subject to amortization
|
|
—
|
|
|
(7,039
|
)
|
|
2,903
|
|
|
1,878
|
|
|
Corridor (10% of greater of APBO or assets)
|
|
—
|
|
|
1,490
|
|
|
1,043
|
|
|
919
|
|
|
Net (gain) loss in excess of corridor
|
|
$
|
—
|
|
|
$
|
(5,549
|
)
|
|
$
|
1,860
|
|
|
$
|
959
|
|
|
Amortization years
|
|
—
|
|
|
8.6
|
|
|
5.8
|
|
|
6.5
|
|
__________
(1) Amounts are zero due to the plan termination effective January 1, 2021.
The following tables provide a reconciliation of the benefit obligation and plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30,
|
|
(In thousands)
|
|
2020
|
|
2019
|
|
Change in Benefit Obligation:
|
|
|
|
|
|
Projected postretirement benefit obligation at beginning of year
|
|
$
|
24,092
|
|
|
$
|
21,283
|
|
|
Service cost
|
|
446
|
|
|
530
|
|
|
Interest cost
|
|
725
|
|
|
887
|
|
|
Participant contributions
|
|
593
|
|
|
605
|
|
|
Amendments
|
|
(13,441
|
)
|
|
—
|
|
|
Actuarial gains (losses)
|
|
(621
|
)
|
|
2,010
|
|
|
Benefits paid
|
|
(1,055
|
)
|
|
(1,223
|
)
|
|
Projected postretirement benefit obligation at end of year
|
|
$
|
10,739
|
|
|
$
|
24,092
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
(In thousands)
|
|
2020
|
|
2019
|
|
Change in Plan Assets:
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Employer contributions
|
|
462
|
|
|
618
|
|
|
Participant contributions
|
|
593
|
|
|
605
|
|
|
Benefits paid
|
|
(1,055
|
)
|
|
(1,223
|
)
|
|
Fair value of plan assets at end of year
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Projected postretirement benefit obligation at end of year
|
|
10,739
|
|
|
24,092
|
|
|
Funded status of plan
|
|
$
|
(10,739
|
)
|
|
$
|
(24,092
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
(In thousands)
|
|
2020
|
|
2019
|
|
Amounts Recognized in the Consolidated Balance Sheets Consist of:
|
|
|
|
|
|
Current liabilities
|
|
$
|
(744
|
)
|
|
$
|
(1,068
|
)
|
|
Non-current liabilities
|
|
(9,995
|
)
|
|
(23,024
|
)
|
|
Total
|
|
$
|
(10,739
|
)
|
|
$
|
(24,092
|
)
|
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
(In thousands)
|
|
2020
|
|
2019
|
|
Amounts Recognized in AOCI Consist of:
|
|
|
|
|
|
Net gain
|
|
$
|
(2,714
|
)
|
|
$
|
(5,160
|
)
|
|
Prior service credit
|
|
(8,961
|
)
|
|
(6,936
|
)
|
|
Total AOCI
|
|
$
|
(11,675
|
)
|
|
$
|
(12,096
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
(In thousands)
|
|
2020
|
|
2019
|
|
Other Changes in Plan Assets and Benefit Obligations Recognized in OCI:
|
|
|
|
|
|
Unrecognized actuarial gains (loss)
|
|
$
|
(621
|
)
|
|
$
|
2,010
|
|
|
Prior service (credit) cost
|
|
(13,441
|
)
|
|
—
|
|
|
Unrecognized prior service cost
|
|
—
|
|
|
—
|
|
|
Amortization of net loss
|
|
3,068
|
|
|
835
|
|
|
Amortization of prior service cost
|
|
11,416
|
|
|
1,757
|
|
|
Total recognized in OCI
|
|
422
|
|
|
4,602
|
|
|
Net periodic benefit cost
|
|
(13,312
|
)
|
|
(1,174
|
)
|
|
Total recognized in net periodic benefit credit and OCI
|
|
$
|
(12,890
|
)
|
|
$
|
3,428
|
|
The estimated net gain that will be amortized from AOCI into net periodic benefit cost in fiscal 2021 is $5.6 million. Prior service credit that will be amortized from AOCI into net periodic benefit cost in fiscal 2021 is $9.0 million.
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
Estimated Future Benefit Payments:
|
|
|
Year Ending:
|
|
|
June 30, 2021
|
$
|
750
|
|
|
June 30, 2022
|
$
|
451
|
|
|
June 30, 2023
|
$
|
464
|
|
|
June 30, 2024
|
$
|
476
|
|
|
June 30, 2025
|
$
|
487
|
|
|
June 30, 2026 to June 30, 2030
|
$
|
2,538
|
|
|
|
|
|
Expected Contributions:
|
|
|
June 30, 2021
|
$
|
750
|
|
Sensitivity in Fiscal 2021 Results
Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plan. A one percentage point change in assumed health care cost trend rates would have the following effects in fiscal 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-Percentage Point
|
|
(In thousands)
|
|
Increase
|
|
Decrease
|
|
Effect on total of service and interest cost components
|
|
$
|
50
|
|
|
$
|
(43
|
)
|
|
Effect on accumulated postretirement benefit obligation
|
|
$
|
—
|
|
|
$
|
—
|
|
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Note 14. Debt Obligations
The following table summarizes the Company’s debt obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
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
|
|
$
|
122,000
|
|
|
4.91
|
%
|
|
$
|
92,000
|
|
|
3.98
|
%
|
In March 2020, pursuant to Amendment No. 2 to Amended and Restated Credit Agreement (the “Second Amendment”) the Company amended its existing senior secured revolving credit facility (such facility as amended to date, including pursuant to the Second Amendment, the “Amended Revolving Facility”) with certain financial institutions. The Second Amendment, among other things: (i) decreased the size of the revolving credit facility to $125.0 million from $150.0 million;(ii) made certain adjustments to the commitment fee rates and interest rates; (iii) increased the maximum total net leverage ratio financial covenant until the quarter ending December 31, 2021; (iv) added a minimum EBITDA financial covenant until the quarter ending December 31, 2021; (v) amended the definitions of “EBITDA” and “Permitted Acquisition”; (vi) removed the accordion feature; (vii) removed the Company’s option to request and agree to an extension of the maturity date with individual lenders; (viii) provided for a mortgage on certain of the Company’s real property; (ix) provides for the revolving commitments to be reduced upon the occurrence of certain asset dispositions and incurrences of other indebtedness; (x) added a monthly reporting requirement; and (xi) modified certain of the Company’s covenant-related baskets.
