Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES þ NO ¨☐ No ☑
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES ¨ NO þ☐ No ☑
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference toof the registrant as of December 31, 2021, the last business day of the registrant’s most recently completed second fiscal quarter, was $96.3 million based upon the closing price at whichreported for such date on the Farmer Bros. Co. common stock was sold on December 30, 2011 was $61.5 million.Nasdaq Global Select Market.
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PART I | | |
ITEM 1. | Business | |
ITEM 1A. | Risk Factors | |
ITEM 1B. | Unresolved Staff Comments | |
ITEM 2. | Properties | |
ITEM 3. | Legal Proceedings | |
ITEM 4. | Mine Safety Disclosures | |
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PART II | | |
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ITEM 5. | Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | |
ITEM 6. | Selected Financial Data | |
ITEM 7. | Management's Discussion and Analysis of Financial Condition and Results of Operations | |
ITEM 7A. | Quantitative and Qualitative Disclosures About Market Risk | |
ITEM 8. | Financial Statements and Supplementary Data | |
ITEM 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | |
ITEM 9A. | Controls and Procedures | |
ITEM 9B. | Other Information | |
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| PART III | | |
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| ITEM 10. | | 1
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| ITEM 11. | | 9
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| ITEM 12. | | 33
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| ITEM 13. | | 36
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| ITEM 14. | | |
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| PART IV | | |
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| ITEM 15. | | 40
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SIGNATURES | | 45
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EXPLANATORY NOTE
Farmer Bros. Co. (“Farmer Bros.” or the “Company”) is filing this Amendment No. 1 on Form 10-K/A (this “Amendment”) to its Form 10-K for the fiscal year ended June 30, 2022, which was filed with the Securities and Exchange Commission (the “SEC”) on September 2, 2022 (the “Original Filing”).
This Amendment is being filed for the purpose of providing the information required by Items 10 through 14 of Part III of Form 10-K. This information was previously omitted from the Original Filing in reliance on General Instruction G(3) to Form 10-K, which permits the above-referenced Items to be incorporated in the Annual Report on Form 10-K by reference from a definitive proxy statement, if such definitive proxy statement is filed no later than 120 days after the last day of the Company’s fiscal year on June 30, 2022.
In accordance with Rule 12b-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the cover page to the Original Filing and Items 10 through 14 of Part III of the Original Filing are hereby amended and restated in their entirety. In addition, pursuant to Rule 12b-15 under the Exchange Act, the Company is including Item 15 of Part IV, solely to file the certifications required under Section 302 of the Sarbanes-Oxley Act of 2002 with this Amendment.
Except as described above, no other changes have been made to the Original Filing. This Amendment does not affect any other section of the Original Filing not otherwise discussed herein and continues to speak as of the date of the Original Filing. The Company has not updated the disclosures contained in the Original Filing to reflect any events that occurred subsequent to the date of the Original Filing. Accordingly, this Amendment should be read in conjunction with the Company’s other filings made with the SEC subsequent to the filing of the Original Filing.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this annual report on Form 10-K are not based on historical fact
This Amendment and
are forward-looking statementsother documents we file with the SEC contain “forward-looking statements” within the meaning of
federal securities lawsSection 27A of the Securities Act of 1933, as amended (the “Securities Act”), and
regulations. These statementsSection 21E of the Exchange Act, that are based on
management’s current expectations,
assumptions, estimates,
forecasts and
observationsprojections about us, our future performance, our financial condition, our products, our business strategy, our beliefs and our management’s assumptions. In addition, we, or others on our behalf, may make forward-looking statements in press releases or written statements, or in our communications and discussions with investors and analysts in the normal course of
future eventsbusiness through meetings, webcasts, phone calls and
include any statements that do not directly relate to any historical or current fact.conference calls. These forward-looking statements can be identified by the use of words like “anticipates,” “estimates,” “projects,” “expects,” “plans,” “believes,” “intends,” “will,”
“could,” “may,” “assumes” and other words of similar meaning.
OwingThese statements are based on management’s beliefs, assumptions, estimates and observations of future events based on information available to
our management at the
time the statements are made and include any statements that do not relate to any historical or current fact. These statements are not guarantees of future performance and they involve certain risks, uncertainties
inherent in forward-looking statements, actualand assumptions that are difficult to predict. Actual outcomes and results
couldmay differ materially from
thosewhat is expressed, implied or forecast by our forward-looking statements due in part to the risks, uncertainties and assumptions set forth in
forward-looking statements. We intend these forward-looking statements to speak only at the timePart I, Item 1.A., Risk Factors as well as Part II, Item 7, Management’s Discussion and Analysis of this reportFinancial Condition and do not undertake to update or revise these statements as more information becomes available except as required under federal securities laws and the rules and regulationsResults of Operations, of the
Original Filing, as well as those discussed elsewhere in the Original Filing and other factors described from time to time in our filings with the SEC.
Factors that could cause actual results to differ materially from those in forward-looking statements include, but are not limited to, disruption to our business and customers from the COVID-19 pandemic (including the effects of emerging and novel variants of the virus and any virus containment measures such as stay-at-home orders or government mandates) and severe winter weather, levels of consumer confidence in national and local economic business conditions, the duration and magnitude of the pandemic’s impact on labor conditions, the success of our strategy to recover from the effects of the pandemic, the success of our turnaround strategy, the impact of capital improvement projects, the adequacy and availability of capital resources to fund our existing and planned business operations and our capital expenditure requirements, the relative effectiveness of compensation-based employee incentives in causing improvements in our performance, the capacity to meet the demands of our large national account customers, the extent of execution of plans for the growth of our business and achievement of financial metrics related to those plans, our success in retaining and/or attracting qualified employees, our success in adapting to technology and new commerce channels, the effect of the capital markets as well as other external factors on stockholder value, fluctuations in availability and cost of green coffee, competition, organizational changes, the impacteffectiveness of a weakerour hedging strategies in reducing price and interest rate risk, changes in consumer preferences, our ability to achieve sustainability goals in ways that do not materially impair profitability, changes in the strength of the economy, including any effects from inflation, business conditions in the coffee industry and food industry in general, our continued success in attracting new customers, variances from budgeted sales mix and growth rates, weather and special or unusual events, changes in the quality or dividend stream of third parties’ securities and other investment vehicles in which we have invested our assets, as well as other risks described in this reportAmendment and other factors described from time to time in our filings with the SEC.
Given these risks and uncertainties, you should not rely on forward-looking statements as a prediction of actual results. Any or all of the forward-looking statements contained in this Amendment and any other public statement made by us, including by our management, may turn out to be incorrect. We are including this cautionary note to make applicable and take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 for forward-looking statements. We expressly disclaim any obligation to update or revise any forward-looking statements, whether as a result of new information, future events, changes in assumptions or otherwise, except as required under federal securities laws and the rules and regulations of the SEC.
PART IIII
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Item 1.10. | BusinessDirectors, Executive Officers and Corporate Governance |
OverviewDirectors
Farmer Bros. Co.
At the 2019 Annual Meeting of Stockholders, stockholders approved the proposal to amend and restate the Company’s Certificate of Incorporation to provide for the phased-in declassification of the Board of Directors. Prior to that time, the Board of Directors was divided into three classes, each class consisting, as nearly as possible, of one-third of the total number of directors, with members of each class serving for a three-year term. Each year only one class of directors was subject to a stockholder vote. Class I consisted of three directors whose term of office will expire at the 2022 Annual Meeting, Class II consisted of two directors whose term of office expired at the 2020 Annual Meeting, and Class III consisted of one director, whose term of office expired at the 2021 Annual Meeting of Stockholders. Beginning at the 2020 Annual Meeting, any director elected to the Board shall be for a one-year term.
The authorized number of directors is set forth in the Company’s Certificate of Incorporation and shall consist of not less than five nor more than nine members, the exact number of which shall be fixed from time to time by resolution of the Board of Directors. The authorized number of directors is currently eight. In no event shall a decrease in the number of directors remove or shorten the term of any incumbent director. Any vacancy on the Board of Directors that results from an increase in the number of directors may be filled by a majority of the directors then in office, provided that a quorum is present, and any other vacancy occurring on the Board of Directors may be filled by a majority of the directors then in office, even if less than a quorum, or by the sole remaining director. Any director elected to fill a vacancy not resulting from an increase in the number of directors will have the same remaining term as that of his or her predecessor.
All of the directors were elected to their current terms by the stockholders. There are no family relationships among any directors or executive officers of the Company. Except as disclosed below, none of the directors are a director of any other publicly held company.
Set forth below are the biographies of each Director, including their ages and positions and offices held with the Company.
Allison M. Boersma, age 57, has served on our Board since 2017 and is currently the Chief Financial Officer and Chief Operating Officer of BRG Sports Inc., a Delaware corporation (including its consolidated subsidiaries unlesscorporate holding company of leading brands that design, develop and market innovative sports equipment, protective products, apparel and related accessories. The company’s core football brand, Riddell, is the context otherwise requires,industry leader in football helmet technology and innovation. Ms. Boersma has served as the “Company,” “we,” “our” or “Farmer Bros.”)finance and operations leader for BRG Sports since April 2016, responsible for financial oversight, including planning, treasury and risk management; leadership of global sourcing, manufacturing and distribution; strategic planning and acquisitions; and manufacturing strategy. Ms. Boersma has also served as Chief Financial Officer and Chief Operating Officer of Riddell Inc., issince May 2014, and Senior Vice President Finance and Chief Financial Officer of Riddell, from February 2009 to May 2014. Previously, Ms. Boersma was a manufacturer, wholesalerfinance executive with Kraft Foods, a multinational confectionery, food and distributorbeverage conglomerate, for over 17 years, with various positions of coffee, teaincreasing responsibility, including serving as Senior Director Finance, Global Procurement, from May 2007 to February 2009, with leadership and culinary products. We areoversight of commodity hedging and risk management, including for coffee; execution of global strategies to improve supplier performance; commodity tracking and derivative accounting. Other positions with Kraft included Controller, Grocery Sector; Controller, Meals Division; Director, Sales Finance, Kraft Food Services Division; and Senior Manager, Corporate Financial Business Analysis. Ms. Boersma began her career as a direct distributorSenior Auditor with Coopers & Lybrand. Ms. Boersma received her undergraduate degree in Accountancy from the University of coffeeIllinois Champaign-Urbana, and her Masters of Management, Marketing and Finance, from JL Kellogg Graduate School of Management.
Stacy Loretz-Congdon, age 63, has served on our Board since 2018. She retired at the end of 2016 after 26 years of service at Core-Mark, one of the largest marketers of fresh and broad-line supply solutions to restaurants, hotels, casinos, hospitalsthe convenience retail industry in North America, where she served in various capacities, including as Senior Vice President, Chief Financial Officer and other foodservice providers,Assistant Secretary from December 2006 to May 2016 and a providerExecutive Advisor from May 2016 through December 2016. From January 2003 to December 2006, Ms. Loretz-Congdon served as Core-Mark’s Vice President of private brand coffee programsFinance and Treasurer and from November 1999 to Quick Serve Restaurants ("QSR's"), grocery retailers, national drugstore chains, restaurant chains, convenience stores, and independent coffee houses, nationwide. We were foundedJanuary 2003 served as Core-Mark’s Corporate Treasurer. Ms. Loretz-Congdon joined Core-Mark in 1912, were incorporated in California in 1923, and reincorporated in Delaware in 2004. We operate in one business segment.
Business Strategy
Our mission is to “sell great coffee, tea and culinary products and provide superior service—one customer1990. Ms. Loretz-Congdon’s experience at a time.” We reach our customers in two ways: through our nationwide Direct-Store-Delivery (“DSD”) networkCore-Mark included oversight of approximately 500 delivery routes, 117 branch warehouses and six distribution centers, and by using the distribution channels of our national retail and institutional customers. We differentiate ourselves in the marketplace through our customer service model. We offer value-added servicesall finance functions, including beverage equipment service, menu solutions, wherein we recommend products, how these products are prepared in the kitchen and presented on the menu, and hassle-free inventory and product procurement management to our foodservice customers. These services are conducted primarily in person through Regional Sales Representatives, or RSR’s, who develop personal relationships with chefs, restaurant owners and food buyers at their drop off locations. We also provide comprehensive coffee programs, including private brand development, green coffee procurement, category management, and supply chain management to our national retail customers.
We manufacture and distribute products under our own brands,all corporate finance disciplines, strategy execution, risk mitigation, investor relations, as well as under private labelsinvolvement with benefits, executive compensation and technology initiatives. During her tenure as Senior Vice President and Chief Financial Officer, Ms. Loretz-Congdon served on behalf of certain customers. Our branded products are sold primarily into the foodservice channel, and are comprised of both national and regional brands. National foodservice brands include The Artisan Collection by Farmer Brothers™, Farmer Brothers®, Superior®, Metropolitan®, Island Medley Iced Tea®, Farmer Brothers Spice Products™, Sierra Tea™ and Orchard Hills Estate™. Regional foodservice and retail brands include Cain's®, Ireland® and McGarvey®.
Since 2007, Farmer Bros. has achieved growth, primarily through the acquisition in 2007 of Coffee Bean Holding Co., Inc., a Delaware corporation ("CBH"), the parent company of Coffee Bean International, Inc., an Oregon corporation (“CBI”), a specialty coffee manufacturer and wholesaler headquartered in Portland, Oregon,Information Technology Steering Committee and the Investment Committee at Core-Mark, as well as a board member of all Core-Mark subsidiaries. Core-Mark was a Fortune 500, publicly traded company listed on the Nasdaq Global Market until September 2021 when it merged with Performance Food Group Company, NYSE. In 2015, Ms. Loretz-Congdon was named as one of the Top 50 female CFOs in the Fortune 500 by Business Insider and Woman of the Year by Convenience Store News. Ms. Loretz-Congdon is an NACD Board Leadership Fellow. Prior to joining Core-Mark, Ms. Loretz-Congdon was an auditor for Coopers & Lybrand. Ms. Loretz-Congdon received her Bachelor of Science degree in Accounting from California State University, San Francisco.
Charles F. Marcy, age 72, is a food industry consultant. He served as Chief Executive Officer of Turtle Mountain, LLC, a privately held natural foods company, and the maker of the So Delicious brand of dairy free products from May 2013 until April 2015. Prior to this, he was a principal with Marcy & Partners, Inc., providing strategic planning and acquisition consulting to consumer products companies. Mr. Marcy served as President and Chief Executive Officer and a member of the Board of Directors of Healthy Food Holdings, a holding company for branded “better-for-you” foods and the maker of YoCrunch Yogurt and Van’s Frozen Waffles from 2005 through April 2010. Previously, Mr. Marcy served as President, Chief Executive Officer and a Director of Horizon Organic Holdings, then a publicly traded company listed on Nasdaq with a leading market position in 2009 from Sara Lee Corporation (“Sara Lee”) of certain assets used in connection with its DSD coffeethe organic food business in the United States (the “DSDand the United Kingdom, from 1999 to 2005. Mr. Marcy also previously served as President and Chief Executive Officer and a member of the Board of Directors of the Sealright Corporation, a manufacturer of food and beverage packaging and packaging systems, from 1995 to 1998. From 1993 to 1995, Mr. Marcy was President of the Golden Grain Company, a subsidiary of Quaker Oats Company and maker of the Near East brand of all-natural grain-based food products. From 1991 to 1993, Mr. Marcy was President of National Dairy Products Corp., the dairy division of Kraft General Foods. From 1974 to 1991, Mr. Marcy held various senior marketing and strategic planning roles with Sara Lee Corporation and Kraft General Foods. Mr. Marcy currently serves as First Vice Chair on the Board of Trustees of Washington and Jefferson College and has served on the Board of Directors of B&G, Foods, Inc. (“B&G”), a manufacturer and distributor of shelf-stable food and household products across the United States, Canada and Puerto Rico and a publicly traded company listed on the New York Stock Exchange, since 2010. Mr. Marcy served on the Strategy Committee and currently serves as a member of the Audit Committee, a member of the Compensation Committee and a member of the Risk Committee of the Board of Directors of B&G. Mr. Marcy received his undergraduate degree in Mathematics and Economics from Washington and Jefferson College, and his MBA from Harvard Business School. Mr. Marcy is an NACD Board Leadership Fellow and has demonstrated his commitment to boardroom excellence by completing NACD’s advanced corporate governance program for directors. Mr. Marcy has served on the Company’s Board of Directors since 2014 and is currently a member of the Nominating and Corporate Governance Committee and Chair of the Compensation Committee.
D. Deverl Maserang II, age 59, is President and Chief Executive Officer of the Company, since September 2019. Prior to joining the Company, from 2017 to 2019, Mr. Maserang served as President and Chief Executive Officer of Earthbound Farm Organic, a global leader in organic food and farming. From 2016 to 2017, Mr. Maserang served as Managing Partner of TADD Holdings, a business advisory firm. From 2013 to 2016, Mr. Maserang was Executive Vice President Global Supply Chain for Starbucks Corporation, a global coffee roaster and retailer, where he was responsible for end-to-end supply chain operations globally spanning manufacturing, engineering, procurement, distribution, planning, transportation, inventory management and worldwide sourcing. Prior to that, he held leadership roles at Chiquita Brands International, Peak Management Group, FreedomPay, Installation Included, Pepsi Bottling Group and United Parcel Service. Mr. Maserang received his Bachelor of Science degree from Texas Tech University.
Christopher P. Mottern, age 78, has served as Chairman of the Board of Directors since January 2020. He acted as interim President and Chief Executive Officer of Farmer Bros. Co. from May through October 2019. Prior to joining Farmer Bros. Co. in his interim role, Mr. Mottern was an independent business consultant. He served as President and Chief Executive Officer of Peet’s Coffee Business”).& Tea, Inc., a specialty coffee and tea company, from 1997 to 2002 and a director of Peet’s Coffee & Tea, Inc., from 1997 through 2004. From 1992 to 1996, Mr. Mottern served as President of The Heublein Wines Group, a manufacturer and marketer of wines, now part of Diageo plc, a multinational alcoholic beverage company. From 1986 through 1991, he served as President and Chief Executive Officer of Capri Sun, Inc., one of the largest single-service juice drink manufacturers in the United States. He has served as a director, including lead director, and member of the finance committee, of a number of private companies. Mr. Mottern received his undergraduate degree in Accounting from the University of Connecticut.
Our product line
Alfred Poe, age 73, has served on our Board of Directors since 2020 and is specifically focusedcurrently the Chief Executive Officer of AJA Restaurant Corp., serving as such since 1999. From 1997 to 2002, he was the Chief Executive Officer of Superior Nutrition Corporation, a provider of nutrition products. He was Chairman of the Board and Chief Executive Officer of MenuDirect Corporation from 1997 to 1999. Mr. Poe was a Corporate Vice President of Campbell Soup Company from 1991 through 1996. From 1993 through 1996, he was the President of the Campbell’s Meal Enhancement Group. From 1982 to 1991, Mr. Poe held various positions, including Vice President, Brands Director and Commercial Director with Mars, Inc. Mr. Poe currently serves on the Board of Directors of B&G, Foods, Inc., a manufacturer and distributor of shelf-stable food and household products across the United States, Canada and Puerto Rico and a publicly traded company listed on the New York Stock Exchange, since 1997. Mr. Poe has previously served on the boards of directors of Centerplate, Inc. and State Street Bank.
John D. Robinson, age 63, has served on our Board since 2021 and is currently an operating partner focusing on food and beverage opportunities at Sequel Holdings, a private equity firm, serving in such role since 2017. Currently, Mr. Robinson serves as CEO of Chairmans Foods, a Sequel portfolio company. Prior to joining Sequel, from 2009 to 2015, Mr. Robinson was Managing Partner for Rutherford Wine Studios LLC, dba The Ranch Winery, a wine co-packing and processing facility in Napa Valley, CA, which was sold to E&J Gallo Winery in 2015. Prior to that, he held leadership roles at Morningstar Foods, Dean Foods Company and Robinson Dairy. Mr. Robinson received a Bachelor of Science in Business Administration from the University of Arizona.
Waheed Zaman, age 62, has served on our Board since September 2021 and is currently the Chief Executive Officer of W&A Consulting, a consulting and advisory firm, where he advises senior executives on transformational change and consults with leaders and teams on personal success and leadership practices to ensure organizational effectiveness and strategy execution, serving as such since April 2017. He also serves as Advisor to Thematiks, a business research company. From April 2013 to March 2017, he was the Senior Vice President, Chief Corporate Strategy & Administrative Officer at the Hershey Company, a food manufacturer. Prior to that, he held leadership roles at Chiquita Brands International and Procter & Gamble. Mr. Zaman holds a bachelor’s degree with a double major in Computer Science and Policy Studies from Dartmouth College.
Executive Officers
The following table sets forth the executive officers of the Company as of the date hereof. At each annual meeting of the Board of Directors, the Board of Directors formally re-appoints the executive officers, and all executive officers serve at the pleasure of the Board of Directors. No executive officer has any family relationship with any director or nominee, or any other executive officer.
| Name | | Age | | Title | | Executive Officer Since |
D. Deverl Maserang II(1) | | 59 | | President and Chief Executive Officer | | 2019 |
| Scott R. Drake | | 53 | | Chief Financial Officer | | 2020 |
| Amber D. Jefferson | | 51 | | Chief Human Resources Officer | | 2021 |
| Ruben E. Inofuentes | | 55 | | Chief Supply Chain Officer | | 2019 |
| Maurice S.J. Moragne | | 58 | | Chief Sales Officer | | 2020 |
| Jared Vitemb | | 39 | | Vice President, General Counsel, Chief Compliance Officer and Secretary | | 2022 |
(1) For D. Deverl Maserang, II, please see his biography under “Directors” above.
Scott R. Drakejoined the Company as Chief Financial Officer in March 2020. As Chief Financial Officer, Mr. Drake’s current responsibilities include overseeing the Finance and Accounting functions. Prior to joining the Company, Mr. Drake served as Senior Vice President of Finance and Treasurer of GameStop Corp., an omnichannel video game retailer, from July 2015 to March 2020, where he was responsible for financial planning and analysis, treasury, risk management and events/travel functions. From 2001 through 2015, Mr. Drake held various senior management positions with 7-Eleven, Inc., an international convenience store chain, most recently as their Vice President of Finance, Strategy and Communications. Prior to 2001, he held finance and accounting positions with Arthur Andersen, La Madeleine French Bakery and Café, Coca-Cola Enterprises and Coopers & Lybrand. Mr. Drake received a B.B.A. in Finance and Accounting and an M.B.A. in Corporate Finance from Texas A&M University. He is a Certified Public Accountant.
Amber D. Jeffersonjoined the Company as Chief Human Resources Officer in October 2021. As Chief Human Resources Officer, Ms. Jefferson’s responsibilities include overseeing the Human Resources, Risk Management and Safety functions. Prior to joining the Company, Ms. Jefferson served as Head of Human Resources KNA Sales & e-Commerce at the Kellogg Company, a global consumer packaged goods company specializing in cereal, cookies, crackers, natural organic and salty snacks production from October 2012 to October 2021, where she was responsible for leading all facets of talent strategies, organizational effectiveness, leadership & capability development, and day-to-day HR operations across the North America region. From 2012 through 2018, Ms. Jefferson held HR leadership roles across various divisions within Kellogg including their Away From Home and Walmart business. Prior to 2012, she held leadership roles with Brinker International, Sabre, Texas Health Resources, The American Lung Association and The American Red Cross. Ms. Jefferson received a Bachelor of Science degree from Texas A&M University and a Master of Science in Healthcare Administration and a Master of Business Administration from Texas Woman’s University.
Ruben E. Inofuentesjoined the Company as Chief Supply Chain Officer in November 2019. As Chief Supply Officer, Mr. Inofuentes’ current responsibilities include overseeing the operations, manufacturing, logistics, procurement, coffee brewing equipment, research and development, green coffee buying, sustainability, supply and demand planning and quality functions. Prior to joining the Company, Mr. Inofuentes served as the Chief Operations Officer of JR286, Inc. (“JR286”), a sports equipment and accessories company from 2005 to 2019, where he was responsible for developing platforms to enable aggressive growth plans and market strategies. Prior to joining JR286, from 2003 to 2005, Mr. Inofuentes was the Vice President of Supply Chain Services for Advocare International, LP, a dietary supplement company. He was responsible for procurement, inventory planning, manufacturing, transportation, logistics, and information technology. Mr. Inofuentes received his undergraduate degree in Industrial Engineering from Iowa State University.
Maurice S. J. Moragnejoined the Company as Chief Sales Officer in June 2020. As Chief Sales Officer, Mr. Moragne’s current responsibilities include oversight of the company’s sales and marketing organizations. Prior to joining the Company, Mr. Moragne served as Chief Executive Officer, Chief Sales Officer and Co-Founder of International Agriculture Group LLC, an ingredient technology company, from August 2015 to June 2020, where he was responsible for managing investor financing, as well as assembling sales, marketing and technical teams. From July 2011 to July 2015, Mr. Moragne served as General Manager of the Chiquita Fruit Solutions business division of Chiquita Brands International, Inc., an agriculture production company, where he directed the daily operations, including oversight of Accounting, Finance, IT, Sales, Logistics, Quality, Operations, R&D, Marketing, Innovation, and Customer Service operations. Prior to 2011, he held various management positions with Naturipe Foods, LLC, Chiquita Brands International, Inc., L’Oreal and British American Tobacco. Mr. Moragne received a B.A. in Political Science and Government from Edinboro University of Pennsylvania.
Jared Vitembjoined the Company as Vice President, General Counsel, Chief Compliance Officer and Secretary in March 2022. Mr. Vitemb’s current responsibilities include overseeing the Company’s Legal and Compliance functions. Prior to joining the Company, Mr. Vitemb held various positions with FTS International Services, Inc., an oilfield services company, from September 2017 to March 2022, where he last served as Senior Vice President, General Counsel, Chief Compliance Officer and Secretary. From March 2014 to September 2017, Mr. Vitemb worked as an in-house attorney for Dean Foods Company, a dairy processing and distribution company. Prior to 2014, he was in private practice, primarily with the law firm of Gardere Wynne Sewell LLP in Dallas, Texas. Mr. Vitemb received a B.A. in History and a J.D. from The University of Texas.
Corporate Governance
Board Meeting and Attendance
The Board of Directors held seven meetings during the year ended June 30, 2022 (“fiscal 2022”), including four regular meetings and three special meetings. During fiscal 2022, each director attended at least 75% of the total number of meetings of the Board of Directors (held during the period for which he or she served as a director) and committees of the Board on which he or she served (during the periods that he or she served). The independent directors generally meet in executive session in connection with each regularly scheduled Board meeting. Under the Company’s Corporate Governance Guidelines, continuing directors are expected to attend the Company’s annual meeting of stockholders absent a valid reason. Seven of eight directors who were then serving were present at the 2021 Annual Meeting of Stockholders.
Charters; Code of Conduct and Ethics; Corporate Governance Guidelines
The Board of Directors maintains charters for its committees, including the Audit Committee, Compensation Committee, Nominating and Corporate Governance Committee, and the ad hoc Technology Committee. In addition, the Board of Directors has adopted a written Code of Conduct and Ethics for all employees, officers and directors. The Board of Directors maintains Corporate Governance Guidelines as a framework to promote the functioning of the Board and its committees and to set forth a common set of expectations as to how the Board should perform its functions. Current standing committee charters, the Code of Conduct and Ethics and the Corporate Governance Guidelines are available on the Company’s website at www.farmerbros.com. Information contained on the website is not incorporated by reference in, or considered part of, this Amendment.
Board Committees
The Board of Directors has three standing committees: the Audit Committee, Compensation Committee, and Nominating and Corporate Governance Committee. Summary information about each of these committees is set forth below.
Additionally, from time to time, the Board of Directors has established ad hoc or other committees, on an interim basis, to assist the Board with its consideration of specific matters, and it expects to continue to do so as it may determine to be prudent and advisable in the future. In December 2021, the Board of Directors established an ad hoc Technology Committee for the purpose of assisting with the review of the technological and cybersecurity needs of the markets we serve: restaurants, hotels, casinos, hospitals and other foodservice providers, as well as private brand retailers in the QSR, grocery, drugstore, restaurant, convenience store and independent coffeehouse channels. Our product line of over 3,000 SKU's (excluding private label), includes roasted coffee, liquid coffee, coffee-related products such as coffee filters, sugar and creamers, assorted teas, cappuccino, cocoa, spices, gelatins and puddings, soup bases, gravy and sauce mixes, pancake and biscuit mixes, and jellies and preserves. For the past three fiscal years, sales of roasted coffee products represented approximately 50% of our total sales and no single product other than roasted coffee accounted for more than 10% of our total sales.Company (the “Technology Committee”).
Coffee purchasing, roasting and packaging takes place at our Torrance, California; Portland, Oregon; and Houston, Texas plants. Spice blending and packaging takes place at our Torrance, California plant. Our distribution centers include our Torrance, Portland and Houston plants, and distribution centers in Northlake, Illinois; Oklahoma City, Oklahoma; and Moonachie, New Jersey. In July 2011, we closed our distribution center in Fridley, Minnesota.
We are focused on distributing our owned brands through our DSD network, while continuing to support and grow our private brand national accounts customers. To provide value to our current and potential customers, in fiscal 2012, we made the following investments:Audit Committee
•Specialty coffee: We have developed
The Audit Committee is a specialty line of coffees called "The Artisan Collection by Farmers Brothers™." Pre-launched at the National Restaurant Association tradeshow in May 2012, this new line of coffees establishes an owned brand presence in the growing specialty coffee market, leveraging the blending, roasting and packaging capabilities of CBI.
•Unified brand: We have developed a unified corporate identity for our business nationwide that is reflected in our updated packaging, our website, many of our fleet vehicles, and in all of our sales materials.
•Optimized portfolio: In fiscal 2012, we continued to optimize and simplify our product portfolio. We eliminated over
1,000 SKU's and plan to eliminate a significant number of additional SKU's in fiscal 2013. These SKU reductions allow us to focus our resources on promoting and supporting fewer brands while lowering inventory and production costs.
•Service improvements: We have invested in sales and training for all of our RSRs, allowing us to expand the role we play as beverage consultants for our DSD customers.
We have also made the following investments to support our private brand national accounts business:
•Coffee industry leadership: Through our dedication to the craft of sourcing, blending and roasting coffee, and our leadership positions with the Specialty Coffee Association of America, World Coffee Research and Coffee Quality Institute, we work to help shape the futurestanding committee of the coffee industry. We believe that due to our commitment to the industry and our leadership roleBoard of Directors established in shaping the industry's future, large retail and foodservice operators are drawn to workingaccordance with us.
•Market insight: We have developed a market insight capability internally that reinforces our business-to-business positioning as a thought leader in the coffee industry. We provide trend insights that help our customers create winning products and integrated marketing strategies for their own coffee brands.
•Sustainability leadership: Due to our proactive efforts in counting carbon, creating programs for waste and energy reduction, and creating farmer relationship programs abroad, we are in a unique position to help retailers and foodservice operators create differentiated coffee sustainability programs such as carbon neutrality programs, direct trade coffee programs, and packaging material reductions.
Raw Materials and Supplies
Our primary raw material is green coffee, an agricultural commodity. The bulkSection 3(a)(58)(A) of the world's green coffee supplies is grown outside the United States and can be subjectExchange Act. The Audit Committee’s principal purposes are to volatile price fluctuations. Weather, real or perceived supply shortages, speculation in the commodity markets, political unrest, labor actions, currency fluctuations, armed conflict in coffee producing nations, and government actions, including treaties and trade controls between the U.S. and coffee producing nations can affect the price of green coffee. Green specialty coffees sell at a premium to other green coffees due to the inability of producers to increase supply in the short run to meet rising demand. As a result, the price spread between specialty coffee and non-specialty coffee is likely to widen as demand for specialty coffee continues to increase.
Green coffee prices can also be affected by the actions of producer organizations. The most prominent of these are the Colombian Coffee Federation, Inc. (CCF) and the International Coffee Organization (ICO). These organizations seek to increase green coffee prices largely by attempting to restrict supplies, thereby limiting the availability of green coffee to coffee consuming nations. As a result, these organizations or others may succeed in raising green coffee prices.
Other raw materials used in the manufacture of our tea and culinary products include a wide variety of spices, such as pepper, chilies, oregano and thyme, as well as cocoa, dehydrated milk products, salt and sugar. These raw materials are agricultural products and can be subject to wide cost fluctuations. In fiscal 2011 and in the first half of fiscal 2012, fluctuations in commodity prices, specifically coffee commodity prices, had a material effectoversee, on our operating results.
Trademarks and Licenses
We own 160 registered trademarks which are integral to customer identification of our products. It is not possible to assess the impactbehalf of the lossBoard, the accounting and financial reporting processes of such identification. Additionally, in connection with the DSD Coffee Business acquisition, the Company and Sara Lee entered into certain operational agreementsthe audit of the Company’s financial statements. As described in its charter, available on the Company’s website under Corporate Governance - Committee Charters, the Audit Committee’s responsibilities include assisting the Board of Directors in overseeing: (i) the integrity of the Company’s financial statements; (ii) the independent auditor’s qualifications and independence; (iii) the performance of the Company’s independent auditor and internal audit function; (iv) the Company’s compliance with legal and regulatory requirements relating to accounting and financial reporting matters; (v) the Company’s system of disclosure controls and procedures, internal control over financial reporting that include trademarkmanagement has established, and formula license agreements. In February 2012,compliance with ethical standards adopted by the trademark agreementsCompany; and formula license agreements(vi) the Company’s framework and guidelines with Sara Lee were assignedrespect to risk assessment and risk management. The Audit Committee is directly and solely responsible for the appointment, dismissal, compensation, retention and oversight of the work of any independent auditor engaged by the Company for the purpose of preparing or issuing an audit report or performing other audit, review or attest services for the Company. The independent auditor reports directly to the J.M. SmuckerAudit Committee.
During fiscal 2022, the Audit Committee held four regular meetings and three special meetings. Allison M. Boersma currently serves as Chair, and Stacy Loretz-Congdon, John D. Robinson and Waheed Zaman currently serve as members of the Audit Committee. All directors who currently serve on the Audit Committee meet the Nasdaq composition requirements, including the requirements regarding financial literacy and financial sophistication, and the Board of Directors has determined that all such directors are independent under the Nasdaq Listing Rules and the rules of the SEC regarding audit committee membership. The Board of Directors has determined that Ms. Boersma and Ms. Loretz-Congdon are “audit committee financial experts” as defined in Item 407(d) of Regulation S-K under the Exchange Act.
Compensation Committee
The Compensation Committee is a standing committee of the Board of Directors. As described in its charter, available on the Company’s website under Corporate Governance - Committee Charters, the Compensation Committee’s principal purposes are to discharge the Board’s responsibilities related to compensation of the Company’s executive officers and administer the Company’s incentive and equity compensation plans. The Compensation Committee’s objectives and philosophy with respect to the fiscal 2022 executive compensation program, and the actions taken by the Compensation Committee in fiscal 2022 with respect to the compensation of our Named Executive Officers, are described below under the heading “Compensation Discussion and Analysis.”
The Compensation Committee also is responsible for evaluating and making recommendations to the Board of Directors regarding director compensation. In addition, the Compensation Committee is responsible for conducting an annual risk evaluation of the Company’s compensation practices, policies and programs.
During fiscal 2022, the Compensation Committee held four regular meetings and three special meetings. Charles F. Marcy currently serves as Chair and Alfred Poe and John D. Robinson currently serve as members of the Compensation Committee. The Board of Directors has determined that all current Compensation Committee members are independent under the Nasdaq Listing Rules.
Compensation Committee Interlocks and Insider Participation
Messrs. Robinson, Marcy, and Poe were members of the Compensation Committee during fiscal 2022. None of the members of the Compensation Committee is or has been an executive officer of the Company, ("J.M. Smucker")nor did any of them have any relationships requiring disclosure by the Company under Item 404 of Regulation S-K. None of the Company’s executive officers served as a director or a member of a compensation committee (or other committee serving an equivalent function) of any other entity, an executive officer of which served as a director of the Company or member of the Compensation Committee during fiscal 2022.
Nominating and Corporate Governance Committee
The Nominating and Corporate Governance Committee is a standing committee of the Board of Directors. As described in its charter, available on the Company’s website under Corporate Governance - Committee Charters, the Nominating and Corporate Governance Committee’s principal purposes are (i) monitoring the Company’s corporate governance structure; (ii) assisting the Board in fulfilling its oversight responsibilities with respect to the management of risks associated with corporate governance; (iii) ensuring that the Board is appropriately constituted in order to meet its fiduciary obligations, including by identifying individuals qualified to become Board members and members of Board committees, recommending to the Board director nominees for the next annual meeting of stockholders or for appointment to vacancies on the Board, and recommending to the Board membership on Board committees (including committee chairs); (iv) leading the Board in its annual review of the Board’s performance; (v) conducting the annual performance review of the Chief Executive Officer and communicating the results to the Board; and (vi) overseeing succession planning for senior management.
During fiscal 2022, the Nominating and Corporate Governance Committee held four regular meetings. Ms. Loretz-Congdon currently serves as Chair, and Charles F. Marcy, John D. Robinson and Alfred Poe currently serve as members of the Nominating and Corporate Governance Committee. The Board of Directors has determined that all current Nominating and Corporate Governance Committee members are independent under the Nasdaq Listing Rules.
Other Committees
In July 2020, the Board of Directors created an ad hoc Search Committee to assist the Nominating and Corporate Governance Committee in identifying and evaluating potential candidates for future director positions. The Search Committee no longer exists.
In December 2021, the Board of Directors established the Technology Committee for the purpose of assisting with the review of the technological and cybersecurity needs of the Company. As described in its charter, available on the Company’s website under Corporate Governance - Committee Charters, the Technology Committee’s principal purposes include: (i) overseeing the quality and effectiveness of the Company’s cybersecurity strategy; and (ii) overseeing the Company’s technology strategy. Waheed Zaman currently serves as Chair, and Allison M. Boersma and Alfred Poe currently serve as members of the Technology Committee. The Technology Committee met four times in fiscal 2022.
Board Diversity
The below Board Diversity Matrix reports self-identified diversity statistics for the Board of Directors.
| | Board Diversity Matrix (As of September 1, 2022) |
| | Total Number of Directors | 8 |
| | | Female | Male | Non-Binary |
| | Part I: Gender Identity | 2 | 6 | 0 |
| | Part II: Demographic Background |
| | African American or Black | 0 | 1 | 0 |
| | Alaskan or Native American | 0 | 0 | 0 |
| | Asian or South Asian | 0 | 1 | 0 |
| | Hispanic | 0 | 0 | 0 |
| | Pacific Islander | 0 | 0 | 0 |
| | White | 2 | 4 | 0 |
| | Two or More Races or Ethnicities | 0 | 0 | 0 |
| | LGBTQ+ | 0 | 0 | 0 |
| | Military Veterans | 0 | 1 | 0 |
| | Directors with Disabilities | 0 | 0 | 0 |
Board Leadership Structure
Under our By-Laws, the Board of Directors, in its discretion, may choose a Chairman of the Board of Directors. If there is a Chairman of the Board of Directors, such person may exercise such powers as provided in the By-Laws or assigned by the Board of Directors. Christopher P. Mottern was appointed as Chairman of the Board in January 2020. Mr. Mottern has served on our Board of Directors since 2013.
Notwithstanding the current separation of Chairman of the Board and Chief Executive Officer, our Chairman of the Board of Directors is generally responsible for soliciting and collecting agenda items from other members of the Board and the Chief Executive Officer, and the Chief Executive Officer is generally responsible for leading discussions during Board meetings. This structure allows for effective and efficient Board meetings and information flow on important matters affecting the Company. As required under the Nasdaq Listing Rules, a majority of the members of a listed company’s board of directors must qualify as “independent,” as affirmatively determined by the board of directors. The Board of Directors has determined that, other than Mr. Maserang, all members of the Board of Directors are independent and each of the Audit, Compensation, and Nominating and Corporate Governance Committees of the Board are composed solely of independent directors. Due principally to the size of the Board of Directors, the Board has not formally designated a lead independent director and believes that as a result thereof, non-employee director and executive sessions of the Board of Directors, which are attended solely by non-employee directors or independent directors, as applicable, result in an open and free flow of discussion of any and all matters that any director may believe relevant to the Company and/or its management.
Although the roles of Chairman and Chief Executive Officer are currently filled by different individuals, no single leadership model is right for all companies at all times, and the Company has no bylaw or policy in place that mandates this leadership structure. The Nominating and Corporate Governance Committee will evaluate and recommend to the Board of Directors any changes in the Board’s leadership structure.
Board’s Role in Risk Oversight
The Board of Directors recognizes that although management is responsible for identifying risk and risk controls related to business activities and developing programs and recommendations to determine the sufficiency of risk identification and the appropriate manner in which to control risk, the Board plays a critical role in the oversight of risk. The Board of Directors implements its risk oversight responsibilities by having management provide periodic briefing and informational sessions on the significant risks that the Company faces and how the Company is seeking to control risk if and when appropriate. In some cases, a Board committee is responsible for oversight of specific risk topics. For example, the Audit Committee has oversight responsibility of risks associated with financial accounting and audits, internal control over financial reporting, and the Company’s major financial risk exposures, including commodity risk and risks relating to hedging programs. Regarding cybersecurity, the Board of Directors temporarily assigned primary oversight responsibility to the Technology Committee, but placed the Chairwoman of the Audit Committee on the Technology Committee and made a second member of the Audit Committee the Chairman of the Technology Committee to ensure that the Audit Committee remained well informed of the Company’s cybersecurity risks. The Compensation Committee has oversight responsibility of risks relating to the Company’s compensation policies and practices. At each regular meeting, or more frequently as needed, the Board of Directors considers reports from the Audit Committee and Compensation Committee which provide detail on risk management issues and management’s response. The Board of Directors, as a whole, examines specific business risks in its periodic reviews of the individual business units, and also of the Company as a whole as part of an acquisition transaction between J.M. Smuckerits regular reviews, including as part of the strategic planning process, annual budget review and Sara Lee.approval, and data and cyber security review. Beyond formal meetings, the Board of Directors and its committees have regular access to senior executives, including the Company’s Chief Executive Officer and Chief Financial Officer. The Company believes that its leadership structure promotes effective Board oversight of risk management because the Board of Directors directly, and through its various committees, is regularly provided by management with the information necessary to appropriately monitor, evaluate and assess the Company’s overall risk management, and all directors are involved in the risk oversight function.
Seasonality
We experience some seasonal influences. The winter monthsCompensation-Related Risk
As part of its risk oversight role, our Compensation Committee annually considers whether our compensation policies and practices for all employees, including our executive officers, create risks that are generally the strongest sales months. However, our product line and geographic diversity provide some sales stability during the warmer months when coffee consumption ordinarily decreases. Additionally, we usually experience an increase in sales during the summer and early fall months from seasonal businesses located in vacation areas, and from grocery retailers ramping up inventory for the winter selling season.
Distribution
Most sales are made “off-truck” to our customers at their places of business by our sales representatives who are responsible for soliciting, selling and collecting from and otherwise maintaining our customer accounts. We serve our customers from six distribution centers strategically located for national coverage. Our distribution trucks are replenished from 117 branch warehouses located throughout the contiguous United States. We operate our own trucking fleet to support our long-haul distribution requirements. A portion of our products is distributed by third parties or is direct shipped via common
carrier. We maintain inventory levels at each branch warehouse to allow for minimal interruption in supply.