The Amended Revolving Facility otherwise retained many of its previous terms, including the sublimit on letters of credit and swingline loans of $15.0 million each. The commitment fee is based on a leverage grid and ranges from 0.20% to 0.50%. Borrowings under the Amended Revolving Facility bear interest on base rate loans based on a leverage grid with a range of PRIME + 0.50% to 2.50%, and on Eurodollar loans based on a leverage grid with a range of Adjusted LIBO Rate + 1.50% to 3.50%. Effective March 27, 2019, the Company entered into a rate swap agreement and in December 2019 amended the agreement to reduce the notional amount. The impact of the amendment for the year ended June 30, 2020, was $0.4 million of realized loss due to the partial unwinding of interest rate swap resulting from the amendment of the notional amount from $80.0 million to $65.0 million. See Note 6 for details.
Under the Amended Revolving Facility, the Company is subject to a variety of affirmative and negative covenants of types customary in a senior secured lending facility, including financial covenants relating to leverage, interest expense coverage and (until the quarter ending December 31, 2021) minimum adjusted EBITDA. The Company is allowed to pay dividends, provided, among other things, a total net leverage ratio is met, and no default exists or has occurred and is continuing as of the date of any such payment and after giving effect thereto. The Amended Revolving Facility has no scheduled payback required on the principal prior to the maturity date on November 6, 2023.
At June 30, 2020, the Company had outstanding borrowings of $122.0 million and had utilized $2.3 million of the letters of credit sublimit.
On July 23, 2020 (the "Effective Date"), pursuant to Amendment No. 3 to Amended and Restated Credit Agreement (the “Third Amendment”), the Company amended its existing senior secured revolving credit facility with certain financial institutions.
The Third Amendment, among other things:
|
|
|
|
(1)
|
retained the revolving commitments under the Credit Agreement of $125.0 million and the sublimit on letters of credit and swingline loans of $15.0 million each;
|
|
|
|
|
(2)
|
added a $5.0 million quarterly commitment reduction beginning September 30, 2021;
|
|
|
|
|
(3)
|
adjusted from cash flow-based to an asset-based lending structure with borrowing a base of 85% of eligible accounts receivable plus 50% of eligible inventory with certain permitted maximum over advance amounts;
|
|
|
|
|
(4)
|
removed all previous financial covenants of net leverage ratio, interest coverage ratio and minimum EBITDA;
|
|
|
|
|
(5)
|
added a covenant relief period (commencing on the effective date of the Third Amendment and ending upon delivery of a compliance certificate on or after fiscal month ending September 30, 2021), during which the Company must comply with the following:
|
(i) a minimum cumulative EBITDA covenant, tested on a monthly basis until the last day of June 2021;
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
(ii) a standalone minimum monthly EBITDA covenant tested on the last day of July 2021 and August 2021; and
(iii) a restriction on capital expenditures such that the amount of capital expenditures shall not exceed $25.0 million in the aggregate.
|
|
|
|
(6)
|
added covenant requiring the Company to maintain a minimum liquidity covenant, tested on a weekly basis;
|
|
|
|
|
(7)
|
added an anti-cash hoarding provision;
|
|
|
|
|
(8)
|
added a minimum fixed charge coverage ratio of 1.05:1.00 commencing with fiscal quarter ending September 30, 2021, and tested on a quarterly basis thereafter;
|
|
|
|
|
(9)
|
modified the applicable margin for base rate loans to range from PRIME + 3.50% to PRIME + 4.50% per annum and the applicable margin for Eurodollar loans to range from Adjusted LIBO Rate + 4.50% to Adjusted LIBO Rate + 5.50% per annum and fixed the commitment fee at 0.50%;
|
|
|
|
|
(10)
|
provided for the revolving commitments to be reduced upon the occurrence of certain asset dispositions and incurrence of non-permitted indebtedness and imposed additional restrictions on the Company’s ability to utilize certain other negative covenant baskets; and
|
|
|
|
|
(11)
|
added a requirement to provide mortgages and related mortgage instruments with respect to certain specified real property owned by the Company.
|
Upon executing the foregoing Third Amendment, the Company was in compliance with all of the financial covenants under the Amended Revolving Facility, and no event of default has occurred or existed through the Third Amendment effective date. Furthermore, the Company believes it will be in compliance with the related financial covenants under the Third Amendment for the next twelve months.
Note 15. Employee Stock Ownership Plan
The Company’s ESOP was established in 2000. As of December 31, 2018, the Company froze the ESOP such that (i) no employees of the Company may commence participation in the ESOP on or after December 31, 2018; (ii) no Company contributions will be made to the ESOP with respect to services performed or compensation received after December 31, 2018; and (iii) the ESOP accounts of all individuals who are actively employed by the Company and participating in the ESOP on December 31, 2018 will be fully vested as of such date. Additionally, the Administrative Committee, with the consent of the Board of Directors, designated certain employees who were terminated in connection with certain reductions-in-force in 2018 to be fully vested in their ESOP accounts as of their severance dates.
Shares were held by the plan trustee for allocation among participants using a compensation-based formula. Subject to vesting requirements, allocated shares are owned by participants and shares are held by the plan trustee until the participant retires.
During the fiscal years ended June 30, 2019 and 2018, the Company charged $0.9 million and $2.3 million, respectively, to compensation expense related to the ESOP. No expenses were recorded for fiscal year ended June 30, 2020. The difference between cost and fair market value of committed to be released shares was recorded as additional paid-in-capital.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30,
|
|
|
|
2020
|
|
2019
|
|
Allocated shares
|
|
1,170,015
|
|
|
1,393,530
|
|
|
Committed to be released shares
|
|
—
|
|
|
—
|
|
|
Unallocated shares
|
|
—
|
|
|
—
|
|
|
Total ESOP shares
|
|
1,170,015
|
|
|
1,393,530
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Fair value of ESOP shares
|
|
$
|
8,588
|
|
|
$
|
22,812
|
|
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Note 16. Share-based Compensation
Farmer Bros. Co. 2017 Long-Term Incentive Plan
On June 20, 2017 (the “Effective Date“), the Company’s stockholders approved the Farmer Bros. Co. 2017 Long-Term Incentive Plan (the “2017 Plan”). The 2017 Plan succeeded the Company's prior long-term incentive plans, the Farmer Bros. Co. Amended and Restated 2007 Long-Term Incentive Plan (the “Amended Equity Plan“) and the Farmer Bros. Co. 2007 Omnibus Plan (collectively, the “Prior Plans“). On the Effective Date, the Company ceased granting awards under the Prior Plans; however, awards outstanding under the Prior Plans will remain subject to the terms of the applicable Prior Plan.
The 2017 Plan provides for the grant of stock options (including incentive stock options and non-qualified stock options), stock appreciation rights, restricted stock, restricted stock units, dividend equivalents, performance shares and other stock- or cash-based awards to eligible participants. Non-employee directors of the Company and employees of the Company or any of its subsidiaries are eligible to receive awards under the 2017 Plan. The 2017 Plan authorizes the issuance of (i) 900,000 shares of common stock plus (ii) the number of shares of common stock subject to awards under the Company’s Prior Plans that are outstanding as of the Effective Date and that expire or are forfeited, cancelled or similarly lapse following the Effective Date. Subject to certain limitations, shares of common stock covered by awards granted under the 2017 Plan that are forfeited, expire or lapse, or are repurchased for or paid in cash, may be used again for new grants under the 2017 Plan. As of June 30, 2020, there were 458,947 shares remain available under the 2017 Plan including shares that were forfeited under the Prior Plans for future issuance. Shares of common stock granted under the 2017 Plan may be authorized but unissued shares, shares purchased on the open market or treasury shares. In no event will more than 900,000 shares of common stock be issuable pursuant to the exercise of incentive stock options under the 2017 Plan.
The 2017 Plan includes annual limits on certain awards that may be granted to any individual participant. The maximum aggregate number of shares of common stock with respect to all stock options and stock appreciation rights that may be granted to any one person during any calendar year is 250,000 shares. The 2017 Plan also includes limits on the maximum aggregate amount that may become payable pursuant to all performance bonus awards that may be granted to any one person during any calendar year and the maximum amount that may become payable pursuant to all cash-based awards granted under the 2017 Plan and the aggregate grant date fair value of all equity-based awards granted under the 2017 Plan to any non-employee director during any calendar year for services as a member of the Board.
The 2017 Plan contains a minimum vesting requirement, subject to limited exceptions, that awards made under the 2017 Plan may not vest earlier than the date that is one year following the grant date of the award. The 2017 Plan also contains provisions with respect to payment of exercise or purchase prices, vesting and expiration of awards, adjustments and treatment of awards upon certain corporate transactions, including stock splits, recapitalizations and mergers, transferability of awards and tax withholding requirements.
The 2017 Plan may be amended or terminated by the Board at any time, subject to certain limitations requiring stockholder consent or the consent of the applicable participant. In addition, the administrator may not, without the approval of the Company’s stockholders, authorize certain re-pricings of any outstanding stock options or stock appreciation rights granted under the 2017 Plan. The 2017 Plan will expire on June 20, 2027.
Farmer Bros. Co. 2020 Inducement Incentive Plan
In March 2020, the Company’s Board of Directors approved the Farmer Bros. Co. 2020 Inducement Incentive Plan (the “2020 Inducement Plan”). The 2020 Inducement Plan’s purpose is to enhance the Company’s ability to attract persons who make (or are expected to make) important contributions to the Company by providing these individuals with equity ownership opportunities. Awards under the 2020 Inducement Plan has the same terms and conditions as the 2017 Plan. The Board of Directors has reserved 300,000 shares of the Company’s common stock for issuance under the 2020 Inducement Plan. As of June 30, 2020, there were 211,505 shares remain available under the 2020 Inducement Plan for future issuance of which 40,134 were issued on July 1, 2020.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Non-qualified stock options with time-based vesting (“NQOs”)
One-third of the total number of NQO vest ratably on each of the first three anniversaries of the grant date, contingent on continued employment, and subject to accelerated vesting in certain circumstances.
Following are the assumptions used in the Black-Scholes valuation model for NQOs granted on the date of the grant during the fiscal years ended June 30, 2020, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
|
|
2020
|
|
2019
|
|
2018
|
|
Weighted average fair value of NQOs
|
|
$
|
4.24
|
|
|
$
|
7.78
|
|
|
$
|
10.41
|
|
|
Risk-free interest rate
|
|
1.5
|
%
|
|
3.0
|
%
|
|
2.0
|
%
|
|
Dividend yield
|
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
|
Average expected term
|
|
4.6 years
|
|
|
4.6 years
|
|
|
4.6 years
|
|
|
Expected stock price volatility
|
|
35.4
|
%
|
|
29.6
|
%
|
|
35.4
|
%
|
The Company’s assumption regarding expected stock price volatility is based on the historical volatility of the Company’s stock price. The risk-free interest rate is based on U.S. Treasury zero-coupon issues at the date of grant with a remaining term equal to the expected life of the stock options. The average expected term is based on historical weighted time outstanding and the expected weighted time outstanding calculated by assuming the settlement of outstanding awards at the midpoint between the vesting date and the end of the contractual term of the award. Currently, management estimates an annual forfeiture rate of 10.0% based on actual forfeiture experience. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
The following table summarizes NQO activity for the year ended June 30, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding NQOs:
|
|
Number
of NQOs
|
|
Weighted
Average
Exercise
Price ($)
|
|
Weighted
Average
Remaining
Life
(Years)
|
|
Aggregate
Intrinsic
Value
($ in thousands)
|
|
Outstanding at June 30, 2019
|
|
198,049
|
|
|
27.35
|
|
5.25
|
|
40
|
|
|
Granted
|
|
536,468
|
|
|
13.16
|
|
—
|
|
—
|
|
|
Exercised
|
|
(10,360
|
)
|
|
12.48
|
|
—
|
|
28
|
|
|
Forfeited
|
|
(157,172
|
)
|
|
24.14
|
|
—
|
|
—
|
|
|
Expired
|
|
(38,027
|
)
|
|
31.31
|
|
—
|
|
—
|
|
|
Outstanding at June 30, 2020
|
|
528,958
|
|
|
13.92
|
|
6.21
|
|
55
|
|
|
Exercisable at June 30, 2020
|
|
20,017
|
|
|
28.27
|
|
3.23
|
|
—
|
|
The weighted-average grant-date fair value of options granted during the year ended June 30, 2020 was $4.24.
The aggregate intrinsic values outstanding at the end of each fiscal period in the table above represent the total pretax intrinsic value, based on the Company’s closing stock price of $7.34 at June 30, 2020 and $16.37 at June 28, 2019, representing the last trading day of the respective fiscal years, which would have been received by NQO holders had all award holders exercised their NQOs that were in-the-money as of those dates. The aggregate intrinsic value of NQO exercises in each fiscal period above represents the difference between the exercise price and the value of the Company’s common stock at the time of exercise. NQOs outstanding that are expected to vest are net of estimated forfeitures.
The Company received $0.1 million, $0.3 million and $1.1 million in proceeds from exercises of vested NQOs in fiscal 2020, 2019 and 2018, respectively.