Customers
We serve a wide variety of customers, from small restaurants and donut shops to large institutional buyers like restaurant chains, hotels, casinos, hospitals, foodservice providers, convenience stores, gourmet coffee houses, bakery/café chains, national drugstore chains, large regional and national grocery and specialty food retailers, QSR's and gaming establishments. Within our DSD channel, we believe on-premise customer contact, our large distribution network, and our relationship-based high quality service model are integral to our past and future success. No single customer represents a significant concentration of sales. As a result, the loss of one or more of our larger customer accounts is notreasonably likely to have a material adverse effect on our results of operations.
Competition
We face competition from many sources, includingCompany. In fiscal 2022, the institutional foodservice divisions of multi-national manufacturers of retail products such as J.M. Smucker (Folgers Coffee), Dunkin' Donuts and Kraft Foods Inc. (Maxwell House Coffee), wholesale foodservice distributors such as Sysco Corporation and U.S. Foods, regional institutional coffee roasters such as S & D Coffee, Inc. and Boyd Coffee Company, and specialty coffee suppliers such as Green Mountain Coffee Roasters, Inc., Rogers Family Company, Distant Lands Coffee, Mother Parkers Tea & Coffee, Inc., and Peet’s Coffee & Tea, Inc. As manyCompensation Committee noted several design features of our customers are small foodservice operators, we also compete with club stores such as Costco and Restaurant Depot. We believe our longevity,compensation programs that reduce the qualitylikelihood of our products, our national distribution network and our comprehensive and superior customer service are the major factors that differentiate us from our competitors.
Competition is robust and is primarily based on products and price, with distribution and service often a major factor. Most of our customers rely on us for distribution; however, some of our customers use third party distribution or conduct their own distribution. Some of our customers are “price” buyers, seeking the low cost provider with little concern about service, while others find great value in the service programs we provide. We compete well when service and distribution are valued by our customers, and are less effective when only price matters. Our customer base is price sensitive, and we are often faced with price competition.
Working Capital
We finance our operations internally and through borrowings under our $85.0 million senior secured revolving credit facility with Wells Fargo Bank, National Association (“Wells Fargo”). We believe this credit facility,excessive risk-taking, including, but not limited to, the extent available, in addition to our cash flows from operations and other liquid assets, are sufficient to fund our working capital and capital expenditure requirements for the next 12 months.
Foreign Operations
We have no material revenues from foreign operations.
Other
On June 30, 2012 we employed 1,821 employees, 624 of whom are subject to collective bargaining agreements.Compliance with government regulations relating to the discharge of materials into the environment, or otherwise relating to protection of the environment, has not had a material effect on our financial condition or results of operations. The nature of our business does not provide for maintenance of or reliance upon a sales backlog. None of our business is subject to renegotiation of profits or termination of contracts or subcontracts at the election of the government.
Available Information
Our Internet website address is http://www.farmerbros.com (the website address is not intended to function as a hyperlink, and the information contained in our website is not intended to be part of this filing), where we make available, free of charge, copies of our annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K including amendments thereto as soon as reasonably practicable after filing such material electronically or otherwise furnishing it to the Securities and Exchange Commission (“SEC”).following:
You should consider eachA good balance of the following factorsfixed and at-risk compensation, as well as an appropriate balance of cash and equity-based compensation.
Management incentive programs are based on multiple metrics, including strategic, individual and operational measures.
The Compensation Committee is directly involved in setting short- and long-term incentive performance targets and payout intervals, assessing performance against targets, and reviewing/approving the performance goals for the CEO and other informationexecutives.
Executive annual short-term incentive awards are generally capped at 200% of the target opportunity and the performance-based restricted stock units in the long-term incentive plan are capped at 180% of target opportunity.
Long-term equity awards are generally made on an annual basis which creates overlapping vesting periods and ensures that management remains exposed to the risks of their decision-making through their unvested equity-based awards for the period during which the business risks are likely to materialize.
Long-term compensation for senior executives is comprised of restricted stock units that vest ratably over three years and performance-based restricted stock units that are earned based on three-year performance goals. Company shares are inherently subject to the risks of the business, and the combination of options and performance-based restricted stock units ensure that management participates in these risks.
The number of performance-based restricted stock units ultimately earned by the Company’s executives and employees are determined at the end of a three-year performance period based on adjusted EBITDA performance and total shareholder return (“TSR”) metrics that are tracked during the performance period.
The Company has significant share ownership requirements for executives and non-employee directors. Executive officers are required to hold share-based compensation awards until meeting their ownership requirements. Company shares held by management are inherently subject to the risks of the business.
Executive compensation is benchmarked annually relative to pay levels and practices at peer companies.
The Company has a clawback policy in place that allows for recovery of incentive compensation if there is a material restatement of financial results caused by the fraud or misconduct of an individual which resulted in an over payment of incentives.
The Company prohibits employees and directors from hedging or pledging its securities.
The Compensation Committee is composed solely of independent directors and retains an independent compensation consultant to provide a balanced perspective on compensation programs and practices. The Compensation Committee approves all pay decisions for executive officers.
Stockholder Engagement
The Company has a history of actively engaging with our stockholders. We believe that strong corporate governance should include regular engagement with our stockholders. We have a long-standing, robust stockholder outreach program through which we solicit feedback on our corporate governance, executive compensation program, disclosure practices, and environmental and social impact programs and goals. Investor feedback is shared with our Board of Directors as received.
Corporate Governance Cycle and 2022 Outreach
Engagement
As part of our stockholder outreach program, and in response to the results of the say-on-pay advisory vote at our 2021 Annual Meeting, we reached out to 16 of our 29 largest stockholders in 2022, representing approximately 47% of our total shares outstanding as of our 2021 Annual Meeting, to solicit and gain a better understanding of stockholder feedback regarding our executive compensation program. Six of the 16 holders elected to participate in this report, includingcompensation-specific outreach program. The feedback we received from our consolidated financial statements and the related notes,stockholders about our executive compensation program was collected directly by members of our Compensation Committee. The Compensation Committee made changes to our plan design in evaluating our business and our prospects. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently consider immaterial may also negatively affect our business operations. If anylight of the following risks actually occurs,feedback we received during this process.
Additionally, our businessCEO and financial results could be harmed. In that case,CFO engage in meaningful dialogue with our stockholders through our quarterly earnings calls and investor-related outreach events.
Topics
Key areas of discussion included:
Corporate Governance
Executive Compensation
Inclusion and Diversity
Human Capital Management
Sustainability Programs
Supply Chain
Company Policy
Brand/Public Affairs
Risk Management
Long-term Growth Strategy
Financial Performance
For additional information, please see “2022 Stockholder Outreach” in Item 11 of this Amendment.
Delinquent Section 16(a) Reports
Section 16(a) of the trading priceExchange Act requires our directors, certain of our officers, and persons who beneficially own more than 10% of the Company’s common stock could decline.
INCREASES IN THE COST OF GREEN COFFEE COULD REDUCE OUR GROSS MARGIN AND PROFIT.
Our primary raw material is green coffee, an agricultural commodity. The bulkto file reports of stock ownership and changes in ownership (Forms 3, 4 and 5) in shares with the SEC. To our knowledge, based solely on our records and certain written representations received from our executive officers and directors, during the fiscal year ended June 30, 2022, all persons related to the Company that are required to file these insider trading reports have filed them in a timely manner, except for a Form 4 filed on May 11, 2022 for Scott R. Drake to correct the amount of securities granted to him in a transaction that occurred on September 13, 2021; a Form 4 filed on July 19, 2022 for Maurice S. J. Moragne to correct the amount of securities granted to him in a transaction that occurred on September 13, 2021; a Form 4 filed on July 19, 2022 for Ruben Inofuentes to correct the amount of securities granted to him in a transaction that occurred on September 13, 2021 and to correct the amount of securities beneficially owned by him in subsequent transactions through July 18, 2022; a Form 4 filed on July 19, 2022 for D. Deverl Maserang II to disclose reportable transactions that occurred on July 16, 2021, September 13, 2021, December 2, 2021, and July 18, 2022; and a Form 4/A filed on August 2, 2022 for Christopher P. Mottern to correct the amount of securities beneficially owned by him. Copies of the world's green coffee supply is mainly grown outside the United States andinsider trading reports can be subjectfound on the Company’s website at www.farmerbros.com.
| Item 11. | Executive Compensation |
Compensation Discussion and Analysis
This Compensation Discussion and Analysis describes our executive compensation philosophy, objectives, and programs, the decisions made under those programs and factors considered by our Compensation Committee in fiscal 2022 with respect to volatile price fluctuations. Weather, real or perceived supply shortages, speculationthe compensation of our Named Executive Officers.
Fiscal 2022 Named Executive Officers
| Name | | Title (as of June 30, 2022) |
| D. Deverl Maserang II | | President and Chief Executive Officer |
| Scott R. Drake | | Chief Financial Officer |
| Ruben E. Inofuentes | | Chief Supply Chain Officer |
| Maurice S. J. Moragne | | Chief Supply Chain Officer |
| Amber D. Jefferson | | Chief Human Resources Officer |
Executive Summary
Our executive compensation programs are designed to:
attract, retain, and motivate talented executives with competitive pay and incentives;
reward positive results by aligning the economic interests of our executive officers with those of our stockholders;
motivate executive officers to achieve our short-term and long-term goals by providing “at risk” compensation, the value of which is ultimately based on our future performance, without creating undue risk-taking behavior nor unduly emphasizing short-term performance over long-term value creation; and
maintain total compensation and relative amounts of base salary, annual, and long-term incentive compensation competitive with those amounts paid by peer companies to remain competitive in the commodity markets, political unrest, labor actions, currency fluctuations, armed conflict in coffee producing nations, and government actions, including treaties and trade controls between the U.S. and coffee producing nations, can affect the price of green coffee. In fiscal 2011, the market for green Arabica coffeetalent.
We believe that this design appropriately focuses our executive officers on the creation of long-term value without creating undue risk-taking behavior. We continued to focus on these key design elements in addressing the impact of and our response to the COVID-19 pandemic and its related impact on our compensation programs.
Impact of and Response to COVID-19
Below we summarize key actions the Company undertook to protect our employees, stockholders, business, and customers throughout COVID-19 pandemic. Management quickly responded to the revised business landscape, purposefully managed liquidity and remained focused on our strategic projects to deliver long-term stockholder value.
In fiscal 2022, although both our DSD and Direct Ship sales channels continued to be impacted by the COVID-19 pandemic, there was significant recovery in these channels throughout the year ended June 30, 2021 (“fiscal 2021”) and fiscal 2022. Net sales in fiscal 2022 increased approximately 80% per pound$71.3 million, or 18%, to $469.2 million from $397.9 million in fiscal 2021. The increase in net sales was primarily due to the continued recovery from the impact of the COVID-19 pandemic on both our DSD and Direct Ship sales channels, along with price increases and delivery surcharges implemented during fiscal 2022.
During fiscal 2022, we delivered higher gross margins compared to the prior fiscal year. Additionally, green specialty coffees sell at a premium to other green coffeesyear primarily due to the inabilitypandemic’s impact on sales volume, which had a larger impact on our higher margin customers in fiscal 2021. Overall, gross margins increased by 3.8%, from 25.4% in fiscal 2021 to 29.2% in fiscal 2022 due in part to the continued recovery from the COVID-19 pandemic. A decline in our unfavorable production variances and inventory scrap write-downs due to the closure of producersour aged Houston, Texas plant during fiscal 2021 also contributed to increasesuch increase. These improvements were partially offset by higher freight costs due to global supply chain challenges. The price increases and delivery surcharges implemented across our DSD network beginning in the short runthree months ended December 31, 2021 helped mitigate the impact of higher supply chain and product costs.
Our capital expenditures for fiscal 2022 were $15.2 million, as compared to meet rising demand. As$15.1 million in fiscal 2021, an increase of $0.1 million. This was driven by lower expansionary capital spend of $5.8 million in fiscal 2022 compared to fiscal 2021, offset by a result, the price spread between specialty coffee and non-specialty coffee is likely to widen as demand for specialty coffee continues to increase.
Green coffee prices can also be affected by the actions of producer organizations. The most prominent of these are the Colombian Coffee Federation, Inc. (CCF) and the International Coffee Organization (ICO). These organizations seek to$5.8 million increase green coffee prices largely by attempting to restrict supplies, thereby limiting the availability of green coffee to coffee consuming nations. As a result, these organizations or others may succeed in raising green coffee prices.
There can be no assurance that we will be successfulmaintenance capital spend in passing commodity price increases on to our customers without losses in sales volume or gross marginfiscal 2022. Also included in the future. Additionally, if green$15.2 million of capital expenditures in fiscal 2022 was $1.6 million for expansion projects and $10.1 million of coffee beans frombrewing equipment spend to execute several key strategic initiatives pertaining to fiscal 2022. The expansionary capital spending reductions were driven by several key initiatives put in place, including a region become unavailable or prohibitively expensive,focus on refurbished coffee brewing equipment to drive cost savings, and reductions across some capital categories due to additional cost controls put in place during the COVID-19 pandemic.
What we could be forceddid for our employees
We implemented the following measures to use alternative coffee beans or discontinue certain blends, which could adversely impactassist our sales.employees:
OUR EFFORTS TO SECURE AN ADEQUATE SUPPLY OF QUALITY COFFEES MAY BE UNSUCCESSFUL AND IMPACT OUR ABILITY TO SUPPLY OUR CUSTOMERS OR EXPOSE US TO COMMODITY PRICE RISK.
Some of the Arabica coffee beans of the quality we purchase do not trade directly on the commodity markets. Rather, we purchase these coffee beans onImplemented Company health guidelines that included social distancing, shift spacing, protective equipment, temperature monitoring and a negotiated basis from coffee brokers, exporters and growers. If any of these supply relationships with coffee brokers, exporters or growers deteriorate, we may be unable to procure a sufficient quantity of high quality coffee beans at prices acceptable to us or at all. In such case, we may not beremote work option for employees able to fulfilldo so;
Provided up to 10 additional days of sick time at no cost for certain employees in locations with a confirmed COVID-19 case or who were quarantined due to COVID-19 related symptoms/exposure;
Provided COVID-19 testing for team members on our health plan at no charge;
Extended company-paid medical benefits for employees enrolled in benefit plans who had been placed on furlough due to the demandCOVID-19 outbreak;
Reinforced access for team members to telehealth options available through our health plans; and
Reinforced availability of our existing customers, supply new customers or expand other channelsEmployee Assistance Program (EAP) that is available to all employees and their families at no cost. The EAP provides helpful tools for managing anxiety and fears for employees and their children.
What we did for our Stockholders
We engaged stockholders in direct conversations regarding our pandemic actions and corresponding changes to our compensation program;
Our Board was regularly informed about all major aspects of distribution.
Maintaining a steady supply of green coffee is essential to keep inventory levels lowour business and secure sufficient stockremains actively engaged with management. Our Board and the Compensation Committee met and continue to meet customermore frequently (relative to prior years) to understand the unique challenges we are encountering; and
Invested in and reallocated capital in a focused approach, allowing team members to continue to deliver on projects to optimize our manufacturing and distribution network during challenging times.
What we did for our Business
Recognizing that maintaining ample liquidity is key to withstanding the pandemic and emerging in a position of strength, we prudently managed cash, including:
Amended our prior credit facility in April 2021 and subsequently entered into a new $127.5 million, four-year financing arrangement, providing a lower overall cost of borrowing and reducing or eliminating several negative covenants in its prior credit facility;
| • | Amended our credit facility a second time in August 2022, providing a further reduction in the overall cost of borrowing and repayment of our term loan agreement, which resulted in the removal of several negative covenants that existed in the term loan agreement. |
Drove cost-reduction and cash preservation strategies to weather the impact of the pandemic;
Remained disciplined in capital allocation priorities, including deferring capital expenditures, as appropriate;
Focused on key initiatives that would drive our business transformation; and
Renegotiated unprofitable contracts to meet evolving business needs. To help ensure future supplies, we may purchase coffee for delivery,
Compensation Policies and Practices—Good Governance
Consistent with our commitment to strong corporate governance, in some instances, upfiscal 2022, our Board followed the compensation policies and practices described below to 18 monthsdrive performance and serve our stockholders’ long-term interests:
What We Do
Our Compensation Committee is composed solely of independent directors, and regularly meets in executive session without members of management present. Our Compensation Committee retains an independent compensation consultant to provide it with advice on matters related to executive compensation. Our Compensation Committee regularly reviews and assesses the potential risks of our compensation policies and practices. The structure of our executive compensation program includes a mix of cash and equity-based compensation, with an emphasis on performance-based compensation. The competitiveness of our executive compensation program is assessed by comparison to the compensation programs of peer group companies that are similar to us in terms of industry, annual revenue, and/or other business characteristics. Our claw-back policy requires the recoupment of certain incentive compensation from our executive officers in the
future. Non-performance by suppliers could expose usevent of a material restatement of the Company’s financial results due to
creditfraud or misconduct. We maintain meaningful stock ownership guidelines for directors and
supply risk. Additionally, entering into such future commitments exposes us to purchase price risk. Because we areexecutive officers that promote a long-term stockholder perspective. What We Do Not Do
We do not
always able to pass price changes throughprovide for excise tax gross-ups in connection with severance or other payments or benefits arising in connection with a change in control. We do not provide for “single trigger” change in control payments or benefits. We do not provide guaranteed base salary increases or guaranteed bonuses. We do not provide supplemental pension benefits to our
customers due to competitive pressures, unpredictable price changes can have an immediate effect on operating results that cannot be correctedNamed Executive Officers. We do not provide excessive perquisites. We do not permit (absent stockholder approval in the
short run. To reduce our potential price risk exposure wecase of repricing/exchanging), and have
from time to time, entered into futures contractsnot engaged in, the practice of backdating or re-pricing/exchanging stock options. We do not allow directors or executive officers to hedge
coffee purchase commitments. Open contracts associatedor short sell Company stock. We do not allow directors or executive officers to pledge shares as collateral for a loan or in a margin account. 2022 Stockholder Outreach
Every year, the Company provides stockholders with the opportunity for an annual vote to approve its executive compensation program on an advisory basis. At our 2021 Annual Meeting, approximately 47% of our stockholders supported our advisory vote on executive compensation. Following this vote, we conducted an extensive engagement campaign with our stockholders. For additional information, see “Corporate Governance Cycle and 2022 Outreach” in Item 10 of this Amendment.
We reached out to investors representing approximately 47% of our common shares outstanding, as of our 2021 Annual Meeting, with invitations to discuss our officer compensation program and provide direct feedback to members of our Compensation Committee. We held discussions with investors representing approximately 15% of our common shares outstanding as of our 2021 Annual Meeting. Below are key learnings from these hedging activitiesdirect discussions with investors. The Compensation Committee will continue to engage directly with stockholders on a periodic basis on officer compensation matters.
Key Themes from Stockholder Engagement
Stockholders that accepted invitations to discuss compensation matters with members of our Compensation Committee were generally supportive of the Farmer Bros. officer compensation programs. Discussions tended to focus on the following categories:
Compensation Amounts: Stockholders did not express concern about the amount of compensation paid to the officers, nor did they express concern about any misalignment between pay and performance.
Mix of Compensation: Stockholders generally expressed a preference that the officer team have a uniform mix of long-term incentives.
Benchmarking Peer Group: Stockholders were supportive of the set of companies selected by the Compensation Committee to benchmark officer compensation. Certain stockholders expressed a view that peer companies should be similar in size and industry to Farmer Bros.
Incentives Plan Metrics: Stockholders were generally supportive of using EBITDA as the featured annual incentive plan metric, and understood the unique approach to goal-setting given the Company’s challenging situation. Several suggested that the Compensation Committee consider return on capital, revenue growth, cash flow, working capital and measuring performance on a per-share basis going forward. Several stockholders expressed a desire for TSR to have a greater weighting for future PBRSU awards.
Incentive Plan Design: Shareholders generally understood and supported the unique annual and long-term incentive design adopted by the Committee as a response to the challenging operating environment caused by the COVID-19 pandemic, as described in our prior year proxy disclosure. Shareholders did express a preference for measuring PBRSU performance over a full three-year period.
Compensation Committee Response to Stockholder Feedback
The Compensation Committee is thankful to the stockholders that accepted invitations to engage and provide feedback on the Company’s officer compensation programs. The Compensation Committee has, and will continue, to discuss the specific feedback and perspective provided by stockholders and intends to consider such feedback for future compensation decisions. The Compensation Committee took immediate action for certain features for fiscal 2023 officer compensation as a direct response to stockholder feedback:
The Compensation Committee removed several companies from the compensation peer group that were relatively larger than the Company in terms of revenue, and added several that are closer in revenues to the Company. These changes are described in Part II, Item 7A, "Quantitativegreater detail the section below titled “Benchmarking and Qualitative Disclosures About Market Risk"Peer Group Companies.”
For fiscal 2023 PBRSU awards, the TSR modifier has been changed to have greater influence on the award outcome. For fiscal 2023 awards, TSR goals have been set based on the Company’s absolute cumulative TSR over a full three-year period (fiscal 2023 through 2025). The Company’s absolute TSR over this three year period can modify amounts earned by adjusted EBITDA performance by a factor of this report.
DECLINES IN OF GREEN COFFEE COMMODITY PRICES MAY NOT BE IMMEDIATELY REFLECTED IN OUR COST OF GOODS SOLD AND MAY INCREASE VOLATILITY IN OUR RESULTS.
We routinely use futures contracts0.80x to lock-in green coffee market prices, in some instances, as much as 18 months1.5x (an increase from the 1.2x factor from prior to the actual delivery date. Accounting rules require that we value our open futures contracts by marking them to market priceawards). Adjusted EBITDA will be measured over three one-year measurement periods and generate a payout factor at the end of each reporting period and include in our financial results the unrealized gains or lossesthree years based on whether the market priceaverage achievement over the three years. This payout factor will then be subject to modification based on the Company’s absolute cumulative three-year as follows:
| Absolute 3-year Cumulative TSR | | Modification Factor |
| ≤ 25.0% | | 0.8x |
| -25.0% to +24.9% | | 1.0x |
| +25.0% to +49.9% | | 1.20x |
| +50.0% to +99.9% | | 1.33x |
| ≥ 100% | | 1.50x |
The purpose of the absolute TSR modifier above is higher or lowerto incentivize achievement of superior shareholder returns over a three-year period.
In addition to placing greater weighting on TSR, shareholders generally expressed a preference that all officers have the same mix of long-term incentive award vehicles with at least 50% of the awards granted in PBRSUs. As such, 50% of LTI granted to officers for the fiscal 2023 was granted in PBRSUs (an increase from 40% from prior year for NEOs other than our CEO which has been awarded 50% of LTI in PBRSUs in prior years).
Additional details about the price we locked-in. If green coffee commodity prices decline below our locked-in price, wefiscal 2023 long-term incentive awards will be reported in the Company’s proxy statement for fiscal 2023.
Oversight of the Executive Compensation Program
Compensation Committee
Under its charter, the Compensation Committee has the duty, among other things, to assess the overall executive compensation structure of the Company, including the compensation for our President and Chief Executive Officer and each of our other Named Executive Officers. In exercising this authority, the Compensation Committee determines the forms and amount of executive compensation appropriate to achieve the Compensation Committee’s strategic objectives, including base salary, bonus, incentive or performance-based compensation, equity awards and other benefits.
Compensation Consultant
The Compensation Committee has the authority to retain the services of outside consultants to assist it in performing its responsibilities. In fiscal 2022, the Compensation Committee engaged Meridian Compensation Partners, LLC, an independent compensation consultant (“Meridian”) to provide advisory and consulting services relating to the Company’s executive officer and director compensation programs, consultation regarding short-term and long-term incentive plan design, consultation regarding CEO pay ratio disclosure, and consultation regarding corporate governance practices and general Compensation Committee matters and processes. In fiscal 2022, the Compensation Committee also engaged Meridian to help determine the compensation of our President and Chief Executive Officer, as well as our other Named Executive Officers.
Meridian provided no other services to the Company or its affiliates during fiscal 2022 other than as described above. The Compensation Committee has determined that Meridian is “independent” according to the criteria required by the SEC in Rule 10C-1 of the Exchange Act.
Management’s Role in Establishing Compensation
The compensation of the Named Executive Officers is determined by the Compensation Committee, taking into account the input and recommendations of our President and Chief Executive Officer regarding compensation for those executive officers, and taking into account the input of the Nominating and Corporate Governance Committee and Chairman regarding performance of our President and Chief Executive Officer. The Compensation Committee has sole authority for all final compensation determinations regarding our President and Chief Executive Officer. In fiscal 2022, our President and Chief Executive Officer, Chief Human Resources Officer and General Counsel routinely attended the meetings of the Compensation Committee to recognizeprovide input, as requested by the Compensation Committee and, in the case of the General Counsel, to act as secretary for the meeting; however, no executive officer has any role in approving his or her own compensation, and neither our President and Chief Executive Officer nor any other Named Executive Officer is present during the portion of the meeting at which the Compensation Committee considers their compensation. The Compensation Committee regularly meets in executive session, without members of the management team present, when discussing and approving executive compensation.
Benchmarking and Peer Group Companies
The Compensation Committee compares the pay levels and programs for the Company’s executive officers to compensation information from a relevant peer group as well as information from published survey sources. The Compensation Committee uses this comparative data as a reference point in its review and determination of executive compensation but also considers competitive compensation practices and other relevant factors based on the members’ collective experience in setting pay. Accordingly, the Compensation Committee does not generally establish compensation at specific benchmark percentiles.
When setting compensation, the Compensation Committee considers other factors in addition to market data, including:
impact on long-term stockholder value creation;
impact on development and execution of Company strategy;
experience and tenure in role;
trends and competitive factors impacting the labor market;
the impact of the COVID-19 pandemic on the business and management’s actions to respond to the uncertain market in fiscal 2022; and
The Compensation Committee, with the assistance of Meridian, developed and approved the following peer group for purposes of benchmarking the compensation levels of our Named Executive Officers relative to our peers and informing fiscal 2022 pay levels for our Named Executive Officers:
| B&G Food, Inc. | The Boston Beer Company, Inc. |
| Seneca Food Corporation | Cal-Maine Foods, Inc. |
| Lancaster Colony Corporation | Medifast, Inc. |
| Hostess Brands, Inc. | The Chef’s Warehouse, Inc. |
| Calavo Growers, Inc. | Utz Brands, Inc. |
| J & J Snack Foods Corp. | The Simply Good Foods Company |
| John B. Sanfilippo & Son, Inc. | SunOpta, Inc. |
| Beyond Meat, Inc. | MGP Ingredients, Inc. |
| Freshpet, Inc. | New Age Beverage Corporation |
| Bridgford Foods Corporation | |
The Compensation Committee evaluates our peer group annually and makes adjustments to this peer group when appropriate to reflect changes in relative size or operations of the Company or its peers, or to address changes resulting lossesfrom mergers, acquisitions or other structural changes. The Compensation Committee found this peer group to be appropriate because it represented a meaningful sample of comparable companies in terms of, as applicable, industry, annual revenue, and other business characteristics. In 2022, for fiscal 2023 compensation, the Compensation Committee has decided to remove B&G Foods, Inc., The Chefs’ Warehouse, Inc., The Boston Beer Company, Inc., Lancaster Colony Corporation, Medifast, Inc., Cal-Maine Foods, Inc., and Seneca Foods Corporation from the peer group, and to add Whole Earth Brands, Inc., The Duckhorn Portfolio, Inc., and Vital Farms, Inc. The changes to the peer group were made to include companies with similar business lines and revenues more comparable to those of the Company.
Fiscal 2022 Named Executive Officer Compensation Mix
In fiscal 2022, the Compensation Committee’s compensation decisions with respect to our Named Executive Officers once again reflected strong alignment between pay and performance. We believe that our fiscal 2022 compensation programs were therefore also strongly aligned with the long-term interests of our stockholders.
The following charts illustrate, with respect to our President and Chief Executive Officer and our other Named Executive Officers as a group, the base salary, target short-term cash incentive compensation, and target long-term equity incentive compensation as a percentage of target total direct compensation for fiscal 2022. As shown below, a significant portion of Named Executive Officer target direct compensation is “at risk” variable compensation rather than fixed compensation, reflecting our philosophy of aligning Named Executive Officer compensation with performance generally and stockholder value creation specifically.
Key Elements of Fiscal 2022 Executive Compensation Program
Below are the key elements of the Company’s fiscal 2022 executive compensation program applicable to our Named Executive Officers.
| What We Pay | | Why and How We Pay It | |
| Base Salary | | • Base salary comprises fixed cash compensation that is designed to provide a reasonable level of Company-wide and individual performance. • Base salaries are reviewed annually and adjusted when appropriate (increases are neither fixed nor guaranteed). • Competitive base salaries are a key component of attracting and retaining executive talent. | |
| Short-Term Cash Incentives | | • Annual cash incentives constitute variable “at risk” compensation, payable in cash based on Company-wide and individual performance. These awards are designed to reward achievement of annual financial objectives as well as near-term strategic objectives that create momentum that is expected to foster the long-term success of the Company’s business. • Company-wide metrics and targets are derived from, and intended to promote, our near-term business strategy. • Individual targets are consistent with our focus on both quantitative and qualitative priorities and thereby reward both attainment of objective metrics and individual contributions. | |
| Long-Term Incentives | | • Stock options, Restricted Stock Units (“RSUs”) and Performance-based Restricted Stock Units (“PBRSUs”) subject to both performance- and time-based vesting conditions are designed to create direct alignment with stockholder objectives, provide a focus on long-term value creation, retain critical talent over extended timeframes and enable key employees to share in value creation. • Performance-based award metrics and targets align with long-term business strategy as well as stock price appreciation creating shareholder value. | |
| Severance Benefits | | • Severance benefits provide income and health insurance protection to our Named Executive Officers in connection with certain involuntary terminations of employment. These severance benefits are designed to enable the Named Executive Officers to focus on the best interests of the Company and its stockholders, including in circumstances that may jeopardize the individual’s job security. • Enhanced severance benefits are available if the termination of employment occurs in connection with a change in control to ensure continued focus on the best alternatives for the Company and its stockholders, free from distractions caused by personal uncertainties associated with the heightened risk to job security that arises for senior executives in the transactional context. • Severance benefits are also key to attracting and retaining key talent. | |
| Retirement and Welfare Benefits | | • A standard complement of retirement, health, welfare and insurance benefits, offered to our Named Executive Officers on terms generally similar to those available to other employees, provides important protections and stability for our Named Executive Officers and their families that help enable our Named Executive Officers to remain focused on their work responsibilities. • These are generally low-cost benefits with a higher perceived value that are intended to help keep our overall compensation package competitive. | |
| Perquisites | | • We provide limited perquisites as well as relocation assistance, each intended to facilitate the operation of the Company’s business and to assist the Company in recruiting and retaining key executives. • These are also low-cost benefits with a higher perceived value that are intended to help keep our overall compensation package competitive. | |
Base Salary
Consistent with the established executive compensation philosophy and objectives described above, and utilizing the peer comparisons provided by Meridian, the Compensation Committee approved fiscal 2022 annual base salaries for the Named Executive Officers as shown in the table below.
Named Executive Officers: | | Fiscal 2022 Annual Base Salary(1) | | | Fiscal 2021 Annual Base Salary(1) | | | Annual Base Salary Percentage Change | |
| D. Deverl Maserang II | | $ | 680,000 | | | $ | 660,000 | | | | 3.0 | % |
| Scott R. Drake | | $ | 450,000 | | | $ | 375,000 | | | | 20.0 | % |
| Ruben E. Inofuentes | | $ | 350,000 | | | $ | 340,000 | | | | 3.0 | % |
| Maurice S. J. Moragne | | $ | 355,000 | | | $ | 340,000 | | | | 4.4 | % |
| Amber D. Jefferson | | $ | 320,000 | | | | N/A | | | | N/A | |
| (1) | Annual base salary as of the end of the applicable fiscal year. |
Short-Term Cash Incentives for Fiscal 2022
Fiscal 2022 awards were designed to place a significant portion of each Named Executive Officer’s annual cash compensation “at risk” and were designed to align the near-term focus of our Named Executive Officers with our business goals for the relevant period. Due to the impact of COVID-19 on the predictability of our business, the Company’s 2022 short-term incentive plan focused on achieving a minimum performance threshold for Company-wide financial results. Although
For the fiscal 2022 Short-Term Cash Incentive Program, the Compensation Committee used adjusted EBITDA as the relevant performance metric and set a minimum threshold for achievement (described below) which, if achieved, the Compensation Committee believed would reflect a meaningful level of Company profitability and would be aligned with our strategic plan to deliver long-term value to our stockholders. Generating EBITDA is critically important during this unprecedented time in the company’s history which is why adjusted EBITDA was the primary performance metric for the fiscal 2022 annual cash incentive program and an important factor in the fiscal 2022 PBRSU awards. The Company must remain in compliance with bank covenants, and as such, lossesthe Compensation Committee believes it is important to incentivize management to drive adjusted EBITDA in excess of what is required by the bank. However, this challenging time makes goal-setting difficult while ensuring that any payouts generated from EBITDA achievement are offsetaffordable and does not put the Company in a compromising cash situation. For this reason, the Committee determined that any payouts above threshold adjusted EBITDA achievement levels would be discretionary. Notwithstanding the foregoing, the Compensation Committee determined that no Short-Term Incentive payments would be made to the extent that doing so would reduce the Company’s adjusted EBITDA below the minimum level required by the Company’s then-existing bank covenants. The Committee will revisit this design for future gainsyears and expects to return to a more conventional program in future years when we sellbusiness conditions stabilize.
For this purpose, “adjusted EBITDA” was defined as net (loss) income excluding the coffee, such transactions could potentially cause volatilityimpact of: (i) income taxes; (ii) interest expense; (iii) income from short-term investments; (iv) depreciation and amortization expense; (v) ESOP and share-based compensation expense; (vi) non-cash impairment losses; non-cash pension withdrawal expense; (viii) other similar non-cash expenses; (ix) restructuring and other transition expenses; (x) non-recurring stockholder-related expenses; (xi) acquisition costs (and related revenues only during the same fiscal year); (xii) capital issuance expenses; (xiii) out of period external legal expenses; (xiv) business segment disposition expenses (and exclusion of related gain on sales); (xv) net gain or loss on sale of assets other than M&A or business segment disposition; and (xvi) non-recurring and/or extraordinary expenses.
In fiscal 2022, our Named Executive Officers were eligible to earn annual cash incentive awards under the Short-Term Cash Incentive Program of 50% of the applicable Named Executive Officer’s target annual bonus for threshold performance. Any performance in our results becauseexcess of the recognitionthreshold would be considered in determining the overall payout at the discretion of lossesthe Compensation Committee. Annual cash incentives are capped at a maximum payout opportunity of 200% of target.
As a result of achieving above the threshold level on adjusted EBITDA, the Compensation Committee determined that the plan should pay out at 80% of each executive’s target annual bonus, subject to adjustment for individual performance. In determining to pay the bonus at this level, the Compensation Committee considered management’s leadership of key initiatives within the company’s optimization strategy that were completed during the fiscal year, including the continued improvement in the Company’s financial performance despite unforeseen lingering impacts of the COVID-19 pandemic, supply chain bottlenecks and the offsetting gains may occur in different fiscal periods. Rapid, sharp decreases in the cost of green coffee could also force us to lower sales prices before realizing cost reductions in our green coffee inventory.
WE FACE EXPOSURE TO OTHER COMMODITY COST FLUCTUATIONS, WHICH COULD IMPACT OUR MARGINS AND PROFITABILITY.
We are exposed to cost fluctuations in other commodities, including milk, spices, natural gas and gasoline. In addition, ansignificant increase in the cost of fuel could indirectly leadraw coffee. The Compensation Committee also considered the continued uncertainty presented by the COVID-19 pandemic, the inflationary environment, and the need for liquidity to higher electricity costs, transportation costs and other commodity costs. Much like green coffee costs,execute the costsCompany’s strategic initiatives in evaluating whether to payout in excess of target given the adjusted EBITDA performance. The Compensation Committee believes that it was important to reward executives for the completion of these commodities depend on various factors beyondkey initiatives and to keep those executives motivated because the achievement of these milestones is essential to the Company’s plans to deliver long-term value to stockholders.
The following table shows such achievement compared to Company-wide performance threshold for fiscal 2022.
| Metric | | AEBITDA Target | | | Threshold Goal (80% of Target Performance) | | | Actual Achievement | | | Actual Achievement Compared to Target Performance | | | Payout for Fiscal 2022 Company-wide Performance | |
| Adjusted EBITDA | | $ | 20.3 | M | | $ | 17.9 | M | | $ | 19.1 | M | | | 93.9 | % | | | 85.0 | % |
The following table shows such target achievement compared to actual earned short-term cash incentive for fiscal 2022.
Named Executive Officers: | | Fiscal 2022 Target Short Term Cash Incentive | | | Fiscal 2022 Target Short Term Earned Cash Incentive | |
| | | | | | | |
| D. Deverl Maserang II | | $ | 680,000 | | | $ | 598,400 | |
| Scott R. Drake | | $ | 337,500 | | | $ | 297,000 | |
| Ruben E. Inofuentes | | $ | 210,000 | | | $ | 159,600 | |
| Maurice S. J. Moragne | | $ | 213,000 | | | $ | 170,400 | |
| Amber D. Jefferson | | $ | 192,000 | | | $ | 168,960 | |
Long-Term Incentive Compensation
Awards
The fiscal 2022 long-term incentives were designed to be competitive with market and directly align our control, including economicincentives with our long-term business priorities and political conditions, foreign currency fluctuations, and global weather patterns. Tocompensation outcomes to Company performance. The Compensation Committee believes that the fiscal 2021 long-term incentive program facilitates strong pay for performance alignment in that the RSUs only appreciate in value to the extent wethat the stock price appreciates, and the PBRSUs only vest to the extent that the performance goals are unableachieved, placing the emphasis on stock price and stockholder alignment on internal company performance and business strategy. The Compensation Committee also believes that long-term incentives serve as a retention tool for key executives, which is particularly important in this competitive market for talent.
Our practice historically has been to pass along such costsgrant annual normal-cycle long-term incentive awards generally in the second quarter of the fiscal year, with interim grants for new hires and promotions after the annual grant date being made on the first day of the calendar month following the hire or promotion, as applicable. Our grants have historically taken the form of 50% PBRSUs vesting over a three-year performance period and 50% in stock options. However, in an attempt to conserve our authorized shares under our equity plan, the Compensation Committee started utilizing RSUs instead of stock options.
Fiscal 2022 Awards
Restricted Stock Units
In fiscal 2022, the RSUs granted to our customers through price increases, our marginsNamed Executive Officers under the Farmer Bros. Co. Amended and profitability will decrease.
IMPAIRMENT CHARGES RELATED TO OUR DEFINITE-LIVED AND INDEFINITE-LIVED INTANGIBLE ASSETS COULD ADVERSELY AFFECT OUR FUTURE OPERATING RESULTS.
Indefinite-lived intangible assets (other than goodwill) are not amortized but instead are reviewed for impairment annually and on an interim basis if events or changes in circumstances between annual tests indicate that an asset might be impaired. A definite-lived intangible asset is only deemed to have become impaired if the sumRestated 2017 Long-Term Incentive Plan (the “2017 Plan”) vest ratably over three years, with one-third of the projected undiscounted future cash flows relatedtotal number of shares subject to the asset is less than the carrying valueeach such RSUs vesting on each of the asset. If the sumfirst three anniversaries of the projected cash flows is less thangrant date, contingent on continued employment. The RSU grants made to Ms. Jefferson, however, cliff vest after three years and were made under the carrying value, then we must write down2020 Inducement Plan.
Performance-Based Restricted Stock Units
In fiscal 2022, the carrying valuePBRSUs granted to its estimated fair value inour Named Executive Officers under the period in which2017 Plan cliff vest at the determination is made. An indefinite-lived intangible asset (other than goodwill) is deemed impaired if its estimated fair value is less than its carrying value.
In the fourth quarter of fiscal 2012, we determined that certain indefinite-lived intangible asset consisting of trademarks acquired in connection with the CBI acquisition were impaired and recorded an impairment charge of $0.5 million in operating expenses. In the fourth quarter of fiscal 2011, we determined that definite-lived intangible assets consistingend of the customer relationships acquired,three-year performance period based upon achievement of adjusted EBITDA (as defined above for purposes of fiscal 2022 cash incentive) performance goals for the performance period July 1, 2021 through June 30, 2024. During this unprecedented period of uncertainty and the distribution agreement and co-pack agreement entered into, in connection with the DSD Coffee Business acquisition were impaired and recorded an impairment charge of $7.8 million inchallenging operating expenses. Failure to achieve our forecasted operating results, due to further weakness in the economic environment or other factors, and further declines in our market capitalization, among other things, could result in further impairment of our definite-lived and indefinite-lived intangible assets.
OUR LEVEL OF INDEBTEDNESS COULD ADVERSELY AFFECT OUR ABILITY TO RAISE ADDITIONAL CAPITAL TO FUND OUR OPERATIONS, AND LIMIT OUR ABILITY TO REACT TO CHANGES IN THE ECONOMY OR OUR INDUSTRY.
We have an $85.0 million senior secured revolving credit facility. As of August 31, 2012, we had estimated outstanding borrowings of $24.0 millionfor Farmer Bros., excluding $0.2 million in loan extension fees, utilized $11.9 million of the letters of credit sublimit, and had excess availability under the credit facility of $39.5 million. Maintaining a large loan balance under our credit facility could adversely affect our business and limit our ability to plan for or respond to changes in our business. Additionally, our borrowings under the credit facility are at variable rates of interest, exposing us to the risk of interest rate volatility, which could lead to an increase in our net loss. Our debt obligations could also:
increase our vulnerability to general adverse economic and industry conditions;
require us to dedicate a portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow for other purposes, including funding daily operations, investing in future business opportunities and capital expenditures;
limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate thereby placing us at a competitive disadvantage comparedgenerating EBITDA is critically important to our competitors that may have less debt or debt with less restrictive debt covenants;
limit, by the financial and other restrictive covenants in our loan agreement, our ability to borrow additional funds; and
have a material adverse effect on us if we fail to comply with the covenants in our loan agreement because such failure could result in an event of default which, if not cured or waived, could result in our indebtedness becoming immediately due and payable.
RESTRICTIVE COVENANTS IN OUR CREDIT FACILITY MAY RESTRICT OUR ABILITY TO PURSUE OUR BUSINESS STRATEGIES.
Our revolving credit facility contains various covenants that limit our ability and/or our subsidiaries’ ability to, among other things:
incur additional indebtedness;
pay dividends on or make distributions in respect of capital stock or make certain other restricted payments or investments;
sell assets;
create liens on certain assets to secure debt; and
consolidate, merge, sell or otherwise dispose of all or substantially all of our assets.
Our credit facility also contains restrictive covenants that require the Company and its subsidiaries to satisfy financial condition and liquidity tests. Our ability to meet those tests may be affected by events beyond our control, and there can be no assurance that we will meet those tests. The breach of any of these covenants or our failure to meet the financial condition or liquidity tests could result in a default under the credit facility, and the lender could elect to declare all amounts borrowed thereunder, together with accrued interest, to be due and payable and could proceed against the collateral securing that indebtedness.
OUR BUSINESS IS SUBJECT TO RISKS ASSOCIATED WITH THE CURRENT ECONOMIC CLIMATE.