As of June 30, 2020 and 2019, respectively, there was $1.7 million and $1.1 million of unrecognized compensation cost related to NQOs. The unrecognized compensation cost related to NQOs at June 30, 2020 is expected to be recognized over the weighted average period of 2.28 years. Total compensation expense for NQOs was $0.7 million, $0.5 million and $0.3 million in fiscal 2020, 2019 and 2018, respectively.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Non-qualified stock options with performance-based and time-based vesting (“PNQs”)
PNQ shares granted for each fiscal year are subject to forfeiture if a target modified net income goal is not attained. For this purpose, “Modified Net Income” is defined as net income (GAAP) before taxes and excluding any gains or losses from sales of assets, and excluding the effect of restructuring and other transition expenses. These PNQs have an exercise price equal the closing price of the Company’s common stock on the date of grant. One-third of the total number of shares subject to each such stock option vest ratably on each of the first three anniversaries of the grant date, contingent on continued employment, and subject to accelerated vesting in certain circumstances.
PNQ shares were not granted during the fiscal years ended June 30, 2020, 2019 and 2018.
The following table summarizes PNQ activity for the year ended June 30, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding PNQs:
|
|
Number
of
PNQs
|
|
Weighted
Average
Exercise
Price ($)
|
|
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
|
|
(210,119
|
)
|
|
25.86
|
|
—
|
|
—
|
|
|
Outstanding at June 30, 2020
|
|
13,630
|
|
|
28.60
|
|
2.36
|
|
—
|
|
|
Exercisable at June 30, 2020
|
|
8,822
|
|
|
26.89
|
|
1.98
|
|
—
|
|
The aggregate intrinsic values outstanding at the end of each fiscal period in the table above represent the total pretax intrinsic values, based on the Company’s closing stock price of $7.34 at June 30, 2020 and $16.37 at June 28, 2019, representing the last trading day of the respective fiscal years, which would have been received by PNQ holders had all award holders exercised their PNQs that were in-the-money as of those dates. The aggregate intrinsic value of PNQ exercises in each fiscal period represents the difference between the exercise price and the value of the Company’s common stock at the time of exercise. PNQs outstanding that are expected to vest are net of estimated forfeitures.
There were no options exercised during the fiscal year ended June 30, 2020. The Company received $0.1 million and $0.3 million in proceeds from exercises of vested PNQs in fiscal 2019 and 2018, respectively.
As of June 30, 2020 and 2019, there were zero and $39.7 thousand, respectively, of unrecognized compensation cost related to PNQs. Total compensation expense related to PNQs in fiscal 2020, 2019 and 2018 was $18.3 thousand, $0.3 million and $0.8 million, respectively.
Restricted Stock
Restricted stock awards cliff vest on the earlier of the one year anniversary of the grant date or the date of the first annual meeting of the Company’s stockholders immediately following the grant date, in the case of non-employee directors, and the third anniversary of the grant date, in the case of eligible employees, in each case subject to continued service to the Company through the vesting date and the acceleration provisions of the award plan and restricted stock agreement. Restricted stock is expected to vest net of estimated forfeitures.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
The following table summarizes restricted stock activity for the year ended June 30, 2020:
|
|
|
|
|
|
|
|
|
|
Outstanding and Nonvested Restricted Stock Awards:
|
|
Shares
Awarded
|
|
Weighted
Average
Grant Date
Fair Value
($)
|
|
Outstanding at June 30, 2019
|
|
32,056
|
|
|
21.10
|
|
Granted
|
|
229,573
|
|
|
13.0
|
|
Exercised/Released
|
|
(30,352
|
)
|
|
20.8
|
|
Cancelled/Forfeited
|
|
(12,673
|
)
|
|
17.7
|
|
Outstanding and nonvested at June 30, 2020
|
|
218,604
|
|
|
13.0
|
The total grant-date fair value of restricted stock granted during the year ended June 30, 2020 was $2.5 million.
As of June 30, 2020 and 2019, there was $1.7 million and $0.4 million, respectively, of unrecognized compensation cost related to restricted stock. The unrecognized compensation cost related to restricted stock at June 30, 2020 is expected to be recognized over the weighted average period of 1.41 years. Total compensation expense for restricted stock was $1.1 million, $23.0 thousand and $0.3 million, for the fiscal years ended June 30, 2020, 2019 and 2018, respectively.
Performance-Based Restricted Stock Units (“PBRSUs”)
The PBRSU awards cliff vest on the third anniversary of the date of grant based on the Company’s achievement of certain financial performance goals during the performance periods, subject to certain continued employment conditions and subject to acceleration provisions of the award plan and restricted stock unit agreement. At the end of the three-year performance period, the number of PBRSUs that actually vest will be 0% to 200% of the target amount, depending on the extent to which the Company meets or exceeds the achievement of those financial performance goals measured over the full three-year performance period. PBRSUs are expected to vest net of estimated forfeitures.
The following table summarizes PBRSU activity for the year ended June 30, 2020:
|
|
|
|
|
|
|
|
|
|
Outstanding and Nonvested PBRSUs:
|
|
PBRSUs
Awarded
|
|
Weighted
Average
Grant Date
Fair Value
($)
|
|
Outstanding and nonvested at June 30, 2019
|
|
51,237
|
|
|
27.69
|
|
Granted
|
|
81,236
|
|
|
14.46
|
|
Vested/Released
|
|
—
|
|
|
—
|
|
Cancelled/Forfeited
|
|
(51,136
|
)
|
|
25.63
|
|
Outstanding and nonvested at June 30, 2020
|
|
81,337
|
|
|
15.78
|
The total grant-date fair value of PBRSUs granted during the year ended June 30, 2020 was $1.2 million.
As of June 30, 2020 and 2019, there was $0.5 million and $0.3 million, respectively, of unrecognized compensation cost related to PBRSUs. The unrecognized compensation cost related to PBRSUs at June 30, 2020 is expected to be recognized over the weighted average period of 2.17 years. Total compensation expense for PBRSUs was $0.2 million in each of the year ended June 30, 2020 and 2018. There was no compensation expense for PBRSUs for the fiscal year ended June 30, 2019.
Performance Cash Awards (“PCAs”)
In November 2019, the Company granted PCAs under the 2017 Plan to certain employees. The PCAs cliff vest on the third anniversary of the date of grant based on the Company’s achievement of certain financial performance goals for the performance period July 1, 2019 through June 30, 2022, subject to certain continued employment conditions and subject to acceleration provisions of the 2017 Plan. At the end of the three-year performance period, the amount of PCAs that actually vest will be 0% to 200% of the target amount, depending on the extent to which the Company meets or exceeds the achievement of those financial performance goals measured over the full three-year performance period.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
The PCAs are measured initially based on a fixed amount of the awards at the date of grant and are required to be re-measured based on the probability of achieving the performance conditions at each reporting date until settlement. Compensation expense for PCAs is recognized over the applicable performance periods. The Company records a liability equal to the cost of PCAs for which achievement of the performance condition is deemed probable. As of June 30, 2020, the Company had recognized accrued liabilities of $72.3 thousand.
At June 30, 2020, there was $0.3 million of unrecognized PCA compensation cost. The unrecognized PCA compensation cost at June 30, 2020 is expected to be recognized over the weighted average period of 2.37 years. Total compensation expense for PCAs was $72.3 thousand for the fiscal year ended June 30, 2020.
Note 17. Other Current Liabilities
Other current liabilities consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30,
|
|
(In thousands)
|
|
2020
|
|
2019
|
|
Accrued postretirement benefits
|
|
$
|
744
|
|
|
$
|
1,068
|
|
|
Accrued workers’ compensation liabilities
|
|
1,466
|
|
|
1,495
|
|
|
Cumulative preferred dividends, undeclared and unpaid (1)
|
|
1,477
|
|
|
305
|
|
|
Earnout payable(2)
|
|
—
|
|
|
1,000
|
|
|
Working capital dispute payable(3)
|
|
551
|
|
|
354
|
|
|
Other(4)
|
|
2,564
|
|
|
3,087
|
|
|
Other current liabilities
|
|
$
|
6,802
|
|
|
$
|
7,309
|
|
___________
(1) Represents the cumulative preferred dividends, undeclared and unpaid. Previously accrued long-term portion has been reclassified to current liabilities.
(2) Represents the estimated fair value of earnout paid in connection with the Company’s acquisition of substantially all of the assets of West Coast Coffee completed on February 7, 2017.
(3) Represents accrued expenses related to working capital disputes in connection with the Company's acquisition of Boyd Coffee on October 2, 2017.
(4) Includes accrued property taxes, sales and use taxes and insurance liabilities.
Note 18. Other Long-Term Liabilities
Other long-term liabilities include the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30,
|
|
(In thousands)
|
|
2020
|
|
2019
|
|
Finance leases liabilities
|
|
$
|
9
|
|
|
$
|
32
|
|
|
Derivative liabilities—noncurrent
|
|
2,859
|
|
|
1,612
|
|
|
Deferred compensation (1)
|
|
1,170
|
|
|
—
|
|
|
Cumulative preferred dividends, undeclared and unpaid—noncurrent
|
|
—
|
|
|
618
|
|
|
Deferred income taxes (2)
|
|
1,494
|
|
|
1,795
|
|
|
Other long-term liabilities
|
|
$
|
5,532
|
|
|
$
|
4,057
|
|
___________
(1) Includes payroll taxes and performance cash awards liability.
(2) Includes deferred tax liabilities that have an indefinite reversal pattern.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Note 19. Income Taxes
The current and deferred components of the provision for income taxes consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended June 30,
|
|
(In thousands)
|
|
2020
|
|
2019
|
|
2018
|
|
Current:
|
|
|
|
|
|
|
|
Federal
|
|
$
|
—
|
|
|
$
|
(1,774
|
)
|
|
$
|
101
|
|
|
State
|
|
105
|
|
|
231
|
|
|
56
|
|
|
Total current income tax (benefit) expense
|
|
105
|
|
|
(1,543
|
)
|
|
157
|
|
|
Deferred:
|
|
|
|
|
|
|
|
Federal
|
|
(458
|
)
|
|
30,618
|
|
|
17,090
|
|
|
State
|
|
158
|
|
|
11,036
|
|
|
65
|
|
|
Total deferred income tax expense
|
|
(300
|
)
|
|
41,654
|
|
|
17,155
|
|
|
Income tax expense
|
|
$
|
(195
|
)
|
|
$
|
40,111
|
|
|
$
|
17,312
|
|
A reconciliation of income tax expense to the federal statutory tax rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended June 30,
|
|
(In thousands)
|
|
2020
|
|
2019
|
|
2018
|
|
Statutory tax rate
|
|
21
|
%
|
|
21
|
%
|
|
28
|
%
|
|
Income tax (benefit) expense at statutory rate
|
|
$
|
(7,829
|
)
|
|
$
|
(7,032
|
)
|
|
$
|
(272
|
)
|
|
State income tax (benefit) expense, net of federal tax benefit
|
|
(1,523
|
)
|
|
(1,295
|
)
|
|
12
|
|
|
Valuation allowance
|
|
9,153
|
|
|
50,123
|
|
|
283
|
|
|
Change in tax rate
|
|
233
|
|
|
124
|
|
|
18,022
|
|
|
Retiree life insurance
|
|
—
|
|
|
—
|
|
|
19
|
|
|
Other (net)
|
|
(229
|
)
|
|
(1,809
|
)
|
|
(752
|
)
|
|
Income tax expense
|
|
$
|
(195
|
)
|
|
$
|
40,111
|
|
|
$
|
17,312
|
|
|
|
|
|
|
|
|
|
Pursuant to the Tax Cuts and Jobs Act enacted on December 22, 2017 (the "Tax Act"), the federal corporate tax rate was reduced to 21.0%, effective for the tax years beginning on or after January 1, 2018. Deferred tax amounts are calculated based on the rates at which they are expected to reverse in the future.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
The primary components of the temporary differences which give rise to the Company’s net deferred tax assets (liabilities) are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30,
|
|
(In thousands)
|
|
2020
|
|
2019
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
Postretirement benefits
|
|
$
|
20,232
|
|
|
$
|
20,775
|
|
|
|
Accrued liabilities
|
|
3,970
|
|
|
5,042
|
|
|
|
Net operating loss carryforwards
|
|
38,754
|
|
|
37,768
|
|
|
|
Intangible assets
|
|
9,482
|
|
|
—
|
|
|
|
Operating lease liabilities
|
|
5,419
|
|
|
—
|
|
|
|
Other
|
|
6,893
|
|
|
5,950
|
|
|
|
Total deferred tax assets
|
|
84,750
|
|
|
69,535
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
Fixed assets
|
|
(13,427
|
)
|
|
(15,562
|
)
|
|
|
Right-of-use operating lease assets
|
|
(5,513
|
)
|
|
—
|
|
|
|
Other
|
|
(2,950
|
)
|
|
(3,749
|
)
|
|
|
Total deferred tax liabilities
|
|
(21,890
|
)
|
|
(19,311
|
)
|
|
|
Valuation allowance
|
|
(64,354
|
)
|
|
(52,019
|
)
|
|
|
Net deferred tax liabilities
|
|
$
|
(1,494
|
)
|
|
$
|
(1,795
|
)
|
|
At June 30, 2020, the Company had approximately $150.6 million in federal and $115.0 million in state net operating loss carryforwards that will expire from June 30, 2021 to June 30, 2030. Additionally, at June 30, 2020, the Company had $0.8 million of federal business tax credits that will expire from June 30, 2025 to June 30, 2038.