Our success, depends to a significant extent on a number of factors that affect discretionary consumer spending, including economic conditions, disposable consumer income and consumer confidence, which have deteriorated due to current economic conditions. In a slow economy, businesses and individuals scale back their discretionary spending on travel and entertainment, including “dining out” as well as the purchase of high-end consumables like specialty coffee. Economic conditions may also cause businesses to reduce travel and entertainment expenses, and may even cause office coffee benefits to be eliminated. The current economic downturn and decrease in consumer spending may continue to adversely impact our revenues, and may affect our ability to market our products or otherwise implement our business strategy. Additionally, many of the effects and consequences of the global financial crisis and a broader global economic downturn are currently unknown; any one or all of them could potentially have a material adverse effect on our liquidity and capital resources, including our ability to sell third party securitiesmeet financing covenants, create shareholder value and afford incentive compensation to attract and retain key talent in which we have invested somea highly competitive labor market. As such, adjusted EBITDA is the featured performance metric for both our short- and long-term incentive plans. The Compensation Committee continuously evaluates alternative incentive plan performance metrics and expects that the use of the same metric in both short- and long-term plans is only a temporary practice until the Company returns to a more stable operating environment and can return to a more diversified suite of metrics across short- and long-term incentives. For the fiscal 2022 awards, adjusted EBITDA targets for each year of the performance period are set independently at the beginning of the year due to the rapidly changing realities of our short-term assetsbusiness during the pandemic. This preserves the incentive of pay-for-performance by making the targets challenging but achievable based on the business environment for the applicable performance year.
Performance against adjusted EBITDA targets for each year will determine a payout factor for that year which can range from 0% to 130% of target. At the end of the 3-year performance period, the average payout factor for each of the three one-year adjusted EBITDA measurement periods will be calculated. This three-year average payout factor for adjusted EBITDA performance is then subject to modification based on Farmer Bros. three-year TSR (the “three-year TSR modifier”) which is applied to the preliminary payout factor determined by the EBITDA target to determine a final payout factor between 0% and 150% of target for the full 3-year measurement period for PBRSUs. No PBRSUs can be earned or raisepaid prior to the conclusion of the full three-year measurement period when the final full three-year achievement is determined.
Our performance goals for adjusted EBITDA are based on business forecasts, our ability to recover from the COVID-19 pandemic and relevant expectations reflecting our strategic plans and aspirations to grow our business. The Compensation Committee has historically established aggressive, yet achievable performance goals intended to motivate the Company’s executive officers to achieve internal goals and results that will benefit the Company’s stockholders, while maintaining strong alignment between pay and performance. With the limited number of shares available for issuance under the 2017 Plan, this annual as opposed to three-year target setting preserves the incentive of equity awards. Actual achievement of the three-year performance goals for the PBRSU awards granted in fiscal 2022 will be reflected in our proxy statement that reports the payouts at the end of the three-year performance period.
For additional capital,information regarding changes to our PBRSU grant practices for fiscal 2023, please see “Compensation Committee Response to Shareholder Feedback” above.
Employment and Change in Control Severance Agreements
The Company has entered into an employment agreement with our President and Chief Executive Officer, Deverl Maserang (“Employment Agreement”), as well as a Change in Control Severance Agreement with each of the Named Executive Officers. A detailed description of the severance benefits each Named Executive Officer is due to receive based on their Employment Agreement and/or Change in Control Severance Agreement is set forth below under the heading “Named Executive Officer Compensation-Potential Payments Upon Termination or Change in Control.”
These agreements were entered into, and continue in effect, to achieve the following objectives: (a) assure the Named Executive Officers’ full attention and dedication to the Company, free from distractions caused by personal uncertainties and risks related to a pending or threatened change in control; (b) assure the Named Executive Officers’ objectivity with respect to stockholders’ interests in a change in control scenario; (c) assure the fair treatment of the Named Executive Officer in case of involuntary termination following a change in control or in connection with a threatened change in control; and (d) attract and retain key talent during uncertain times. The agreements are structured so that payments and benefits are provided only if needed,there is both a change in control or threatened change in control and a qualifying termination of employment (“double trigger”), either by us (other than for “Cause,” “Disability” or death), or by the abilityNamed Executive Officer in connection with a “Resignation for Good Reason” (as each is defined in the change in control severance agreements).
Retirement and Welfare Benefits
The Named Executive Officers receive the same welfare benefits as those received by our employees generally, including medical, dental, life, disability and accident insurance.
The Named Executive Officers are eligible on the same basis as our employees generally to participate in the Company’s 401(k). plan. The value of the Named Executive Officers’ 401(k) plan balances depends solely on the performance of investment alternatives selected by the applicable Named Executive Officer from among the alternatives offered to all participants. All investment options in the 401(k) plan are market-based, meaning there are no “above-market” or. guaranteed rates of return. In the beginning of the year ended June 30, 2021 (“fiscal 2020”), the Company offered a discretionary match of the employees’ annual contributions under the 401(k) plan equal to 50% of an employee’s annual contribution, up to 6% of the employee’s eligible income. As a result of the COVID-19 crisis and the corresponding impact on our business, the match was suspended effective April 1, 2020 and was reinstated effective with the July 9, 2021 paycheck for each eligible employee.
Today, the Company offers two different types of contributions: (1) a “non-elective” contribution that does not require the team member to contribute and is equal to 4% of eligible earnings; and (2) a company match of 100% of the first 3% of eligible earnings that eligible employees contribute. The Company match is currently made in Company stock to help the Company manage its cash position as it emerges from the impacts of COVID-19. Through our shareholder outreach program, we learned that many of our lendershareholders are concerned about dilution. So, effective January 1, 2023, we will eliminate the 4% non-elective contribution and change the Company match to honor draws100% of the first 3% each eligible employee contributes plus 50% on our credit facility, or otherwise negatively affectthe next 2% they contribute. This model will allow the Company to take advantage of the “safe harbor” provisions of the regulations applicable to its 401(k) and remain competitive in a challenging labor market, while reducing the dilutive effects of the match.
Perquisites
We believe that offering certain limited perquisites facilitates the operation of our business, financial condition, operating resultsallows our Named Executive Officers to better focus their time, attention and cash flows.
WE RELY ON INFORMATION TECHNOLOGY AND ARE DEPENDENT ON ENTERPRISE RESOURCE PLANNING SOFTWARE IN OUR OPERATIONS. ANY MATERIAL FAILURE, INADEQUACY, INTERRUPTION OR SECURITY FAILURE OF THAT TECHNOLOGY COULD AFFECT OUR ABILITY TO EFFECTIVELY OPERATE OUR BUSINESS.
We relycapabilities on information technology systems across our operations, including management of our supply chain, point-of-sale processing, and various other processes and transactions. Our ability to effectively manage our business, and coordinateassists the production, distributionCompany in recruiting and saleretaining key executives. We also believe that the perquisites offered to our Named Executive Officers are generally consistent with practices among companies in our peer group.
It is the Company’s and the Compensation Committee’s intention to continually assess business needs and evolving practices to ensure that perquisite offerings are competitive and reasonable.
Compensation Policies and Practices
Stock Ownership Guidelines
The Board has adopted Stock Ownership Guidelines to further align the interests of our products depends significantlythe Company’s executive officers with the interests of the Company’s stockholders. Under the stock ownership guidelines, an executive officer is not permitted to sell any shares of Common Stock received as a result of grants under the Company’s long-term incentive plans unless the executive officer achieves and maintains the applicable threshold share ownership level set forth in the table below. Further, under the stock ownership guidelines, a non-employee director is expected to own and hold during his or her service as a Board member a number of shares of Common Stock with a value of at least four times his or her annual cash retainer for service on the reliabilityBoard, and capacityis not permitted to sell any shares of Common Stock received as grants under the Company’s long-term incentive plans unless and until the non-employee director achieves and maintains this threshold share ownership level.
Shares of Common Stock that count toward satisfaction of these systems. The failureguidelines include: (i) shares of these systems to operate effectively, problems with transitioning to upgradedCommon Stock owned outright by the executive officer or replacement systems,non-employee director and his or a breachher immediate family members who share the same household, whether held individually or jointly; (ii) restricted stock or restricted stock units (whether or not the restrictions have lapsed); (iii) shares of Common Stock held in securitytrust for the benefit of these systems could result in delays in processing replenishment orders from our branch warehouses, our inability to record product salesthe executive officer or non-employee director or his or her family; and reduced operational efficiency. Significant capital investments could be required to remediate any potential problems.(iv) shares of Common Stock issuable under vested options held by the executive officer or non-employee director.
VOLATILITY IN THE EQUITY MARKETS COULD REDUCE THE VALUE OF OUR INVESTMENT PORTFOLIO.
We maintain a portfolio of fixed-income based investments disclosed as cash equivalents| Position | | Value of Shares Owned |
| Chief Executive Officer | | 3x base salary |
| Other Executive Officers | | 1x base salary |
| Non-Employee Directors | | 4x Annual Cash Retainer |
Insider Trading Policy (Including Anti-Hedging and short-term investments on our consolidated balance sheets. The value of our investments may be adversely affected by interest rate fluctuations, downgrades in credit ratings, illiquidity in the capital marketsAnti-Pledging Policies)
Our insider trading policy prohibits all employees, officers, directors, consultants and other factors whichassociates of the Company and certain of their family members from, among other things, purchasing or selling any type of security, whether the issuer of that security is the Company or any other company, while aware of material, non-public information relating to the issuer of the security or from providing such material, non-public information to any person who may resulttrade while aware of such information. The insider trading policy also prohibits employees from engaging in other than temporary declines in the value of our investments. Any of these events could cause us to record impairment chargesshort sales with respect to our investment portfoliosecurities, purchasing or pledging Company stock on margin and entering into derivative or similar transactions (i.e., puts, calls, options, forward contracts, collars, swaps or exchange agreements) with respect to realize lossesour securities. We also have procedures that require trades by certain insiders, including our directors and executive officers, to be pre-cleared by appropriate Company personnel. Additionally, such insiders are generally prohibited from conducting transactions involving the purchase or sale of the Company’s securities from 12:01 a.m. New York City time on the salefourteenth calendar day before the end of investments. If our operating losses continue, a portion or this entire investment portfolio may be liquidated to fund those losses.
WE ARE LARGELY RELIANT ON MAJOR FACILITIES IN CALIFORNIA, TEXAS AND OREGON FOR PRODUCTION OF OUR PRODUCT LINE.
A significant interruption in operations at our manufacturing facilities in Torrance, California (our largest facility); Houston, Texas; or Portland, Oregon, whether as a result of a natural disaster, terrorism or other causes, could significantly impair our ability to operate our business. The majority of our green coffee comes through the Ports of Los Angeles, Long Beach, Houston, San Francisco and Portland. Any interruption to port operations, highway arteries, gas mains or electrical service in these areas could restrict our ability to supply our branch warehouses with product and would adversely impact our business.
INCREASED SEVERE WEATHER PATTERNS MAY INCREASE COMMODITY COSTS, DAMAGE OUR FACILITIES, AND IMPACT OR DISRUPT OUR PRODUCTION CAPABILITIES AND SUPPLY CHAIN.
There is increasing concern that a gradual increase in global average temperatures due to increased concentration of carbon dioxide and other greenhouse gases in the atmosphere have caused and will continue to cause significant changes in weather patterns around the globe and an increase in the frequency and severity of extreme weather events. Major weather phenomena like El Niño and La Niña are dramatically affecting coffee growing countries. The wet and dry seasons are becoming unpredictable in timing and duration causing improper developmenteach of the coffee cherries. Decreased agricultural productivity in certain regions as a resultCompany’s four fiscal quarters (including fiscal year end) through 11:59 p.m. New York City time on the business day following the date of changing weather patterns may affect the quality, limit availability or increasepublic release containing the cost of key agricultural commodities, such as green coffee, sugar and tea, which are important ingredients for our products. Increased frequency or duration of extreme weather conditions could also damage our facilities, impair production capabilities, disrupt our supply chain or impact demand for our products. As a result, the effects of climate change could have a long-term adverse impact on our business andCompany’s quarterly (including annual) results of operations.
OUR INDUSTRY IS HIGHLY COMPETITIVE AND WE MAY NOT HAVE THE RESOURCES TO COMPETE EFFECTIVELY.
We primarily compete with other coffee companies, including multi-national firms with substantially greater19
Clawback Policy on Executive Compensation in Restatement Situations
In the event of a material restatement of the financial marketing and operating resources thanresults of the Company. We face competition from many sources includingCompany, the institutional foodservice divisions of multi-national manufacturers of retail products such as J.M. Smucker (Folgers Coffee), Dunkin' Donuts and Kraft Foods Inc. (Maxwell House Coffee), wholesale foodservice distributors such as Sysco Corporation and U.S. Foods, regional institutional coffee roasters such as S & D Coffee, Inc. and Boyd Coffee Company, and specialty coffee suppliers such as Green Mountain Coffee Roasters, Inc., Rogers Family Company, Distant Lands Coffee, Mother Parkers Tea & Coffee, Inc., and Peet’s Coffee & Tea, Inc. As many of our customers are small foodservice operators, we also compete with club stores such as Costco and Restaurant Depot. If we do not succeed in differentiating ourselves from our competitorsBoard, or our competitors adopt our strategies, then our competitive position may be weakened. In addition, from time to time, we may need to reduce our prices in response to competitive and customer pressures and to maintain our market share. Competition and customer pressures, however, also may restrict our ability to increase prices in response to commoditythe appropriate committee thereof, will review all bonuses and other cost increases. Ourincentive and equity compensation awarded to the Company’s executive officers on the basis of having met or exceeded performance targets for performance periods that occurred during the restatement period. If such bonuses and other incentive and equity compensation would have been lower had they been calculated based on such restated results, of operations will be adversely affected if our profit margins decrease, as a result of a reduction in prices or an increase in costs, and if we are unable to increase sales volumes to offset those profit margin decreases.
VOLATILITY IN THE EQUITY MARKETS OR INTEREST RATE FLUCTUATIONS COULD SUBSTANTIALLY INCREASE OUR PENSION FUNDING REQUIREMENTS AND NEGATIVELY IMPACT OUR FINANCIAL POSITION.
At June 30, 2012, the projected benefit obligation under our single employer defined benefit pension plans was $130.4 million and the fair value of plan assets was $85.8 million. The difference between plan obligations and assets,Board, or the funded statusappropriate committee thereof, may, to the extent permitted by governing law and as appropriate under the circumstances, seek to recover for the benefit of the plans, significantly affects the net periodic benefit cost and ongoing funding requirements of those plans. Among other factors, changes in interest rates, mortality rates, early retirement rates, investment returns and the market value of plan assets can affect the level of plan funding, cause volatility in the net periodic benefit cost and increase our future funding requirements. As of June 30, 2012, we have made $7.3 million in contributions to these pension plans and accrued $1.2 million in expense. We expect to make approximately $4.3 million in contributions to our single employer defined benefit pension plans in fiscal 2013 and accrue expense of approximately $1.2 million per year beginning in fiscal 2013. These pension payments are expected to continue at this level for several years, and the current economic environment increases the risk that we may be required to make even larger contributions in the future.
OUR SALES AND DISTRIBUTION NETWORK IS COSTLY TO MAINTAIN.
Our sales and distribution network requires a large investment to maintain and operate. Costs include the fluctuating cost of gasoline, diesel and oil, costs associated with managing, purchasing, leasing, maintaining and insuring a fleet of delivery vehicles, the cost of maintaining distribution centers and branch warehouses throughout the country, and the cost of hiring, training and managing our route sales professionals. Many of these costs are beyond our control, and many are fixed rather than variable. Some competitors use alternate methods of distribution that eliminate many of the costs associated with our method of distribution.
EMPLOYEE STRIKES AND OTHER LABOR-RELATED DISRUPTIONS MAY ADVERSELY AFFECT OUR OPERATIONS.
We have union contracts relating to a significant portion of our workforce. Although we believe union relations have been amicable in the past, there is no assurance that this will continue in the future. There are potential adverse effects of labor disputes with our own employees or by others who provide transportation (shipping lines, truck drivers) or cargo handling (longshoremen), both domestic and foreign, of our raw materials or other products. These actions could restrict our ability to obtain, process and/or distribute our products.
GOVERNMENT MANDATORY HEALTHCARE REQUIREMENTS COULD ADVERSELY AFFECT OUR PROFITS.
We offer healthcare benefits to all employees who work at least 40 hours a week and meet service eligibility requirements. In the past, some states, including California, have proposed legislation mandating that employers pay healthcare premiums into a state-run fund for all employees immediately upon hiring or pay a penalty for failing to do so. If legislation similar to this were to be enacted in California, or in the other states in which we do business, it could have an adverse effect on our results of operations. In addition, comprehensive health care legislation (the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010) was passed and signed into law in March 2010. Due to the breadth and complexity of this legislation, it is difficult to predict the financial and operational impacts this legislation will have on us. Our expenses may significantly increase over the long-term as a result of this legislation.
POSSIBLE LEGISLATION OR REGULATION INTENDED TO ADDRESS CONCERNS ABOUT CLIMATE CHANGE COULD ADVERSELY AFFECT OUR RESULTS OF OPERATIONS, CASH FLOWS AND FINANCIAL CONDITION.
Governmental agencies are evaluating changes in laws to address concerns about the possible effects of greenhouse gas emissions on climate. Increased public awareness and concern over climate change may increase the likelihood of more proposals to reduce or mitigate the emission of greenhouse gases. Laws enacted that directly or indirectly affect our suppliers (through an increase in the cost of production or their ability to produce satisfactory products) or our business (through an impact on our inventory availability, cost of goods sold, operations or demand for the products we sell) could adversely affect our business, financial condition, results of operations and cash flows. Compliance with any new or more stringent laws or regulations, or stricter interpretations of existing laws, including increased government regulations to limit carbon dioxide and other greenhouse gas emissions as a result of concern over climate change, could require us to reduce emissions and to incur compliance costs which could affect our profitability or impede the production or distribution of our products, which could affect our results of operations, cash flows and financial condition. In addition, public expectations for reductions in greenhouse gas emissions could result in increased energy, transportation and raw material costs and may require us to make additional investments in facilities and equipment.
CHANGES IN CONSUMER PREFERENCES COULD ADVERSELY AFFECT OUR BUSINESS.
Our continued success depends, in part, upon the demand for coffee. We believe that competition from other beverages continues to dilute the demand for coffee. Consumers who choose soft drinks, juices, bottled water, teas and other beverages reduce spending on coffee. Consumer trends away from coffee could negatively impact our business.
WE ARE SELF-INSURED. OUR RESERVES MAY NOT BE SUFFICIENT TO COVER FUTURE CLAIMS.
We are self-insured for many risks up to significant deductible amounts. The premiums associated with our insurance continue to increase. General liability, fire, workers’ compensation, directors and officers liability, life, employee medical, dental and vision and automobile risks present a large potential liability. While we accrue for this liability based on historical
experience, future claims may exceed claims we have incurred in the past. Should a different number of claims occur compared
to what was estimated or the cost of the claims increase beyond what was anticipated, reserves recorded may not be sufficient and the accruals may need to be adjusted accordingly in future periods. In May 2011, we did not meet the minimum credit rating criteria for participation in the alternative security program for California self-insurers. As a result we were required to post a $5.9 million letter of credit as a security deposit to the State of California Department of Industrial Relations Self-Insurance Plans. As of June 30, 2012, this letter of credit continues to serve as a security deposit.
COMPETITORS MAY BE ABLE TO DUPLICATE OUR ROASTING AND BLENDING METHODS, WHICH COULD HARM OUR COMPETITIVE POSITION.
We consider our roasting and blending methods essential to the flavor and richness of our coffees and, therefore, essential to our brand. Because our roasting methods cannot be patented, we would be unable to prevent competitors from copying these methods if such methods became known. If our competitors copy our roasts or blends, the value of our brand may be diminished, and we may lose customers to our competitors. In addition, competitors may be able to develop roasting or blending methods that are more advanced than our production methods, which may also harm our competitive position.
OUR OPERATING RESULTS MAY HAVE SIGNIFICANT FLUCTUATIONS FROM QUARTER TO QUARTER WHICH COULD HAVE A NEGATIVE EFFECT ON OUR STOCK PRICE.
Our operating results may fluctuate from period to period or within certain periods as a result of a number of factors, including fluctuations in the price and supply of green coffee, fluctuations in the selling prices of our products, the success of our hedging strategy, competition from existing or new competitors in our industry, changes in consumer preferences, and our ability to manage inventory and fulfillment operations and maintain gross margins. At the end of each quarter, we record the expected effect of the liquidation of LIFO inventory quantities and record the actual impact at fiscal year end. Fluctuations in our operating results as a result of these factors or for any other reason, could cause our stock price to decline. Accordingly, we believe that period-to-period comparisons of our operating results are not necessarily meaningful, and such comparisons should not be relied upon as indicators of future performance.
OPERATING LOSSES MAY CONTINUE AND, AS A RESULT, COULD LEAD TO INCREASED LEVERAGE WHICH MAY HARM OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
We have incurred operating losses and net losses for each of the prior three fiscal years. If our current strategies are unsuccessful we may not achieve the levels of sales and earnings we expect. As a result, we could suffer additional losses in future years and our stock price could decline leading to deterioration in our credit rating, which could limit the availability of additional financing and increase the cost of obtaining financing. In addition, an increase in leverage could raise the likelihood of a financial covenant breach which in turn could limit our access to existing funding under our revolving credit facility.
Our ability to satisfy our operating lease obligations and make payments of principal and interest on our indebtedness depends on our future performance. Should we experience deterioration in operating performance, we will have less cash flow available to meet these obligations. In addition, if such deterioration were to lead to the closure of branch warehouses or distribution centers, we would need to fund the costs of terminating those leases. If we are unable to generate sufficient cash flow from operations in the future to satisfy these financial obligations, we may be required to, among other things:
seek additional financing in the debt or equity markets;
refinance or restructureCompany all or a portion of our indebtedness;
sell selected assets; or
reduce or delay planned capital or operating expenditures.
Such measures might not be sufficientsuch bonuses and incentive and equity compensation awarded to enable us to satisfy our financial obligations. In addition, any such financing, refinancing or sale of assets might not be available on economically favorable terms.
WE COULD FACE SIGNIFICANT WITHDRAWAL LIABILITY IF WE WITHDRAW FROM PARTICIPATION IN THE MULTIEMPLOYER PENSION PLANS IN WHICH WE PARTICIPATE.
We participate in a multiemployer defined benefit pension plan and a multiemployer defined contribution pension plan for certain union employees. We make periodic contributions to these plans to allow them to meet their pension benefit obligations to their participants. In the event we withdraw from participation in one or both of these plans, we could be required to make an additional lump-sum contribution to the plan, which would be reflected as an expense in our consolidated statement of operations and a liability on our consolidated balance sheet. Our withdrawal liability for any multiemployer plan
would depend on the extent of the plan’s funding of vested benefits. In fiscal 2012, in connection with the withdrawal from one of the multiemployer pension plans in which we participated, we recorded a charge of $4.3 million, representing the present value of the estimated withdrawal liability expected to be paid in quarterly installments of $0.1 million over 80 quarters. The installment payments will commence once the final amount of withdrawal liability is established, which determination may take up to 24 months from the date of withdrawal from the pension plan. Future collective bargaining negotiations may result in the Company withdrawing from the remaining multiemployer pension plans in which we participate and, if successful, may result in a withdrawal liability, the amount of which could be material to our results of operations and cash flows.
WE DEPEND ON THE EXPERTISE OF KEY PERSONNEL. THE UNEXPECTED LOSS OF ONE OR MORE OF THESE KEY EMPLOYEES COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR OPERATIONS AND COMPETITIVE POSITION.
Our continued success largely depends on the efforts and abilities of our executive officers and other key personnel. There is limited management depth in certain key positions throughout the Company. We must continue to recruit, retain and motivate management and other employees to maintain our current business and support our projected growth. The loss of key employees could adversely affect our operations and competitive position. We do not maintain key person life insurance policies on any of our executive officers.
CONCENTRATION OF OWNERSHIP AMONG OUR PRINCIPAL STOCKHOLDERS MAY PREVENT NEW INVESTORS FROM INFLUENCING SIGNIFICANT CORPORATE DECISIONS AND MAY RESULT IN A LOWER TRADING PRICE FOR OUR STOCK THAN IF OWNERSHIP OF OUR STOCK WAS LESS CONCENTRATED.
As of September 6, 2012, members of the Farmer familywhose fraud or entities controlledmisconduct caused or partially caused such restatement, as determined by the Farmer family (including trusts) as a group beneficially owned approximately 39.3% of our outstanding common stock. As a result, these stockholders, acting together, may be able to influence the outcome of stockholder votes, including votes concerning the election and removal of directors and approval of significant corporate transactions. This level of concentrated ownership may have the effect of delaying or preventing a change in the management or voting control of the Company. In addition, this significant concentration of share ownership may adversely affect the trading price of our common stock if investors perceive disadvantages in owning stock in a company with such concentrated ownership.
FUTURE SALES OF SHARES BY EXISTING STOCKHOLDERS COULD CAUSE OUR STOCK PRICE TO DECLINE.
All of our outstanding shares are eligible for sale in the public market, subject in certain cases to limitations under Rule 144 of the Securities Act of 1933, as amended (the “Securities Act”). Also, shares subject to outstanding options and restricted stock under the Farmer Bros. Co. 2007 Omnibus Plan (the "Omnibus Plan") are eligible for sale in the public market to the extent permitted by the provisions of various vesting agreements, our stock ownership guidelines, and Rule 144 under the Securities Act. If these shares are sold, or if it is perceived that they will be sold in the public market, the trading price of our common stock could decline.
ANTI-TAKEOVER PROVISIONS COULD MAKE IT MORE DIFFICULT FOR A THIRD PARTY TO ACQUIRE US.
We have adopted a stockholder rights plan (the “Rights Plan”) pursuant to which each share of our outstanding common stock is accompanied by one preferred share purchase right (a “Right”). Each Right, when exercisable, will entitle the registered holder to purchase from the Company one one-hundredth of a share of Series A Junior Participating Preferred Stock, $1.00 par value per share, at a purchase price of $112.50, subject to adjustment. The Rights expire on March 28, 2015, unless they are earlier redeemed, exchanged or terminated as provided in the Rights Plan. Because the Rights may substantially dilute the stock ownership of a person or group attempting to take us over without the approval of our Board, of Directors, our Rights Plan could make it more difficult for a third party to acquire us (or a significant percentage of our outstanding capital stock) without first negotiating with our Board of Directors regarding such acquisition.
In addition, our Board of Directors has the authority to issue up to 500,000 shares of preferred stock (of which 200,000 shares have been designated as Series A Junior Participating Preferred Stock) and to determine the price, rights, preferences, privileges and restrictions, including voting rights, of those shares without any further vote or action by stockholders. The rights of the holders of our common stock may be subject to, and may be adversely affected by, the rights of the holders of any preferred stock that may be issued in the future. The issuance of preferred stock may have the effect of delaying, deterring or preventing a change in control of the Company without further action by stockholders and may adversely affect the voting and other rights of the holders of our common stock.
Further, certain provisions of our charter documents, including a classified board of directors, provisions eliminating the ability of stockholders to take action by written consent, and provisions limiting the ability of stockholders to raise
matters at a meeting of stockholders without giving advance notice, may have the effect of delaying or preventing changes in control or management of the Company, which could have an adverse effect on the market price of our stock. In addition, our charter documents do not permit cumulative voting, which may make it more difficult for a third party to gain control of our Board of Directors. Further, we are subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law, which will prohibit us from engaging in a “business combination” with an “interested stockholder” for a period of three years after the date of the transaction in which the person became an interested stockholder, even if such combination is favored by a majority of stockholders, unless the business combination is approved in a prescribed manner. The application of Section 203 also could have the effect of delaying or preventing a change in control or management.
QUALITY CONTROL PROBLEMS MAY ADVERSELY AFFECT OUR BRANDS THEREBY NEGATIVELY IMPACTING OUR SALES.
Our success depends on our ability to provide customers with high quality products and service. Although we take measures to ensure that we sell only fresh coffee, tea and culinary products, we have no control over our products once they are purchased by our customers. Accordingly, customers may store our products for longer periods of time, potentially affecting product quality. If consumers do not perceive our products and service to be of high quality, then the value of our brands may be diminished and, consequently, our operating results and sales may be adversely affected.
ADVERSE PUBLIC OR MEDICAL OPINIONS ABOUT CAFFEINE AND REPORTS OF INCIDENTS INVOLVING FOOD BORNE ILLNESS AND TAMPERING MAY HARM OUR BUSINESS.
Coffee contains significant amounts of caffeine and other active compounds, the health effects of some of which are not fully understood. A number of research studies conclude or suggest that excessive consumption of caffeine may lead to increased adverse health effects. An unfavorable report on the health effects of caffeine or other compounds present in coffee could significantly reduce the demand for coffee which could harm our business and reduce our sales.
Similarly, instances or reports, whether true or not, of unclean water supply, food-borne illnesses and food tampering have in the past severely injured the reputations of companies in the food processing sector and could in the future affect us as well. Any report linking us to the use of unclean water, food-borne illnesses or food tampering could damage the value of our brands, negatively impact sales of our products, and potentially lead to product liability claims. Clean water is critical to the preparation of coffee beverages. We have no ability to ensure that our customers use a clean water supply to prepare coffee beverages.
PRODUCT RECALLS AND INJURIES CAUSED BY PRODUCTS COULD REDUCE OUR SALES AND HARM OUR BUSINESS.
Selling products for human consumption involves inherent legal risks. We could be required to recall products due to product contamination, spoilage or other adulteration, product misbranding or product tampering. We may also suffer losses if our products or operations violate applicable laws or regulations, or if our products cause injury, illness or death. A significant product liability claim against us, whether or not successful, or a widespread product recall may reduce our sales and harm our business.
GOVERNMENT REGULATIONS COULD INCREASE OUR OPERATING COSTS, REDUCE DEMAND FOR OUR PRODUCTS OR RESULT IN LITIGATION.
The conduct of our business, including the production, distribution, sale, advertising, marketing, labeling, safety, transportation and use of many of our products, are subject to various federal, state and local laws and regulations. These laws and regulations and interpretations thereof are subject to change as a result of political, economic or social events. Such changes may include changes in: food and drug laws; laws relating to product labeling, advertising and marketing practices; laws regarding ingredients used in our products; and increased regulatory scrutiny of, and increased litigation involving, product claims and concerns regarding the effects on health of ingredients in, or attributes of, our products. For example, we are subject to the California Safe Drinking Water and Toxic Enforcement Act of 1986 (commonly known as “Proposition 65”), a law which requires that a specific warning appear on any product sold in California that contains a substance listed by that State as having been found to cause cancer or birth defects. Proposition 65 exposes all food and beverage producers to the possibility of having to provide warnings on their products in California because it does not provide for any generally applicable quantitative threshold below which the presence of a listed substance is exempt from the warning requirement. Consequently, the detection of even a trace amount of a listed substance can subject an affected product to the requirement of a warning label.
On June 21, 2012, the Council for Education and Research on Toxics, a public interest group, issued a pre-litigation notice of intent to sue a number of companies, including CBI, which sell coffee in California for allegedly failing to issue clear and reasonable warnings that the coffee they produce, distribute and/or sell contains acrylamide in accordance with Proposition 65. Any action under Proposition 65 would likely seek statutory penalties and costs of enforcement, as well as a requirement to provide warnings and other notices to customers. If we were required to add warning labels to any of our products or place warnings in certain locations where our products are sold, sales of those products could suffer not only in those locations but elsewhere. Any change in labeling requirements for our products also may lead to an increase in packaging costs or interruptions or delays in packaging deliveries. If we fail to comply with applicable laws and regulations, we may be subject to civil remedies, including fines, injunctions, recalls or seizures, as well as potential criminal sanctions, which could have a material adverse effect on our results of operations.
FAILURE TO MAINTAIN EFFECTIVE INTERNAL CONTROLS IN ACCORDANCE WITH SECTION 404 OF THE SARBANES OXLEY ACT OF 2002 COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS AND STOCK PRICE.
As directed by Section 404 of the Sarbanes Oxley Act of 2002 (“SOX”), the SEC adopted rules requiring us, as a public company, to include a report of management on our internal controls over financial reporting in our annual report on Form 10‑K and quarterly reports on Form 10‑Q that contains an assessment by management of the effectiveness of our internal controls over financial reporting. In addition, our independent auditors must attest to and report on management’s assessment of the effectiveness of our internal controls over financial reporting as of the end of the fiscal year. Compliance with SOX Section 404 has been a challenge for many companies. Our ability to continue to comply is uncertain as we expect that our internal controls will continue to evolve as our business activities change. If, during any year, our independent auditors are not satisfied with our internal controls over financial reporting or the level at which these controls are designed, documented, operated, tested or assessed, or if the independent auditors interpret the requirements, rules or regulations differently than we do, then they may decline to attest to management’s assessment or may issue a report that is qualified. In addition, if we fail to maintain the adequacy of our internal controls, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal controls over financial reporting in accordance with SOX Section 404. Failure to maintain an effective internal control environment could have a material adverse effect on our stock price. In addition, there can be no assurance that we will be able to remediate material weaknesses, if any, which may be identified in future periods.
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Item 1.B. | Unresolved Staff Comments |
None.
Our largest and most significant facility is our corporate headquarters in Torrance, California. Our Torrance facility is a manufacturing facility and the distribution hub for our long-haul trucking fleet and houses our primary administrative offices. Coffee purchasing, roasting and packaging takes place at our Torrance, California; Portland, Oregon; and Houston, Texas plants. Spice blending and packaging takes place at our Torrance, California plant. Our distribution centers include our Torrance, Portland and Houston plants as well as distribution centers in Northlake, Illinois; Oklahoma City, Oklahoma; and Moonachie, New Jersey.
We stage our products in 117 branch warehouses throughout the contiguous United States. These branch warehouses and our 6 distribution centers, taken together, represent a vital part of our business, but no individual branch warehouse is material to the business as a whole. Our branch warehouses vary in size from approximately 2,500 to 50,000 square feet.
Approximately 55% of our facilities are leased with a variety of expiration dates through 2019, although our two largest facilities, in Torrance and Houston, are owned. The lease on the Portland facility expires in 2018 and has a 10 year renewal option.
We believe our plants, distribution centers and branch warehouses will continue to provide adequate capacity for the foreseeable future. A complete list of properties operated by Farmer Bros. is attached hereto as Exhibit 99.1 and incorporated herein by reference.
We are both defendant and plaintiff in various legal proceedings incidental to our business which are ordinary and routine. It is our opinion that the resolution of these lawsuits will not have a material impact on our financial condition or results of operations.
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Item 4. | Mine Safety Disclosures |
Not applicable.
PART II
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Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
Market Information
We have one class of common stock which is traded on the NASDAQ Global Market under the symbol “FARM.” The following table sets forth, for the periods indicated, the cash dividends declared and the high and low sales prices of the shares of common stock of the Company as quoted on the NASDAQ Global Market.
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| | | Fiscal year ended June 30, 2012 | | Fiscal year ended June 30, 2011 |
| | | High | | Low | | Dividend | | High | | Low | | Dividend |
| 1st Quarter | | $ | 12.45 |
| | $ | 4.43 |
| | $ | — |
| | $ | 17.46 |
| | $ | 13.94 |
| | $ | 0.115 |
|
| 2nd Quarter | | $ | 8.00 |
| | $ | 4.96 |
| | $ | — |
| | $ | 18.93 |
| | $ | 15.55 |
| | $ | 0.060 |
|
| 3rd Quarter | | $ | 12.25 |
| | $ | 7.67 |
| | $ | — |
| | $ | 18.13 |
| | $ | 10.28 |
| | $ | — |
|
| 4th Quarter | | $ | 10.92 |
| | $ | 6.73 |
| | $ | — |
| | $ | 13.38 |
| | $ | 8.59 |
| | $ | — |
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Holders
There were approximately 2,300 holders of record on September 6, 2012. Determination of holders of record is based upon the number of record holders and individual participants in security position listings.
Dividends
Although historically the Company has paid a dividend to stockholders, in light of the Company’s current financial position, the Company’s Board of Directors has omitted the payment of a quarterly dividend since the third quarter of fiscal 2011. The amount, if any, of dividends to be paid in the future will depend upon the Company’s then available cash, anticipated cash needs, overall financial condition, loan agreement restrictions, future prospects for earnings and cash flows, as well as other relevant factors. For a description of the loan agreement restrictions on the payment of dividends, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” included in Part II, Item 7 of this report, and Note 8 “Bank Loan” to the consolidated financial statements included in Part II, Item 8 of this report.
Equity Compensation Plan Information
This information appears in Part III, Item 12 of this report.
Performance Graph
The chart set forth below shows the value of an investment of $100 at the close of trading on June 30, 2006 in each of Farmer Bros. Co. common stock, the Russell 2000 Index and the Value Line Food Processing Index. All values assume reinvestment of the pre-tax value of dividends paid by companies included in these indices and are calculated as of June 30 of each year. The historical stock price performance of the Company’s common stock shown in the performance graph below is not necessarily indicative of future stock price performance.
Comparison of Five-Year Cumulative Total Return
Farmer Bros. Co., Russell 2000 Index And Value Line Food Processing Index
(Performance Results Through 6/30/12)
Source: Value Line Publishing, LLC
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2007 | | 2008 | | 2009 | | 2010 | | 2011 | | 2012 |
| Farmer Bros. Co. | | $ | 100.00 |
| | $ | 95.29 |
| | $ | 105.28 |
| | $ | 71.02 |
| | $ | 48.65 |
| | $ | 38.19 |
|
| Russell 2000 Index | | $ | 100.00 |
| | $ | 83.81 |
| | $ | 62.85 |
| | $ | 76.36 |
| | $ | 104.92 |
| | $ | 102.74 |
|
| Value Line Food Processing Index | | $ | 100.00 |
| | $ | 95.79 |
| | $ | 91.02 |
| | $ | 111.46 |
| | $ | 144.37 |
| | $ | 156.86 |
|
|
| |
Item 6. | Selected Financial Data |
|
| | | | | | | | | | | | | | | | | | | | |
| | | Fiscal year ended June 30, |
| | | 2012 | | 2011 | | 2010 | | 2009(1) | | 2008(2) |
| | | (In thousands, except per share data) |
| Net sales | | $ | 495,442 |
| | $ | 463,945 |
| | $ | 450,318 |
| | $ | 341,724 |
| | $ | 266,485 |
|
| Cost of goods sold | | $ | 322,618 |
| | $ | 306,771 |
| | $ | 252,754 |
| | $ | 181,508 |
| | $ | 147,073 |
|
| Loss from operations | | $ | (24,867 | ) | | $ | (68,422 | ) | | $ | (39,192 | ) | | $ | (15,203 | ) | | $ | (10,644 | ) |
| Loss from operations per common share | | (1.61 | ) | | (4.54 | ) | | (2.64 | ) | | (1.05 | ) | | (0.75 | ) |
| Net loss(3) | | $ | (29,329 | ) | | $ | (54,317 | ) | | $ | (23,953 | ) | | $ | (33,270 | ) | | $ | (7,924 | ) |
| Net loss per common share | | $ | (1.89 | ) | | $ | (3.61 | ) | | $ | (1.61 | ) | | $ | (2.29 | ) | | $ | (0.55 | ) |
| Total assets | | $ | 255,359 |
| | $ | 290,053 |
| | $ | 339,121 |
| | $ | 330,017 |
| | $ | 312,984 |
|
| Capital lease obligations(4) | | $ | 15,867 |
| | $ | 8,636 |
| | $ | 3,861 |
| | $ | 1,252 |
| | $ | — |
|
| Cash dividends declared per common share | | $ | — |
| | $ | 0.18 |
| | $ | 0.46 |
| | $ | 0.46 |
| | $ | 0.46 |
|
_______________appropriate committee thereof.
(1) Includes the results of operations of the DSD Coffee Business since its acquisition by the Company effective February 28, 2009.Accounting Standards
(2) Includes the results of operations of CBH since its acquisition by the Company effective April 27, 2007.
(3) Includes: (a) $5.6 million in impairment losses on goodwill and intangible assets, $4.6 million in pension withdrawal expense and $14.2 million in beneficial effect of liquidation of LIFO inventory quantities in fiscal 2012; (b) $7.8 million in impairment losses on intangible assets, $1.5 million in pension curtailment charge, $1.1 million in beneficial effect of liquidation of LIFO inventory quantities and $9.2 million in income tax benefit in fiscal 2011; (c) $0.8 million in beneficial effect of liquidation of LIFO inventory quantities and $2.5 million in income tax benefit in fiscal 2010; and (d) a deferred tax asset valuation allowance of $19.7 million recorded as income tax expense in fiscal 2009.
(4) Excludes imputed interest.
The Notes to Consolidated Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations included elsewhere in this report should be read in conjunction with the selected financial data in order to understand factors such as business combinations and unusual items which may affect the comparability of the information shown above.
|
| |
Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
The following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of many factors. The results of operations for the fiscal years ended June 30, 2012, 2011 and 2010 are not necessarily indicative of the results that may be expected for any future period. The following discussion should be read in combination with the consolidated financial statements and the notes thereto included in Part II, Item 8 of this report and with the “Risk Factors” described in Part I, Item 1A of this report.
Overview
Farmer Bros. Co., a Delaware corporation (including its consolidated subsidiaries unless the context otherwise requires, the “Company,” “we,” “our” or “Farmer Bros.”), is a manufacturer, wholesaler and distributor of coffee, tea and culinary products. We are a direct distributor of coffee to restaurants, hotels, casinos, hospitals and other foodservice providers, and a provider of private brand coffee programs to Quick Serve Restaurants ("QSR's"), grocery retailers, national drugstore chains, restaurant chains, convenience stores, and independent coffee houses, nationwide. We were founded in 1912, were incorporated in California in 1923, and reincorporated in Delaware in 2004. We operate in one business segment.
Since 2007, Farmer Bros. has achieved growth, primarily through the acquisition in 2007 of Coffee Bean Holding Co., Inc., a Delaware corporation ("CBH"), the parent company of Coffee Bean International, Inc., an Oregon corporation (“CBI”), a specialty coffee manufacturer and wholesaler headquartered in Portland, Oregon, and the acquisition in 2009 from Sara Lee Corporation (“Sara Lee”) of certain assets used in connection with its DSD coffee business in the United States (the “DSD Coffee Business”).
Critical Accounting Policies and Estimates
Management’s discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP"). Our significant accounting policies are discussed in Note 1 to our consolidated financial statements, included herein at Part II, Item 8. The preparation of these financial statementsStandards Board (FASB) Accounting Standards Codification (ASC) Topic 718 requires us to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to inventory valuation, including LIFO reserves, the allowance for doubtful accounts, deferred tax assets, liabilities relating to retirement benefits, liabilities resulting from self-insurance of our workers’ compensation liabilities, tax liabilities and litigation. We base our estimates, judgments and assumptions on historical experience and other relevant factors that are believed to be reasonable based on information available to us at the time these estimates are made.
While we believe that the historical experience and other factors considered provide a meaningful basis for the accounting policies applied in the preparation of the consolidated financial statements, actual results may differ from these estimates, which could require us to make adjustments to these estimates in future periods.
We believe that the estimates, judgments and assumptions involved in the accounting policies described below require the most subjective judgment and have the greatest potential impact on our financial statements, so we consider these to be our critical accounting policies. Our senior management has reviewed the development and selection of these critical accounting policies and estimates, and their related disclosure in this report, with the Audit Committee of our Board of Directors.