At June 30, 2020, the Company had net deferred tax assets of $62.9 million before valuation allowance of $64.4 million. In assessing if the deferred tax assets will be realized, the Company considers whether it is probable that some or all of the deferred tax assets will not be realized. In determining whether the deferred taxes are realizable, the Company considers the period of expiration of the tax asset, historical and projected taxable income, and tax liabilities for the tax jurisdiction in which the tax asset is located. Valuation allowances are provided to reduce the amounts of deferred tax assets to an amount that is more likely than not to be realized based on an assessment of positive and negative evidence, including estimates of future taxable income necessary to realize future deductible amounts.
For the years ended June 30, 2020, 2019 and 2018, due to recent cumulative losses, the Company concluded that certain federal and state net operating loss carry forwards and tax credit carryovers will not be utilized before expiration. The amounts of valuation allowance recorded in the Consolidated Balance Sheets were $64.4 million, $52.0 million and $1.9 million to reduce deferred tax assets in fiscal 2020, 2019 and 2018, respectively. The Company's valuation allowance increased in fiscal 2020, 2019 and 2018 by $12.3 million, $50.1 million and $0.3 million, respectively.
As of, and for the three years ended June 30, 2020, 2019 and 2018, the Company had no significant uncertain tax positions.
The Company files income tax returns in the U.S. and in various state jurisdictions with varying statutes of limitations. The Company is no longer subject to U.S. income tax examinations for the fiscal years prior to June 30, 2018. Although the outcome of tax audits is always uncertain, the Company does not believe the outcome of any future audit will have a material adverse effect on the Company’s consolidated financial statements.
The Company’s policy is to recognize interest expense and penalties related to income tax matters as a component of income tax expense. There were no amount of interest and penalties recognized in the Consolidated Balance Sheets in the fiscal years ended June 30, 2020 and 2019, associated with uncertain tax positions. Additionally, the Company did not record any income tax expense related to interest and penalties on uncertain tax positions in the fiscal years ended June 30, 2020, 2019 and 2018, respectively.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Note 20. Net (Loss) Income Per Common Share
Basic net income (loss) per common share is calculated by dividing net income (loss) attributable to the Company by the weighted average number of common shares outstanding during the periods presented. Diluted net income (loss) per common share is calculated by dividing diluted net income (loss) attributable to the Company by the weighted average number of common shares outstanding adjusted to include the effect, if dilutive, of the exercise of in-the-money stock options, unvested performance-based restricted stock units, and shares of Series A Preferred Stock, as converted, during the periods presented. The calculation of dilutive shares outstanding excludes out-of-the-money stock options (i.e., such option’s exercise prices were greater than the average market price of our common shares for the period) and unvested performance-based restricted stock units because their inclusion would be have been anti-dilutive.
The following table presents the computation of basic and diluted earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended June 30,
|
|
(In thousands, except share and per share amounts)
|
|
2020
|
|
2019
|
|
2018
|
|
Undistributed net (loss) income available to common stockholders
|
|
$
|
(37,462
|
)
|
|
$
|
(74,054
|
)
|
|
$
|
(18,652
|
)
|
|
Undistributed net (loss) income available to nonvested restricted stockholders and holders of convertible preferred stock
|
|
(179
|
)
|
|
(76
|
)
|
|
(17
|
)
|
|
Net (loss) income available to common stockholders—basic
|
|
$
|
(37,641
|
)
|
|
$
|
(74,130
|
)
|
|
$
|
(18,669
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding—basic
|
|
17,205,849
|
|
|
16,996,354
|
|
|
16,815,020
|
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
Shares issuable under stock options
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Weighted average common shares outstanding—diluted
|
|
17,205,849
|
|
|
16,996,354
|
|
|
16,815,020
|
|
|
Net (loss) income per common share available to common stockholders—basic
|
|
$
|
(2.19
|
)
|
|
$
|
(4.36
|
)
|
|
$
|
(1.11
|
)
|
|
Net (loss) income per common share available to common stockholders—diluted
|
|
$
|
(2.19
|
)
|
|
$
|
(4.36
|
)
|
|
$
|
(1.11
|
)
|
The following table summarizes anti-dilutive securities excluded from the computation of diluted net income (loss) per common share for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended June 30,
|
|
|
|
2020
|
|
2019
|
|
2018
|
|
Shares issuable under stock options
|
|
330,627
|
|
|
157,850
|
|
|
462,032
|
|
|
Shares issuable under convertible preferred stock
|
|
422,193
|
|
|
407,734
|
|
|
393,769
|
|
|
Shares issuable under PBRSUs
|
|
73,012
|
|
|
65,971
|
|
|
35,732
|
|
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Note 21. Preferred Stock
The Company is authorized to issue 500,000 shares of preferred stock at a par value of $1.00, including 21,000 authorized shares of Series A Preferred Stock.
Series A Convertible Participating Cumulative Perpetual Preferred Stock
The Series A Preferred Stock (a) pays a dividend, when, as and if declared by the Company’s Board of Directors, of 3.5% APR of the stated value per share, payable quarterly in arrears, (b) has an initial stated value of $1,000 per share, adjustable up or down by the amount of undeclared and unpaid dividends or subsequent payment of accumulated dividends thereon, respectively, and (c) has a conversion price of $38.32. Dividends may be paid in cash. The Company accrues for undeclared and unpaid dividends as they are payable in accordance with the terms of the Certificate of Designations filed with the Secretary of State of the State of Delaware. At June 30, 2020, the Company had undeclared and unpaid preferred dividends of $1,478,429 on 14,700 issued and outstanding shares of Series A Preferred Stock. Series A Preferred Stock is a participating security and has rights to earnings that otherwise would have been available to holders of the Company's common stock. On an as converted basis, holders of Series A Preferred Stock are entitled to vote together with the holders of the Company’s common stock and are entitled to share in the dividends on the Company's common stock, when declared. Each share of Series A Preferred Stock is convertible into the number of shares of the Company’s common stock (rounded down to the nearest whole share and subject to adjustment in accordance with the terms of the Certificate of Designations) equal to the stated value per share of Series A Preferred Stock divided by the conversion price of $38.32. Series A Preferred Stock is a perpetual stock and is not redeemable at the election of the Company or any holder. Based on its characteristics, the Company classified Series A Preferred Stock as permanent equity.