Coffee Brewing Equipment and Service
We classify certain expenses related to coffee brewing equipment provided to customers as cost of goods sold. These costs include the cost of the equipment as well as the cost of servicing that equipment (including service employees' salaries, cost of transportation and the cost of supplies and parts) and are considered directly attributable to the generation of revenues from our customers. We capitalize coffee brewing equipment and depreciate it over a three or five year period, depending on the assessment of its useful life and report the depreciation expense in cost of goods sold.
Investments
Our investments consist of money market instruments, marketable debt and equity securities, various derivative instruments, primarily exchange traded treasury and green coffee futures and options. All derivative instruments not designated as accounting hedges are marked to market and changes are recognized in current earnings. At June 30, 2012 and 2011, no derivative instruments were designated as accounting hedges. The fair value of derivative instruments is based upon broker
quotes. The cost of investments sold is determined on the specific identification method. Dividend and interest income is accrued as earned.
Allowance for Doubtful Accounts
We maintain an allowance for estimated losses resulting from the inability of our customers to meet their obligations. In fiscal 2010, based on a larger customer base due to the recent Company acquisitions and in response to slower collection of our accounts receivable resulting from the impact of the economic downturn on our customers, we increased our allowance for doubtful accounts. In fiscal 2011, we decreased the allowance for doubtful accounts by $0.4 million due to improved collections of outstanding receivables. In fiscal 2012, we continued to improve the collection of past due accounts, and further decreased the allowance for doubtful accounts by $1.0 million.
Inventories
Inventories are valued at the lower of cost or market. We account for coffee, tea and culinary products on a last in, first out ("LIFO") basis, and coffee brewing equipment manufactured on a first in, first out ("FIFO") basis. We regularly evaluate our inventories to determine whether market conditions are correctly reflected in the recorded carrying value. At the end of each quarter, we record the expected effect of the liquidation of LIFO inventory quantities and record the actual impact at fiscal year-end. An actual valuation of inventory under the LIFO method is made only at the end of each fiscal year based on the inventory levels and costs at that time.
If inventory quantities decline at the end of the fiscal year compared to the beginning of the fiscal year, the reduction results in the liquidation of LIFO inventory quantities carried at the cost prevailing in prior years. This LIFO inventory liquidation may result in a decrease or increase in cost of goods sold depending on whether the cost prevailing in prior years was lower or higher, respectively, than the current year cost. In fiscal 2012, 2011 and 2010, the beneficial effect of this liquidation of LIFO inventory quantities reduced cost of goods sold and net loss in the amounts of $14.2 million, $1.1 million and $0.8 million, respectively.
Impairment of Goodwill and Indefinite-lived Intangible Assets
We perform our annual goodwill and indefinite-lived intangible assets impairment test as of June 30 of each fiscal year. Goodwill and other indefinite-lived intangible assets are not amortized but instead are reviewed for impairment annually and on an interim basis if events or changes in circumstances between annual tests indicate that an asset might be impaired. Testing for impairment of goodwill is a two-step process. The first step requires us to compare the fair value of our reporting units to the carrying value of the net assets of the respective reporting units, including goodwill. If the fair value of a reporting unit is less than its carrying value, goodwill of the reporting unit is potentially impaired and we then complete step two to measure the impairment loss, if any. The second step requires the calculation of the implied fair value of goodwill, which is the residual fair value remaining after deducting the fair value of all tangible and intangible net assets of the reporting unit from the fair value of the reporting unit. If the implied fair value of goodwill is less than the carrying amount of goodwill, an impairment loss is recognized equal to the difference. Indefinite-lived intangible assets are tested for impairment by comparing their fair values to their carrying values.
In the fourth quarter of fiscal 2012, during our annual test for impairment of goodwill, we identified indicators of impairment including a decline in market capitalization and continuing losses from operations. We performed impairment tests to determine the recoverability of the carrying values of the assets or if impairment should be measured. We were required to make estimates of the fair value of the Company's intangible assets, and all assets of CBI, the reporting unit. As a result of these impairment tests, we determined that the Company's trademarks acquired in connection with the CBI acquisition were impaired and the carrying value of all of the assets of CBI excluding goodwill exceeded their estimated fair values resulting in an implied fair value of zero for CBI's goodwill. Accordingly, in the fourth quarter of fiscal 2012, we recorded a total impairment charge of $5.6 million including $5.1 million in impairment losses on goodwill, which is included in operating expenses.
Long-Lived Assets, Excluding Goodwill and Indefinite-lived Intangible Assets
We review the recoverability of our long-lived assets whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Long-lived assets evaluated for impairment are grouped with other assets to 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. In our annual test of impairment as of the end of fiscal 2011, we identified indicators of
impairment including a decline in market capitalization and continuing losses from operations. We performed impairment tests to determine the recoverability of the carrying values of the assets or if impairment should be measured. The carrying value of these intangible assets was higher than the sum of each of their projected undiscounted cash flows. We determined that definite-lived intangible assets consisting of the customer relationships acquired, and the distribution agreement and co-pack agreement entered into, in connection with the DSD Coffee Business acquisition were impaired. As a result, in fiscal 2011 we recorded an impairment charge of $7.8 million in operating expenses.
Self-Insurance
We are self-insured for California workers’ compensation insurance subject to specific retention levels and use historical analysis to determine and record the estimates of expected future expenses resulting from workers’ compensation claims. The estimated outstanding losses are the accrued cost of unpaid claims valued as of June 30, 2012. The estimated outstanding losses, including allocated loss adjustment expenses (“ALAE”), include case reserves, the development of known claims and incurred but not reported (IBNR) claims. ALAE are the direct expenses for settling specific claims. The amounts reflect per occurrence and annual aggregate limits maintained by the Company. The analysis does not include estimating a provision for unallocated loss adjustment expenses.
Management believes that the amount accrued is adequate to cover all known claims at June 30, 2012. If the actual costs of such claims and related expenses exceed the amount estimated, additional reserves may be required which could have a material negative effect on operating results. If our estimate were off by as much as 15%, the reserve could be under or overstated by approximately $0.8 million as of June 30, 2012.
In May 2011, we did not meet the minimum credit rating criteria for participation in the alternative security program for California self-insurers. As a result, we were required to post a $5.9 million letter of credit as a security deposit to the State of California Department of Industrial Relations Self-Insurance Plans. As of June 30, 2012, this letter of credit continues to serve as a security deposit.
Estimated Company liability resulting from our general liability and automobile liability policies, within our deductible limits, is accounted for by specific identification. Large losses have historically been infrequent, and the lag between incurred but not reported claims has historically been short. Once a potential loss has been identified, the case is monitored by our risk manager to try and determine a likely outcome. Lawsuits arising from injury that are expected to reach our deductible are not reserved until we have consulted with legal counsel, become aware of the likely amount of loss and determined when payment is expected.
The estimated liability related to our self-insured group medical insurance is 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.
Retirement Plans
We have a defined benefit pension plan, the Farmer Bros. Salaried Employees Pension Plan (the “Farmer Bros. Plan”), for the majority of our employees who are not covered under a collective bargaining agreement, and two defined benefit pension plans for certain hourly employees covered under a collective bargaining agreement (the "Brewmatic Plan" and the "Hourly Employees’ Plan"). In addition, we contribute to a multiemployer defined benefit pension plan and a multiemployer defined contribution plan for certain union employees.
As of June 30, 2011, we amended the Farmer Bros. Plan, freezing the benefit for all participants effective June 30, 2011. After the plan freeze, participants do not accrue any benefits under the plan, and new hires are not eligible to participate in the plan. However, account balances continue to be credited with interest until paid out. As a result, we recorded $1.5 million in curtailment charge in the fourth quarter of fiscal 2011. Beginning in fiscal 2012, pension expense is significantly lower than in prior fiscal years due to the freeze in benefits as of June 30, 2011.
We obtain actuarial valuations for our plans and in fiscal 2012 we discounted the pension obligations using a 4.55% discount rate and we estimated an 8.25% long-term return on plan assets. The performance of the stock market and other investments as well as the overall health of the economy can have a material effect on pension investment returns and these assumptions. A change in these assumptions could affect our operating results.
At June 30, 2012, the projected benefit obligation under our single employer defined benefit pension plans was $130.4 million and the fair value of plan assets was $85.8 million. The difference between the projected benefit obligation and the fair value of plan assets is recognized as a decrease in other comprehensive income (loss) (“OCI”) and an increase in pension liability and deferred tax assets. The difference between plan obligations and assets, or the funded status of the plans,
significantly affects the net periodic benefit costs and ongoing funding requirements of those plans. Among other factors, changes in interest rates, mortality rates, early retirement rates, investment returns and the market value of plan assets can affect the level of plan funding, cause volatility in the net periodic benefit cost and increase our future funding requirements. As of June 30, 2012, we have made $7.3 million in contributions to these plans and accrued $1.2 million in expense. We expect to make approximately $4.3 million in contributions to our single employer defined benefit pension plans in fiscal 2013 and accrue expense of approximately $1.2 million per year beginning in fiscal 2013. These pension payments are expected to continue at this level for several years, and the current economic environment increases the risk that we may be required to make even larger contributions in the future.
The following chart quantifies the effect on the projected benefit obligation and the net periodic benefit cost of a change in the discount rate assumption and the impact on the net periodic benefit cost of a change in the assumed rate of return on plan assets for fiscal 2013:
|
| | | | | | | | | | | | |
| | | (Dollars in thousands) |
| Farmer Bros. Plan Discount Rate | | 4.05% | | Actual 4.55% | | 5.05% |
| Net periodic benefit cost | | $ | 673 |
| | $ | 617 |
| | $ | 549 |
|
| Projected benefit obligation | | $ | 133,619 |
| | $ | 124,828 |
| | $ | 116,928 |
|
| | | | | | | |
| Farmer Bros. Plan Rate of Return | | 7.50% | | Actual 8.00% | | 8.50% |
| Net periodic benefit cost | | $ | 1,026 |
| | $ | 617 |
| | $ | 207 |
|
| | | | | | | |
| Brewmatic Plan Discount Rate | | 4.05% | | Actual 4.55% | | 5.05% |
| Net periodic benefit cost | | $ | 194 |
| | $ | 184 |
| | $ | 175 |
|
| Projected benefit obligation | | $ | 4,242 |
| | $ | 4,022 |
| | $ | 3,823 |
|
| | | | | | | |
| Brewmatic Plan Rate of Return | | 7.50% | | Actual 8.00% | | 8.50% |
| Net periodic benefit cost | | $ | 197 |
| | $ | 184 |
| | $ | 171 |
|
| | | | | | | |
| Hourly Employees’ Plan Discount Rate | | 4.05% | | Actual 4.55% | | 5.05% |
| Net periodic benefit cost | | $ | 441 |
| | $ | 400 |
| | $ | 369 |
|
| Projected benefit obligation | | $ | 1,654 |
| | $ | 1,520 |
| | $ | 1,402 |
|
| | | | | | | |
| Hourly Employees' Rate of Return | | 7.50% | | Actual 8.00% | | 8.50% |
| Net periodic benefit cost | | $ | 406 |
| | $ | 400 |
| | $ | 395 |
|
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 the differences are expected to reverse. Estimating our tax liabilities involves judgments related to uncertainties in the application of complex tax regulations. We make certain estimates and judgments to determine tax expense for financial statement purposes as we evaluate the effect of tax credits, tax benefits and deductions, some of which result from differences in timing of recognition of revenue or expense for tax and financial statement purposes. Changes to these estimates may result in significant changes to our tax provision in future periods. Each fiscal quarter we reevaluate our tax provision and reconsider our estimates and assumptions related to specific tax assets and liabilities, making adjustments as circumstances change.
Deferred Tax Asset Valuation Allowance
We assess 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 such assessment, significant weight is to be given to evidence that can be objectively verified such as recent operating results and less consideration is to be given to less objective indicators such as future earnings projections. We have evaluated our deferred tax assets in accordance with these requirements.
After consideration of positive and negative evidence, including the recent history of losses, the Company is maintaining a valuation allowance against its deferred tax assets as of June 30, 2012. The valuation allowance increased to $85.0 million in fiscal 2012, from $60.4 million and $43.9 million in fiscal 2011 and 2010, respectively.
Deferred tax assets increased to $88.6 million as of June 30, 2012 compared to $68.8 million and $53.7 million in fiscal 2011 and 2010, respectively. In fiscal 2012, deferred tax assets increased primarily due to net loss carryovers and a decrease in expected pension asset values related to a change in actuarial assumptions. In fiscal 2011, deferred tax assets increased primarily due to net loss carryovers partially offset by a reduction in deferred tax assets due to an increase in expected pension asset values.
Postretirement Benefits
We sponsor a postretirement medical and dental plan that covers qualified non-union employees and retirees, and certain qualified union retirees. Under this postretirement plan, our 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, but subject to a maximum monthly Company contribution.
Our retiree medical plan is unfunded and its liability was calculated using an assumed discount rate of 4.4% at June 30, 2012. We project an initial medical trend rate of 7.0% ultimately reducing to 5.0% in 5 years.
Share-based Compensation
We measure all share-based compensation cost at the grant date, based on the fair value of the award, and recognize such cost as an expense in our consolidated statement of operations over the requisite service period. The process of estimatingfor the fair value of share-based compensation awards and recognizing share-based compensation cost over the requisite service period involves significant assumptions and judgments. We estimate the fair valueawards. Grants of stock option awards onoptions, restricted stock and PBRSUs under the dateCompany’s long-term incentive plans are accounted for under FASB ASC Topic 718. The Compensation Committee considers the accounting implications of grant usingsignificant compensation decisions, especially in connection with decisions that relate to our long-term incentive program. As accounting standards change, the Black-Scholes option valuation model which requires that we makeCompany may revise certain assumptions regarding: (i) the expected volatility in the market priceprograms to appropriately align accounting expenses of our common stock; (ii) dividend yield; (iii) risk-free interest rates; and (iv) the period of time employees are expected to hold the award prior to exercise (referred to as the expected holding period). In addition, we estimate the expected impact of forfeited awards and recognize share-based compensation cost only for those awards expected to vest. If actual forfeiture rates differ materially from our estimates, share-based compensation expense could differ significantly from the amounts we have recorded in the current period. We will periodically review actual forfeiture experience and revise our estimates, as necessary. We 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 we revise our assumptions and estimates, our share-based compensation expense could change materiallyawards with our overall executive compensation philosophy and objectives.
Summary Compensation Table
The following table sets forth summary information concerning compensation awarded to, earned by, or paid to each of our Named Executive Officers for all services rendered in the future. In fiscal 2012 and 2011, we used an estimated 6.5% annual forfeiture rateall capacities to calculate share-based compensation expense based on actual forfeiture experience from the inception of the Omnibus Plan.
Liquidity and Capital Resources
Credit Facility
On September 12, 2011, we entered into an Amended and Restated Loan and Security Agreement (the “Loan Agreement”) among the Company and CBI, as Borrowers, certainits subsidiaries in the last three fiscal years. For a complete understanding of the Company’s other subsidiaries,table, please read the footnotes and narrative disclosures that follow the table.
| A | | B |
| | C |
| | D |
| | E |
| | F |
| | G |
| | H |
| | I |
|
Name and Principal Position | | Fiscal Year | | | Salary ($) | | | Bonus ($) | | | Stock Awards ($) | | | Option Awards ($) | | | Non-Equity Incentive Plan Compensation ($) | | | All Other Compensation ($) | | | Total ($) | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| D. Deverl Maserang II (1) | | 2022 | | | 676,154 | | | — | | | 2,006,755 | | | — | | | 598,400 | | | 20,900 | | | 3,292,209 | |
| President and Chief Executive Officer | | 2021 | | | 615,574 | | | — | | | 1,899,995 | | | — | | | 660,000 | | | 11,114 | | | 3,186,683 | |
| | | 2020 | | | 487,385 | | | — | | | 499,990 | | | 999,997 | | | — | | | 13,200 | | | 2,000,572 | |
| Scott R. Drake (2) | | 2022 | | | 397,500 | | | — | | | 712,160 | | | — | | | 297,000 | | | 19,119 | | | 1,425,779 | |
| Chief Financial Officer | | 2021 | | | 349,758 | | | — | | | 344,989 | | | — | | | 281,250 | | | 14,226 | | | 990,223 | |
| | | 2020 | | | 80,769 | | | — | | | — | | | 199,999 | | | — | | | — | | | 280,768 | |
| Ruben E. Inofuentes (3) | | 2022 | | | 348,077 | | | — | | | | | | — | | | 159,600 | | | 20,675 | | | 773,618 | |
| Chief Supply Chain Officer | | 2021 | | | 317,114 | | | — | | | 359,992 | | | — | | | 204,000 | | | 11,248 | | | 892,354 | |
| | | 2020 | | | 192,231 | | | — | | | 125,000 | | | 124,999 | | | — | | | 96,368 | | | 538,598 | |
| Maurice S. J. Moragne (4) | | 2022 | | | 352,115 | | | — | | | 267,567 | | | — | | | 170,400 | | | 20,606 | | | 810,688 | |
| Chief Sales Officer | | 2021 | | | 340,000 | | | — | | | 289,986 | | | 74,998 | | | 204,000 | | | 10,994 | | | 844,980 | |
| Amber D. Jefferson (5) | | 2022 | | | 221,538 | | | — | | | 249,996 | | | — | | | 168,960 | | | 10,359 | | | 650,853 | |
| Chief Human Resources Officer | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
(1) Mr. Maserang joined as Guarantors, the Lenders party thereto,our President and Wells Fargo Bank, National Association ("Wells Fargo")Chief Executive Officer effective September 13, 2019.
(2) Mr. Drake joined as our Chief Financial Officer effective March 23, 2020.
(3) Mr. Inofuentes joined as our Chief Supply Chain Officer effective November 15, 2019.
(4) Mr. Moragne joined as our Chief Sales Officer effective June 8, 2020.
(5) Ms. Jefferson joined as our Chief Human Resources Officer effective October 11, as Agent2021.
Salary (Column C)
The Loan Agreement provides for a senior secured revolving credit facility of up to $85.0 million, with a letter of credit sublimit of $20.0 million. The revolving credit facility provides for advances of 85% of eligible accounts receivable and 75% of eligible inventory (subject to a $60.0 million inventory loan limit), as defined. The Loan Agreement provides for interest rates based on modified Monthly Average Excess Availability levels with a range of PRIME + 0.25% to PRIME + 0.75% or Adjusted Eurodollar Rate + 2.0% to Adjusted Eurodollar Rate + 2.5%. The Loan Agreement has an amendment fee of 0.375% and an unused line fee of 0.25%. Outstanding obligations under the Loan Agreement are collateralizedamounts reported in column C represent base salaries earned by alleach of the Borrowers’ assets, including the Company’s preferred stock portfolio. The term of the Loan Agreement expires on March 2, 2015.
The Loan Agreement contains a variety of affirmative and negative covenants of types customary in an asset-based lending facility, including those relating to reporting requirements, maintenance of records, properties and corporate existence, compliance with laws, incurrence of other indebtedness and liens, limitations on certain payments, including the payment of dividends and capital expenditures, and transactions and extraordinary corporate events. The Loan Agreement allows us to pay dividends, subject to certain liquidity requirements. The Loan Agreement also contains financial covenants requiring the Borrowers to maintain minimum Excess Availability and Total Liquidity levels. The Loan Agreement allows the Lender to establish reserve requirements, which may reduce the amount of credit otherwise available to us, to reflect events, conditions, or risks that would have a reasonable likelihood of adversely affecting the Lender’s collateral or our assets, including our green coffee inventory.
The Loan Agreement provides that an event of default includes, among other things, subject to certain grace periods: (i) payment defaults; (ii) failure by any guarantor to perform any guarantee in favor of Lender; (iii) failure to abide by loan covenants; (iv) default with respect to other material indebtedness; (v) final judgment in a material amount not discharged or stayed; (vi) any change of control; (vii) bankruptcy or insolvency; and (viii) the failure of the Farmer Bros. Co. Employee Stock Ownership Benefit Trust, created by the Company to implement the Farmer Bros. Co. Employee Stock Ownership Plan ("ESOP"), to be duly qualified under Section 401(a) of the Internal Revenue Code of 1986, as amended, or exempt from federal income taxation, or if the ESOP engages in a material non-exempt prohibited transaction.
On January 9, 2012, the Loan Agreement was amended (“Amendment No. 1”) in connection with JPMorgan Chase Bank, N.A. (“JPMorgan Chase”), becoming an additional Lender thereunder. Pursuant to Amendment No. 1, Wells Fargo will provide a commitment of $60.0 million and JPMorgan Chase will provide a commitment of $25.0 million.
The interest rate on our outstanding borrowings under the Loan Agreement was 3.5% at June 30, 2012. As of June 30, 2012, we had outstanding borrowings of $29.1 million, excluding loan extension fees of $0.2 million, utilized $11.9 million of the letters of credit sublimit, and had excess availability under the credit facility of $31.4 million. Due to the short-term nature of the credit facility and the variable interest rate, fair value of the balance outstanding approximates carrying value. As of June 30, 2012, we were in compliance with all restrictive covenants under the Loan Agreement. There can be no assurance that the Lender will issue a waiver or grant an amendment to the covenants in future periods, if the Company required one. As of August 31, 2012, we had estimated outstanding borrowings of $24.0 million, excluding loan extension fees of $0.2 million, utilized $11.9 million of the letters of credit sublimit, and had excess availability under the credit facility of $39.5 million.
Liquidity
We generally finance our operations through cash flow from operations and borrowings under our revolving credit facility described above. As of June 30, 2012, we had $3.9 million in cash and cash equivalents and $21.0 million in short-term investments. We believe our revolving credit facility, to the extent available, in addition to our cash flows from operations and other liquid assets, are sufficient to fund our working capital and capital expenditure requirements for the next 12 months.
We generate cash from operating activities primarily from cash collections related to the sale of our products. Net cash provided by operating activities was $18.1 million in fiscal 2012, compared with $33.9 million in fiscal 2011 and net cash used in operating activities of $1.0 million in fiscal 2010. The lower level of net cash provided by operating activities in fiscal 2012 was primarily due to an increase in accounts payable payments. In fiscal 2011, net cash provided by operating activities was larger primarily due to a decrease in accounts payable payments and higher proceeds from the sale of investments.
Net cash used in investing activities decreased to $14.5 million in fiscal 2012, compared to $17.4 million and $28.0 million in fiscal 2011 and fiscal 2010, respectively, primarily due to reduced levels of capital expenditures.
Net cash used in financing activities was $5.8 million in fiscal 2012, compared to $14.6 million in fiscal 2011 and net cash provided by financing activities of $13.2 million in fiscal 2010. Net cash used in financing activities in fiscal 2012 included net repayments on our credit facility of $4.0 million compared to net repayments of $8.5 million and net borrowings of $21.0 million in fiscal 2011 and 2010, respectively. In addition, there were no dividend payments in fiscal 2012, compared to dividend payments of $4.7 million and $6.9 million in fiscal 2011 and 2010, respectively.
In fiscal 2012, we capitalized $17.5 million in property, plant and equipment purchases which included $13.9 million in expenditures to replace normal wear and tear of coffee brewing equipment, $0.1 million in building and facility improvements, $3.0 million in expenditures for vehicles, and machinery and equipment, and $0.5 million in information technology related expenditures. In addition, during fiscal 2012 we acquired equipment and trucks under capital leases totaling $9.5 million.
Our expected capital expenditures for fiscal 2013 include expenditures to replace normal wear and tear of coffee brewing equipment, vehicles, and machinery and equipment, and are expected not to deviate significantly from fiscal 2012 levels.
Our working capital is comprised of the following:
|
| | | | | | | | |
| | | June 30, |
| | | 2012 | | 2011 |
| | | (In thousands) |
| Current assets | | $ | 135,851 |
| | $ | 157,410 |
|
| Current liabilities | | 92,689 |
| | 103,462 |
|
| Working capital | | $ | 43,162 |
| | $ | 53,948 |
|
|
| | | | | | | | | | | | |
| | | June 30, |
| | | 2012 | | 2011 | | 2010 |
| | | (In thousands) |
| Capital expenditures | | $ | 17,498 |
| | $ | 19,416 |
| | $ | 28,484 |
|
| Dividends paid | | $ | — |
| | $ | 4,657 |
| | $ | 6,939 |
|
| Dividends payable | | $ | — |
| | $ | — |
| | $ | 1,849 |
|
Results of Operations
Fiscal Years Ended June 30, 2012 and 2011
Overview
In fiscal 2012, commodity prices remained high through the first half of the fiscal year and started to fall during the second half of the fiscal year, with the exception of fuel costs which remained high throughout fiscal 2012. We utilize several strategies to minimize the impact of increasing green coffee prices, including the purchase of future coffee contracts, in some instances, up to 18 months in advance of the actual delivery date, to enable us to lock-in green coffee prices within a pre-established range. Although this strategy minimizes the impact of increasing green coffee prices, if green coffee prices decline after we lock the purchase cost, the cost of our purchases reflected in our financial results may be higher compared to the current market cost of green coffee. To address the increase in freight and fuel expense, in fiscal 2011 we instituted an energy surcharge which continued in fiscal 2012.
To address downward margin pressures, we continued to focus on streamlining our operations in fiscal 2012. Specifically, we continued our focus on expense reductions and asset redeployment to improve our operating results. The benefit of initiatives we implemented in fiscal 2011 intended to reduce the cost of our operations, including headcount reduction, inventory reduction, implementation of improved collection practices of past due accounts, cost-sharing measures to address increases in employee healthcare costs, automation of certain functions, centralization of certain IT functions, and in-sourcing of certain business support functions, also started to be realized. In fiscal 2012, we also implemented employee benefit plan restructuring, and continued to improve our real-estate asset management by divesting underutilized properties and renegotiating our lease terms in response to more favorable market conditions in certain markets.
Operations
Net sales in fiscal 2012 increased $31.5 million, or 6.8%, to $495.4 million from $463.9 million in fiscal 2011, primarily due to increases in list prices of our coffee, cappuccino, cocoa and selected spice products implemented in the second half of fiscal 2011, offset in part by the effect of a decrease in the number of customers who purchased our products as compared to the prior fiscal year.
Cost of goods sold in fiscal 2012 increased $15.8 million, or 5.2%, to $322.6 million, or 65.1% of sales, from $306.8 million, or 66.1% of sales, in fiscal 2011, primarily due to the increase in net sales. The decrease in cost of goods sold as a percent of net sales in fiscal 2012 is primarily due to a reduction in coffee inventory, which resulted in the liquidation of LIFO inventory quantities carried at lower costs prevailing in prior years. The beneficial effect of this liquidation of LIFO inventory quantities reduced cost of goods sold by $14.2 million compared to $1.1 million in fiscal 2011. This reduction in cost of goods sold was offset, in part, by a 16.0% increase in the average cost of green coffee purchased in fiscal 2012 compared to the prior fiscal year.
Gross profit in fiscal 2012 increased $15.7 million, or 10.0%, to $172.8 million from $157.2 million in fiscal 2011. Gross margin increased to 35% in fiscal 2012 from 34% in the prior fiscal year. The increase in gross profit and gross margin is primarily due to the beneficial effect of the liquidation of LIFO inventory quantities and the full year benefit of price increases for our coffee, cappuccino, cocoa and selected spice products in fiscal 2012, offset by changes in the mix of our customers and the products we sell to them and a 16.0% increase in the average cost of green coffee purchased in fiscal 2012.
In fiscal 2012, operating expenses decreased $27.9 million, or 12.4%, to $197.7 million, or 40% of sales, from $225.6 million, or 49% of sales, in fiscal 2011. The reduction in operating expenses in fiscal 2012 is primarily due to lower payroll and related expenses resulting from a decreased employee headcount, savings from employee benefit plan restructuring and ongoing cost control measures. The decrease if operating expenses was offset, in part, by impairment losses on goodwill and intangible assets in the amount of $5.6 million and charges related to withdrawal from multiemployer pension plans in the amount of $4.6 million.
In our annual test of impairment of long-lived assets, we determined that goodwill and certain trademarks acquired in connection with the CBI acquisition were impaired. Accordingly, in the fourth quarter of fiscal 2012, we recorded total impairment charges of $5.6 million including $5.1 million in impairment losses on goodwill.
In fiscal 2012, we withdrew from two multiemployer defined benefit pension plans and recorded a charge of $4.3 million associated with withdrawal from one of these plans, representing the present value of the estimated withdrawal liability expected to be paid in quarterly installments of $0.1 million over 80 quarters. Installment payments will commence once the final determination of the amount of withdrawal liability is established, which determination may take up to 24 months from the date of withdrawal from the pension plan. Upon withdrawal, the employees covered under one of these multiemployer pension plans were included in our 401(k) plan ("401(k) Plan") and the other defined benefit multiemployer pension plan was replaced with a defined contribution pension plan. The $4.3 million charge is included in our consolidated statement of operations for the year ended June 30, 2012 as “Pension withdrawal expense” and in current and long-term liabilities on the Company’s balance sheet at June 30, 2012. In addition, we also recorded $0.3 million in pension withdrawal expense for acquisition-related pension withdrawal liability assumed in connection with the DSD Coffee Business acquisition that was fully paid in fiscal 2012.
Loss from operations in fiscal 2012 was $(24.9) million compared to $(68.4) million in fiscal 2011, due to improvement in gross profit and reduction in operating expenses.
Total other income (expense)
Total other expense in fiscal 2012 was $4.8 million compared to total other income of $4.9 million in fiscal 2011, primarily due to net derivative losses of $4.1 million in fiscal 2012 compared to net derivative gains of $4.2 million in fiscal 2011. The net derivative losses and gains were primarily due to coffee-related futures contracts.
Income taxes
In fiscal 2012, we recorded an income tax benefit of $0.3 million compared to $9.2 million in fiscal 2011. Income tax benefit for fiscal 2012 was primarily attributable to the settlement of certain tax issues with the Internal Revenue Service and the State of California during our exam appeals. In fiscal 2012, unrecognized tax benefits related to certain tax refunds were released and the resulting benefit was recorded.
Income tax benefit for fiscal 2011 was primarily attributable to gains on postretirement benefits. Income tax expense or benefit from continuing operations is generally determined without regard to other categories of earnings, such as discontinued operations and OCI. An exception is provided in Accounting Standards Codification ("ASC") 740, "Income Taxes," when there is aggregate income from categories other than continuing operations and a loss from continuing operations in the current year. In this case, the tax benefit allocated to continuing operations is the amount by which the loss from continuing operations reduces the tax expenses recorded with respect to the other categories of earnings, even when a valuation allowance has been established against the deferred tax assets. In instances where a valuation allowance is established against current year losses, income from other sources, including gain from postretirement benefits recorded as a component of OCI, is considered when determining whether sufficient future taxable income exists to realize the deferred tax assets. As a result,Named Executive Officers for the fiscal year ended June 30, 2011, we recorded a tax expenseindicated, prorated based on applicable start dates during the fiscal year or the dates of $9.8 million in OCI relatedresignation or termination. The amounts shown include amounts contributed by the employee to the gain on postretirement benefits, and recorded a corresponding tax benefit of $9.8 million in continuing operations.
Net Loss
As a result of the above operating factors, net loss decreased to $(29.3) million, or $(1.89) per common share, in fiscal 2012 compared to a net loss of $(54.3) million, or $(3.61) per common share, in fiscal 2011.
Fiscal Years Ended June 30, 2011 and 2010
Overview
Fiscal 2011 was a period of rapid commodity inflation, which impacted our cost of green coffee, sugar and cocoa and freight expense. Since we value our inventory on a LIFO basis rather than on a FIFO basis, the escalating coffee prices had a significant negative impact on our cost of goods sold and the resulting gross profit. To address the increase in freight and fuel expense, we instituted an energy surcharge in fiscal 2011 and, to minimize gross margin erosion, we increased pricing to our customers several times in fiscal 2011 although the price increases, at times, lagged the relatively rapid and steep cost increases we incurred. In an environment of record-high costs, rising unemployment and a severe economic downturn, we were unable to fully pass along our costs to our customers.
To address downward margin pressures, we continued to focus on streamlining our operations in fiscal 2011. Specifically, we focused on expense reductions, asset redeployment and automation intended to improve our operating results. We implemented a number of initiatives intended to reduce the cost of our operations, including headcount reduction, inventory reduction, implementation of improved collection practices of past due accounts, cost-sharing measures to address increases in employee healthcare costs, automation of certain functions, centralization of certain IT functions, and in-sourcing of certain business support functions. We have and expect to continue to improve our real-estate asset management by divesting underutilized properties and renegotiating our lease terms in response to more favorable market conditions in certain markets.
In fiscal 2011, we significantly modified our retirement benefit program. Specifically, we amended the Farmer Bros. Plan, freezing the benefit for all participants effective June 30, 2011. After the plan freeze, participants do not accrue any benefits under theCompany’s 401(k) plan and new hires are not eligible to participate in the plan. However, account balances continue to be credited with interest until paid out. The freeze of the Farmer Bros. Plan coincided with an enhanced defined contribution
401(k) Plan with a discretionary Company match of the employees’ annual contributions. In fiscal 2011, the Company accrued $0.1 million towards this Company match. The pension freeze was anticipated to save over $8.0 million annually in future pension expense accrual, which is expected to be offset by any discretionary Company match under the 401(k) Plan.
In fiscal 2011, we also sold a portion of our investments in preferred stock in order to pay down a portion of the outstanding balance on our revolving credit facility.
Operations
Net sales in fiscal 2011 increased $13.6 million, or 3%, to $463.9 million from $450.3 million in fiscal 2010, primarily due to increases in list prices of our coffee, cappuccino, cocoa and selected spice products implemented in the second half of fiscal 2011, offset in part by a decrease in the number of customers who purchased our products as compared to the prior fiscal year.
Cost of goods sold in fiscal 2011 increased $54.0 million, or 21%, to $306.8 million, or 66% of sales, from $252.8 million, or 56% of sales, in fiscal 2010 primarily due to the increase in the cost of green coffee beans. Green coffee costs increased 80% in fiscal 2011 compared to the prior fiscal year. Additionally, the cost of coffee brewing equipment and related service also contributed to the increase in cost of goods sold. Cost of coffee brewing equipment and related service in fiscal 2011 was $27.1 million compared to $21.5 million in fiscal 2010.
Gross profit in fiscal 2011 decreased $(40.4) million, or (20)%, to $157.2 million from $197.6 million in fiscal 2010. Gross margin decreased to 34% in fiscal 2011 from 44% in the prior fiscal year. This decrease in gross margin is primarily due to (1) increased raw material costs including an 80% increase in the cost of green coffee beans in fiscal 2011 compared to the prior fiscal year partially offset by price increases for finished goods during the period, (2) increased coffee brewing equipment and service costs, and (3) changes in the mix of our customers and the products we sell to them.
In fiscal 2011, operating expenses decreased $(11.2) million, or (5)%, to $225.6 million, or 49% of sales, from $236.8 million, or 53% of sales, in fiscal 2010. The reduction in operating expenses in fiscal 2011, as compared to the prior fiscal year, is primarily due to lower payroll and related expenses resulting from a reduction in the number of employees offset in part by higher freight and fuel costs, and severance costs associated withreflects the reduction in headcount of approximately 200 employees in the amount of $3.1 million. Operating expenses in fiscal 2011 also include $7.8 million in impairment losses related to intangible assets, $1.5 million in pension curtailment charges, and $0.7 million in severance costs recorded pursuant to the Separation Agreement between the Company and Roger M. Laverty III, the Company’s former President and Chief Executive Officer.
Lossbase salary from operations in fiscal 2011 was $(68.4) million compared to $(39.2) million in fiscal 2010, primarily due to decline in gross profit.
Total other income (expense)
Total other income in fiscal 2011 was $4.9 million compared to $12.7 million in fiscal 2010. The decrease in total other income was primarily due to lower net realized and unrealized gains on a smaller investment portfolio and higher interest expense related to borrowings under our revolving credit facility in fiscal 2011 as compared to fiscal 2010.
Income taxes
In fiscal 2011, we recorded an income tax benefit of $9.2 million compared to $2.5 million in fiscal 2010. Income tax expense or benefit from continuing operations is generally determined without regard to other categories of earnings, such as
discontinued operations and OCI. An exception is provided in ASC 740 when there is aggregate income from categories other than continuing operations and a loss from continuing operations in the current year. In this case, the tax benefit allocated to continuing operations is the amount by which the loss from continuing operations reduces the tax expenses recorded with respect to the other categories of earnings, even when a valuation allowance has been established against the deferred tax assets. In instances where a valuation allowance is established against current year losses, income from other sources, including gain from postretirement benefits recorded as a component of OCI, is considered when determining whether sufficient future taxable income exists to realize the deferred tax assets. As a result, for the fiscal year ended June 30, 2011, we recorded a tax expense of $9.8 million in OCI related to the gain on postretirement benefits, and recorded a corresponding tax benefit of $9.8 million in continuing operations. Income tax benefit for fiscal 2010 was primarily attributable to federal legislation allowing a five year net operating loss carryback period for net operating losses incurred in tax years that ended in 2008 and 2009. This legislation allowed us to claim additional income tax receivable and record a corresponding decrease in our deferred tax assets relating to our net operating loss carryovers, thereby reducing the valuation allowance recorded as of June 30, 2009 and resulting in income tax benefit for fiscal 2010.
Net Loss
As a result of the above operating factors, net loss increased to $(54.3) million, or $(3.61) per common share, in fiscal 2011 compared to a net loss of $(24.0) million, or $(1.61) per common share, in fiscal 2010.
Non-GAAP Financial Measures
In addition to net income (loss) determined in accordance with GAAP, we use certain non-GAAP financial measures, such as “Net income (loss) excluding LIFO impact,” “EBITDAE” and “Adjusted EBITDAE,” in assessing our operating performance. We believe the non-GAAP measures serve as appropriate measures to be used in evaluating the performance of our business.
We define “Net income (loss) excluding LIFO impact” as net income (loss) excluding the impact of LIFO charge or credit. LIFO charge or credit includes: (1) the effect of the liquidation of LIFO inventory quantities as of the fiscal year end recorded in cost of goods sold, and (2) an estimate of the difference between cost of goods sold recorded on a LIFO basis and cost of goods sold that would have been recorded if we had used the FIFO method of inventory valuation.
We define “EBITDAE” as net income (loss) excluding the impact of income taxes, interest expense, depreciation
and amortization, ESOP and share-based compensation expense, non-cash impairment losses, pension withdrawal expense, and gains and losses from derivatives and investments. We reference this particular non-GAAP financial measure frequently in our decision-making because it provides supplemental information that facilitates internal comparisons to the historical operating performance of prior periods. In addition, incentive compensation is based, in part, on EBITDAE and we base certain of our forward-looking estimates on EBITDAE to facilitate quantification of planned business activities and enhance subsequent follow-up with comparisons of actual to planned EBITDAE.
We define “Adjusted EBITDAE” as EBITDAE excluding the impact of LIFO charges or credits. While we believe the use of the LIFO method of inventory valuation for coffee, tea and culinary products results in a better matching of costs and revenues, we believe Adjusted EBITDAE provides a basis for comparisons to companies that do not use LIFO and enhances the understanding of our historical operating performance.
Net income (loss) excluding LIFO, EBITDAE and Adjusted EBITDAE as defined by us may not be comparable to similarly titled measures reported by other companies. We do not intend for non-GAAP financial measures to be considered in isolation or as a substitute for other measures prepared in accordance with GAAP.
Set forth below is a reconciliation of reported net loss and reported basic and diluted net loss per common share to net loss excluding LIFO impact and basic and diluted net loss per common share excluding LIFO impact, respectively:
|
| | | | | | | | | | | | |
| | | Year Ended June 30, |
| | | 2012 | | 2011 | | 2010 |
| | | (In thousands, except share and per share data) |
| Net loss, as reported | | $ | (29,329 | ) | | $ | (54,317 | ) | | $ | (23,953 | ) |
| LIFO (credit) charge: | | | | | | |
| Effect of liquidation of LIFO inventory quantities, net of taxes of zero(1) | | (14,206 | ) | | (1,100 | ) | | (800 | ) |
| Estimated difference in cost of goods sold—LIFO basis vs. FIFO basis, net of taxes of zero(1)(2) | | 1,847 |
| | 32,854 |
| | 1,033 |
|
| Net loss, excluding LIFO impact | | $ | (41,688 | ) | | $ | (22,563 | ) | | $ | (23,720 | ) |
| Weighted average common shares outstanding, basic and diluted | | 15,492,314 |
| | 15,066,663 |
| | 14,866,306 |
|
| Net loss per common share—basic and diluted, as reported | | $ | (1.89 | ) | | $ | (3.61 | ) | | $ | (1.61 | ) |
| Net loss per common share, excluding LIFO impact—basic and diluted | | $ | (2.69 | ) | | $ | (1.50 | ) | | $ | (1.60 | ) |
Set forth below is a reconciliation of reported net loss to EBITDAE and Adjusted EBITDAE:
|
| | | | | | | | | | | | |
| | | Year Ended June 30, |
| | | 2012 | | 2011 | | 2010 |
| | | (In thousands) |
| Net loss, as reported | | $ | (29,329 | ) | | $ | (54,317 | ) | | $ | (23,953 | ) |
| Income tax benefit | | (347 | ) | | (9,167 | ) | | (2,529 | ) |
| Interest expense | | 2,137 |
| | 1,965 |
| | 986 |
|
| Depreciation and amortization expense | | 32,113 |
| | 31,758 |
| | 26,778 |
|
| ESOP and share-based compensation expense | | 3,287 |
| | 3,825 |
| | 4,785 |
|
| Impairment losses on goodwill and intangible assets | | 5,585 |
| | 7,805 |
| | — |
|
| Pension withdrawal expense | | 4,568 |
| | — |
| | — |
|
| Net loss (gain) on derivatives and investments | | 4,117 |
| | (4,191 | ) | | (10,169 | ) |
| EBITDAE | | $ | 22,131 |
| | $ | (22,322 | ) | | $ | (4,102 | ) |
| LIFO (credit) charge: | | | | | | |
| Effect of liquidation of LIFO inventory quantities, net of taxes of zero(1) | | (14,206 | ) | | (1,100 | ) | | (800 | ) |
| Estimated difference in cost of goods sold—LIFO basis vs. FIFO basis, net of taxes of zero(1)(2) | | 1,847 |
| | 32,854 |
| | 1,033 |
|
| LIFO (credit) charge, net of taxes of zero(1) | | (12,359 | ) | | 31,754 |
| | 233 |
|
| Adjusted EBITDAE | | $ | 9,772 |
| | $ | 9,432 |
| | $ | (3,869 | ) |
______________
(1) LIFO (credit) charge had no impact on income tax (benefit) expense since we have recorded a 100% valuation allowance against deferred tax assets.