At June 30, 2020, 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
|
|
|
$
|
1,101
|
|
|
$
|
16,178
|
|
|
$
|
1,478
|
|
|
$
|
16,178
|
|
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Note 22. Commitments and Contingencies
Purchase Commitments
As of June 30, 2020, the Company had committed to purchase green coffee inventory totaling $50.5 million under fixed-price contracts, $7.0 million in other inventory under non-cancelable purchase orders and $8.2 million in other purchases under non-cancelable purchase orders.
Legal Proceedings
Council for Education and Research on Toxics (“CERT”) v. Brad Berry Company Ltd., et al., Superior Court of the State of California, County of Los Angeles
On August 31, 2012, CERT filed an amendment to a private enforcement action adding a number of companies as defendants, including the Company’s subsidiary, Coffee Bean International, Inc., which sell coffee in California under the State of California's Safe Drinking Water and Toxic Enforcement Act of 1986 (“Prop 65”). The suit alleges that the defendants have failed to issue clear and reasonable warnings in accordance with Prop 65 that the coffee they produce, distribute, and sell contains acrylamide. This lawsuit was filed in Los Angeles Superior Court (the “Court”). CERT alleges that the Company and the other defendants failed to provide warnings for their coffee products of exposure to the chemical acrylamide as required under Prop 65. Plaintiff seeks equitable relief, including providing warnings to consumers of coffee products, as well as civil penalties in the amount of the statutory maximum of $2,500.00 per day per violation of Prop 65. The Plaintiff asserts that every consumed cup of coffee, absent a compliant warning, is equivalent to a violation under Prop 65.
The Company, as part of a joint defense group (“JDG”) organized to defend against the lawsuit, disputes the claims of CERT. Acrylamide is not added to coffee but is present in all coffee in small amounts (parts per billion) as a byproduct of the coffee bean roasting process. Acrylamide is produced naturally in connection with the heating of many foods, especially starchy foods, and is believed to be caused by the Maillard reaction, though it has also been found in unheated foods such as olives. With respect to coffee, acrylamide is produced when coffee beans are heated during the roasting process-it is the roasting itself that produces the acrylamide. While there has been a significant amount of research concerning proposals for treatments and other processes aimed at reducing acrylamide content of different types of foods, to our knowledge there is currently no known strategy for reducing acrylamide in coffee without negatively impacting the sensorial properties of the product.
The Company has asserted multiple affirmative defenses. Trial of the first phase of the case commenced on September 8, 2014, and was limited to three affirmative defenses shared by all defendants. On September 1, 2015, the trial court issued a final ruling adverse to defendants on all Phase 1 defenses. Trial of the second phase of the case commenced in the fall of 2017. On May 7, 2018, the trial court issued a ruling adverse to defendants on the Phase 2 defense, the Company's last remaining defense to liability. On June 22, 2018, the California Office of Environmental Health Hazard Assessment (OEHHA) proposed a new regulation clarifying that cancer warnings are not required for coffee under Proposition 65. The case was set to proceed to a third phase trial on damages, remedies and attorneys' fees on October 15, 2018. However, on October 12, 2018, the California Court of Appeal granted the “defendants” request for a stay of the Phase 3 trial.
On June 3, 2019, the Office of Administrative Law (OAL) approved the coffee exemption regulation. The regulation became effective on October 1, 2019. On June 24, 2019, the Court of Appeal lifted the stay of the litigation. A status conference was held on July 11, 2019. The Court granted the JDG’s motion for leave to amend its answers to add the coffee exemption regulation as a defense. Concurrently, the Court denied CERT’s motion to add OEHHA as a party but granted CERT’s motions to complete the administrative record with respect to the exemption and to undertake certain third party discovery. A status conference was held November 12, 2019 to discuss discovery issues and dispositive motions. Plaintiff’s motion to compel OEHHA to add documents to the rulemaking file for the new coffee exemption regulation was denied. CERT continues to pursue third-party discovery with plans to file motions to compel appearances of proposed deponents. These motions, along with CERT’s eight summary judgment motions, were heard at a January 21, 2020 hearing where the Court denied several of CERT’s discovery requests. The JDG’s reply in support of its motion for summary judgment was due to the Court on the March 16, 2020 however, on March 17, 2020, notice was given that the Court was rescheduling the hearings set for March 23, 2020. Due to COVID 19 restrictions, the Court continued the hearing on the nine motions until July 16, 2020. At the hearing, the Court denied three of CERT’s motions for summary adjudication that challenged the OEHHA rulemaking, and rescheduled the balance of the pending motions for August 10, 2020. Subsequent to the hearing on January 21, 2020, Plaintiff made broad discovery requests against each of the defendants in hopes of opening up a third round of discovery. The discovery focuses on
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
“additives to” and “flavorings” in coffee. The JDG has responded to the discovery requests but Plaintiff has filed a motion to compel further answers to discovery and production of documents. The Court has continued a hearing on this matter until August 21, 2020.
At the August 10, 2020 hearing, the Court denied multiple motions by the Plaintiffs for summary adjudication. The hearing on the remaining motions was scheduled for August 21, 2020 and at that hearing, the Court denied CERT’s motion for summary judgment and granted the JDG’s motion for summary judgment, noting that the discovery and claims regarding additives were outside the scope of this case.
The JDG is preparing an order and a proposed form of judgment reflecting the Courts ruling to submit to the Court. At this time, the Company is unable to predict the timing of the final judgment or any procedural next steps by CERT. In addition, the Company is not able to predict the probability of the outcome or estimate of loss, if any, related to this matter.
The Company is a party to various other pending legal and administrative proceedings. It is management’s opinion that the outcome of such proceedings will not have a material impact on the Company’s financial position, results of operations, or cash flows.
Note 23. Revenue Recognition
The Company’s primary sources of revenue are sales of coffee, tea and culinary products. The Company recognizes revenue when control of the promised good or service is transferred to the customer and in amounts that the Company expects to collect. The timing of revenue recognition takes into consideration the various shipping terms applicable to the Company’s sales.
The Company delivers products to customers primarily through two methods, DSD to the Company’s customers at their place of business and direct ship from the Company’s warehouse to the customer’s warehouse or facility. Each delivery or shipment made to a third party customer is to satisfy a performance obligation. Performance obligations generally occur at a point in time and are satisfied when control of the goods passes to the customer. The Company is entitled to collection of the sales price under normal credit terms in the regions in which it operates.