(2) Effective OctoberApril 1, 2011, we refined the methodology that we use to estimate the LIFO impact and use the average purchase cost over the months of inventory-on-hand instead of the latest purchase cost to value the ending inventory. In an environment of volatile prices, using the average purchase cost provides a more accurate inventory value than using the latest purchase cost for that period. The effect of this refinement in methodology on previously disclosed non-GAAP financial measures is included in the fiscal year ended June 30, 2011 and 2010 columns above and is summarized below:
|
| | | | | | | | | | | | | | | | |
| | | As Previously Reported | | As Refined |
| | | Fiscal Year Ended June 30, | | Fiscal Year Ended June 30, |
| | 2011 | | 2010 | | 2011 | | 2010 |
| (In thousands, except per share data) | | | | | | | | |
| LIFO charge (credit), net of taxes of zero | | $ | 40,317 |
| | $ | 1,033 |
| | $ | 31,754 |
| | $ | 233 |
|
| Net loss, excluding LIFO impact | | $ | (14,000 | ) | | $ | (22,920 | ) | | $ | (22,563 | ) | | $ | (23,720 | ) |
| Net loss per common share, excluding LIFO impact—basic and diluted | | $ | (0.93 | ) | | $ | (1.54 | ) | | $ | (1.50 | ) | | $ | (1.60 | ) |
| Adjusted EBITDAE | | $ | 17,995 |
| | $ | (3,070 | ) | | $ | 9,432 |
| | $ | (3,869 | ) |
Contractual Obligations
The following table contains supplemental information regarding total contractual obligations as of June 30, 2012, including capital leases:
|
| | | | | | | | | | | | | | | | | | | | |
| | Payment due by period |
| (In thousands) | | Total | | Less Than One Year | | 1-3 Years | | 3-5 Years | | More Than 5 Years |
| Contractual obligations: | | | | | | | | | | |
| Operating lease obligations | | $ | 15,456 |
| | $ | 3,979 |
| | $ | 6,139 |
| | $ | 3,291 |
| | $ | 2,047 |
|
| Capital lease obligations(1) | | 17,939 |
| | 4,523 |
| | 7,532 |
| | 4,926 |
| | 958 |
|
| Pension plan obligations | | 74,570 |
| | 6,364 |
| | 13,200 |
| | 14,063 |
| | 40,943 |
|
| Postretirement benefits other than pension plans | | 24,686 |
| | 1,363 |
| | 3,296 |
| | 4,468 |
| | 15,559 |
|
| Revolving credit facility(2) | | 29,126 |
| | 29,126 |
| | — |
| | — |
| | — |
|
| | | $ | 161,777 |
| | $ | 45,355 |
| | $ | 30,167 |
| | $ | 26,748 |
| | $ | 59,507 |
|
______________
(1) Includes imputed interest of $2,072.
(2) Revolving credit facility expires 2020 through March 2, 2015, but is presented as a current liability on the Company's consolidated balance sheets.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
|
| |
Item 7A. | Quantitative and Qualitative Disclosures About Market Risk |
Interest Rate Risk
We are exposed to market value risk arising from changes in interest rates on our securities portfolio. Our portfolio of preferred securities has sometimes included investments in derivatives that provide a natural economic hedge of interest rate risk. We review the interest rate sensitivity of these securities and may enter into “short positions” in futures contracts on U.S. Treasury securities or hold put options on such futures contracts to reduce the impact of certain interest rate changes. Specifically, we attempt to manage the risk arising from changes in the general level of interest rates. We do not transact in futures contracts or put options for speculative purposes. The number and type of futures and options contracts entered into depends on, among other items, the specific maturity and issuer redemption provisions for each preferred stock held, the slope of the Treasury yield curve, the expected volatility of U.S. Treasury yields, and the costs of using futures and/or options.
The following table demonstrates the impact of varying interest rate changes based on our preferred securities holdings and market yield and price relationships at June 30, 2012. This table is predicated on an “instantaneous” change in the general level of interest rates and assumes predictable relationships between the prices of our preferred securities holdings and the yields on U.S. Treasury securities. At June 30, 2012, we had no futures contracts or put options designated as interest rate risk hedges.
|
| | | | | | | | |
| | | Market Value of Preferred Securities at June 30, 2012 | | Change in Market Value |
| Interest Rate Changes | | (In thousands) |
| –150 basis points | | $ | 20,159 |
| | $ | 764 |
|
| –100 basis points | | $ | 19,962 |
| | $ | 567 |
|
| Unchanged | | $ | 19,395 |
| | $ | — |
|
| +100 basis points | | $ | 18,628 |
| | $ | (767 | ) |
| +150 basis points | | $ | 18,272 |
| | $ | (1,123 | ) |
Our revolving credit facility with Wells Fargo is at a variable rate. The interest rate varies based upon line usage, borrowing base availability and market conditions. As of June 30, 2012, we had outstanding borrowings of $29.1 million, excluding loan extension fees of $0.2 million, utilized $11.9 million of the letters of credit sublimit, and had excess availability under the credit facility of $31.4 million. The interest rate on the outstanding borrowings at June 30, 2012 was 3.5%. The Loan Agreement provides for interest rates based on modified Monthly Average Excess Availability levels with a range of PRIME + 0.25% to PRIME + 0.75% or Adjusted Eurodollar Rate + 2.0% to Adjusted Eurodollar Rate + 2.5%.
The following table demonstrates the impact of interest rate changes on our annual interest expense under the revolving credit facility based on the outstanding balance and interest rate as of June 30, 2012:
|
| | | | | | | |
| | | Interest Rate | | Annual Interest Expense |
| Interest Rate Changes | | | | (In thousands) |
| –150 basis points | | 2.0 | % | | $ | 585 |
|
| –100 basis points | | 2.5 | % | | $ | 732 |
|
| Unchanged | | 3.5 | % | | $ | 1,025 |
|
| +100 basis points | | 4.5 | % | | $ | 1,317 |
|
| +150 basis points | | 5.0 | % | | $ | 1,464 |
|
Commodity Price Risk
We are exposed to commodity price risk arising from changes in the market price of green coffee. We value green coffee inventory on the LIFO basis. In the normal course of business we hold a large green coffee inventory and enter into forward commodity purchase agreements with suppliers. We are subject to price risk resulting from the volatility of green coffee prices. Due to competition and market conditions, volatile price increases cannot always be passed on to our customers.
We routinely enter into specialized hedging transactions to purchase future coffee contracts to enable us to lock in green coffee prices within a pre-established range, and hold a mix of futures contracts and options to help hedge against volatility in green coffee prices. Gains and losses on these derivative instruments are realized immediately in "Other, net."
For the fiscal year ended June 30, 2012, 2011 and 2010, we recorded $(8.6) million, $0.9 million and $29,000, respectively, in coffee-related net realized derivative (losses) and gains. For the fiscal years ended June 30, 2012, 2011 and 2010, we recorded $1.2 million, $(2.4) million and $1.5 million, respectively, in coffee-related net unrealized derivative gains (losses).
The following table demonstrates the impact of changes in the market value of coffee cost on the market value of coffee inventory and forward purchase contracts:
|
| | | | | | | | | | | | | | | | | | | | |
| | Market Value | | (Decrease) Increase in Market Value |
| | | Coffee Inventory | | Futures & Options | | Total | | Derivatives | | Inventory |
| Coffee Cost (Decrease) Increase | | |
| | | (In thousands) |
| – 10% | | $ | 25,000 |
| | $ | (486 | ) | | $ | 24,514 |
| | $ | (486 | ) | | $ | (2,321 | ) |
| Unchanged | | $ | 27,321 |
| | $ | 1,626 |
| | $ | 28,947 |
| | $ | — |
| | $ | — |
|
| +10% | | $ | 30,000 |
| | $ | 486 |
| | $ | 30,486 |
| | $ | 486 |
| | $ | 2,679 |
|
|
| |
Item 8. | Financial Statements and Supplementary Data |
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of
Farmer Bros. Co. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Farmer Bros. Co. and Subsidiaries as of June 30, 2012 and 2011, and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity and cash flows for each of the three years in the period ended June 30, 2012. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Farmer Bros. Co. and Subsidiaries at June 30, 2012 and 2011, and the consolidated results of their operations and their cash flows for each of the three years in the period ended June 30, 2012, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Farmer Bros. Co. and Subsidiaries’ internal control over financial reporting as of June 30, 2012, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated September 7, 2012 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Los Angeles, California
September 7, 2012
FARMER BROS. CO.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
|
| | | | | | | |
| | June 30, 2012 |
| | June 30, 2011 |
|
| ASSETS | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 3,906 |
| | $ | 6,081 |
|
| Short-term investments | 21,021 |
| | 24,874 |
|
| Accounts and notes receivable, net of allowance for doubtful accounts of $1,872 and $2,852, respectively | 40,736 |
| | 43,501 |
|
| Inventories | 65,981 |
| | 79,759 |
|
| Income tax receivable | 762 |
| | 448 |
|
| Prepaid expenses | 3,445 |
| | 2,747 |
|
| Total current assets | 135,851 |
| | 157,410 |
|
| Property, plant and equipment, net | 108,135 |
| | 114,107 |
|
| Goodwill and other intangible assets, net | 7,615 |
| | 14,639 |
|
| Other assets | 2,904 |
| | 2,892 |
|
| Deferred income taxes | 854 |
| | 1,005 |
|
| Total assets | $ | 255,359 |
| | $ | 290,053 |
|
| LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
| Current liabilities: | | | |
| Accounts payable | $ | 27,676 |
| | $ | 42,473 |
|
| Accrued payroll expenses | 20,494 |
| | 15,675 |
|
| Short-term borrowings under revolving credit facility | 29,126 |
| | 31,362 |
|
| Short-term obligations under capital leases | 3,737 |
| | 1,570 |
|
| Deferred income taxes | 1,480 |
| | 500 |
|
| Other current liabilities | 10,176 |
| | 11,882 |
|
| Total current liabilities | 92,689 |
| | 103,462 |
|
| Accrued postretirement benefits | 34,557 |
| | 23,585 |
|
| Other long-term liabilities—capital leases | 12,130 |
| | 7,066 |
|
| Accrued pension liabilities | 42,513 |
| | 22,371 |
|
| Accrued workers’ compensation liabilities | 4,131 |
| | 3,639 |
|
| Deferred income taxes | 607 |
| | 1,815 |
|
| Total liabilities | $ | 186,627 |
| | $ | 161,938 |
|
| Commitments and contingencies (Note 14) |
| |
|
| Stockholders’ equity: | | | |
| Preferred stock, $1.00 par value, 500,000 shares authorized and none issued | $ | — |
| | $ | — |
|
| Common stock, $1.00 par value, 25,000,000 shares authorized; 16,308,859 and 16,186,372 issued and outstanding at June 30, 2012 and 2011, respectively | 16,309 |
| | 16,186 |
|
| Additional paid-in capital | 34,834 |
| | 36,470 |
|
| Retained earnings | 100,455 |
| | 129,784 |
|
| Unearned ESOP shares | (25,637 | ) | | (30,437 | ) |
| Less accumulated other comprehensive loss | (57,229 | ) | | (23,888 | ) |
| Total stockholders’ equity | $ | 68,732 |
| | $ | 128,115 |
|
| Total liabilities and stockholders’ equity | $ | 255,359 |
| | $ | 290,053 |
|
The accompanying notes are an integral part of these financial statements.
FARMER BROS. CO.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
|
| | | | | | | | | | | |
| | Year ended June 30, |
| | 2012 | | 2011 | | 2010 |
| Net sales | $ | 495,442 |
| | $ | 463,945 |
| | $ | 450,318 |
|
| Cost of goods sold | 322,618 |
| | 306,771 |
| | 252,754 |
|
| Gross profit | 172,824 |
| | 157,174 |
| | 197,564 |
|
| Selling expenses | 150,641 |
| | 170,670 |
| | 187,685 |
|
| General and administrative expenses | 36,897 |
| | 47,121 |
| | 49,071 |
|
| Impairment losses on goodwill and intangible assets | 5,585 |
| | 7,805 |
| | — |
|
| Pension withdrawal expense | 4,568 |
| | — |
| | — |
|
| Operating expenses | 197,691 |
| | 225,596 |
| | 236,756 |
|
| Loss from operations | (24,867 | ) | | (68,422 | ) | | (39,192 | ) |
| Other (expense) income: | | | | |
|
| Dividend income | 1,231 |
| | 2,534 |
| | 3,224 |
|
| Interest income | 214 |
| | 178 |
| | 303 |
|
| Interest expense | (2,137 | ) | | (1,965 | ) | | (986 | ) |
| Other, net | (4,117 | ) | | 4,191 |
| | 10,169 |
|
| Total other (expense) income | (4,809 | ) | | 4,938 |
| | 12,710 |
|
| Loss before taxes | (29,676 | ) | | (63,484 | ) | | (26,482 | ) |
| Income tax benefit | (347 | ) | | (9,167 | ) | | (2,529 | ) |
| Net loss | $ | (29,329 | ) | | $ | (54,317 | ) | | $ | (23,953 | ) |
| Net loss per common share—basic and diluted | $ | (1.89 | ) | | $ | (3.61 | ) | | $ | (1.61 | ) |
| Weighted average common shares outstanding—basic and diluted | 15,492,314 |
| | 15,066,663 |
| | 14,866,306 |
|
| Cash dividends declared per common share | $ | — |
| | $ | 0.18 |
| | $ | 0.46 |
|
The accompanying notes are an integral part of these financial statements.
FARMER BROS. CO.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
|
| | | | | | | | | | | | |
| | | Year Ended June 30, |
| | | 2012 | | 2011 | | 2010 |
| Net loss | | $ | (29,329 | ) | | $ | (54,317 | ) | | $ | (23,953 | ) |
| Other comprehensive loss, net of tax: | | | | | | |
| Retiree benefits | | (33,341 | ) | | 25,634 |
| | (4,787 | ) |
| Income tax benefit | | — |
| | (9,823 | ) | | — |
|
| Total comprehensive loss, net of tax | | $ | (62,670 | ) | | $ | (38,506 | ) | | $ | (28,740 | ) |
FARMER BROS. CO.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
|
| | | | | | | | | | | | |
| | | Year ended June 30, |
| | | 2012 | | 2011 | | 2010 |
| Cash flows from operating activities: | | | | | | |
| Net loss | | $ | (29,329 | ) | | $ | (54,317 | ) | | $ | (23,953 | ) |
| Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | | | | | | |
| Depreciation and amortization | | 32,113 |
| | 31,758 |
| | 26,778 |
|
| Provision for doubtful accounts | | — |
| | 2,024 |
| | 3,188 |
|
| Deferred income taxes | | (78 | ) | | 336 |
| | 758 |
|
| Impairment losses on goodwill and intangible assets | | 5,585 |
| | 7,805 |
| | — |
|
| (Gain) loss on sales of assets | | (268 | ) | | 358 |
| | 430 |
|
| ESOP and share-based compensation expense | | 3,287 |
| | 3,825 |
| | 4,785 |
|
| Net loss (gain) on investments | | 6,175 |
| | (1,312 | ) | | (9,382 | ) |
| Change in operating assets and liabilities: | | | | | | |
| Short-term investments | | (2,322 | ) | | 27,381 |
| | 1,365 |
|
| Accounts and notes receivable | | 2,765 |
| | (2,929 | ) | | (40 | ) |
| Inventories | | 13,314 |
| | 3,952 |
| | (14,751 | ) |
| Income tax receivable | | (314 | ) | | 5,392 |
| | (1,677 | ) |
| Prepaid expenses and other assets | | (711 | ) | | (434 | ) | | 178 |
|
| Accounts payable | | (13,083 | ) | | 12,997 |
| | (738 | ) |
| Accrued payroll, expenses and other liabilities | | 3,112 |
| | 2,112 |
| | 2,904 |
|
| Accrued postretirement benefits | | 995 |
| | 1,399 |
| | 3,926 |
|
| Other long-term liabilities | | (3,108 | ) | | (6,410 | ) | | 5,182 |
|
| Net cash provided by (used in) operating activities | | $ | 18,133 |
| | $ | 33,937 |
| | $ | (1,047 | ) |
| Cash flows from investing activities: | | | | | | |
| Purchases of property, plant and equipment | | (17,498 | ) | | (19,416 | ) | | (28,484 | ) |
| Proceeds from sales of property, plant and equipment | | 3,037 |
| | 2,021 |
| | 437 |
|
| Net cash used in investing activities | | $ | (14,461 | ) | | $ | (17,395 | ) | | $ | (28,047 | ) |
| Cash flows from financing activities: | | | | | | |
| Proceeds from revolving credit facility | | 17,250 |
| | 35,450 |
| | 33,737 |
|
| Repayments on revolving credit facility | | (21,200 | ) | | (43,970 | ) | | (12,756 | ) |
| Payments of capital lease obligations | | (1,897 | ) | | (1,433 | ) | | (837 | ) |
| Dividends paid | | — |
| | (4,657 | ) | | (6,939 | ) |
| Net cash (used in) provided by financing activities | | $ | (5,847 | ) | | $ | (14,610 | ) | | $ | 13,205 |
|
| Net (decrease) increase in cash and cash equivalents | | $ | (2,175 | ) | | $ | 1,932 |
| | $ | (15,889 | ) |
| Cash and cash equivalents at beginning of year | | 6,081 |
| | 4,149 |
| | 20,038 |
|
| Cash and cash equivalents at end of year | | $ | 3,906 |
| | $ | 6,081 |
| | $ | 4,149 |
|
(continued on next page)
FARMER BROS. CO.
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued from previous page)
(In thousands)
|
| | | | | | | | | | | | |
| | | Year ended June 30, |
| | | 2012 | | 2011 | | 2010 |
| Supplemental disclosure of cash flow information: | | | | | | |
| Cash paid for interest | | $ | 2,123 |
| | $ | 1,945 |
| | $ | 890 |
|
| Cash paid for income taxes | | $ | 317 |
| | $ | 324 |
| | $ | 154 |
|
| Non-cash financing and investing activities: | | | | | | |
| Equipment acquired under capital leases | | $ | 9,508 |
| | $ | 5,659 |
| | $ | 3,954 |
|
| Dividends accrued, but not paid | | $ | — |
| | $ | — |
| | $ | 1,849 |
|
The accompanying notes are an integral part of these financial statements.
FARMER BROS. CO.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands, except share and per share data)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Common Shares | | Stock Amount | | Additional Paid-in Capital | | Retained Earnings | | Unearned ESOP Shares | | Accumulated Other Comprehensive Income (Loss) | | Total |
| Balance at June 30, 2009 | | 16,078,111 |
| | $ | 16,078 |
| | $ | 31,135 |
| | $ | 217,792 |
| | $ | (33,604 | ) | | $ | (34,912 | ) | | $ | 196,489 |
|
| Net loss | | | | | | | | (23,953 | ) | | | | | | (23,953 | ) |
| Retiree benefits, net of tax of $0 | | | | | | | | | | | | (4,787 | ) | | (4,787 | ) |
| Dividends ($0.46 per share) | | | | | | | | (6,939 | ) | | | | | | (6,939 | ) |
| ESOP compensation expense, including reclassifications | | | | | | 5,344 |
| | | | (1,634 | ) | | | | 3,710 |
|
| Share-based compensation | | 86,068 |
| | 86 |
| | 989 |
| | | | | | | | 1,075 |
|
| Balance at June 30, 2010 | | 16,164,179 |
| | $ | 16,164 |
| | $ | 37,468 |
| | $ | 186,900 |
| | $ | (35,238 | ) | | $ | (39,699 | ) | | $ | 165,595 |
|
| Net loss | | | | | | | | (54,317 | ) | | | | | | (54,317 | ) |
| Retiree benefits, net of tax benefit of $9,823 | | | | | | | | | | | | 15,811 |
| | 15,811 |
|
| Dividends ($0.18 per share) | | | | | | | | (2,799 | ) | | | | | | (2,799 | ) |
| ESOP contributions | | 1,040 |
| | 1 |
| | 8 |
| | | | (9 | ) | | | | — |
|
| ESOP compensation expense, including reclassifications | | | | | | (2,173 | ) | | | | 4,810 |
| | | | 2,637 |
|
| Share-based compensation | | 21,153 |
| | 21 |
| | 1,167 |
| | | | | | | | 1,188 |
|
| Balance at June 30, 2011 | | 16,186,372 |
| | $ | 16,186 |
| | $ | 36,470 |
| | $ | 129,784 |
| | $ | (30,437 | ) | | $ | (23,888 | ) | | $ | 128,115 |
|
| Net loss | | | | | | | | (29,329 | ) | | | | | | (29,329 | ) |
| Retiree benefits, net of tax of $0 | | | | | | | | | | | | (33,341 | ) | | (33,341 | ) |
| ESOP compensation expense, including reclassifications | | | | | | (3,327 | ) | | | | 4,800 |
| | | | 1,473 |
|
| Share-based compensation | | 122,487 |
| | 123 |
| | 1,691 |
| | | | — |
| | | | 1,814 |
|
| Balance at June 30, 2012 | | 16,308,859 |
| | $ | 16,309 |
| | $ | 34,834 |
| | $ | 100,455 |
| | $ | (25,637 | ) | | $ | (57,229 | ) | | $ | 68,732 |
|
The accompanying notes are an integral part of these financial statements.
FARMER BROS. CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
Organization
Farmer Bros. Co., a Delaware corporation (including its consolidated subsidiaries unless the context otherwise requires, the “Company,” or “Farmer Bros.”), is a manufacturer, wholesaler and distributor of coffee, tea and culinary products. The Company is a direct distributor of coffee to restaurants, hotels, casinos, hospitals and other foodservice providers, and is a provider of private brand coffee programs to Quick Serve Restaurants ("QSR's"), grocery retailers, national drugstore chains, restaurant chains, convenience stores and independent coffee houses, nationwide. The Company was founded in 1912, was incorporated in California in 1923, and reincorporated in Delaware in 2004. The Company operates in one business segment.
The Company’s product line includes roasted coffee, liquid coffee, coffee-related products such as coffee filters, sugar and creamers, assorted teas, cappuccino, cocoa, spices, gelatins and puddings, soup bases, gravy and sauce mixes, pancake and biscuit mixes, and jellies and preserves. Most sales are made “off-truck” by the Company to its customers at their places of business.
The Company serves its customers from six distribution centers and its distribution trucks are replenished from 117 branch warehouses located throughout the contiguous United States. The Company operates its own trucking fleet to support its long-haul distribution requirements. A portion of the Company’s products is distributed by third parties or is direct shipped via common carrier.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries FBC Finance Company and Coffee Bean Holding Co., Inc. All inter-company balances and transactions have been eliminated.
Financial Statement Preparation
The preparation of financial statements in conformity with U.S. generally accepted accounting principles ("GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could 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.
Investments
The Company’s investments consist of money market instruments, marketable debt and equity securities, various derivative instruments, primarily exchange traded treasury and green coffee futures and options. Investments are held for trading purposes and stated at fair value. All derivative instruments not designated as accounting hedges are marked to market and changes are recognized in current earnings. At June 30, 2012 and 2011, no derivative instruments were designated as accounting hedges. The fair value of derivative instruments is based upon broker quotes. The cost of investments sold is determined on the specific identification method. Dividend and interest income is accrued as earned.
Concentration of Credit Risk
At June 30, 2012, the financial instruments which potentially expose the Company to concentration of credit risk consist of cash in financial institutions (which exceeds federally insured limits), short-term investments, investments in the preferred stocks of other companies and trade receivables. Cash equivalents and short-term investments are not concentrated by issuer, industry or geographic area. Maturities are generally shorter than 180 days. Investments in the preferred stocks of other companies are limited to high quality issuers and are not concentrated by geographic area or issuer.
Concentration of credit risk with respect to trade receivables for the Company is limited due to the large number of customers comprising the Company’s customer base and their dispersion across many different geographic areas. The trade receivables are generally short-term and all probable bad debt losses have been appropriately considered in establishing the allowance for doubtful accounts. In fiscal 2010, based on a larger customer base due to the recent Company acquisitions and in response to slower collection of the Company’s accounts receivable resulting from the impact of the economic downturn on the Company’s customers, the Company increased its allowance for doubtful accounts from the previous fiscal year by$2.1 million and recorded a $3.2 million charge to bad debt expense. In fiscal 2012 and fiscal 2011, due to improvements in the collection of past due accounts, the Company reduced its allowance for doubtful accounts by $1.0 million and $0.4 million, respectively.
Inventories
Inventories are valued at the lower of cost or market. The Company accounts for coffee, tea and culinary products on a last in, first out (“LIFO”) basis, and coffee brewing equipment manufactured on a first in, first out (“FIFO”) basis. The Company regularly evaluates these inventories to determine whether market conditions are correctly reflected in the recorded carrying value. At the end of each quarter, the Company records the expected beneficial effect of the liquidation of LIFO inventory quantities and records the actual impact at fiscal year-end. An actual valuation of inventory under the LIFO method is made only at the end of each fiscal year based on the inventory levels and costs at that time.
If inventory quantities decline at the end of the fiscal year compared to the beginning of the fiscal year, the reduction results in the liquidation of LIFO inventory quantities carried at the cost prevailing in prior years. This LIFO inventory liquidation may result in a decrease or increase in cost of goods sold depending on whether the cost prevailing in prior years was lower or higher, respectively, than the current year cost.
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:
|
| |
Buildings and facilities | 10 to 30 years |
Machinery and equipment | 3 to 5 years |
Equipment under capital leases | Term of lease |
Office furniture and equipment | 5 years |
Capitalized software | 3 years |
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 betterments are capitalized.
Coffee Brewing Equipment and Service
The Company classifies certain expenses related to coffee brewing equipment provided to customers as cost of goods sold. These costs include the cost of the equipment as well as the cost of servicing that equipment (including service employees’ salaries, cost of transportation and the cost of supplies and parts) and are considered directly attributable to the generation of revenues from its customers. Accordingly, such costs included in cost of goods sold in the accompanying consolidated financial statements for the years ended June 30, 2012, 2011 and 2010 are $24.9 million, $27.1 million and $21.5 million, respectively.
The Company has capitalized coffee brewing equipment in the amounts of $13.9 million and $12.7 million in fiscal 2012 and 2011, respectively. During fiscal 2012, 2011 and 2010, the Company had depreciation expense related to the capitalized coffee brewing equipment reported as cost of goods sold in the amounts of $12.2 million, $9.6 million and $6.1 million, respectively.
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 they evaluate 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 reevaluates their tax provision and reconsiders their estimates and their assumptions related to specific tax assets and liabilities, making adjustments as circumstances change.
Revenue Recognition
Most product sales are made “off-truck” to the Company’s customers at their places of business by the Company’s sales representatives. Revenue is recognized at the time the Company’s sales representatives physically deliver products to customers and title passes or when it is accepted by the customer when shipped by third-party delivery.
The Company sells roast and ground coffee and tea to The J.M. Smucker Company ("J.M. Smucker") pursuant to a co‑packing agreement as J.M. Smucker's agent. The co-packing agreement was assigned by Sara Lee Corporation ("Sara Lee") to J.M. Smucker on February 17, 2012, as part of J.M. Smucker's acquisition of Sara Lee's coffee business. The Company recognizes revenue from this arrangement on a net basis, net of direct costs of revenue. As of June 30, 2012 and 2011, the Company had $0.8 million and $4.9 million, respectively, of receivables relating to this arrangement which are included in "Other receivables" (see Note 3).
Earnings (Loss) Per Common Share
Basic earnings (loss) per share (“EPS”) represents net earnings attributable to common stockholders divided by the weighted-average number of common shares outstanding for the period (see Note 13), excluding unallocated shares held by the Company's Employee Stock Ownership Plan. Diluted EPS represents net earnings attributable to common stockholders divided by the weighted-average number of common shares outstanding, inclusive of the dilutive impact of common equivalent shares outstanding during the period. However, nonvested restricted stock awards (referred to as participating securities) are excluded from the dilutive impact of common equivalent shares outstanding in accordance with authoritative guidance under the two-class method since the nonvested restricted stockholders are entitled to participate in dividends declared on common stock as if the shares were fully vested and hence are deemed to be participating securities. Under the two-class method, earnings (loss) attributable to nonvested restricted stockholders are excluded from net earnings (loss) attributable to common stockholders for purposes of calculating basic and diluted EPS. Computation of EPS for the years ended June 30, 2012, 2011 and 2010 does not include the dilutive effect of 667,235, 497,810 and 404,943 shares, respectively, issuable under stock options since their inclusion would be anti-dilutive. Accordingly, the consolidated financial statements present only basic net income (loss) per common share (see Note 13).
Dividends Declared
Although historically the Company has paid a dividend to stockholders, in light of the Company’s current financial position, the Company’s Board of Directors has omitted the payment of a quarterly dividend since the third quarter of fiscal 2011. The amount, if any, of dividends to be paid in the future will depend upon the Company’s then available cash, anticipated cash needs, overall financial condition, loan agreement restrictions, future prospects for earnings and cash flows, as well as other relevant factors.
Employee Stock Ownership Plan (“ESOP”)
Compensation cost for the ESOP is based on the fair market value of shares released or deemed to be released for the period. Dividends on allocated shares retain the character of true dividends, but dividends on unallocated shares are considered compensation cost. 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 is recognized.
Impairment of Goodwill and Intangible Assets
The Company performs its annual goodwill and indefinite-lived intangible assets impairment test as of June 30 of each fiscal year. Goodwill and other indefinite-lived intangible assets are not amortized but instead are reviewed for impairment annually and on an interim basis if events or changes in circumstances between annual tests indicate that an asset might be impaired. Indefinite-lived intangible assets are tested for impairment by comparing their fair values to their carrying values. Testing for impairment of goodwill is a two-step process. The first step requires the Company to compare the fair value of its reporting units to the carrying value of the net assets of the respective reporting units, including goodwill. If the fair value of the reporting unit is less than the carrying value, goodwill of the reporting unit is potentially impaired and the Company then completes step two to measure the impairment loss, if any. The second step requires the calculation of the implied fair value of goodwill, which is the residual fair value remaining after deducting the fair value of all tangible and intangible net assets of the reporting unit from the fair value of the reporting unit. If the implied fair value of goodwill is less than the carrying amount of goodwill, an impairment loss is recognized equal to the difference.
In its annual test of impairment in the fourth quarter of fiscal 2012, the Company identified indicators of impairment including a decline in market capitalization and continuing losses from operations arising from its DSD coffee business. The Company performed impairment tests to determine the recoverability of the carrying values of the assets or if impairment should be measured. The Company was required to make estimates of the fair value of the Company's intangible assets, and all assets of CBI, the reporting unit, which were based on the use of the income approach and/or market approach.
The Company used the relief from royalty method under the income approach to estimate the fair value of its indefinite-lived intangible assets. Inputs to this method included estimated royalty rates associated with licensing and franchise royalty agreements in related industries, which are Level 3 inputs within the fair value hierarchy. To estimate the fair value of CBI, the Company used discounted cash flow analysis under the income approach and the guideline public company method under the market approach. Inputs to the discounted cash flow analysis included the projection of future cash flows which are Level 3 inputs within the fair value hierarchy. Inputs to the guideline public company analysis included valuation multiples of publicly traded companies similar to CBI, which are Level 2 inputs within the fair value hierarchy.
As a result of these impairment tests, the Company determined that the Company's trademarks acquired in connection with the CBI acquisition were impaired and that the carrying value of all of the assets of CBI excluding goodwill exceeded their estimated fair values resulting in an implied fair value of zero for CBI's goodwill. Accordingly, in the fourth quarter of fiscal 2012, the Company recorded total impairment charges of $5.6 million including $5.1 million in impairment losses on goodwill.
Long-Lived Assets, Excluding Goodwill and Indefinite-lived Intangible Assets
The Company reviews the recoverability of its long-lived assets whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Long-lived assets evaluated for impairment are grouped with other assets to 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. In its annual test of impairment as of the end of fiscal 2011, the Company identified indicators of impairment including a decline in market capitalization and continuing losses from operations. The Company performed impairment tests to determine the recoverability of the carrying values of the assets or if impairment should be measured. The carrying value of these intangible assets was higher than the sum of each of their projected undiscounted cash flows. The Company was required to make estimates of the fair value of the intangible assets in this group, which were based on the use of the income approach. Inputs to the analysis include the projection of future cash flows which are Level 3 inputs within the fair value hierarchy. The Company determined that definite-lived intangible assets consisting of the customer relationships acquired, and the distribution agreement and co-pack agreement entered into, in connection with the DSD Coffee Business acquisition were impaired. The total impairment charge recorded in operating expenses on the consolidated statement of operations15, 2021 as a result of the impairment test was $7.8 million.unprecedented impact of the COVID-19 pandemic on the food and beverage industry and our business, as described above.
Shipping and Handling Costs
Bonus (Column D)
This column reflects that no cash-based bonus payments outside of an incentive plan were made during the fiscal years set forth. All non-equity incentive plan compensation for services performed during the fiscal year by the Named Executive Officers under the 2017 Plan is shown in column G.
Stock Awards (Column E)
The Company distributes its products directly to its customers and shipping and handling costs are recorded as Company selling expenses.
Collective Bargaining Agreements
Certain Company employees are subject to collective bargaining agreements. The duration of these agreements extend to 2014. Approximately 34% of the workforce is covered by such agreements.
Reclassifications
Certain reclassifications have been made to prior year balances to conform to the current year presentation.
Recently Adopted Accounting Standards
In September 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-09, “Compensation-Retirement Benefits-Multiemployer Plans (Subtopic 715-80), Disclosures about an Employer's Participationamounts in a Multiemployer Plan” (“ASU 2011-09”). ASU 2011-09 requires companies participating in multiemployer pension plans to disclose more information about the multiemployer plan(s), the employer's level of participation in the multiemployer plan(s), the financial health of the plan(s), and the nature of the employer's commitments to the plan(s). The Company adopted the amendments effective fiscal year ended June 30, 2012. Since ASU 2011-09 does not change the accounting for an employer's participation in a multiemployer plan, adoption of ASU 2011-09 did not impact the results of operations, financial position or cash flows of the Company.
In June 2011, the FASB issued ASU No. 2011-05, “Comprehensive Income (Topic 220), Presentation of Comprehensive Income” (“ASU 2011-05”). The new GAAP guidance gives companies two choices of how to present items of net income, items of other comprehensive income (loss) ("OCI") and total comprehensive income (loss): Companies can create one continuous statement of comprehensive income or two separate consecutive statements. Companies will no longer be allowed to present OCI in the statement of stockholders’ equity. Earnings per share would continue to be based on net income. Although existing guidance related to items that must be presented in OCI has not changed, companies will be required to display reclassification adjustments for each component of OCI in both net income and OCI. Also, companies will need to present the components of OCI in their interim and annual financial statements. The amendments in the ASU should be applied retrospectively. For public entities, the amendments are effectivecolumn E for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company adopted2020 represent the amendments effective fiscal year ended June 30, 2012. Adoption of ASU 2011-05 did not impact the results of operations, financial position or cash flows of the Company.
New Accounting Pronouncements
In January 2012, the FASB proposed guidance that would give companies the option to first perform a qualitative assessment to determine whether it more likely than not that an indefinite-lived intangible asset is impaired. The proposed guidance is similar to ASU 2011-08, "Testing Goodwill for Impairment." Companies would consider relevant events and circumstances that may affect the significant inputs used in determining the fair value of an indefinite-lived intangible asset. A company that concludes that it is more likely than not that the fair value of such an asset exceeds its carrying amount would not need to calculate theaggregate grant date fair value of the assetPBRSU award received by each of Mr. Maserang and Mr. Inofuentes in connection with the current year. However, if a company concludes that it is more likely than not thatcommencement of their respective employment in fiscal 2020. The amounts in column E for fiscal 2021 include the asset is impaired, it must calculate theaggregate grant date fair value of the assetannual PBRSU awards received by each of Messrs. Maserang, Drake, Inofuentes, and compare that value with its carrying amount, as is requiredMoragne and the annual RSU awards received by current guidance.each of Messrs. Maserang, Drake, Inofuentes and Moragne. The final amendments would be applied prospectively for annual and interim impairment tests performedamounts in column E for fiscal years beginning after September 15, 2012, with early adoption permitted, and, for2022 include the Company, the amendments are effective beginning in July 1, 2013. The Company believes that adoption of ASU 2011-04 will not impact the results of operations, financial position or cash flows of the Company.
In May 2011, the FASB issued ASU No. 2011-04, “Fair Value Measurement (Topic 820), Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs” (“ASU 2011-04”). The ASU amends the fair value measurement and disclosure guidance in ASC 820, “Fair Value Measurement,” to converge GAAP and International Financial Reporting Standards requirements for measuring amounts at fair value as well as disclosures about these measurements. Many of the amendments clarify existing concepts and are generally not expected to result in significant changes to how many companies currently apply the fair value principles. In certain instances, however, the FASB changed a principle to achieve convergence, and while limited, these amendments have the potential to significantly change practice for some companies. For public entities, the amendments are effective during interim and annual periods beginning after December 15, 2011 and, for the Company, the amendments are effective beginning in July 1, 2012. The Company believes that adoption of ASU 2011-04 will not impact the results of operations, financial position or cash flows of the Company.
Note 2. Investments and Derivative Instruments
The Company purchases various derivative instruments as investments or to create economic hedges of its interest rate risk and commodity price risk. At June 30, 2012 and 2011, derivative instruments were not designated as accounting hedges as defined by ASC 815, “Accounting for Derivative Instruments and Hedging Activities.” Theaggregate grant date fair value of derivative instruments is based upon broker quotes. The Company records unrealized gainsthe annual PBRSU awards received by each of Messrs. Maserang, Drake, Inofuentes, and losses on trading securities and changes in the market value of certain coffee contracts meeting the definition of derivatives in "Other, net."
The Company groups its assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are tradedMoragne and the reliabilityannual RSU awards received by each of Messrs. Maserang, Drake, Inofuentes and Moragne and Ms. Jefferson. A discussion 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 quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.
Level 3—Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.
Assets and liabilities measured and recorded at fair value on a recurring basis were as follows (in thousands):
|
| | | | | | | | | | | | | | | | |
| As of June 30, 2012 | | Total | | Level 1 | | Level 2 | | Level 3 |
| Preferred stock(1) | | $ | 19,395 |
| | $ | 14,078 |
| | $ | 5,317 |
| | $ | — |
|
| Futures, options and other derivative assets(1) | | $ | 1,626 |
| | $ | — |
| | $ | 1,626 |
| | $ | — |
|
| Derivative liabilities(2) | | $ | 410 |
| | $ | — |
| | $ | 410 |
| | $ | — |
|
| | | | | | | | | |
| | | | | | | | | |
| As of June 30, 2011 | | Total | | Level 1 | | Level 2 | | Level 3 |
| Preferred stock(1) | | $ | 24,407 |
| | $ | 7,181 |
| | $ | 17,226 |
| | $ | — |
|
| Futures, options and other derivatives(1) | | $ | 467 |
| | $ | — |
| | $ | 467 |
| | $ | — |
|
| Derivative liabilities(2) | | $ | 1,647 |
| | $ | — |
| | $ | 1,647 |
| | $ | — |
|
____________________
| |
(1) | Included in "Short-term investments" on the consolidated balance sheet. |
| |
(2) | Included in "Accounts Payable" on the consolidated balance sheet. |
There were no significant transfers of securities between Level 1 and Level 2.
Gains and losses, both realized and unrealized, are included in "Other, net" on the statement of operations and in the "Net loss (gain) on investments" in the statement of cash flows. Net realized and unrealized gains and losses are as follows:
|
| | | | | | | | | | | | |
| | | June 30, |
| | | 2012 | | 2011 | | 2010 |
| | | (In thousands) |
| Investments and coffee-related derivatives: | | | | | | |
| Unrealized gains | | $ | 1,940 |
| | $ | 865 |
| | $ | 9,647 |
|
| Unrealized losses | | (1,013 | ) | | — |
| | — |
|
| Realized gains | | 1,545 |
| | 447 |
| | — |
|
| Realized losses | | (8,647 | ) | | — |
| | (265 | ) |
| Net realized and unrealized (losses) gains | | (6,175 | ) | | 1,312 |
| | 9,382 |
|
| Net gains from sales of assets | | 1,375 |
| | 1,359 |
| | 201 |
|
| Other gains, net | | 683 |
| | 1,520 |
| | 586 |
|
| Other, net | | $ | (4,117 | ) | | $ | 4,191 |
| | $ | 10,169 |
|
Preferred stock investments as of June 30, 2012 consisted of securities with a fair value of $16.5 million in an unrealized gain position and securities with a fair value of $2.9 million in an unrealized loss position. Preferred stock investments as of June 30, 2011 consisted of securities with a fair value of $18.1 million in an unrealized gain position and securities with a fair value of $6.3 million in an unrealized loss position.
The following tables show gross unrealized losses (although such losses have been recognized in the consolidated statements of operations) and fair value for those investments that were in an unrealized loss position as of June 30, 2012 and 2011, aggregated by the length of time those investments have been in a continuous loss position:
|
| | | | | | | | | | | | | | | | |
| | | June 30, 2012 |
| | | Less than 12 Months | | Total |
| (In thousands) | | Fair Value | | Unrealized Loss | | Fair Value | | Unrealized Loss |
| Preferred stock | | $ | 1,750 |
| | $ | (16 | ) | | $ | 2,891 |
| | $ | (40 | ) |
| | | | | | | | | |
| | | June 30, 2011 |
| | | Less than 12 Months | | Total |
| (In thousands) | | Fair Value | | Unrealized Loss | | Fair Value | | Unrealized Loss |
| Preferred stock | | $ | 319 |
| | $ | (3 | ) | | $ | 6,326 |
| | $ | (1,122 | ) |
Note 3. Accounts and Notes Receivable, net
|
| | | | | | | | |
| | | June 30, |
| | | 2012 | | 2011 |
| | | (In thousands) |
| Trade receivables | | $ | 40,687 |
| | $ | 40,716 |
|
| Other receivables | | 1,921 |
| | 5,637 |
|
| Allowance for doubtful accounts | | (1,872 | ) | | (2,852 | ) |
| | | $ | 40,736 |
| | $ | 43,501 |
|
In fiscal 2010, based on a larger customer base due to recent Company acquisitions and in response to slower collection of the Company’s accounts receivable resulting from the impact of the economic downturn on the Company’s customers, the Company recorded a $3.2 million charge to bad debt expense resulting in a net increase of $2.1 million in its allowance for doubtful accounts. In fiscal 2012 and fiscal 2011, due to improvements in the collection of past due accounts, the Company reduced its allowance for doubtful accounts by $1.0 million and $0.4 million, respectively.
Allowance for doubtful accounts:
|
| | | |
| (In thousands) | |
| Balance at June 30, 2009 | $ | (1,173 | ) |
| Additions | (3,188 | ) |
| Write-offs | 1,068 |
|
| | |
| Balance at June 30, 2010 | (3,293 | ) |
| Additions | (2,024 | ) |
| Write-offs | 2,465 |
|
| | |
| Balance at June 30, 2011 | (2,852 | ) |
| Additions | — |
|
| Write-offs | 980 |
|
| | |
| Balance at June 30, 2012 | $ | (1,872 | ) |
| | |
|
| | | | | | | | | | | | |
| | | Processed | | Unprocessed | | Total |
| June 30, 2012 | | (In thousands) |
| Coffee | | $ | 15,485 |
| | $ | 11,836 |
| | $ | 27,321 |
|
| Tea and culinary products | | 24,502 |
| | 4,817 |
| | 29,319 |
|
| Coffee brewing equipment | | 3,977 |
| | 5,364 |
| | 9,341 |
|
| | | $ | 43,964 |
| | $ | 22,017 |
| | $ | 65,981 |
|
| | | | | | | |
| | | Processed | | Unprocessed | | Total |
| June 30, 2011 | | (In thousands) |
| Coffee | | $ | 22,464 |
| | $ | 17,220 |
| | $ | 39,684 |
|
| Tea and culinary products | | 25,469 |
| | 4,100 |
| | 29,569 |
|
| Coffee brewing equipment | | 3,930 |
| | 6,576 |
| | 10,506 |
|
| | | $ | 51,863 |
| | $ | 27,896 |
| | $ | 79,759 |
|
Current cost of coffee, tea and culinary inventories exceeds the LIFO cost by:
|
| | | | | | | | |
| | June 30, |
| (In thousands) | | 2012 | | 2011 |
| Coffee | | $ | 34,844 |
| | $ | 62,870 |
|
| Tea and culinary products | | 7,239 |
| | 6,695 |
|
| Total | | $ | 42,083 |
| | $ | 69,565 |
|
The Company routinely enters into specialized hedging transactions to purchase future coffee contracts to enable it to lock in green coffee prices within a pre-established range, and holds a mix of futures contracts and options to help hedge against volatility in green coffee prices. None of these hedging transactions, futures contracts or options is designated as an accounting hedge. Gains and losses on these derivative instruments are realized immediately in “Other, net.”