The Company disaggregates net sales from contracts with customers based on the characteristics of the products sold:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended June 30,
|
|
|
|
2020
|
|
2019
|
|
2018
|
|
(In thousands)
|
|
$
|
|
% of total
|
|
$
|
|
% of total
|
|
$
|
|
% of total
|
|
Net Sales by Product Category:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Coffee (Roasted)
|
|
$
|
325,764
|
|
|
64.9
|
%
|
|
$
|
378,583
|
|
|
63.5
|
%
|
|
$
|
379,951
|
|
|
62.6
|
%
|
|
Coffee (Frozen Liquid)
|
|
28,619
|
|
|
5.7
|
%
|
|
34,541
|
|
|
5.8
|
%
|
|
34,794
|
|
|
5.7
|
%
|
|
Tea (Iced & Hot)
|
|
25,369
|
|
|
5.1
|
%
|
|
33,109
|
|
|
5.6
|
%
|
|
32,477
|
|
|
5.4
|
%
|
|
Culinary
|
|
50,135
|
|
|
10.0
|
%
|
|
64,100
|
|
|
10.8
|
%
|
|
64,432
|
|
|
10.6
|
%
|
|
Spice
|
|
21,473
|
|
|
4.3
|
%
|
|
24,101
|
|
|
4.0
|
%
|
|
25,150
|
|
|
4.2
|
%
|
|
Other beverages(1)
|
|
44,983
|
|
|
9.0
|
%
|
|
58,367
|
|
|
9.8
|
%
|
|
66,699
|
|
|
11.0
|
%
|
|
Other revenues(2)
|
|
2,701
|
|
|
0.5
|
%
|
|
—
|
|
|
—
|
%
|
|
—
|
|
|
—
|
%
|
|
Net sales by product category
|
|
499,044
|
|
|
99.5
|
%
|
|
592,801
|
|
|
99.5
|
%
|
|
603,503
|
|
|
99.5
|
%
|
|
Fuel surcharge
|
|
2,276
|
|
|
0.5
|
%
|
|
3,141
|
|
|
0.5
|
%
|
|
3,041
|
|
|
0.5
|
%
|
|
Net sales
|
|
$
|
501,320
|
|
|
100.0
|
%
|
|
$
|
595,942
|
|
|
100.0
|
%
|
|
$
|
606,544
|
|
|
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.
|
The Company does not have any material contract assets and liabilities as of June 30, 2020. Receivables from contracts with customers are included in “Accounts receivable, net” on the Company’s condensed consolidated balance sheets. At June 30, 2020, 2019 and 2018, “Accounts receivable, net” included, $40.7 million, $53.6 million and $54.5 million, respectively, in receivables from contracts with customers.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Note 24. Selected Quarterly Financial Data (Unaudited)
The following tables set forth certain unaudited quarterly information for each of the eight fiscal quarters in the two year period ended June 30, 2020. This quarterly information has been prepared on a consistent basis with the audited consolidated financial statements and, in the opinion of management, includes all adjustments which management believes are necessary for a fair presentation of the information for the periods presented. All prior period amounts have been retrospectively adjusted to reflect the impact of the certain changes in accounting principles and corrections to previously issued financial statements.
The Company's quarterly operating results may fluctuate significantly as a result of a variety of factors, and operating results for any fiscal quarter are not necessarily indicative of results for a full fiscal year or future fiscal quarters.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For The Three Months Ended
|
|
|
|
September 30,
2019
|
|
December 31,
2019
|
|
March 31,
2020
|
|
June 30,
2020
|
|
(In thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
138,600
|
|
|
$
|
152,498
|
|
|
$
|
129,139
|
|
|
$
|
81,083
|
|
|
Cost of goods sold
|
|
$
|
97,959
|
|
|
$
|
108,513
|
|
|
$
|
91,190
|
|
|
$
|
65,536
|
|
|
Gross profit
|
|
$
|
40,641
|
|
|
$
|
43,985
|
|
|
$
|
37,949
|
|
|
$
|
15,547
|
|
|
Selling expenses
|
|
$
|
33,614
|
|
|
$
|
34,906
|
|
|
$
|
31,968
|
|
|
$
|
21,274
|
|
|
Income (loss) from operations
|
|
$
|
6,892
|
|
|
$
|
8,870
|
|
|
$
|
(45,169
|
)
|
|
$
|
(13,595
|
)
|
|
Net income (loss)
|
|
$
|
4,654
|
|
|
$
|
7,754
|
|
|
$
|
(39,777
|
)
|
|
$
|
(9,718
|
)
|
|
Net income (loss) available to common stockholders per common share—basic
|
|
$
|
0.26
|
|
|
$
|
0.44
|
|
|
$
|
(2.32
|
)
|
|
$
|
(0.57
|
)
|
|
Net income (loss) available to common stockholders per common share—diluted
|
|
$
|
0.26
|
|
|
$
|
0.43
|
|
|
$
|
(2.32
|
)
|
|
$
|
(0.57
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For The Three Months Ended
|
|
|
|
September 30,
2018
|
|
December 31,
2018
|
|
March 31,
2019
|
|
June 30,
2019
|
|
(In thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
147,440
|
|
|
$
|
159,773
|
|
|
$
|
146,679
|
|
|
$
|
142,050
|
|
|
Cost of goods sold
|
|
$
|
99,205
|
|
|
$
|
106,529
|
|
|
$
|
106,779
|
|
|
$
|
104,327
|
|
|
Gross profit
|
|
$
|
48,235
|
|
|
$
|
53,244
|
|
|
$
|
39,900
|
|
|
$
|
37,723
|
|
|
Selling expenses
|
|
$
|
37,310
|
|
|
$
|
39,591
|
|
|
$
|
34,422
|
|
|
$
|
28,324
|
|
|
(Loss) income from operations
|
|
$
|
(2,078
|
)
|
|
$
|
502
|
|
|
$
|
(6,102
|
)
|
|
$
|
(7,024
|
)
|
|
Net loss
|
|
$
|
(2,986
|
)
|
|
$
|
(10,100
|
)
|
|
$
|
(51,749
|
)
|
|
$
|
(8,760
|
)
|
|
Net loss available to common stockholders per common share—basic
|
|
$
|
(0.18
|
)
|
|
$
|
(0.60
|
)
|
|
$
|
(3.05
|
)
|
|
$
|
(0.52
|
)
|
|
Net loss available to common stockholders per common share—diluted
|
|
$
|
(0.18
|
)
|
|
$
|
(0.60
|
)
|
|
$
|
(3.05
|
)
|
|
$
|
(0.52
|
)
|
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Note 25. Subsequent Events
The Company evaluated all events or transactions that occurred after June 30, 2019 through the date the consolidated financial statements were issued. During this period the Company had the following material subsequent events that require disclosure:
On July 23, 2020, pursuant to Amendment No. 3 to Amended and Restated Credit Agreement, the Company amended its existing senior secured revolving credit facility with certain financial institutions. See Note 14 for summary description of the key items of Amendment No. 3. The full text of Amendment No. 3 has been included as Exhibit 10.12 in this Annual Report on Form 10‑K.