For the fiscal years ended June 30, 2012, 2011 and 2010, the Company recorded $(8.6) million, $0.9 million, and $29,000, respectively, in coffee-related net realized derivative (losses) gains. For the fiscal years ended June 30, 2012, 2011 and 2010, the Company recorded $1.2 million, $(2.4) million and $1.5 million in coffee-related net unrealized derivative gains (losses).
In fiscal 2012 and 2011, certain inventory quantities were reduced. This reduction resulted in the liquidation of LIFO inventory quantities carried at lower costs prevailing in prior years. The beneficial effect of this liquidation of LIFO inventory quantities reduced net loss for fiscal 2012, 2011 and 2010 by $14.2 million and $1.1 million, $0.8 million respectively.
Note 5. Property, Plant and Equipment
|
| | | | | | | | |
| | | June 30, |
| | | 2012 | | 2011 |
| | | (In thousands) |
| Buildings and facilities | | $ | 78,608 |
| | $ | 80,352 |
|
| Machinery and equipment | | 129,845 |
| | 119,209 |
|
| Equipment under capital leases | | 19,731 |
| | 10,675 |
|
| Capitalized software | | 18,524 |
| | 18,294 |
|
| Office furniture and equipment | | 16,818 |
| | 16,839 |
|
| | | $ | 263,526 |
| | $ | 245,369 |
|
| Accumulated depreciation | | (164,662 | ) | | (140,996 | ) |
| Land | | 9,271 |
| | 9,734 |
|
| Property, plant and equipment, net | | $ | 108,135 |
| | $ | 114,107 |
|
Capital leases consist mainly of vehicle leases at June 30, 2012 and 2011.
The Company has capitalized coffee brewing equipment (included in machinery and equipment) incalculating the amounts of $13.9 million and $12.7 millionin fiscal 2012 and 2011, respectively. Depreciation expense related to the capitalized coffee brewing equipment reported as cost of goods sold was $12.2 million, $9.6 million and $6.1 million in fiscal 2012, 2011 and 2010, respectively. Depreciation and amortization expense includes amortization expense for assets recorded under capitalized leases.
Maintenance and repairs to property, plant and equipment charged to expense for the years ended June 30, 2012, 2011 and 2010 were $7.9 million, $10.3 million and $15.0 million, respectively.
Note 6. Goodwill and Intangible Assets
The following is a summary of the Company’s amortized and unamortized intangible assets other than goodwill, along with amortization expense on these intangible assets for the past three fiscal years and estimated aggregate amortization expense for each of the next five fiscal years:
|
| | | | | | | | | | | | | | | | |
| | | As of June 30, 2012 | | As of June 30, 2011 |
| | | Gross Carrying Amount | | Accumulated Amortization | | Gross Carrying Amount | | Accumulated Amortization |
| | | (In thousands) |
| Amortized intangible assets: | | | | | | | | |
| Customer relationships | | $ | 10,083 |
| | $ | (8,188 | ) | | $ | 10,460 |
| | $ | (7,291 | ) |
| Total amortized intangible assets | | $ | 10,083 |
| | $ | (8,188 | ) | | $ | 10,460 |
| | $ | (7,291 | ) |
| Unamortized intangible assets: | | | | | | | | |
| Tradenames with indefinite lives | | $ | 3,640 |
| | $ | — |
| | $ | 4,080 |
| | $ | — |
|
| Trademarks with indefinite lives | | 2,080 |
| | — |
| | 2,080 |
| | — |
|
| CBI Goodwill | | — |
| | — |
| | 5,310 |
| | — |
|
| Total unamortized intangible assets | | $ | 5,720 |
| | $ | — |
| | $ | 11,470 |
| | $ | — |
|
| Total intangible assets | | $ | 15,803 |
| | $ | (8,188 | ) | | $ | 21,930 |
| | $ | (7,291 | ) |
| | | | | | | | | |
| Aggregate amortization expense for the past three fiscal years: | | | | | | |
| For the fiscal year ended June 30, 2012 | | $ | 1,439 |
| | | | | | |
| For the fiscal year ended June 30, 2011 | | $ | 2,948 |
| | | | | | |
| For the fiscal year ended June 30, 2010 | | $ | 2,849 |
| | | | | | |
| | | | | | | | | |
| Estimated amortization expense for each of the next five fiscal years: | | | | |
| For the fiscal year ended June 30, 2013 | | $ | 1,246 |
| | | | | | |
| For the fiscal year ended June 30, 2014 | | $ | 649 |
| | | | | | |
| | | | | | | | | |
| The remaining weighted average amortization periods for intangible assets with finite lives are as follows: | | | | | | |
| Customer relationships (years) | | 1.4 |
| | | | | | |
| | | | | | | | | |
|
| | | | |
| Summary of the changes in the carrying value of goodwill: |
| Balance at July 1, 2010 | | $ | 5,310 |
|
| Acquisitions during year | | — |
|
| Balance at July 1, 2011 | | $ | 5,310 |
|
| Reclassification | | (165 | ) |
| Impairment loss | | (5,145 | ) |
| Balance at June 30, 2012 | | $ | — |
|
Note 7. Employee Benefit Plans
The Company provides pension plans for most full time employees. Generally the plans provide benefits based on years of service and/or a combination of years of service and earnings. Certain retirees are also eligible for medical, dental and vision benefits.
The Company is required to recognize the funded status of a benefit plan in its balance sheet. The Company is also required to recognize in OCI certain gains and losses that arise during the period but are deferred under pension accounting rules.
Single Employer Pension Plans
The Company has a defined benefit pension plan, the Farmer Bros. Salaried Employees Pension Plan (the “Farmer Bros. Plan”), for the majority of its employees who are not covered under a collective bargaining agreement. The Company amended the Farmer Bros. Plan, freezing the benefit for all participants effective June 30, 2011. After the plan freeze, participants do not accrue any benefits under the plan, and new hires are not eligible to participate in the plan. As a result, the Company recorded a curtailment charge of $1.5 million in the fourth quarter of fiscal 2011. As all plan participants became inactive following this curtailment, net (gain) loss is now amortized based on the remaining life expectancy of these participants instead of the remaining service period of these participants.
The Company also has two defined benefit pensions plan for certain hourly employees covered under a collective bargaining agreement (the “Brewmatic Plan” and the “Hourly Employees’ Plan”). All assets and benefit obligations were determined using a measurement date of June 30.
Obligations and Funded Status
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Farmer Bros. Plan June 30, | | Brewmatic Plan June 30, | | Hourly Employees’ Plan June 30, |
| | | 2012 | | 2011 | | 2012 | | 2011 | | 2012 | | 2011 |
| | | (In thousands) | | (In thousands) | | (In thousands) |
| Change in projected benefit obligation | | | | | | | | | | | | |
| Benefit obligation at the beginning of the year | | $ | 107,071 |
| | $ | 110,449 |
| | $ | 3,662 |
| | $ | 3,707 |
| | $ | 1,055 |
| | $ | 578 |
|
| Service cost | | — |
| | 4,609 |
| | 39 |
| | 57 |
| | 456 |
| | 409 |
|
| Interest cost | | 5,846 |
| | 5,999 |
| | 197 |
| | 199 |
| | 59 |
| | 32 |
|
| Plan participant contributions | | 81 |
| | 1,005 |
| | — |
| | — |
| | — |
| | — |
|
| Actuarial (gain) loss | | 17,066 |
| | (1,409 | ) | | 416 |
| | (24 | ) | | (38 | ) | | 39 |
|
| Benefits paid | | (5,236 | ) | | (5,022 | ) | | (292 | ) | | (284 | ) | | (12 | ) | | (3 | ) |
| Effect of curtailment | | — |
| | (8,560 | ) | | — |
| | 7 |
| | — |
| | — |
|
| Projected benefit obligation at the end of the year | | $ | 124,828 |
| | $ | 107,071 |
| | $ | 4,022 |
| | $ | 3,662 |
| | $ | 1,520 |
| | $ | 1,055 |
|
| Change in plan assets | | | | | | | | | | | | |
| Fair value of plan assets at the beginning of the year | | 80,448 |
| | 63,462 |
| | 2,871 |
| | 2,490 |
| | 421 |
| | — |
|
| Actual return on plan assets | | 246 |
| | 16,619 |
| | (25 | ) | | 635 |
| | (4 | ) | | 11 |
|
| Employer contributions | | 6,571 |
| | 4,384 |
| | 164 |
| | 30 |
| | 608 |
| | 413 |
|
| Plan participant contributions | | 81 |
| | 1,005 |
| | — |
| | — |
| | — |
| | — |
|
| Benefits paid | | (5,236 | ) | | (5,022 | ) | | (292 | ) | | (284 | ) | | (12 | ) | | (3 | ) |
| Fair value of plan assets at the end of the year | | $ | 82,110 |
| | $ | 80,448 |
| | $ | 2,718 |
| | $ | 2,871 |
| | $ | 1,013 |
| | $ | 421 |
|
| Funded status at end of year (underfunded) overfunded | | $ | (42,718 | ) | | $ | (26,623 | ) | | $ | (1,304 | ) | | $ | (791 | ) | | $ | (507 | ) | | $ | (634 | ) |
| Amounts recognized in balance sheet | | | | | | | | | | | | |
| Noncurrent assets | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Current liabilities | | (5,700 | ) | | (5,360 | ) | | (300 | ) | | (310 | ) | | (17 | ) | | (8 | ) |
| Noncurrent liabilities | | (37,018 | ) | | (21,263 | ) | | (1,004 | ) | | (481 | ) | | (490 | ) | | (626 | ) |
| Total | | $ | (42,718 | ) | | $ | (26,623 | ) | | $ | (1,304 | ) | | $ | (791 | ) | | $ | (507 | ) | | $ | (634 | ) |
| Amounts recognized in balance sheet | | | | | | | | | | | | |
| Total net (gain) loss | | $ | 48,720 |
| | $ | 25,900 |
| | $ | 2,154 |
| | $ | 1,587 |
| | $ | 90 |
| | $ | 96 |
|
| Transition (asset) obligation | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Prior service cost (credit) | | — |
| | — |
| | 53 |
| | 71 |
| | — |
| | — |
|
| Total accumulated OCI (not adjusted for applicable tax) | | $ | 48,720 |
| | $ | 25,900 |
| | $ | 2,207 |
| | $ | 1,658 |
| | $ | 90 |
| | $ | 96 |
|
| Weighted average assumptions used to determine benefit obligations | | | | | | | | | | | | |
| Discount rate | | 4.55 | % | | 5.60 | % | | 4.55 | % | | 5.60 | % | | 4.55 | % | | 5.60 | % |
| Rate of compensation increase | | N/A |
| | 3.00 | % | | N/A |
| | N/A |
| | N/A |
| | 3.00 | % |
Components of Net Periodic Benefit Cost and
Other Changes Recognized in Other Comprehensive Income (Loss) (OCI)
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Farmer Bros. Plan June 30, | | Brewmatic Plan June 30, | | Hourly Employees’ Plan June 30, |
| | | 2012 | | 2011 | | 2012 | | 2011 | | 2012 | | 2011 |
| | | (In thousands) | | (In thousands) | | (In thousands) |
| Components of net periodic benefit cost | | | | | | | | | | | | |
| Service cost | | $ | — |
| | $ | 4,609 |
| | $ | 39 |
| | $ | 57 |
| | $ | 456 |
| | $ | 409 |
|
| Interest cost | | 5,846 |
| | 5,999 |
| | 197 |
| | 199 |
| | 59 |
| | 32 |
|
| Expected return on plan assets | | (6,569 | ) | | (5,323 | ) | | (213 | ) | | (179 | ) | | (28 | ) | | (9 | ) |
| Amortization of net (gain) loss | | 570 |
| | 2,871 |
| | 87 |
| | 119 |
| | — |
| | — |
|
| Amortization of prior service cost (credit) | | — |
| | 122 |
| | 18 |
| | 18 |
| | — |
| | — |
|
| Amount recognized due to special event (curtailment) | | — |
| | 1,456 |
| | — |
| | — |
| | — |
| | — |
|
| Net periodic benefit cost | | $ | (153 | ) | | $ | 9,734 |
| | $ | 128 |
| | $ | 214 |
| | $ | 487 |
| | $ | 432 |
|
| Other changes recognized in OCI | | | | | | | | | | | | |
| Net (gain) loss | | $ | 23,389 |
| | $ | (12,705 | ) | | $ | 654 |
| | $ | (480 | ) | | $ | (6 | ) | | $ | 37 |
|
| Prior service cost (credit) | | — |
| | — |
| | — |
| | 7 |
| | — |
| | — |
|
| Amortization of net gain (loss) | | (570 | ) | | (2,871 | ) | | (87 | ) | | (119 | ) | | — |
| | — |
|
| Amortization of transition asset (obligation) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Amortization of prior service (cost) credit | | — |
| | (122 | ) | | (18 | ) | | (18 | ) | | — |
| | — |
|
| Amount recognized due to special event (curtailment) | | — |
| | (10,016 | ) | | — |
| | — |
| | — |
| | — |
|
| Total recognized in OCI | | $ | 22,819 |
| | $ | (25,714 | ) | | $ | 549 |
| | $ | (610 | ) | | $ | (6 | ) | | $ | 37 |
|
| Total recognized in net periodic benefit cost and OCI | | $ | 22,666 |
| | $ | (15,980 | ) | | $ | 677 |
| | $ | (396 | ) | | $ | 481 |
| | $ | 469 |
|
| Weighted-average assumptions used to determine net periodic benefit cost | | | | | | | | | | | | |
| Discount rate | | 5.60 | % | | 5.60 | % | | 5.60 | % | | 5.60 | % | | 5.60 | % | | 5.60 | % |
| Expected long-term return on plan assets | | 8.25 | % | | 8.25 | % | | 8.25 | % | | 8.25 | % | | 8.25 | % | | 8.25 | % |
| Rate of compensation increase | | N/A |
| | N/A |
| | N/A |
| | N/A |
| | 3.00 | % | | 3.00 | % |
All qualifying employees of the DSD Coffee Business who accepted the Company’s offer of employment were allowed to enroll in the Farmer Bros. Plan during March 2009. Those who enrolled in the Farmer Bros. Plan were granted full service credit for plan vesting and eligibility but not for purposes of benefit accruals.
Basis Used to Determine Expected Long-term Return on Plan Assets
Historical and future projected returns of multiple asset classes were analyzed to develop a risk-free real rate of return and risk premiums for each asset class. The overall rate for each asset class was developed by combining a long-term inflation component, the risk-free real rate of return, and the associated risk premium. A weighted average rate was developed based on those overall rates and the target asset allocations of the plans.
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. Plan June 30, | | Brewmatic Plan June 30, | | Hourly Employees’ Plan June 30, |
| | | 2012 | | 2011 | | 2012 | | 2011 | | 2012 | | 2011 |
| | | ($ In thousands) | | ($ In thousands) | | ($ In thousands) |
| Comparison of obligations to plan assets | | | | | | | | | | | | |
| Projected benefit obligation | | $ | 124,828 |
| | $ | 107,071 |
| | $ | 4,022 |
| | $ | 3,662 |
| | $ | 1,520 |
| | $ | 1,055 |
|
| Accumulated benefit obligation | | $ | 124,828 |
| | $ | 107,071 |
| | $ | 4,022 |
| | $ | 3,662 |
| | $ | 1,520 |
| | $ | 1,055 |
|
| Fair value of plan assets at measurement date | | $ | 82,110 |
| | $ | 80,448 |
| | $ | 2,718 |
| | $ | 2,871 |
| | $ | 1,013 |
| | $ | 421 |
|
| Plan assets by category | | | | | | | | | | | | |
| Equity securities | | $ | 53,396 |
| | $ | 56,792 |
| | $ | 1,767 |
| | $ | 2,016 |
| | $ | 686 |
| | $ | 297 |
|
| Debt securities | | 24,610 |
| | 18,945 |
| | 815 |
| | 688 |
| | 261 |
| | 99 |
|
| Real estate | | 4,104 |
| | 4,711 |
| | 136 |
| | 167 |
| | 66 |
| | 25 |
|
| Total | | $ | 82,110 |
| | $ | 80,448 |
| | $ | 2,718 |
| | $ | 2,871 |
| | $ | 1,013 |
| | $ | 421 |
|
| Plan assets by category | | | | | | | | | | | | |
| Equity securities | | 65 | % | | 70 | % | | 65 | % | | 70 | % | | 68 | % | | 70 | % |
| Debt securities | | 30 | % | | 24 | % | | 30 | % | | 24 | % | | 26 | % | | 24 | % |
| Real estate | | 5 | % | | 6 | % | | 5 | % | | 6 | % | | 6 | % | | 6 | % |
| Total | | 100 | % | | 100 | % | | 100 | % | | 100 | % | | 100 | % | | 100 | % |
As of June 30, 2012, fair values of plan assets were as follows:
|
| | | | | | | | | | | | | | | | |
| (In thousands) | | Total | | Level 1 | | Level 2 | | Level 3 |
| Farmer Bros. Plan | | $ | 82,110 |
| | $ | — |
| | $ | 78,006 |
| | $ | 4,104 |
|
| Brewmatic Plan | | $ | 2,718 |
| | $ | — |
| | $ | 2,582 |
| | $ | 136 |
|
| Hourly Employees’ Plan | | $ | 1,013 |
| | $ | — |
| | $ | 947 |
| | $ | 66 |
|
As of June 30, 2011, fair values of plan assets were as follows:
|
| | | | | | | | | | | | | | | | |
| (In thousands) | | Total | | Level 1 | | Level 2 | | Level 3 |
| Farmer Bros. Plan | | $ | 80,447 |
| | $ | — |
| | $ | 75,736 |
| | $ | 4,711 |
|
| Brewmatic Plan | | $ | 2,871 |
| | $ | — |
| | $ | 2,704 |
| | $ | 167 |
|
| Hourly Employees’ Plan | | $ | 421 |
| | $ | — |
| | $ | 396 |
| | $ | 25 |
|
As of June 30, 2012 and 2011, approximately 95.0% and 94.0%, respectively, of the assets in each of the Farmer Bros. Plan, the Brewmatic Plan and the Hourly Employees’ Plan were invested in pooled separate accounts which did not have publicly quoted prices. The pooled separate accounts invest in publicly traded mutual funds. The fair values of the mutual funds were publicly quoted pricing input (Level 1) and were used to determine the net asset value of the pooled separate accounts. Therefore, these assets have Level 2 pricing inputs.
As of June 30, 2012 and 2011, approximately 5.0% and 6.0% respectively, of the assets in each of the Farmer Bros. Plan, the Brewmatic Plan and the Hourly Employees’ Plan were invested in commercial real estate and include mortgage loans which are backed by the associated properties. These underlying real estate investments have unobservable Level 3 pricing inputs. The fair value of the underlying real estate is estimated using discounted cash flow valuation models that utilize public real estate market data inputs such as transaction prices, market rents, vacancy levels, leasing absorption, market capitalization rates and discount rates. In addition, each property is appraised annually by an independent appraiser. The amounts and types of investments within plan assets did not change significantly from June 30, 2011.
The following is a reconciliation of asset balances with Level 3 input pricing:
|
| | | | | | | | | | | | | | | | | | | | |
| | | Beginning Balance | | Total Gains | | Settlements | | Ending Balance | | Unrealized Gains |
| As of June 30, 2012 | | (In thousands) |
| Farmer Bros. Plan | | $ | 4,711 |
| | $ | 561 |
| | $ | (1,168 | ) | | $ | 4,104 |
| | $ | 561 |
|
| Brewmatic Plan | | $ | 167 |
| | $ | 19 |
| | $ | (50 | ) | | $ | 136 |
| | $ | 19 |
|
| Hourly Employees’ Plan | | $ | 25 |
| | $ | 5 |
| | $ | 36 |
| | $ | 66 |
| | $ | 5 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| | | Beginning Balance | | Total Gains | | Settlements | | Ending Balance | | Unrealized Gains |
| As of June 30, 2011 | | (In thousands) |
| Farmer Bros. Plan | | $ | 3,147 |
| | $ | 652 |
| | $ | 912 |
| | $ | 4,711 |
| | $ | 652 |
|
| Brewmatic Plan | | $ | 132 |
| | $ | 28 |
| | $ | 7 |
| | $ | 167 |
| | $ | 28 |
|
| Hourly Employees’ Plan | | $ | — |
| | $ | — |
| | $ | 25 |
| | $ | 25 |
| | $ | — |
|
Target Plan Asset Allocation for Farmer Bros. Plan and Brewmatic Plan
|
| | |
| Fiscal 2013 |
U.S. large cap equity securities | 35.8 | % |
U.S. small cap equity securities | 9.2 | % |
International equity securities | 15.0 | % |
Debt securities | 30.0 | % |
Real estate | 10.0 | % |
| |
|
Total | 100.0 | % |
| |
Estimated Amounts in OCI Expected To Be Recognized
In fiscal 2013, the Company expects to recognize $0.6 million as a component of net periodic benefit cost for the Farmer Bros. Plan, $0.2 million for the Brewmatic Plan, and $0.4 million for the Hourly Employees’ Plan.
Estimated Future Contributions and Refunds
In fiscal 2013, the Company expects to contribute $3.9 million to the Farmer Bros. Plan, $0.4 million to the Brewmatic Plan, and $0.1 million to the Hourly Employees’ Plan. The Company is not aware of any refunds expected from postretirement plans.
Estimated Future Benefit Payments
The following benefit payments are expected to be paid over the next 10 fiscal years:
Estimated future benefit payments
|
| | | | | | | | | | | | |
| Year ending | | Farmer Bros. Plan | | Brewmatic Plan | | Hourly Employees’ Plan |
| | | (In thousands) |
| June 30, 2013 | | $ | 5,700 |
| | $ | 300 |
| | $ | 17 |
|
| June 30, 2014 | | $ | 5,840 |
| | $ | 290 |
| | $ | 31 |
|
| June 30, 2015 | | $ | 6,010 |
| | $ | 290 |
| | $ | 45 |
|
| June 30, 2016 | | $ | 6,200 |
| | $ | 290 |
| | $ | 61 |
|
| June 30, 2017 | | $ | 6,460 |
| | $ | 280 |
| | $ | 78 |
|
| June 30, 2018 to June 30, 2022 | | $ | 36,230 |
| | $ | 1,420 |
| | $ | 680 |
|
These amounts are based on current data and assumptions and reflect expected future service, as appropriate.
Multiemployer Pension Plans
The Company participates in a multiemployer defined benefit pension plan, the Western Conference of Teamsters Pension Plan (“WCTPP”), that is union sponsored and collectively bargained for the benefit of certain employees subject to collective bargaining agreements. The Company makes contributions to WCTPP generally based on the number of hours worked by the participants in accordance with the provisions of negotiated labor contracts.
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 employercolumn may be usedfound in Note 13 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's participation in WCTPP is outlined in the table below. The Pension Protection Act (“PPA”) Zone Status available in the Company's fiscal year 2012 and fiscal year 2011 is for the plan's year ended December 31, 2010 and December 31, 2009, respectively. The zone status is based on information obtained from WCTPP and is certified by WCTPP's actuary. Among other factors, plans in the green zone are generally more than 80% funded. Based on WCTPP's annual report on Form 5500, WCTPP was 90.3% and 93.4% funded for its plan year beginning January 1, 2012 and 2011, respectively. The “FIP/RP Status Pending/Implemented” column indicates if a funding improvement plan (“FIP”) or a rehabilitation plan (“RP”) is either pending or has been implemented.
|
| | | | | | | | | | | | | | | |
| Pension Plan | | Employer
Identification
Number
| | Pension
Plan
Number
| | PPA Zone Status | | FIP/RP
Status
Pending/
Implemented
| | Surcharge
Imposed
| | Expiration Date
of Collective
Bargaining
Agreements
|
|
| July 1,
2012
| | July 1,
2011
| |
|
| Western Conference of Teamsters Pension Plan | | 91-6145047 | | 001 | | Green | | Green | | No | | No | | January 2014 to August 2014 |
Based upon the most recent information available from the trustees managing WCTPP, the Company's share of the unfunded vested benefit liability for the plan was estimated to be approximately $7.7 million if the withdrawal had occurred in calendar year 2011. These estimates were calculated by the trustees managing WCTPP. Although the Company believes the most recent plan data available from WCTPP was used in computing this 2011 estimate, the actual withdrawal liability amount is subject to change based on, among other things, the plan's investment returns and benefit levels, interest rates, financial difficulty of other participating employers in the plan such as bankruptcy, and continued participation by the Company and other employers in the plan, each of which could impact the ultimate withdrawal liability.
If withdrawal liability were to be triggered, the withdrawal liability assessment can be paid in a lump sum or on a monthly basis. The amount of the monthly payment is determined as follows: Average number of hours reported to the pension plan trust during the three consecutive years with highest number of hours in the 10-year period prior to the withdrawal is multiplied by the highest hourly contribution rate during the 10-year period to determine the amount of withdrawal liability that has to be paid annually. The annual amount is divided by 12 to arrive at the monthly payment due. If monthly payments are elected, interest is assessed on the unpaid balance after 12 months at the rate of 7% per annum.
Effective October 2011, the Company withdrew from the defined benefit pension plan, United Teamsters Pension Fund, and replaced it with the defined contribution pension plan, “United Teamsters Annuity Fund” (“Annuity Fund”), for its employees covered by a certain collective bargaining agreement with a term expiring in 2014. The Company incurred no withdrawal liabilities related to the withdrawal from the United Teamsters Pension Fund. The Company's contributions to the Annuity Fund are based on the number of compensable hours worked by the Company's employees who participate in the Annuity Fund.
In fiscal 2012, the Company withdrew from the Labor Management Pension Fund and recorded a charge of $4.3 million associated with withdrawal from this plan, representing the present value of the estimated withdrawal liability expected to be paid in quarterly installments of $0.1 million over 80 quarters. Installment payments will commence once the final determination of the amount of withdrawal liability is established, which determination may take up to 24 months from the date of withdrawal from the pension plan. Upon withdrawal, the employees covered under this multiemployer pension plan were included in the Company's 401(k) plan (the “401(k) Plan”). The $4.3 million estimated withdrawal charge is included in the Company's consolidated statement of operations for the fiscal year ended June 30, 2012 as “Pension withdrawal expense” and in current and long-term liabilities on the Company's balance sheet at June 30, 2012. In the fourth quarter ended June 30, 2012, the Company paid a final settlement of $0.3 million towards withdrawal from the Central States Pension Fund that was part of the DSD Coffee Business acquisition and recorded the charge as "Pension withdrawal expense."
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.
Company contributions to the multiemployer pension plans:
|
| | | | | | | | |
| (In thousands) | | WCTPP(1)(2)(3) | | All other Plans(4) |
| Fiscal Year Ended: | | | | |
| June 30, 2012 | | $ | 3,048 |
| | $ | 113 |
|
| June 30, 2011 | | $ | 2,929 |
| | $ | 254 |
|
| June 30, 2010 | | $ | 2,820 |
| | $ | 282 |
|
____________
| |
(1) | Individually significant plan. |
| |
(2) | Less than 5% of total contribution to WCTPP based on WCTPP's most recent annual report on Form 5500 for the calendar year ended December 31, 2010.
|
| |
(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 plans that are not individually significant. |
For the fiscal year ending June 30, 2013, the Company expects to make $3.2 million in contributions to multiemployer pension plans.
Multiemployer Plans Other Than Pension Plans
The Company participates in nine defined contribution multiemployer plans other than pension plans that provide medical, vision and dental healthcare and disability benefits for certain retirees subject to collective bargaining agreements who meet the eligibility rules in effect when they retire and/or qualified members of their families. 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 retired participants make self-payments to the plans, the amounts of which are fixed from time to time by the boards of trustees of the plans. The Company's participation in these plans is governed by the collective bargaining agreements which expire on or before September 2014. The Company's contributions in the fiscal years ended June 30, 2012, 2011 and 2010 were $5.8 million, $5.4 million and $4.8 million, respectively. The Company expects to contribute $6.4 million towards multiemployer plans other than pension plans in fiscal 2013.
401(k) Plan
The Company's 401(k) Plan 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 1% to 15% 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. For the calendar years 2011 and 2012, the Company's Board of Directors approved a Company matching contribution of 50.0% of an employee's annual contribution to the 401(k) Plan, up to 6.0% of the employee's eligible income. The matching contributions (and any earnings thereon) vest at the rate of 20.0% for each of the participant's first 5 years of vesting service, so that a participant is fully vested in his or her matching contribution account after 5 years of vesting service. A participant is automatically vested in the event of death, disability or attainment of age 65 while employed by the Company. Employees are 100% vested in their contributions. For employees subject to a collective bargaining agreement, the match is only available if so provided in the labor agreement.
The Company recorded matching contributions of $1.4 million and $0.1 million in operating expenses for the fiscal years ended June 30, 2012 and June 30, 2011. No contributions were recorded in the Company'sour audited consolidated financial statements for the fiscal year ended June 30, 2010.
Postretirement Benefits
The Company sponsors an unfunded postretirement medical, dental and vision plan2022 included in our 2022 Form 10-K, except that, covers qualified non-union retirees and certain qualified union retirees. Underas required by applicable SEC rules, we did not reduce the amounts in this postretirement plan, the Company’s contributions toward premiumscolumn 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, but subjectany forfeitures relating to a maximum monthly Company contribution.service-based (time-based) vesting conditions.
The following table shows the components of net periodic postretirement benefit cost for the fiscal years ended June 30, 2012 and 2011. Postretirement cost (income) for fiscal 2012 was based on employee census information as of July 1, 2011 and asset information as of June 30, 2012.
|
| | | | | | | | |
| | | June 30, |
| | | 2012 | | 2011 |
| Components of Net Periodic Postretirement Benefit Cost | | (In thousands) |
| Service cost | | $ | 1,634 |
| | $ | 1,564 |
|
| Interest cost | | 1,319 |
| | 1,205 |
|
| Expected return on plan assets | | — |
| | — |
|
| Amortization of net gain | | (794 | ) | | (802 | ) |
| Amortization of unrecognized transition (asset) obligation | | — |
| | — |
|
| Amortization of prior service cost (credit) | | (230 | ) | | (230 | ) |
| Net periodic benefit cost | | $ | 1,929 |
| | $ | 1,737 |
|
The difference between the assets and the Accumulated Postretirement Benefit Obligation (APBO) at the adoption of ASC 715-60, "Defined Benefit Plans-Other Postretirement," was established as a transition (asset) obligation and is amortized over the average expected future service for active employees as measured at the date of adoption. Any plan amendments that retroactively increase benefits create prior service cost. The increase in the APBO due to any plan amendment is established as a base and amortized over the average remaining years of service to the full eligibility date of active participants who are not yet fully eligible for benefits at the plan amendment date. Gains and losses due to experience different than that assumed or from changes in actuarial assumptions are not immediately recognized. 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.
|
| | |
Amortization Schedule | | |
Transition (Asset) Obligation: The transition (asset) obligations have been fully amortized. |
Prior Service Cost (Credit) (dollars in thousands):
|
| | | | | | | | | | | | | | | | | | |
| Date Established | | Balance at July 1, 2011 | | Annual Amortization | | Years Remaining | | Curtailment | | Balance at June 30, 2012 |
| January 1, 2008 | | $ | (1,884 | ) | | $ | 230 |
| | 8.20 |
| | — |
| | $ | (1,654 | ) |
|
| | | | |
| Amortization of Net (Gain) Loss (dollars in thousands): | | |
| Net (gain) loss as of July 1, 2011 | | $ | (12,086 | ) |
| Asset (gains) losses not yet recognized in market related value of assets | | — |
|
| Net (gain) loss subject to amortization | | $ | (12,086 | ) |
| Corridor (10% of greater of APBO or assets) | | 2,473 |
|
| Net (gain) loss in excess of corridor | | $ | (9,613 | ) |
| Amortization years | | 12.11 |
|
| Amortization of net (gain) loss for the year | | $ | (794 | ) |
The following tables provide a reconciliation of the benefit obligation and plan assets:
|
| | | | | | | | |
| | | Year Ended June 30, |
| | | 2012 | | 2011 |
| Change in Benefit Obligation | | (In thousands) |
| Projected benefit obligation at beginning of year | | $ | 24,733 |
| | $ | 23,261 |
|
| Service cost | | 1,634 |
| | 1,564 |
|
| Interest cost | | 1,319 |
| | 1,205 |
|
| Participant contributions | | 665 |
| | 1,103 |
|
| Losses (gains) | | 8,953 |
| | (378 | ) |
| Benefits paid | | (1,384 | ) | | (2,022 | ) |
| Projected benefit obligation at end of year | | $ | 35,920 |
| | $ | 24,733 |
|
|
| | | | | | | | |
| | | Year Ended June 30, |
| | | 2012 | | 2011 |
| Change in Plan Assets | | (In thousands) |
| Fair value of plan assets at beginning of year | | $ | — |
| | $ | — |
|
| Actual return on assets | | — |
| | — |
|
| Employer contributions | | 719 |
| | 919 |
|
| Participant contributions | | 665 |
| | 1,103 |
|
| Benefits paid | | (1,384 | ) | | (2,022 | ) |
| Fair value of plan assets at end of year | | $ | — |
| | $ | — |
|
| Funded status of plan | | $ | (35,920 | ) | | $ | (24,733 | ) |
|
| | | | | | | | |
| | | As of June 30, |
| | | 2012 | | 2011 |
| Amounts Recognized in the Balance Sheet Consist of: | | (In thousands) |
| Noncurrent assets | | $ | — |
| | $ | — |
|
| Current liabilities | | 1,363 |
| | 1,148 |
|
| Noncurrent liabilities | | 34,557 |
| | 23,585 |
|
| Total | | $ | 35,920 |
| | $ | 24,733 |
|
|
| | | | | | | | |
| | | Year Ended June 30, |
| | 2012 | | 2011 |
Amounts Recognized in Accumulated OCI
Consist of: | | (In thousands) |
| Net gain | | $ | (2,338 | ) | | $ | (12,086 | ) |
| Transition obligation | | — |
| | — |
|
| Prior service credit | | (1,654 | ) | | (1,884 | ) |
| Total accumulated OCI | | $ | (3,992 | ) | | $ | (13,970 | ) |
|
| | | | | | | | |
| | | Year Ended June 30, |
| | | 2012 | | 2011 |
| Other Changes in Plan Assets and Benefit Obligations Recognized in OCI | | (In thousands) |
| Unrecognized actuarial loss (gain) | | $ | 8,953 |
| | $ | (379 | ) |
| Unrecognized transition (asset) obligation | | — |
| | — |
|
| Unrecognized prior service cost | | — |
| | — |
|
| Amortization of net loss | | 794 |
| | 802 |
|
| Amortization of prior service cost | | 230 |
| | 230 |
|
| Total recognized in OCI | | 9,977 |
| | 653 |
|
| Net periodic benefit cost | | 1,929 |
| | 1,737 |
|
| Total recognized in OCI and net periodic benefit cost | | $ | 11,906 |
| | $ | 2,390 |
|
The estimated net gain and prior service cost credit that will be amortized from accumulated OCI into net periodic benefit cost in fiscal 2013 are $0.8 million and $0.2 million, respectively.
|
| | | |
| | |
| Estimated Future Benefit Payments (in thousands) | |
| Fiscal 2013 | $ | 1,363 |
|
| Fiscal 2014 | $ | 1,450 |
|
| Fiscal 2015 | $ | 1,846 |
|
| Fiscal 2016 | $ | 2,106 |
|
| Fiscal 2017 | $ | 2,362 |
|
| Fiscal 2018-2022 | $ | 15,559 |
|
| | |
| | |
| | |
| Expected Contributions (in thousands) | |
| Fiscal 2013 | $ | 1,363 |
|
Sensitivity in Fiscal 2012 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 2012 (in thousands):
|
| | | | | | | | |
| | | 1-Percentage Point |
| | | Increase | | Decrease |
| Effect on total of service and interest cost components | | $ | 81 |
| | $ | (89 | ) |
| Effect on accumulated postretirement benefit obligation | | $ | 1,816 |
| | $ | (1,854 | ) |
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Note 8. Bank Loan
On September 12, 2011, the Company entered into an Amended and Restated Loan and Security Agreement (the “Loan Agreement”) among the Company and Coffee Bean International, Inc. (“CBI”), as Borrowers, certain of the Company’s other subsidiaries, as Guarantors, the Lenders party thereto, and Wells Fargo Bank, National Association (“Wells Fargo”), as Agent.
The Loan Agreement provides for a senior secured revolving credit facility of up to $85.0 million, with a letter of credit sublimit of $20.0 million. The revolving credit facility provides for advances of 85% of eligible accounts receivable and 75% of eligible inventory (subject to a $60.0 million inventory loan limit), as defined. The Loan Agreement provides for interest rates based on modified Monthly Average Excess Availability levels with a range of PRIME + 0.25% to PRIME + 0.75% or Adjusted Eurodollar Rate + 2.0% to Adjusted Eurodollar Rate + 2.5%. The Loan Agreement has an amendment fee of 0.375% and an unused line fee of 0.25%. Outstanding obligations under the Loan Agreement are collateralized by all of the Borrowers’ assets, including the Company’s preferred stock portfolio. The Loan Agreement expires on March 2, 2015.
The Loan Agreement contains a variety of affirmative and negative covenants of types customary in an asset-based lending facility, including those relating to reporting requirements, maintenance of records, properties and corporate existence, compliance with laws, incurrence of other indebtedness and liens, limitations on certain payments, including the payment of dividends and capital expenditures, and transactions and extraordinary corporate events. The Loan Agreement allows the Company to pay dividends, subject to certain liquidity requirements. The Loan Agreement also contains financial covenants requiring the Borrowers to maintain minimum Excess Availability and Total Liquidity levels. The Loan Agreement allows the Lender to establish reserve requirements, which may reduce the amount of credit otherwise available to the Company, to reflect events, conditions, or risks that would have a reasonable likelihood of adversely affecting the Lender’s collateral or the Company’s assets, including the Company’s green coffee inventory.
On January 9, 2012, the Loan Agreement was amended (“Amendment No. 1”) in connection with JPMorgan Chase Bank, N.A. (“JPMorgan Chase”), becoming an additional Lender thereunder. Pursuant to Amendment No. 1, Wells Fargo will provide a commitment of $60.0 million and JPMorgan Chase will provide a commitment of $25.0 million.
On June 30, 2012, the Company was eligible to borrow up to a total of $72.6 million under the credit facility. As of June 30, 2012, the Company had outstanding borrowings of $29.1 million, excluding loan extension fees of $0.2 million, utilized $11.9 million of its letters of credit sublimit, and had excess availability under the credit facility of $31.4 million. Due to the short-term nature of the credit facility and the variable interest rate, fair value of the balance outstanding approximates carrying value. As of June 30, 2012, the interest rate on the Company’s outstanding borrowings under the credit facility was 3.5%. As of June 30, 2012, the Company was in compliance with all restrictive covenants under the credit facility. There can be no assurance that the Lender will issue a waiver or grant an amendment to the covenants in future periods, if the Company required one.
Note 9. Employee Stock Ownership Plan
The Company’s ESOP was established in 2000. The plan is a leveraged ESOP in which the Company is the lender. The loans will be repaid from the Company’s discretionary plan contributions over the original 15 year terms with a variable rate of interest. TheFor annual interest rate was 1.66% at June 30, 2012, which is updated on a quarterly basis.
|
| | | | | | | | | | | | |
| | | As of and for the years ended June 30, |
| | | 2012 | | 2011 | | 2010 |
| Loan amount (in thousands) | | $ | 25,637 |
| | $ | 30,437 |
| | $ | 35,238 |
|
| Shares purchased | | — |
| | — |
| | — |
|
Shares are held by the plan trustee for allocation among participants as the loan is repaid. The unencumbered shares are allocated to 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.
In fiscal 2011 and 2010, the Company used $1.3 million and $0.7 million, respectively, of the dividends on ESOP shares to pay down the loans, and allocated to the ESOP participants shares equivalent to the fair market value of the dividends they would have received. No dividends were paid in fiscal 2012. In fiscal 2011, the Company issued 1,040 shares of common stock to the ESOP to compensate for a shortfall in unallocated, uncommitted shares.
The Company reports compensation expense equal to the fair market value of shares committed to be released to employees in the period in which they are committed. 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 earnings per share calculations.
During the fiscal years ended June 30, 2012, 2011 and 2010, the Company charged $1.5 million, $2.6 million and $3.7 million to compensation expense related to the ESOP. The difference between cost and fair market value of committed to be released shares, which was $0.1 million, $(1.4) million and $(0.2) million for the fiscal years ended June 30, 2012, 2011 and 2010, respectively, is recorded as additional paid-in capital.
|
| | | | | | | | |
| | | June 30, |
| | | 2012 | | 2011 |
| Allocated shares | | 1,763,742 |
| | 1,533,578 |
|
| Committed to be released shares | | 185,538 |
| | 186,582 |
|
| Unallocated shares | | 911,599 |
| | 1,097,136 |
|
| Total ESOP shares | | 2,860,879 |
| | 2,817,296 |
|
| | | | | |
| | | | | |
| | | (In thousands) |
| Fair value of ESOP shares | | $ | 22,773 |
| | $ | 28,567 |
|
Note 10. Share-based Compensation
On August 23, 2007, the Company’s Board of Directors approved the Farmer Bros. Co. 2007 Omnibus Plan (the “Omnibus Plan”), which was approved by stockholders on December 6, 2007. Prior to adoption of the Omnibus Plan the Company had no share-based compensation plan. Awards issued under the Omnibus Plan may take the form of stock options, stock appreciation rights, restricted stock, restricted stock units, dividend equivalents, performance-basedPBRSU awards stock payments, cash-based awards or other incentives payable in cash or shares of stock, or any combination thereof. Each award will be set forth in a separate agreement with the person receiving the award and will indicate the type, terms and conditions of the award. The maximum number of shares of common stock as to which awards may be granted under the Omnibus Plan is 1,000,000, subject to adjustment as provided in the Omnibus Plan.
The Company measures and recognizes compensation expense for all share-based payment awards made under the Omnibus Plan based on estimated fair values.
Stock Options
The Company estimates the fair value of share-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service period in the Company’s consolidated statements of operations.
Share-based compensation expense recognized during the period is based on the value of the portion of share-based payment awards that is ultimately expected to vest during the period. Compensation expense recognized for all stock option awards granted is recognized using the straight-line method over the vesting period. The options generally vest ratably over a period of 3 years, however, fiscal 2012 grants included nonqualified stock option awards to executive officers with different vesting periods, in each case, subject to certain events of acceleration as provided in the applicable employment agreement or award agreement with the executive officer.
The share-based compensation expense recognized in the Company’s consolidated statement of operations for the fiscal years ended June 30, 2012, 20112022, fiscal 2021 and 2010 is based on awards ultimately expected to vest. Currently, management estimates an annual forfeiture rate of 6.5% based on actual forfeiture experience from the inception of the Omnibus Plan. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
The Company uses 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 the grant. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options thatfiscal 2020, we have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company’s stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimates, in management’s opinion the existing models may not necessarily provide a reliable single measure ofreported the fair value of the Company’s stock options. Althoughaward based upon the probable satisfaction of the performance conditions as of the grant date. The maximum aggregate grant date fair value of stock options is determined using an option valuation model that value may not be indicative of the fair value observed in a willing buyer/willing seller market transaction.
The following are the weighted average assumptions used in the Black-Scholes valuation model:
|
| | | | | | | | | | | | |
| | | Year Ended June 30, |
| | | 2012 | | 2011 | | 2010 |
| Average fair value of options | | $ | 4.42 |
| | $ | 7.05 |
| | $ | 6.09 |
|
| Forfeiture rate | | 6.5 | % | | 6.5 | % | | 6.5 | % |
| Risk-free interest rate | | 1.1 | % | | 2.7 | % | | 2.6 | % |
| Dividend yield | | — | % | | 1.3 | % | | 2.5 | % |
| Average expected life | | 6 years |
| | 6 years |
| | 6 years |
|
| Expected stock price volatility | | 52.5 | % | | 54.7 | % | | 41.2 | % |
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 life is based on the midpoint between the vesting date and the end of the contractual term of the award.
The following table summarizes stock option activity for the three most recent fiscal years:
|
| | | | | | | | | | | |
| Outstanding Stock Options | | Number of Stock Options | | Weighted Average Exercise Price ($) | | Weighted Average Grant Date Fair Value ($) | | Weighted Average Remaining Life (Years) | | Aggregate Intrinsic Value (Dollars in thousands) |
| Outstanding at June 30, 2009 | | 239,000 |
| | 22.22 | | 6.41 | | 6.1 | | 60 |
| Granted | | 220,789 |
| | 18.25 | | 6.09 | | — | | — |
| Cancelled/Forfeited | | (54,846 | ) | | 21.65 | | 6.87 | | — | | — |
| Outstanding at June 30, 2010 | | 404,943 |
| | 20.17 | | 6.25 | | 5.8 | | — |
| Granted | | 327,656 |
| | 14.95 | | 7.05 | | — | | — |
| Cancelled/Forfeited | | (234,789 | ) | | 19.21 | | 6.97 | | — | | — |
| Outstanding at June 30, 2011 | | 497,810 |
| | 17.19 | | 6.44 | | 5.7 | | 61 |
| Granted | | 356,834 |
| | 8.90 | | 4.42 | | — | | — |
| Cancelled/Forfeited | | (187,409 | ) | | 16.89 | | 5.06 | | — | | — |
| Outstanding at June 30, 2012 | | 667,235 |
| | 12.84 | | 4.78 | | 4.8 | | 143 |
| Vested and exercisable, June 30, 2012 | | 323,996 |
| | 15.04 | | 5.39 | | 3.1 | | — |
| Vested and expected to vest, June 30, 2012 | | 641,455 |
| | 12.84 | | 4.80 | | 3.1 | | 128 |
The aggregate intrinsic values in the table above represent the total pretax intrinsic value, based on the Company’s closing stock price of $7.96 at June 29, 2012, $10.14 at June 30, 2011 and $15.09 at June 30, 2010, representing the last trading day of the respective years, which would have been received by award holders had all award holders exercised their awards that were in-the-money asif the highest level of those dates. Totalperformance was achieved in fiscal 2020 would have been $999,981 for Mr. Maserang and $250,000 for Mr. Inofuentes. The maximum aggregate grant date fair value that would have been received if the highest level of options vested duringperformance was achieved in fiscal 2012, 20112021 would have been $1,709,998 for Mr. Maserang, $155,246 for Mr. Drake, $161,998 for Mr. Inofuentes, and 2010$96,744 for Mr. Moragne. The maximum aggregate grant date fair value that would have been received if the highest level of performance was $1.2 million,achieved in fiscal 2022 would have been $1,505,077 for Mr. Maserang, $187,297 for Mr. Drake, $147,166 for Mr. Inofuentes, and $160,540 for Mr. Moragne. These amounts do not reflect the Company’s expense for accounting purposes for these awards, and do not represent the actual value that may be realized by the Named Executive Officers. For further information on these awards, see the Grants of Plan-Based Awards Table and Outstanding Equity Awards at Fiscal Year-End Table in this Amendment.
$0.7 million and $0.4 million, respectively.
|
| | | | | | | | | |
| Nonvested Stock Options | | Number of Stock Options | | Weighted Average Exercise Price ($) | | Weighted Average Grant Date Fair Value ($) | | Weighted Average Remaining Life (Years) |
| Outstanding at June 30, 2009 | | 198,510 |
| | 22.13 | | 6.46 | | 2.1 |
| Granted | | 220,789 |
| | 18.25 | | 6.09 | | — |
| Vested | | (68,990 | ) | | 22.20 | | 6.43 | | — |
| Cancelled/Forfeited | | (49,515 | ) | | 21.21 | | 6.35 | | — |
| Outstanding at June 30, 2010 | | 300,794 |
| | 19.42 | | 6.22 | | 2.1 |
| Granted | | 327,656 |
| | 14.95 | | 7.05 | | — |
| Vested | | (105,458 | ) | | 20.29 | | 6.30 | | — |
| Cancelled/Forfeited | | (200,123 | ) | | 18.74 | | 7.09 | | — |
| Outstanding at June 30, 2011 | | 322,869 |
| | 15.02 | | 6.50 | | 1.7 |
| Granted | | 356,834 |
| | 8.90 | | 4.42 | | — |
| Vested | | (243,518 | ) | | 13.00 | | 5.85 | | — |
| Cancelled/Forfeited | | (92,946 | ) | | 12.54 | | 5.80 | | — |
| Outstanding at June 30, 2012 | | 343,239 |
| | 10.76 | | 4.20 | | 6.3 |
As of June 30, 2012, 2011 and 2010, there was approximately $1.3 million, $1.5 million, and $1.4 million, respectively, of unrecognized compensation cost related to stock options. Compensation expense recognizedThe amounts reported in general and administrative expenses was $1.2 million, $0.7 million and $0.6 million for fiscal 2012, 2011 and 2010, respectively.
Restricted Stock
During each of fiscal 2012, 2011 and 2010column F represent the Company granted a total of 142,070 shares, 63,979 shares and 48,722 shares of restricted stock, respectively, with a weighted averageaggregate grant date fair value of $7.70, $16.67stock option awards computed in accordance with FASB ASC Topic 718. The stock option awards granted in fiscal 2020 reflects an award received by Messrs. Maserang, Inofuentes and $18.31 per share, respectively, to eligible employees, officers and directors under the Omnibus Plan. SharesDrake in connection with commencement of restrictedtheir respective employment. The stock generally vest at the endoption awards granted in fiscal 2021 reflects awards received by Mr. Moragne in connection with commencement of three years for eligible employees and officers who are employees. The fiscal 2012 grants included awards to executive officers with different vesting periods, in each case, subject to accelerated vesting as provided in the applicable employment agreement or award agreement with the executive officer.
Shares of restricted stock generally vest ratably over a period of three years for directors and officers who are not employees. Compensation expense is recognized on a straight-line basis over the service period based on the estimated fair valuehis employment. A discussion of the restricted stock. Compensation expense recognizedassumptions used in general and administrative expense was $0.6 million, $0.5 million and $0.4 million, forcalculating the fiscal years ended June 30, 2012, 2011 and 2010, respectively. As of June 30, 2012, 2011 and 2010, there was approximately $1.3 million, $0.9 million and $0.9 million, respectively, of unrecognized compensation cost relatedamounts in this column may be found in Note 13 to restricted stock.
The following tables summarize restricted stock activity: |
| | | | | | | | | | | |
| Outstanding and Nonvested Restricted Stock Awards | | Shares Awarded | | Weighted Average Grant Date Fair Value ($) | | Weighted Average Remaining Life (Years) | | Aggregate Intrinsic Value ($ in thousands) |
| Outstanding at June 30, 2009 | | 48,169 |
| | 22.19 |
| | 2.1 | | 1,072 |
|
| Granted | | 48,722 |
| | 18.31 |
| | — | | 892 |
|
| Exercised/Released | | (5,860 | ) | | 22.18 |
| | — | | 105 |
|
| Cancelled/Forfeited | | (10,823 | ) | | 21.79 |
| | — | | 235 |
|
| Outstanding at June 30, 2010 | | 80,208 |
| | 19.91 |
| | 2.0 | | 1,210 |
|
| Granted | | 63,979 |
| | 16.67 |
| | — | | 1,066 |
|
| Exercised/Released | | (20,674 | ) | | 21.52 |
| | — | | 332 |
|
| Cancelled/Forfeited | | (42,826 | ) | | 19.19 |
| | — | | 497 |
|
| Outstanding at June 30, 2011 | | 80,687 |
| | 17.31 |
| | 2.6 | | 818 |
|
| Granted | | 142,070 |
| | 7.70 |
| | — | | 1,094 |
|
| Exercised/Released | | (27,227 | ) | | 15.80 |
| | — | | 202 |
|
| Cancelled/Forfeited | | (19,583 | ) | | 13.92 |
| | — | | — |
|
| Outstanding June 30, 2012 | | 175,947 |
| | 10.16 |
| | 1.9 | | 1,401 |
|
| Expected to vest, June 30, 2012 | | 143,819 |
| | 10.16 |
| | 1.9 | | 1,401 |
|
Note 11. Other Current Liabilities
Other current liabilities consist of the following:
|
| | | | | | | | |
| | | June 30, |
| | | 2012 | | 2011 |
| | | (In thousands) |
| Accrued workers’ compensation liabilities | | $ | 1,244 |
| | $ | 1,320 |
|
| Dividends payable | | — |
| | 9 |
|
| Postretirement medical liability | | 1,363 |
| | 1,148 |
|
| Accrued pension liabilities | | 6,364 |
| | 5,678 |
|
| Other (including net taxes payable) | | 1,205 |
| | 3,727 |
|
| | | $ | 10,176 |
| | $ | 11,882 |
|
Note 12. Income Taxes
The current and deferred components of the provision for income taxes consist of the following:
|
| | | | | | | | | | | | |
| | | June 30, |
| | | 2012 | | 2011 | | 2010 |
| | | (In thousands) |
| Current: | | | | | | |
| Federal | | $ | (385 | ) | | $ | (4 | ) | | $ | (3,514 | ) |
| State | | 115 |
| | 324 |
| | 227 |
|
| Total current income tax (benefit) expense | | (270 | ) | | 320 |
| | (3,287 | ) |
| Deferred: | | | | | | |
| Federal | | (63 | ) | | (7,867 | ) | | 629 |
|
| State | | (14 | ) | | (1,620 | ) | | 129 |
|
| Total deferred income tax (benefit) expense | | (77 | ) | | (9,487 | ) | | 758 |
|
| Income tax benefit | | $ | (347 | ) | | $ | (9,167 | ) | | $ | (2,529 | ) |
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Income tax expense or benefit from continuing operations is generally determined without regard to other categories of earnings, such as discontinued operations and OCI. An exception is provided in ASC 740 when there is aggregate income from categories other than continuing operations and a loss from continuing operations in the current year. In this case, the tax benefit allocated to continuing operations is the amount by which the loss from continuing operations reduces the tax expenses recorded with respect to the other categories of earnings, even when a valuation allowance has been established against the deferred tax assets. In instances where a valuation allowance is established against current year losses, income from other sources, including gain from post retirement benefits recorded as a component of OCI, is considered when determining whether sufficient future taxable income exists to realize the deferred tax assets. As a result, for the year ended June 30, 2011, the Company recorded a tax expense of $9.8 million in OCI related to the gain on postretirement benefits, and recorded a corresponding tax benefit of $9.8 million in continuing operations.
A reconciliation of income tax benefit to the federal statutory tax rate is as follows:
|
| | | | | | | | | | | | |
| | | June 30, 2012 |
| | June 30, 2011 |
| | June 30, 2010 |
|
| Statutory tax rate | | 34 | % | | 34 | % | | 34 | % |
| | | | | | | |
| | | (In thousands) |
| Income tax benefit at statutory rate | | $ | (10,090 | ) | | $ | (21,585 | ) | | $ | (9,004 | ) |
| State income tax (net of federal tax benefit) | | (1,167 | ) | | (2,765 | ) | | (1,238 | ) |
| Dividend income exclusion | | (85 | ) | | (532 | ) | | (765 | ) |
| Valuation allowance | | 11,794 |
| | 16,529 |
| | 8,752 |
|
| Change in contingency reserve (net) | | (561 | ) | | (1,308 | ) | | 7 |
|
| Research tax credit (net) | | (15 | ) | | (16 | ) | | (66 | ) |
| Other (net) | | (223 | ) | | 510 |
| | (215 | ) |
| Income tax benefit | | $ | (347 | ) | | $ | (9,167 | ) | | $ | (2,529 | ) |
The primary components of the temporary differences which give rise to the Company’s net deferred tax liabilities are as follows:
|
| | | | | | | | | | | | |
| | | June 30, |
| | | 2012 | | 2011 | | 2010 |
| | | (In thousands) |
| Deferred tax assets: | | | | | | |
| Postretirement benefits | | $ | 32,481 |
| | $ | 20,226 |
| | $ | 27,589 |
|
| Accrued liabilities | | 3,958 |
| | 4,138 |
| | 4,376 |
|
| Capital loss carryforward | | 2,865 |
| | 2,945 |
| | 1,971 |
|
| Net operating loss carryforward | | 47,114 |
| | 37,170 |
| | 17,261 |
|
| Intangible assets | | 919 |
| | — |
| | — |
|
| Other | | 1,295 |
| | 4,328 |
| | 2,464 |
|
| Total deferred tax assets | | 88,632 |
| | 68,807 |
| | 53,661 |
|
| Deferred tax liabilities: | | | | | | |
| Fixed assets | | (4,117 | ) | | (7,881 | ) | | (5,551 | ) |
| Intangible assets | | — |
| | (1,032 | ) | | (4,498 | ) |
| Other | | (794 | ) | | (814 | ) | | (726 | ) |
| Total deferred tax liabilities | | (4,911 | ) | | (9,727 | ) | | (10,775 | ) |
| Valuation allowance | | (84,954 | ) | | (60,390 | ) | | (43,860 | ) |
| Net deferred tax liability | | $ | (1,233 | ) | | $ | (1,310 | ) | | $ | (974 | ) |
The Company has approximately $121.7 million and $132.9 million of federal and state net operating loss carryforwards that will begin to expire in the years ending June 30, 2025 and June 30, 2020, respectively. The Company also has approximately $7.6 million and $6.5 million of federal and state capital loss carryforwards, respectively, that may only be used to offset capital gains that begin expiring in June 30, 2013.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
At June 30, 2012, the Company had total deferred tax assets of $88.6 million and net deferred tax assets before valuation allowance of $83.7 million. The Company considered whether a valuation allowance should be recorded against deferred tax assets based on the likelihood that the benefits of the deferred tax assets would or would not ultimately be realized in future periods. In making such assessment, significant weight was given to evidence that could be objectively verified such as recent operating results and less consideration was given to less objective indicators such as future earnings projections.
After consideration of positive and negative evidence, including the recent history of losses, the Company cannot conclude that it is more likely than not to generate future earnings sufficient to realize the Company’s deferred tax assets as of June 30, 2012. Accordingly, a valuation allowance of $85.0 million has been recorded to offset this deferred tax asset. The valuation allowance increased by $24.6 million, $16.5 million, and $10.6 million in the fiscal years ended June 30, 2012, 2011 and 2010, respectively.
A tabular reconciliation of the total amounts (in absolute values) of unrecognized tax benefits is as follows:
|
| | | | | | | | | | | | |
| | | Year Ended June 30, |
| | 2012 | | 2011 | | 2010 |
| | | (In thousands) |
| Unrecognized tax benefits at beginning of year | | $ | 3,902 |
| | $ | 5,218 |
| | $ | 4,382 |
|
| Increases in tax positions for prior years | | — |
| | — |
| | — |
|
| (Decreases) increases in tax positions for current year | | — |
| | (1,316 | ) | | 836 |
|
| Settlements | | (691 | ) | | — |
| | — |
|
| Lapse in statute of limitations | | — |
| | — |
| | — |
|
| Unrecognized tax benefits at end of year | | $ | 3,211 |
| | $ | 3,902 |
| | $ | 5,218 |
|
At June 30, 2012 and 2011, the Company has approximately $3.1 million and $3.6 million, respectively, of unrecognized tax benefits that, if recognized, would affect the effective tax rate, subject to the valuation allowance. The Company believes it is reasonably possible that approximately $41,000 of its total unrecognized tax benefits could be released in the next 12 months.
The Company is currently appealing a decision reached by the Internal Revenue Service regarding its June 30, 2003 through June 30, 2008 tax returns, and in January 2012 the appeals officer gave a preliminary indication that the audit result will be upheld. Additionally, in January 2012, the State of California completed an audit of the Company's June 30, 2006 and June 30, 2007 tax returns, and the Company also reached a Settlement Agreement with the State of California regarding the Company's June 30, 2002 to June 30, 2005 research and development tax credit claims. As a result of these decisions, the Company released $0.7 million of unrecognized tax benefit in the third quarter of fiscal 2012, which resulted in a tax benefit of $0.7 million excluding interest and penalties.
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, 2003.
The Company’s policy is to recognize interest expense and penalties related to income tax matters as a component of income tax expense. As of June 30, 2012 and 2011, the Company recorded $10,000 and $47,000, respectively, in accrued interest and penalties associated with uncertain tax positions. Additionally, the Company recorded income (expense) of $37,000, $(12,000), and $(10,000) related to interest and penalties on uncertain tax positions in the years ended June 30, 2012, 2011 and 2010, respectively.
Note 13. Earnings (Loss) Per Common Share
|
| | | | | | | | | | | | |
| | | Year ended June 30, |
| 2012 | | 2011 | | 2010 |
| | | (In thousands, except share and per share amounts) |
| Net loss attributable to common stockholders—basic | | $ | (28,996 | ) | | $ | (53,897 | ) | | $ | (23,847 | ) |
| Net loss attributable to nonvested restricted stockholders | | (333 | ) | | (420 | ) | | (106 | ) |
| Total net loss | | $ | (29,329 | ) | | $ | (54,317 | ) | | $ | (23,953 | ) |
| | | |
| Weighted average shares outstanding—basic | | 15,492,314 |
| | 15,066,663 |
| | 14,866,306 |
|
| Effect of dilutive securities: | | | | | | |
| Shares issuable under stock options | | — |
| | — |
| | — |
|
| Weighted average shares outstanding—diluted | | 15,492,314 |
| | 15,066,663 |
| | 14,866,306 |
|
| Net loss per common share—basic and diluted | | $ | (1.89 | ) | | $ | (3.61 | ) | | $ | (1.61 | ) |
Note 14. Commitments and Contingencies
With the acquisition of the DSD Coffee Business in the fiscal year ended June 30, 2009, the Company assumed some of the operating lease obligations associated with the acquired vehicles. The Company also refinanced some of the existing leases and entered into new capital leases for certain vehicles. The terms of the capital leases vary from 12 months to 84 months with varying expiration dates through 2019.
The Company is also obligated under operating leases for branch warehouses. Some operating leases have renewal options that allow the Company, as lessee, to extend the leases. The Company has one operating lease with a term greater than five years that expires in 2018 and has a ten year renewal option, and operating leases for computer hardware with terms that do not exceed five years. Rent expense for the fiscal years ended June 30, 2012, 2011 and 2010 was $4.5 million, $6.3 million and $6.6 million, respectively.
In May 2011, the Company did not meet the minimum credit rating criteria for participation in the alternative security program for California self-insurers. As a result, the Company was required to post a $5.9 million letter of credit as a security deposit to the State of California Department of Industrial Relations Self-Insurance Plans. As of June 30, 2012, this letter of credit continues to serve as a security deposit.
Contractual obligations for future fiscal years are as follows (in thousands):
|
| | | | | | | | | | | | | | | | |
| | | Contractual Obligations |
Year Ended June 30, | | Capital Lease Obligations | | Operating Lease Obligations | | Pension Plan Obligations | | Postretirement Benefits Other Than Pensions |
| 2013 | | $ | 4,523 |
| | $ | 3,979 |
| | $ | 6,364 |
| | $ | 1,363 |
|
| 2014 | | 3,790 |
| | 3,382 |
| | 6,508 |
| | 1,450 |
|
| 2015 | | 3,742 |
| | 2,757 |
| | 6,692 |
| | 1,846 |
|
| 2016 | | 3,425 |
| | 1,950 |
| | 6,898 |
| | 2,106 |
|
| 2017 | | 1,501 |
| | 1,341 |
| | 7,165 |
| | 2,362 |
|
| Thereafter | | 958 |
| | 2,047 |
| | 40,943 |
| | 15,559 |
|
| | | | | $ | 15,456 |
| | $ | 74,570 |
| | $ | 24,686 |
|
| Total minimum lease payments | | $ | 17,939 |
| | | | | | |
| Less: imputed interest (0.82% to 10.7%) | | (2,072 | ) | | | | | | |
| Present value of future minimum lease payments | | $ | 15,867 |
| | | | | | |
| Less: current portion | | 3,737 |
| | | | | | |
| Long-term capital lease obligations | | $ | 12,130 |
| | | | | | |
The Company is a party to various 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’sour audited consolidated financial position, results of operations, or cash flows.
Note 15. Quarterly Financial Data (Unaudited)
|
| | | | | | | | | | | | | | | | |
| | | September 30,
2011 | | December 31,
2011 | | March 31,
2012 | | June 30,
2012 |
| | | (In thousands, except per share data) |
| Net sales | | $ | 121,197 |
| | $ | 131,770 |
| | $ | 121,527 |
| | $ | 120,948 |
|
| Gross profit | | $ | 39,685 |
| | $ | 44,541 |
| | $ | 43,147 |
| | $ | 45,451 |
|
| Loss from operations | | $ | (4,630 | ) | | $ | (5,649 | ) | | $ | (4,107 | ) | | $ | (10,481 | ) |
| Net loss | | $ | (7,584 | ) | | $ | (4,110 | ) | | $ | (5,501 | ) | | $ | (12,134 | ) |
| Net loss per common share | | $ | (0.50 | ) | | $ | (0.27 | ) | | $ | (0.35 | ) | | $ | (0.77 | ) |
| | | | | | | | | |
| | | September 30,
2010 | | December 31,
2010 | | March 31,
2011 | | June 30,
2011 |
| | | (In thousands, except per share data) |
| Net sales | | $ | 108,743 |
| | $ | 119,227 |
| | $ | 116,732 |
| | $ | 119,243 |
|
| Gross profit | | $ | 43,945 |
| | $ | 45,016 |
| | $ | 41,861 |
| | $ | 26,352 |
|
| Loss from operations | | $ | (12,019 | ) | | $ | (10,543 | ) | | $ | (14,463 | ) | | $ | (31,397 | ) |
| Net loss | | $ | (9,873 | ) | | $ | (8,912 | ) | | $ | (13,196 | ) | | $ | (22,336 | ) |
| Net loss per common share | | $ | (0.66 | ) | | $ | (0.59 | ) | | $ | (0.87 | ) | | $ | (1.47 | ) |
During the fourth quarter andstatements for the fiscal year ended June 30, 2012,2022 included in our 2022 Form 10-K, except that, as required by applicable SEC rules, we did not reduce the amounts in this column for any risk of forfeiture relating to service-based (time-based) vesting conditions. For further information on these awards, see the Grants of Plan-Based Awards Table and Outstanding Equity Awards at Fiscal Year-End Table in this Amendment.
Non-Equity Incentive Plan Compensation (Column G)
The amounts reported in column G represent the aggregate dollar value of the annual incentives earned by the Named Executive Officers under the 2017 Plan for fiscal 2022 and 2021 under the short-term incentive plan for the relevant fiscal year. In accordance with SEC rules, the actual annual incentive amounts earned by the Named Executive Officers are reflected in the Summary Compensation Table in the fiscal year earned, even though these annual incentive amounts are paid in the subsequent fiscal year.
As a result of the Company’s failure to achieve threshold levels of performance in fiscal 2021, no payouts are reported for any of the Named Executive Officers during that period.
All Other Compensation (Column H)
The amounts reported in column H include the following:
All Other Compensation (1)
| | | | Company Contributions to 401(k) Plan (2)($) | | | Relocation Expense ($) | | | Relocation Tax Gross-Up ($) | |
| | | | | | | | | | | |
| D. Deverl Maserang II | 2022 | | 20,900 | | | — | | | — | |
| 2021 | | 11,114 | | | — | | | — | |
| 2020 | | 13,200 | | | — | | | — | |
| Scott R. Drake | 2022 | | 19,119 | | | — | | | — | |
| 2021 | | 14,226 | | | — | | | — | |
| 2020 | | — | | | — | | | — | |
| Ruben E. Inofuentes | 2022 | | 20,675 | | | — | | | — | |
| 2021 | | 11,248 | | | — | | | — | |
| 2020 | | 7,637 | | | 70,550 | | | 18,181 | |
| Maurice S.J. Moragne | 2022 | | 20,606 | | | — | | | — | |
| 2021 | | 10,994 | | | — | | | — | |
| Amber D. Jefferson | 2022 | | 10,359 | | | — | | | — | |
(1) Except as set forth in the table, the total value of all perquisites and other personal benefits received by each of our Named Executive Officers did not exceed $10,000 in fiscal 2022 and has been excluded from the table.
(2) Represents the Company’s contribution under the 401(k) plan including the company matching contribution and the Qualified Non-elective Contribution (QNEC). Company contributions (and any earnings thereon) are 100% vested. The QNEC contributions are given in Company Common Stock.
Total Compensation (Column I)
The amounts reported in column I are the sum of columns C through H for each of the Named Executive Officers.
Fiscal 2022 Grants of Plan-Based Awards
The following table sets forth, for each of our Named Executive Officers, the plan-based awards granted to each of our Named Executive Officers during fiscal 2022.
| | | Estimated Future Payouts Under Non- Equity Incentive Plan Awards | | | Estimated Future Payouts Under Equity Incentive Plan
Awards(1) | | | | |
| Name | Grant Date | | Threshold ($)(3) | | | Target ($)(3) | | | Maximum ($)(3) | | | Threshold (#) | | | Target (#) | | | Maximum (#) | | | All Other Stock Awards: Number of Shares of Stock or Units (#) | | | All Other Option Awards: Number of Securities Underlying Options (#) | | | Exercise or Base Price of Option Awards ($/Sh) | | | Grant Date Fair Value of Stock and Option Awards ($)(2) | |
| D. Deverl Maserang II | 9/13/2021 | | − | | | − | | | − | | | − | | | − | | | − | | | 112,612 | | | − | | | − | | | 1,003,373 | |
| 9/13/2021 | | − | | | − | | | − | | | 0 | | | 112,613 | | | 202,703 | | | − | | | − | | | − | | | 1,003,382 | |
| Scott R. Drake | 9/13/2021 | | − | | | − | | | − | | | − | | | − | | | − | | | 21,021 | | | − | | | − | | | 187,297 | |
| 9/13/2021 | | − | | | − | | | − | | | 0 | | | 14,014 | | | 25,255 | | | − | | | − | | | − | | | 124,865 | |
| 5/09/2022 | | − | | | − | | | − | | | − | | | − | | | − | | | 73,529 | | | − | | | − | | | 399,998 | |
| Ruben E. Inofuentes | 9/13/2021 | | − | | | − | | | − | | | − | | | − | | | − | | | 16,516 | | | − | | | − | | | 147,158 | |
| 9/13/2021 | | − | | | − | | | − | | | 0 | | | 11,011 | | | 19,820 | | | − | | | − | | | − | | | 98,108 | |
Maurice S.J. Moragne | 9/13/2021 | | − | | | − | | | − | | | − | | | − | | | − | | | 18,018 | | | − | | | − | | | 160,540 | |
| 9/13/2021 | | − | | | − | | | − | | | 0 | | | 12,012 | | | 21,622 | | | | | | − | | | − | | | 107,027 | |
| Amber D. Jefferson | | | 11/1/21 | | | − | | | − | | | − | | | − | | | − | | | − | | | 32,851 | | | − | | | − | |
(1) Represents PBRSU awards granted to our Named Executive Officers in fiscal 2022 which cliff vest based upon achievement of adjusted EBITDA performance goals and TSR for the performance period of July 1, 2021 through June 30, 2024. Each year, performance targets for adjusted EBITDA will be established, performance in each of those years will create a bank of shares between 0% to 130% of the target amount, depending on the extent to which the Company recorded $5.1 millionmeets or exceeds the achievement of the performance goals. At the end of the three-year performance period a TSR modifier is applied which can increase or decrease the cumulative number of shares earned based on adjusted EBITDA by as much as 15%. All shares, including banked shares will be forfeited if the executive voluntarily leaves the Company prior to the end of the performance period.
(2) Reflects the grant date fair value of restricted stock and PBRSU awards computed in impairment loss on goodwill and $0.5 millionaccordance with FASB ASC Topic 718. A discussion of the assumptions used in impairment loss on its indefinite-lived intangible assets relatedcalculating the amounts in this column may be found in Note 14 to CBI (see Note 6). During the fourth quarter andour audited consolidated financial statements for the fiscal year ended June 30, 2011,2022, included in our 2022 Form 10-K, except that, as required by applicable SEC rules, we did not reduce the Company recorded an impairment lossamounts in this column for any risk of $7.8 million on definite-lived intangible assets thatforfeiture relating to service-based (time-based) vesting conditions. The amount reported for PBRSU awards is based upon the Company acquired or entered into duringprobable satisfaction of the DSD Coffee Business acquisition. Duringperformance conditions as of the fourth quarter of fiscal 2011, the Company also recorded $9.2 million in income tax benefit (see Note 12).grant date.
|
| |
Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
None.
|
| |
Item 9A. | Controls and Procedures |
Disclosure Controls and Procedures
Disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) promulgated(3) Represents annual cash incentive opportunities under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the rules and forms of the SEC. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information we are required to disclose in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.
As of June 30, 2012, our management, with the participation of our Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15(e) promulgated under the Exchange Act. Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of June 30, 2012, our disclosure controls and procedures were effective.
Management Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). With the participation of the Chief Executive Officer and Chief Financial Officer, our management conducted an evaluation of the effectiveness of our internal control over financial reportingShort-Term Cash Incentive Program based on the framework and criteria established in Internal Control—Integrated Framework, issuedCompany’s achievement of certain metrics, as determined by the Compensation Committee. Our Named Executive Officers received a cash payout at Target under the Short-Term Cash Incentive Program in fiscal 2022, based on the Compensation Committee’s discretion once threshold performance was achieved. Annual cash incentive awards earned by our Named Executive Officers for performance in respect of a fiscal year are paid during the subsequent fiscal year. Such earned awards are included in the “Non-Equity Incentive Plan Compensation” column of the Summary Compensation Table.
Outstanding Equity Awards at Fiscal Year-End
The following table sets forth summary information regarding the outstanding equity awards at June 30, 2022 granted to each of our Named Executive Officers.
| | | | | | Option Awards | | | | | | | | | | | | Stock Awards | | | | |
| Name | | Number of Securities Underlying Unexercised Options Exercisable (#)(1) | | | Number of Securities Underlying Unexercised Options Unexercisable (#)(1) | | | Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#) | | | Option Exercise Price ($) | | | Option Expiration Date | | | Number of Shares or Units of Stock That Have Not Vested (#) (2) | | | Market Value of Shares or Units of Stock That Have Not Vested ($) (3) | | | Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested (#)(4) | | | Equity Incentive Plan Awards: Market or Payout Value Of Unearned Shares, Units or Other Rights That Have Not Vested ($)(3) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| D. Deverl Maserang II | | 147,650 | | | 76,063 | | | − | | | | 13.13 | | | 9/13/2026 | | | − | | | − | | | − | | | − | |
| | | − | | | − | | | − | | | | − | | | − | | | − | | | − | | | 231,707 | | | 1,086,706 | |
| | | − | | | − | | | − | | | | − | | | − | | | − | | | − | | | 112,613 | | | 528,155 | |
| | | − | | | − | | | − | | | | − | | | − | | | 105,030 | | | 492,591 | | | − | | | − | |
| | | − | | | − | | | − | | | | − | | | − | | | 112,612 | | | 528,150 | | | − | | | − | |
| Scott R. Drake | | 58,406 | | | 30,089 | | | | | | | 6.72 | | | 4/01/2027 | | | − | | | − | | | − | | | − | |
| | | − | | | − | | | − | | | | − | | | − | | | − | | | − | | | 21,036 | | | 98,659 | |
| | | − | | | − | | | − | | | | − | | | − | | | − | | | − | | | 14,014 | | | 65,726 | |
| | | − | | | − | | | − | | | | − | | | − | | | 19,071 | | | 89,443 | | | | | | | |
| | | − | | | − | | | − | | | | − | | | − | | | 13,341 | | | 62,569 | | | − | | | − | |
| | | − | | | − | | | − | | | | − | | | − | | | 21,021 | | | 98,589 | | | − | | | − | |
| | | − | | | − | | | − | | | | − | | | − | | | 73,529 | | | 344,851 | | | − | | | − | |
| Ruben E. Inofuentes | | 17,973 | | | 9,260 | | | | | | | 14.92 | | | 11/15/2026 | | | − | | | − | | | − | | | − | |
| | | − | | | − | | | − | | | | − | | | − | | | − | | | − | | | 8,378 | | | 39,293 | |
| | | − | | | − | | | − | | | | − | | | − | | | − | | | − | | | 21,951 | | | 102,950 | |
| | | − | | | − | | | − | | | | − | | | − | | | − | | | − | | | 11,011 | | | 51,642 | |
| | | − | | | − | | | − | | | | − | | | − | | | 19,900 | | | 93,331 | | | − | | | − | |
| | | − | | | − | | | − | | | | − | | | − | | | 13,921 | | | 65,289 | | | − | | | − | |
| | | − | | | − | | | − | | | | − | | | − | | | 16,516 | | | 77,460 | | | − | | | − | |
| Maurice S.J. Moragne | | 9,821 | | | 19,940 | | | | | | | 7.23 | | | 7/01/2027 | | | − | | | − | | | − | | | − | |
| | | − | | | − | | | − | | | | − | | | − | | | − | | | − | | | 13,109 | | | 61,481 | |
| | | − | | | − | | | − | | | | − | | | − | | | − | | | − | | | 12,012 | | | 56,336 | |
| | | − | | | − | | | − | | | | − | | | − | | | 10,373 | | | 48,649 | | | − | | | − | |
| | | − | | | − | | | − | | | | − | | | − | | | 11,855 | | | 55,741 | | | − | | | − | |
| | | − | | | − | | | − | | | | − | | | − | | | 8,314 | | | 38,993 | | | − | | | − | |
| | | − | | | − | | | − | | | | − | | | − | | | 18,018 | | | 84,504 | | | − | | | − | |
| Amber D. Jefferson | | − | | | − | | | − | | | | − | | | − | | | 32,851 | | | 154,071 | | | − | | | − | |
(1) Stock options vest in equal ratable installments on each of the first three anniversaries of the date of grant, contingent on continued employment through the applicable vesting date, and subject to accelerated vesting in certain circumstances.
(2) Restricted stock units vest in equal ratable installments on each of the first three anniversaries of the date of grant, contingent on continued employment through the applicable vesting date, and subject to accelerated vesting in certain circumstances.
(3) The market value was calculated by multiplying the closing price of our Common Stock on June 30, 2022 ($4.69) by the number of shares of Common Stock underlying the unvested restricted stock or PBRSUs.
(4) PBRSU awards cliff vest following the expiration of the three-year performance period upon the certification by the Compensation Committee of Sponsoring Organizationsthe Company’s achievement of performance goals for the three-year performance, subject to certain continued employment conditions and subject to the acceleration provisions of the Treadway Commission. Based on this evaluation, our management has concluded2017 Plan and restricted stock unit award agreement. At the end of the three-year performance period, the number of PBRSUs that our internal control over financial reporting was effective asactually vest will be 0% to 200% of June 30, 2012.
Ernst & Young LLP, an independent registered public accounting firm, issued an attestation reportthe target amount, depending on the Company’s internal controlextent to which the Company meets or exceeds the achievement of those performance goals measured over financial reporting asthe full three-year performance period, with payouts for performance between threshold and target, and between target and maximum determined by reference to a matrix established by the Compensation Committee. The target number of June 30, 2012, as statedPBRSUs is presented in the table.
Option Exercises and Stock Vested
None of our Named Executive Officers exercised options nor did any of their report which is included herein.
Changes in Internal Control Over Financial Reporting
There has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Exchange Act)stock awards vest during our fiscal quarteryear ended June 30, 2012, that has materially affected,2022.
Pension Benefits
None of our Named Executive Officers are entitled to payments or is reasonably likely to materially affect, our internal control over financial reporting.other benefits at, following, or in connection with retirement.
Change in Control and Termination Arrangements
3525
Report of Independent Registered Public Accounting FirmChange in Control Agreements
The Board of Directors and Stockholders of
Farmer Bros. Co. and Subsidiaries
We have audited Farmer Bros. Co. and Subsidiaries’ internalCompany has entered into change in control over financial reporting as of June 30, 2012, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizationsseverance agreement (“Severance Agreement”) with each of the Treadway Commission (the COSO criteria)Named Executive Officers. The Severance Agreements provide certain severance benefits in the event of a termination of employment in connection with a Change in Control (as defined below). Farmer Bros. Co. and Subsidiaries’ management is responsible for maintaining effective internal control over financial reporting, and for its assessment
Under each of the effectivenessSeverance Agreements, a “Change in Control” generally will be deemed to have occurred at any of internal control over financial reporting includedthe following times: (i) upon the acquisition by any person, entity or group of beneficial ownership of 50% or more of either the then outstanding Common Stock or the combined voting power of the Company’s then outstanding securities entitled to vote generally in the accompanying “Management Report on Internal Control Over Financial Reporting.” Our responsibility is to express an opinion onelection of directors; (ii) at the company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standardstime individuals who were members of the PublicBoard at the effective time of the Severance Agreement (or whose election, or nomination for election, was approved by a vote of at least a majority of the members of the Board at the effective time of the Severance Agreement, but excluding any such individual whose initial election or assumption of office occurs as a result of either an actual or threatened election contest) (the “Incumbent Board”) cease for any reason to constitute at least a majority of the Board; or (iii) the approval of the stockholders of the Company Accounting Oversight Board (United States). Those standards require that we plan and performof a reorganization, merger, consolidation, complete liquidation, or dissolution of the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained inCompany, the sale or disposition of all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositionsor substantially all of the assets of the company; (2) provide reasonable assuranceCompany or any similar corporate transaction (other than any transaction with respect to which persons who were the stockholders of the Company immediately prior to such transaction continue to hold shares of Common Stock representing at least 50% of the outstanding Common Stock of the Company or such surviving entity or parent or affiliate thereof immediately after such transaction). Further, a “Threatened Change in Control” generally will be deemed to have occurred upon the first day that transactionsany bona fide pending tender offer for any class of the Company’s outstanding shares of Common Stock, any pending bona fide offer to acquire the Company by merger or consolidation, or any other pending action or plan to effect, or which would lead to, a Change in Control, as determined by the Incumbent Board, becomes manifest, and will continue in effect when such action is abandoned or a Change in Control occurs.
In the event of a Named Executive Officer’s termination of employment other than for “Cause” or due to death or “Disability”, or in the event of a Named Executive Officer’s “Resignation for Good Reason” (each, as defined in the Severance Agreements), in each case, in connection with a Change in Control or Threatened Change in Control, each of the Named Executive Officers will be entitled to the payments and benefits shown in the tables below.
Each Severance Agreement provides that while the relevant Named Executive Officer is receiving compensation and benefits thereunder, that Named Executive Officer will not in any manner attempt to induce or assist others to attempt to induce any officer, employee, customer or client of the Company to terminate its association with the Company, nor do anything directly or indirectly to interfere with the relationship between the Company and any such persons or concerns. In the event such Named Executive Officer breaches this provision, all compensation and benefits under the Severance Agreement will immediately cease.
Employment Agreements
Under Mr. Maserang’s Employment Agreement, he is eligible for severance payments in the event of termination without Cause or for resignation with Good Reason (each, as defined in Mr. Maserang’s Employment Agreement) that are recordednot in conjunction with a Change in Control. In the aforementioned events, he would receive the following severance payments:
the sum of his base salary and target annual bonus payable over twelve months,
partially Company-paid COBRA coverage under the Company’s health plan for a period of 12 months
a pro rata bonus, if earned for the year of termination and
if such termination occurs after the end of the fiscal year but before any bonus for the fiscal year is paid, then the payment of any such earned bonus.
The potential amount of these payments are reflected in the table below.
Potential Payments Upon Termination or Change in Control
The following tables describe potential payments and benefits upon termination (including resignation, severance, retirement or a constructive termination) or a change in control to which the Named Executive Officers would be entitled. The actual amount of payments and benefits can only be determined at the time of such a termination or change in control and therefore the actual amounts may vary from the estimated amounts in the tables below. Descriptions of how such payments and benefits are determined under the circumstances, material conditions and obligations applicable to the receipt of payments or benefits and other material factors regarding such agreements, as necessarywell as other material assumptions that we have made in calculating the estimated compensation, follow these tables.
The estimated amount of compensation payable to permit preparationeach Named Executive Officer in each situation is listed in the tables below and, with respect to each Named Executive Officer, assumes that the termination and/or change in control of financial statementsthe Company occurred on June 30, 2022.
| D. Deverl Maserang II | Change in Control and Involuntarily Terminated or Resignation for Good Reason Within 24 Months of Change in Control | Threatened Change in Control and Involuntarily Terminated or Resignation for Good Reason | Termination Without Cause or Resignation With Good Reason |
| | | | |
| Base Salary Continuation | 1,360,000 | 1,360,000 | 680,000 |
| Annual Incentive Payments | 680,000 | 680,000 | 680,000 |
| Value of Accelerated Stock Options | | 0 | 0 |
| Value of Accelerated Restricted Stock | 1,020,741 | 1,020,741 | 1,020,741 |
| Value of Accelerated PBRSUs | 1,614,861 | 1,614,861 | 1,614,861 |
| Health and Dental Insurance | 34,014 | 34,014 | 17,007 |
| Outplacement Services | 25,000 | 25,000 | 25,000 |
| Total Pre-Tax Benefit | 2,099,014 | 2,099,014 | 4,037,609 |
Scott R. Drake
| Base Salary Continuation | 900,000 | 900,000 | 0 |
| Annual Incentive Payments | 337,500 | 337,500 | 0 |
| Value of Accelerated Stock Options | 0 | 0 | 0 |
| Value of Accelerated Restricted Stock | 595,452 | 595,452 | 0 |
| Value of Accelerated PBRSUs | 164,385 | 164,385 | 0 |
| Health and Dental Insurance | 34,014 | 34,014 | 0 |
| Outplacement Services | 25,000 | 25,000 | 0 |
| Total Pre-Tax Benefit | 1,312,966 | 1,312,966 | 0 |
Ruben E. Inofuentes
| Base Salary Continuation | 700,000 | 700,000 | 0 |
| Annual Incentive Payments | 210,000 | 210,000 | 0 |
| Value of Accelerated Stock Options | 0 | 0 | 0 |
| Value of Accelerated Restricted Stock | 236,080 | 236,080 | 0 |
| Value of Accelerated PBRSUs | 193,885 | 193,885 | 0 |
| Health and Dental Insurance | 49,972 | 49,972 | 0 |
| Outplacement Services | 25,000 | 25,000 | 0 |
| Total Pre-Tax Benefit | 984,972 | 984,972 | 0 |
Maurice S.J. Moragne
| Base Salary Continuation | 710,000 | 710,000 | 0 |
| Annual Incentive Payments | 213,000 | 213,000 | 0 |
| Value of Accelerated Stock Options | 0 | 0 | 0 |
| Value of Accelerated Restricted Stock | 227,887 | 227,887 | 0 |
| Value of Accelerated PBRSUs | 117,817 | 117,817 | 0 |
| Health and Dental Insurance | 34,486 | 34,486 | 0 |
| Outplacement Services | 25,000 | 25,000 | 0 |
| Total Pre-Tax Benefit | 984,486 | 984,486 | 0 |
Amber D. Jefferson
| Base Salary Continuation | 640,000 | 640,000 | 0 |
| Annual Incentive Payments | 192,000 | 192,000 | 0 |
| Value of Accelerated Stock Options | 0 | 0 | 0 |
| Value of Accelerated Restricted Stock | 154,071 | 154,071 | 0 |
| Value of Accelerated PBRSUs | 0 | 0 | 0 |
| Health and Dental Insurance | 17,332 | 17,332 | 0 |
| Outplacement Services | 25,000 | 25,000 | 0 |
| Total Pre-Tax Benefit | 874,332 | 874,332 | 0 |
Base Salary Continuation
Severance Agreements
Under each Severance Agreement, if (i) a Change in Control occurs and a Named Executive Officer’s employment is terminated within the two years following the occurrence of the Change in Control by the Company other than for Cause, Disability or death, or is terminated due to the Named Executive Officer’s Resignation for Good Reason, or (ii) a Threatened Change in Control occurs and the executive officer’s employment is terminated during the “Threatened Change in Control Period” (as defined in the Severance Agreement) by the Company other than for Cause, Disability or death, or is terminated due to the Named Executive Officer’s Resignation for Good Reason (each, a “Change in Control Qualifying Termination”), such Named Executive Officer will be entitled to base salary continuation for a period of 12-month or 24-months depending upon the terms of their individual agreement, with such payment to be made in installments in accordance with generally accepted accounting principles,the Company’s standard payroll practices over such period.
Bonus and that receipts and expendituresAnnual Incentive Payments
Severance Agreements
Under each Severance Agreement, if a Change in Control Qualifying Termination occurs, the Named Executive Officer will receive a lump sum payment equal to 100% of the companyexecutive officer’s target annual cash bonus for the fiscal year in which the date of termination occurs (or, if no target annual cash bonus has been assigned as of the date of termination, the average annual cash bonus paid to such Named Executive Officer for the last three completed fiscal years or for the number of completed fiscal years such person has been in the employ of the Company if fewer than three).
Value of Accelerated Vesting of Stock Options and Restricted Stock
Under the terms of the Named Executive Officers’ outstanding awards, in the event of death or “Disability” (as defined in the applicable plan):
100% of any unvested stock options will vest;
a pro rata portion of any unvested restricted stock will vest; and
outstanding PBRSU awards will remain outstanding and the participant will be eligible to earn a pro-rata portion of the number of PBRSU awards that would have been earned based on actual performance through the end of the performance period (amounts shown in the tables above assume 100% of the target PBRSU awards were earned at the end of the performance period).
Under the applicable award agreement, if a Change in Control (as defined in the applicable plan) occurs and a participant’s awards are being made onlynot continued, converted, assumed or replaced by the Company or a parent or subsidiary of the Company, or a Successor Entity (as defined in the applicable plan), such awards will become fully exercisable and/or payable, and all forfeiture, repurchase and other restrictions on such awards will lapse immediately prior to such Change in Control. In the case of PBRSU awards, the vested shares will be a prorated number of the target PBRSU awards. The amounts in the tables above assume all awards were continued, converted, assumed, or replaced in connection with a Change in Control.
If there is a Change in Control and the Named Executive Officer’s employment is terminated by the Company without Cause or by the participant for Good Reason, in either case, within twenty-four months following the Change in Control:
100% of any unvested stock options will vest;
100% of any unvested restricted stock or restricted stock units will vest; and
the target number of PBRSU awards will be deemed to have immediately vested as of the date of termination of service.
The value of accelerated awards shown in the tables above was calculated using the closing price of our Common Stock on June 30, 2022 ($4.69). The value of accelerated stock options is based on the difference between the exercise price and such closing price for all accelerated stock options that were in-the-money as of such date.
Under the applicable plan, the Plan Administrator also has discretionary authority regarding accelerated vesting of awards in certain circumstances. The amounts in the tables above assume such discretionary authority was not exercised.
Health and Dental Insurance
Severance Agreements
Under each Severance Agreement, if a Change in Control Qualifying Termination occurs, the health, dental, and life insurance benefits coverage provided to the Named Executive Officer at his or her date of termination will be continued by the Company during the 12-month or 24-month period following the Named Executive Officer’s date of termination, based on the terms of their individual agreement unless he or she commences employment prior to the end of the relevant period and qualifies for substantially equivalent insurance benefits with his or her new employer, in which case such insurance coverage will end on the date of qualification. The Company will generally provide for such insurance coverage at its expense at the same level and in the same manner as in effect at the applicable date of termination. Any additional coverage the Named Executive Officer had at the time of termination, including dependent coverage, will also be continued for such period on the same terms, to the extent permitted by the applicable policies or contracts. If the terms of any benefit plan do not permit such continued coverage, the Company will arrange for other coverage at its expense providing substantially similar benefits. Estimated payments shown in the tables above represent the current net annual cost to the Company of the Named Executive Officer’s participation in the Company’s health and/or dental insurance program offered to all non-union employees.
Company Benefit Plans
The tables and discussion above do not reflect the value of accrued and unused paid days off, disability benefits under the Company’s group health plan, the value of retiree medical, vision and dental insurance benefits, and group life insurance, if any, that would be paid and/or provided to each Named Executive Officer following termination of employment, because, in each case, these benefits are generally available to all regular Company employees similarly situated in age, years of service and date of hire and do not discriminate in favor of the Named Executive Officers.
Outplacement Services
Under each of the 12-month or 24-month Severance Agreements, if a Change in Control Qualifying Termination occurs, the Company will provide the Named Executive Officer with outplacement services at the expense of the Company, in an amount of $15,000 or $25,000, respectively.
CEO to Median Employee Pay Ratio
In accordance with applicable SEC rules, we are providing the ratio of the annual total compensation of our CEO to the median of the annual total compensation of our other employees, excluding our CEO. For fiscal 2022, as calculated in accordance with authorizationsthe requirements of management and directorsItem 402(c)(2)(x) of Regulation S-K, the annual total compensation of our CEO was $3,292,209 as disclosed in the “Summary Compensation Table”, the median of the company;annual total compensation of our employees other than the CEO was $44,452, and (3) provide reasonable assurance regarding prevention or timely detectionthe ratio of unauthorized acquisition, use, or dispositionour CEO’s annual total compensation to the median of the company’s assets that could haveannual total compensation of our other employees was 74 to 1.
We believe the ratio presented above is a material effectreasonable estimate calculated in a manner consistent with Item 402(u) of Regulation S-K. We determined our median employee based on the financial statements.
Becausetotal direct compensation paid to all of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projectionsour employees (consisting of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Farmer Bros. Co. and Subsidiaries maintained, in all material respects, effective internal control over financial reportingapproximately 1,068 individuals active as of June 30, 2012, based on2022) for the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Farmer Bros. Co. and Subsidiaries as of June 30, 2012 and 2011, and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the three years in the period ended June 30, 2012 of Farmer Bros. Co. and Subsidiaries and our report dated September 7, 2012 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Los Angeles, California
September 7, 2012
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Item 9B. | Other Information |
None.
PART III
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Item 10. | Directors, Executive Officers and Corporate Governance |
The information required by this item will be set forth in the Proxy Statement or Form 10-K/A and is incorporated in this report by reference.
To the Company’s knowledge, based solely on a review of the copies of such reports furnished to the Company and written representations that no other reports were required during the fiscal year ended June 30, 2012, its officers, directors and ten percent shareholders complied with all applicable Section 16(a) filing requirements, with the exception of those filings listed in the Company's Proxy Statement expected to be dated and filed with the SEC not later than 120 days after the conclusion of the Company's fiscal year ended June 30, 2012. 2022. Total direct compensation was calculated using internal human resources records and included base salary (wages earned based on our payroll records), cash incentive awards earned for the period, and the annual grant date fair value of long-term incentive awards during fiscal 2022.
Because the SEC rules for identifying the median employee and calculating the pay ratio based on that employee’s annual total compensation allow companies to adopt a variety of methodologies, to apply certain exclusions, and to make reasonable estimates and assumptions that reflect their compensation practices, the pay ratio reported by other companies may not be comparable to the pay ratio reported above, as other companies may have different employment and compensation practices and may utilize different methodologies, exclusions, estimates and assumptions in calculating their own pay ratios.
Director Compensation
Non-Employee Director Compensation
The compensation program for our non-employee directors is intended to fairly compensate our non-employee directors for the time and effort required of a director given the size and complexity of the Company’s operations. Portions of the compensation program utilize our stock in order to further align the interests of the directors with all other stockholders of the Company and to motivate the directors to focus on the long-term financial interest of the Company. Directors who are Company employees are not paid any additional fees for serving on the Board or for attending Board meetings.
The Company’s non-employee director compensation program is as follows:
Form of Non-Employee Director Compensation | Director Compensation Program |
| Annual Board Cash Retainer | $60,000 |
Item 11.Committee Chair Cash Retainer | Executive$10,000 for Nominating and Corporate Governance Committee and Technology Committee $15,000 for Compensation Committee $20,000 for Audit Committee |
| Non-Chair Committee Cash Retainer | $7,500 for Compensation Committee and Nominating and Corporate Governance Committee $10,000 for Audit Committee |
| Chairman of the Board Cash Retainer | $50,000, with no additional fees for committee service |
| Meeting Fees | $2,000, only paid for Board or committee meetings in excess of seven in a fiscal year |
| Annual Equity Award Value | $95,000 |
| Expense Reimbursement | Payment or reimbursement of reasonable travel expenses from outside the greater Dallas-Fort Worth area, in accordance with Company policy, incurred in connection with attendance at Board and committee meetings, as well as payment or reimbursement of amounts incurred in connection with director continuing education |
| Other | Ad hoc committee fees are determined from time to time by the Board, as needed. |
The informationannual grant of restricted stock is generally made on the date on which the Company holds its annual meeting of stockholders or such other date as the Board may determine, in each case, subject to any blackout period under the Company’s insider trading policy. In fiscal 2022, the annual grant of restricted stock was made on December 15, 2021. Each non-employee director received a grant of 14,683 shares of restricted stock based on the $6.47 closing price per share of our Common Stock on December 15, 2021 (for an aggregate amount of $94,999.01), with the exception of Mr. Zaman. Mr. Zaman received a grant of 17,613 shares of restricted stock based on the $6.47 closing price per share of our Common Stock on December 15, 2021 (for an aggregate amount of $113,956.11). Mr. Zaman received a larger grant because he joined the Board on September 1, 2021 but did not receive an equity grant for his approximately 3.5 months of service prior to December 15, 2021. Such grants cliff vest on the one-year anniversary of the grant date, subject to continued service to the Company through the vesting date and the acceleration provisions of the 2017 Plan and the restricted stock award agreement.
Stock Ownership Guidelines
Under the Company’s stock ownership guidelines, a non-employee director is expected to own and hold during his or her service as a Board member a number of shares of Common Stock with a value of at least four times their annual retainer, and is not permitted to sell any shares of Common Stock received as grants under the Company’s long-term incentive plans unless and until the non-employee director achieves and maintains this threshold share ownership level.
Shares of Common Stock that count toward satisfaction of these guidelines include (to the extent applicable): (i) shares of Common Stock owned outright by the non-employee director and his or her immediate family members who share the same household, whether held individually or jointly; restricted stock or restricted stock units (whether or not the restrictions have lapsed); (iii) shares of Common Stock held in trust for the benefit of the non-employee director or his or her family; and (iv) shares of Common Stock issuable under vested options held by the non-employee director.
Director Compensation Table
The following table sets forth non-employee director compensation for fiscal 2022:
| Director | | Fees Earned or Paid in Cash ($) | | | Stock Awards ($)(1) | | | Total ($) | |
| Allison M. Boersma | | 85,000 | | | 95,000 | | | 180,000 | |
| Stacy Loretz-Congdon | | 80,000 | | | 95,000 | | | 175,000 | |
| Charles F. Marcy | | 80,000 | | | 95,000 | | | 175,000 | |
| Christopher P. Mottern | | 110,000 | | | 95,000 | | | 205,000 | |
| Alfred Poe | | 83,750 | | | 95,000 | | | 178,750 | |
| John D. Robinson | | 46,042 | | | 95,000 | | | 141,042 | |
| Waheed Zaman | | 63,333 | | | 113,956 | | | 177,289 | |
(1) Represents the full grant date fair value of restricted stock granted to each non-employee director in fiscal 2022, computed in accordance with FASB ASC Topic 718. A discussion of the assumptions used in calculating the amounts in this column may be found in Note 16 to our audited consolidated financial statements for the fiscal year ended June 30, 2022, included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2022, except that, as required by applicable SEC rules, we did not reduce the amounts in this itemcolumn for any risk of forfeiture relating to service-based (time-based) vesting conditions.
Director Indemnification
Under the Company’s Certificate of Incorporation and By-Laws, the current and former directors are entitled to indemnification and advancement of expenses from the Company to the fullest extent permitted by Delaware corporate law. The Board of Directors has approved a form of Indemnification Agreement (“Indemnification Agreement”) to be entered into between the Company and its directors and officers. The Company’s Board of Directors may from time to time authorize the Company to enter into additional indemnification agreements with future directors and officers of the Company.
The Indemnification Agreements provide, among other things, that the Company will, to the extent permitted by applicable law, indemnify and hold harmless each indemnitee if, by reason of his or her corporate status as a director, officer, trustee, general partner, managing member, fiduciary, employee or agent of the Company or of any other enterprise which such person is or was serving at the request of the Company, such indemnitee was, is or is threatened to be set forthmade, a party to or a participant (as a witness or otherwise) in any threatened, pending or completed proceeding, whether formal or informal, whether brought in the Proxy Statementright of the Company or Form 10-K/Aotherwise and whether of a civil, criminal, administrative or investigative nature, against all expenses, judgments, fines, penalties and amounts paid in settlement actually and reasonably incurred by him or her or on his or her behalf in connection with such proceeding. In addition, the Indemnification Agreements provide for the payment, advancement or reimbursement of expenses incurred by the indemnitee in connection with any such proceeding to the fullest extent permitted by applicable law. The Indemnification Agreements also provide that, in the event of a Potential Change in Control (as defined in the Indemnification Agreements), the Company will, upon request by the indemnitee, create a trust for the benefit of the indemnitee and fund such trust in an amount sufficient to satisfy expenses reasonably anticipated to be incurred in connection with investigating, preparing for, participating in or defending any proceedings, and any judgments, fines, penalties and amounts paid in settlement in connection with any proceedings. The Indemnification Agreements do not exclude any other rights to indemnification or advancement of expenses to which the indemnitee may be entitled, including any rights arising under the Certificate of Incorporation or By-Laws of the Company, or the General Corporation Law of the State of Delaware. The Company is incorporatedalso obligated to maintain directors’ and officers’ liability insurance coverage, including tail coverage under certain circumstances.
Compensation Committee Report
The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis with management and, based on the review and discussions, recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this reportAmendment and incorporated by reference.
reference in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2022. | Compensation Committee |
| of the Board of Directors |
|
| Charles F. Marcy, Chair |
| Alfred Poe |
| John D. Robinson |
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
Securities Authorized for Issuance under Equity Compensation Plans
The following table sets forth information required by this item willas of June 30, 2022 with respect to the shares of Common Stock that may be set forth inissued upon the Proxy Statement or Form 10-K/Aexercise of options and is incorporated in this report by reference.
Equity Compensation Plan Information
Information aboutother rights under our existing equity compensation plans at and arrangements in effect as of June 30, 2012 that were either approved or not approved2022. The information includes the number of shares covered by, our stockholders was as follows:and the weighted average exercise price of, outstanding options and the number of shares remaining available for future grant, excluding the shares to be issued upon exercise of outstanding options, warrants and rights.
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| | | | | | | | |
| Plan Category | | Number of Shares to be Issued Upon Exercise of Outstanding Options | | Weighted Average Exercise Price of Outstanding Options | | Number of Shares Remaining Available for Future Issuance(2) |
| Equity compensation plans approved by stockholders(1) | | 667,235 | | $ | 12.84 |
| | 100,026 |
| Equity compensation plans not approved by stockholders | | — | | $ | — |
| | — |
| Total | | 667,235 | | $ | 12.84 |
| | 100,026 |
________________| Plan Category | | Number of Shares to be Issued Upon Exercise / Vesting of Outstanding Options or
Rights(2) | | | Weighted Average Exercise Price of Outstanding Options(3) | | | Number of Shares Remaining Available for Future Issuance(4) | |
| | | | | | | | | | |
| Equity compensation plans approved by stockholders(1) | | | 641,205 | | | $ | 14.36 | | | | 1,581,299 | |
| Equity compensation plans not approved by stockholders (5) | | | 118.256 | | | $ | 6.85 | | | | 99,537 | |
| Total | | | 759,461 | | | | | | | | 1,680,836 | |
(1) Includes shares issued under the Amended and Restated 2007 Long-Term Incentive Plan, and its predecessor plan, the Farmer Bros. Co. 2007 Omnibus Incentive Plan (together, the “Prior Plans”) and the 2017 Plan. The 2017 Plan succeeded the Prior Plans. On the Effective Date of the 2017 Plan, 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.
(2) Shares available for future issuanceIncludes shares that may be issued upon the achievement of certain financial and other performance criteria as a condition to vesting in addition to time-based vesting pursuant to PBRSUs granted under the Omnibus2017 Plan. The PBRSUs included in the table include the maximum number of shares that may be issued under the awards. Under the terms of the awards, the recipient may earn between 0% and 200% of the target number of PBRSUs depending on the extent to which the Company meets or exceeds the achievement of the applicable financial performance goals.
(3) Does not include outstanding PBRSUs.
(4) The 2017 Plan authorizes the issuance of (i) 3,550,000 shares of Common Stock plus (ii) the number of shares of Common Stock subject to awards under the 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. Shares of Common Stock granted under the 2017 Plan may be awardedauthorized but unissued shares, shares purchased on the open market or treasury shares. In no event will more than 3,550,000 shares of Common Stock be issuable pursuant to the exercise of incentive stock options under the 2017 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. If the Plan Amendment is adopted, the Company’s consultants would also be eligible to receive awards under the 2017 Plan.
(5) Consists of grants made under the Farmer Bros. Co. 2020 Inducement Incentive Award Plan (the “Inducement Award Plan”), which in accordance with Rule 5635(c)(4) of the formNasdaq Listing Rules (“Rule 5635(c)(4)”) permits grants of up to 300,000 shares of Common Stock to newly hired employees who have not previously been a member of the Board, or to an employee who is being rehired following a bona fide period of non-employment by the Company or a subsidiary, as a material inducement to the employee’s entering into employment with the Company or its subsidiary. Subject to certain limitations, shares of Common Stock covered by awards granted under the Inducement Award Plan that are forfeited, expire or lapse, or are repurchased for or paid in cash, may be used again for new grants under the Amended and Restated 2017 Plan. The Inducement Award Plan allows for the grant of non-qualified stock options, stock appreciation rights, restricted stock, restricted stock units, and dividend equivalents, performance-based awards, stock payments,equivalents.
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information regarding the beneficial ownership of the Company’s voting securities as of October 1, 2022 by (i) each of our current directors, (ii) each of our executive officers required to be listed pursuant to Item 402 of Regulation S-K, (iii) all of our current directors and executive officers as a group, and (iv) each person, or other incentives payable ingroup of affiliated persons, known to us to be the beneficial owner of more than five percent (5%) of our outstanding Common Stock, based on 19,279,970 shares of stock, or any combination thereof. Shares covered by an award will be countedCommon Stock outstanding as used at the time the award is granted to a participant. If any award lapses, expires, terminates or is canceled prior to the issuanceof October 1, 2022.
The amounts and percentages of shares thereunderbeneficially owned are reported on the basis of SEC regulations governing the determination of beneficial ownership of securities. Under SEC rules, a person is deemed to be a “beneficial” owner of a security if that person has or if shares voting power or investment power, which includes the power to dispose of or to direct the disposition of such security. A person is also deemed to be a beneficial owner of any securities of which that person has a right to acquire beneficial ownership within 60 days. Securities that can be so acquired are issued undernot deemed to be outstanding for purposes of computing any other person’s percentage. Under these rules, more than one person may be deemed to be a beneficial owner of securities as to which such person has no economic interest.
Except as otherwise indicated in these footnotes, each of the Omnibus Planindividuals or entities listed below has, to a participantour knowledge, sole voting and are thereafter reacquired by the Company, the shares subject to such awards and the reacquired shares will again be available for issuance under the Omnibus Plan. In additioninvestment power with respect to the shares of Common Stock. Unless otherwise indicated below, the address for each natural person listed below is c/o Farmer Bros. Co., 1912 Farmer Brothers Drive, Northlake, Texas 76262.
| Name of Beneficial Owner | Amount and Nature of Beneficial Ownership | Percent of Class(1) |
| Non-Employee Directors: | | |
Allison M. Boersma(2) | 45,913 | * |
Stacy Loretz-Congdon(2) | 45,641 | * |
Charles F. Marcy(3) | 58,283 | * |
Christopher P. Mottern(4) | 103,379 | * |
Alfred Poe(2) | 33,764 | * |
John Robinson(2) | 14,683 | * |
Waheed Zaman(5) | 17,613 | * |
| Named Executive Officers: | | |
D. Deverl Maserang II(6) | 282,715 | |
Scott R. Drake(7) | 156,210 | * |
Ruben E. Inofuentes(8) | 88,225 | * |
Maurice S.J. Moragne(9) | 58,544 | * |
Amber D. Jefferson(10) | 2,345 | * |
All directors and executive officers as a group (13 individuals)(11) | 939,401 | |
| Greater than 5% Stockholders: | | |
Mario J. Gabelli, GAMCO Investors, Inc. and Affiliated Parties(12) | 1,523,457 | |
Kennedy Capital Management, Inc.(13) | 1,030,211 | |
James C. Pappas, Aron R. English, Bradley L. Radoff and Affiliated Parties(14) | 3,285,073 | |
Farmer Bros. Co. 401(k) Plan(15) | | |
* Less than 1%
(1) Percent of class is calculated based on 19,279,970 outstanding shares of Common Stock, plus securities deemed outstanding pursuant to Rule 13d-3(d)(1) under the Exchange Act, as of October 1, 2022 and may differ from the percent of class reported in statements of beneficial ownership filed with the SEC.
(2) Includes 14,683 unvested shares of restricted stock which will vest in December 2022.
(3) Includes 14,683 unvested shares of restricted stock which will vest in December 2022, 2,000 shares held in a SEP IRA and 5,000 shares held in a revocable trust.
(4) Includes 14,683 unvested shares of restricted stock which will vest in December 2022 and 20,000 shares held by the Mottern Family Trust.
(5) Includes 17,613 unvested shares of restricted stock which will vest in December 2022
(6) Includes 223,713 shares of Common Stock issuable upon exercise of options which are currently exercisable or will become exercisable within 60 days and 6,099 shares of Common Stock beneficially owned by Mr. Maserang through the Company’s 401(k) Plan, rounded to the nearest whole share.
(7) Includes 58,406 shares of Common Stock issuable upon exercise of options which are currently exercisable or will become exercisable within 60 days and 5,870 shares of Common Stock beneficially owned by Mr. Drake through the Company’s 401(k) Plan, rounded to the nearest whole share.
(8) Includes 9,260 shares of Common Stock issuable upon exercise of options which are currently exercisable or will become exercisable within 60 days and 4,416 shares of Common Stock beneficially owned by Mr. Inofuentes through the 401(k) Plan, rounded to the nearest whole share.
(9) Includes 19,642 shares of Common Stock issuable upon exercise of options which are currently exercisable or will become exercisable within 60 days and 5,110 shares of Common Stock beneficially owned by Mr. Moragne through the 401(k) Plan, rounded to the nearest whole share.
(10) Includes 2,345 shares of Common Stock beneficially owned by Ms. Jefferson through the 401(k) Plan, rounded to the nearest whole share.
(11) Includes 328,994 shares of Common Stock issuable upon exercise of options which will become exercisable within 60 days and 23,840 shares of Common Stock beneficially owned through the 401(k) Plan, rounded to the nearest whole share.
(12) Based solely on an amendment to Schedule 13D filed March 31, 2022, according to which (i) Mario J. Gabelli may be deemed to beneficially own 1,523,457 of these shares, (ii) Gabelli Funds, LLC may be deemed to beneficially own 297,167 of these shares, (iii) GAMCO Asset Management, Inc. may be deemed to beneficially own 767,000 of these shares, (iv) Teton Advisors, Inc. may be deemed to beneficially own 459,000 of these shares, (v) and GAMCO Investors, Inc. may be deemed to beneficially own 290 of these shares. The principal address of each of the aforementioned parties is One Corporate Center, Rye, New York 10580.
(13) Based solely on a Schedule 13G filed on February 14, 2022. The principal address of Kennedy Capital Management, Inc. is 10829 Olive Blvd., St. Louis, Missouri 63141.
(14) Based solely on (1) a Schedule 13D filed October 7, 2022, according to which (i) Aron R. English may be deemed to beneficially own 1,964,536 of these shares, (ii) 22NW Fund, LP, 22NW, LP, 22NW Fund GP, LLC, and 22NW GP, Inc. may each be deemed to beneficially own 1,955,526 of these shares, (iii) Cory J. Mitchell may be deemed to beneficially own 1,300 of these shares, (iv) Bryson O. Hirai-Hadley may be deemed to beneficially own 1,261 of these shares, and (v) Ryan W. Broderick may be deemed to beneficially own 150 of these shares, and (2) an amendment to Schedule 13D filed on October 3, 2022, according to which (i) James C. Pappas and JCP Investment Management, LLC may each be deemed to beneficially own 992,826 of these shares, (ii) JCP Investment Partnership, LP, JCP Investment Partners, LP and JCP Investment Holdings, LLC may each be deemed to beneficially own 671,955 of these shares, (iii) Bradley L. Radoff may be deemed to beneficially own 275,000 of these shares, and (iv) The Radoff Family Foundation may be deemed to beneficially own 75,000 of these shares. The principal address of each of Aron R. English, 22NW Fund, LP, 22NW, LP, 22NW Fund GP, LLC, 22NW GP, Inc., Cory J. Mitchell, Bryson O. Hirai-Hadley, and Ryan W. Broderick is 1455 NW Leary Way, Suite 400, Seattle, Washington 98107. The principal address of James C. Pappas, JCP Investment Management, LLC, JCP Investment Partnership, LP, JCP Investment Partners, LP, and JCP Investment Holdings, LLC is 1177 West Loop South, Suite 1320, Houston, Texas 77027. The principal address of Bradley L. Radoff and The Radoff Family Foundation is 2727 Kirby Drive, Unit 29L, Houston, Texas 77098.
(15) This information is based on the Company’s records and includes 1,921,751 shares of Common Stock that are actually issuedheld in the 401(k) Plan and allocated to a participant’s account (“allocated shares”) as of October 1, 2022, and includes the 23,840 shares of Common Stock beneficially owned by the executive officers described above. The 401(k) Trustee votes allocated shares as directed by such participant or beneficiary of the following items will be counted against401(k). The present member of the total numberAdministrative Committee of shares availablethe Farmer Bros. Co. Qualified Employee Retirement Plans (the “Management Administrative Committee”), which administers the 401(k) Plan, is Ms. Jefferson. Each member of the Management Administrative Committee disclaims beneficial ownership of the securities held by the 401(k) Plan except for issuance underthose, if any, that have been allocated to the Omnibus Plan: (i) shares subject to an award that are not delivered tomember as a participant becausein the award is exercised through a reduction of shares subject to the award (i.e., “net exercised”); (ii) shares subject to an award that are not delivered to a participant because such shares are withheld in satisfaction401(k) Plan. The principal address of the withholding401(k) Plan is c/o Farmer Bros. Co., 1912 Farmer Brothers Drive, Northlake, Texas 76262.
35
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| Item 13. | Certain Relationships and Related Transactions, and Director Independence |
The information required by this item willReview and Approval of Related Person Transactions
Under the Company’s written Policies and Procedures for the Review, Approval or Ratification of Related Person Transactions, a related person transaction may be consummated or may continue only if the Audit Committee approves or ratifies the transaction in accordance with the guidelines set forth in the Proxy Statementpolicy. The policy applies to: (i) any person who is, or Form 10-K/Aat any time since the beginning of the Company’s last fiscal year was, a director, nominee for director or executive officer of the Company; (ii) any person who is known to be the beneficial owner of more than 5% of any class of the Company’s voting securities; and (iii) any immediate family member, as defined in the policy, of, or sharing a household with, any of the foregoing persons. For purposes of the policy, a related person transaction includes, but is incorporatednot limited to, any financial transaction, arrangement or relationship or any series of similar transactions, arrangements or relationships, specifically including indebtedness and guarantees of indebtedness and transactions involving employment, consulting or similar arrangements, between the Company and any of the foregoing persons since the beginning of the Company’s last fiscal year, or any currently proposed transaction in this report by reference.which the Company was or is to be a participant or a party, in which the amount involved exceeds $120,000, and in which any of the foregoing persons had or will have a direct or indirect material interest.
The Company will maintain a related person master list to assist in identifying related person transactions, which will be distributed by the Company’s General Counsel to the Company’s executive officers; the function or department managers responsible for purchasing goods or services for the Company and its subsidiaries; the director of accounts payable and the director of accounts receivable for the Company and its subsidiaries; and any other persons whom the Audit Committee, the Chief Compliance Officer or the General Counsel may designate.
Upon referral by the Chief Compliance Officer, General Counsel or Secretary of the Company, any proposed related person transaction will be reviewed by the Audit Committee for approval or disapproval based on the following:
The materiality of the related person’s interest, including the relationship of the related person to the Company, the nature and importance of the interest to the related person, the amount involved in the transaction, whether the transaction has the potential to present a conflict of interest, whether there are business reasons for the Company to enter the transaction, and whether the transaction would impair the independence of any independent director;
Whether the terms of the transaction, in the aggregate, are comparable to those that would have been reached by unrelated parties in an arm’s length transaction;
The availability of alternative transactions, including whether there is another person or entity that could accomplish the same purposes as the transaction and, if alternative transactions are available, there must be a clear and articulable reason for the transaction with the related person;
Whether the transaction is proposed to be undertaken in the ordinary course of the Company’s business, on the same terms that the Company offers generally in transactions with persons who are not related persons; and
Such additional factors as the Audit Committee determines relevant.
Following review, the Audit Committee will approve or ratify in writing any related person transaction determined by the Audit Committee to be in, or not inconsistent with, the best interests of the Company and its stockholders.
The Audit Committee may impose conditions or guidelines on any related person transaction, including, but not limited to: (i) conditions relating to on-going reporting to the Audit Committee and other internal reporting; (ii) limitations on the amount involved in the transaction; (iii) limitations on the duration of the transaction or the Audit Committee’s approval of the transaction; and (iv) other conditions for the protection of the Company and to avoid conferring an improper benefit, or creating the appearance of a conflict of interest. Any member of the Audit Committee who has or whose immediate family member has an interest in the transaction under discussion will abstain from voting on the approval of the related person transaction, but may, if so requested by the Chair of the Audit Committee, participate in some or all of the Audit Committee’s discussions of the related person transaction.
The Audit Committee will direct the Company’s executive officers to disclose all related person transactions approved by the Audit Committee to the extent required under applicable accounting rules, Federal securities laws, SEC rules and regulations, and Nasdaq rules.
Related Person Transactions
The Company did not have any related person transactions in fiscal 2022.
Director Independence
At least annually and in connection with any individuals being nominated to serve on the Board, the Board reviews the independence of each director or nominee, including pursuant to Rule 5605 of the Nasdaq Stock Market, Inc. Marketplace Rules (“Nasdaq Listing Rules”), and affirmatively determines whether each director or nominee qualifies as independent.
The Board believes that stockholder interests are best served by having a number of objective, independent representatives on the Board. For this purpose, a director or nominee will be considered to be “independent” only if the Board affirmatively determines that the director or nominee has no relationship with respect to the Company that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. Additionally, pursuant to Rule 5605 of the Nasdaq Listing Rules, our Board must determine that an independent director has no material relationship with us other than as a director. The standards specify the criteria by which the independence of our directors will be determined, including strict guidelines for directors and their immediate families with respect to past employment or affiliation with us or our independent registered public accounting firm. The standards also prohibit Audit Committee members from having any direct or indirect financial relationship with us and restrict both commercial and not-for-profit relationships between us and each director. We may not give personal loans or extensions of credit to our directors, and all directors are required to deal at arm’s length with us and our subsidiaries, and to disclose any circumstance that might be perceived as a conflict of interest.
In making its independence determinations, the Board reviewed transactions, relationships, behavior and arrangements between each director and nominee, or any member of his or her immediate family, and us or our subsidiaries based on information provided by the director or nominee, our records and publicly available information. The Board made the following independence determinations (the transactions, relationships and arrangements reviewed by the Board in making such determinations are set forth in the footnotes below):
| Director | Status |
| Allison M. Boersma | Independent |
| Stacy Loretz-Congdon | Independent (1) |
| Charles F. Marcy | Independent |
| D. Deverl Maserang | Not Independent (2) |
| Christopher P. Mottern | Independent |
| Alfred Poe | Independent |
| John D. Robinson | Independent |
| Waheed Zaman | Independent |
(1) CoreMark HoldingCompany, Inc. (“Core-Mark”) was a customer of the Company in fiscal 2022 and continues to be a customer of the Company in fiscal 2023. Ms. Loretz-Congdon retired from Core-Mark at the end of 2016 after 26 years of service, including as Senior Vice President, Chief Financial Officer and Assistant Secretary from December 2006 to May 2016 and Executive Advisor from May 2016 to December 2016. Ms. Loretz-Congdon also serves as a Board Director and Treasurer of the Core-Mark Families Foundation, an independent non-profit foundation that provides scholarships to children of Core-Mark employees, since 2015. Ms. Loretz-Congdon owns less than 1% of the outstanding publicly traded stock of Performance Food Group Company which Core-Mark merged with in September 2021. The Board has determined that these relationships do not create a conflict of interest under the Company’s Code of Conduct and Ethics, do not require disclosure under Item 404(a) of Regulation S-K, and do not interfere with Ms. Loretz-Congdon’s exercise of independent judgment in carrying out the responsibilities of a director of the Company.
(2) Mr. Maserang is the Company’s President and Chief Executive Officer.
| Item 14. | Principal Accountant Fees and Services |
Audit Committee Report
The informationAudit Committee has reviewed and discussed with management the Company’s audited consolidated financial statements as of and for the fiscal year ended June 30, 2022.
The Audit Committee has discussed with the Company’s independent registered public accounting firm, Grant Thornton LLP (“Grant Thornton”) (Dallas, Texas, PCAOB ID Number 248), the matters required to be discussed by the Statement on Auditing Standards No. 16, “Communications with Audit Committees,” as adopted by the Public Company Accounting Oversight Board.
The Audit Committee has received the written disclosures and the letter from Grant Thornton required by this itemapplicable requirements of the Public Company Accounting Oversight Board regarding Grant Thornton’s communications with the Audit Committee concerning independence, and has discussed with Grant Thornton that firm’s independence.
Based on the reviews and discussions referred to above, the Audit Committee recommended to the Board of Directors that the audited consolidated financial statements referred to above be included in the Company’s 2022 Form 10-K for filing with the SEC.
| Audit Committee of the Board of Directors |
|
| Allison M. Boersma, Chair |
| Stacy Loretz-Congdon |
| John D. Robinson |
| Waheed Zaman |
Change of Independent Public Accounting Firm
As previously reported on the Company’s Current Report on Form 8-K, filed with the SEC on December 22, 2021, on December 16, 2021, the Company, upon the approval of the Audit Committee, dismissed Deloitte & Touche LLP (“Deloitte”) as its independent registered public accounting firm effective as of December 16, 2021, and engaged Grant Thornton as of such date. Deloitte served as the Company’s independent registered public accounting firm since fiscal 2014.
The reports of Deloitte on the audited consolidated financial statements of the Company for fiscal 2021 and fiscal 2020 did not contain an adverse opinion or a disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope, or accounting principles. During the fiscal 2021 and fiscal 2020, and in the subsequent interim period through December 16, 2021, there were (a) no disagreements (as that term is described in Item 304(a)(1)(iv) of Regulation S-K) with Deloitte on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedures, which disagreements, if not resolved to the satisfaction of Deloitte, would have caused Deloitte to make reference to the subject matter of the disagreements in its reports on the consolidated financial statements for such years, and (b) no “reportable events” (as defined in Item 304(a)(1)(v) of Regulation S-K).
Pursuant to Item 304(a)(3) of Regulation S-K, the Company provided Deloitte with a copy of the foregoing disclosures and requested that Deloitte furnish the Company with a letter addressed to the SEC stating whether or not it agrees with the statements made herein. A copy of Deloitte’s letter to the SEC, dated December 22, 2021, is filed as Exhibit 16.1 to the Current Report on Form 8-K filed by the Company regarding the foregoing.
Independent Registered Public Accounting Firm Fees
The following table sets forth the aggregate fees billed by Deloitte and Grant Thornton for fiscal 2021 and 2022, respectively, for audit and non-audit services (as well as all “out-of-pocket” costs incurred in connection with these services) and are categorized as Audit Fees, Audit-Related Fees, Tax Fees and All Other Fees. The nature of the services provided in each such category is described following the table. The Audit Committee approved all audit and permissible non-audit services provided by Deloitte and Grant Thornton in accordance with the pre-approval policies and procedures described below.
| | | Fiscal 2022 | | | Fiscal 2021 | |
| | | Grant Thornton | | | Deloitte | | |
| Audit fees(1) | | $ | 626,031 | | | $ | 1,098,523 | | |
| Audit-related fees(2) | | $ | 0 | | | $ | 0 | | |
| Tax fees(3) | | $ | 0 | | | $ | 0 | | |
| All other fees(4) | | $ | 0 | | | $ | 0 | | |
| Total fees | | $ | 626,031 | | | $ | 1,098,523 | | |
(1) “Audit Fees” are fees paid for the audit of the Company’s annual consolidated financial statements included in its Form 10-K and review of financial statements included in the Form 10-Q’s, for the audit of the Company’s internal control over financial reporting, and for services that are normally provided by the auditor in connection with statutory and regulatory filings or engagements. Audit fees for fiscal 2021 and fiscal 2022 consisted of fees associated with the audit of the Company’s annual financial statements, the audit of internal control over financial reporting, the review of the Company’s quarterly reports on Form 10-Q, services associated with SEC registration statements, and accounting advisory services in connection with the impact of new accounting standards.
(2) “Audit-Related Fees” represent fees for assurance and related services that are traditionally performed by Deloitte or Grant Thornton. No audit-related fees were paid to Deloitte or Grant Thornton for fiscal 2021 or fiscal 2022.
(3) “Tax Fees” are fees for tax compliance, planning, advice and consultation services, including state tax representation and miscellaneous consulting on federal and state taxation matters. No tax fees were paid to Deloitte or Grant Thornton for fiscal 2021 or fiscal 2022.
(4) No other fees were paid to Deloitte or Grant Thornton for fiscal 2021 or fiscal 2022.
Pre-Approval of Audit and Non-Audit Services
Under the Farmer Bros. Co. Audit and Non-Audit Services Pre-Approval Policy, the Audit Committee must pre-approve all audit and non-audit services provided by the independent auditor. The policy, as described below, sets forth the procedures and conditions for such pre-approval of services to be performed by the independent auditor. The policy utilizes both a framework of general pre-approval for certain specified services and specific pre-approval for all other services. Unless a type of service has received general pre-approval, it will require specific pre-approval by the Audit Committee if it is to be provided by the independent auditor. Any proposed services exceeding pre-approved cost levels or budgeted amounts will also require specific pre-approval by the Audit Committee.
In the first quarter of each year, the Audit Committee is asked to pre-approve the engagement of the independent auditor and the projected fees for audit services for the current fiscal year. The Audit Committee is also asked to provide general pre-approval for certain audit-related services (assurance and related services that are reasonably related to the performance of the auditor’s review of the financial statements or that are traditionally performed by the independent auditor) and tax services (such as tax compliance, tax planning and tax advice) for the current fiscal year consistent with the SEC’s rules on auditor independence. If the Company wishes to engage the independent auditor for additional services that have not been generally pre-approved as described above, then such engagement will be set forth inpresented to the Proxy StatementAudit Committee for pre-approval at its next regularly scheduled meeting. Pre-approval of any engagement by the Audit Committee is required before the independent auditor may commence any engagement.
In fiscal 2022, there were no fees paid to Deloitte or Form 10-K/A and is incorporated in this report by reference.Grant Thornton under a de minimis exception to the rules that waive pre-approval for certain non-audit services.
39
PART IV
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| Item 15. | Exhibits and Financial Statement Schedules |
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| (a) | List of Financial Statements and Financial Statement Schedules: |
1. Financial Statements included in Part II, Item 8 of this report:
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Consolidated Balance Sheets as of June 30, 2012 and 2011 |
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Consolidated Statements of Operations for the Years Ended June 30, 2012, 2011 and 2010 |
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Consolidated Statements of Comprehensive Income (Loss) for the Years Ended June 30, 2012, 2011 and 2010 |
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Consolidated Statements of Cash Flows for the Years Ended June 30, 2012, 2011 and 2010 |
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Consolidated Statements of Stockholders’ Equity for the Years Ended June 30, 2012, 2011 and 2010 |
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Notes to Consolidated Financial Statements |
2. Financial Statement Schedules: Financial Statement Schedules are omitted as they are not applicable, or the required information is given in theThe consolidated financial statements and notes thereto.
3. The exhibits to this Annual Report on Form 10-K are listed on the accompanying index to exhibits and are incorporated herein by reference or are filed as part of this report are indexed in the Annual Report on Form 10-K. Each management contracttable of contents of the Original Filing and incorporated by reference to the Original Filing. Financial Statement Schedules have been omitted, since they are either not applicable, not required or compensation plan required to be filed as an exhibitthe information is identified by an asterisk (*).included elsewhere herein.
Exhibit No. | | Description |
(b) | Exhibits: See | |
| 3.1 | | |
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| 3.2 | | |
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| 3.3 | | |
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| 3.4 | | |
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| 3.5 | | |
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| 3.6 | | |
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| 3.7 | | |
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| 4.1 | | |
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| 4.2 | | |
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| 4.3 | | |
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| 10.1 | | |
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| 10.2 | | |
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| 10.3 | | |
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| 10.4 | | |
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| 10.5 | | |
Exhibit No. | | Description |
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| 10.6 | | |
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| 10.7 | | |
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| 10.8 | | |
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| 10.9 | | |
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| 10.10 | | |
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| 10.11 | | |
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| 10.12 | | |
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| 10.13 | | |
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| 10.14 | | |
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| 10.15 | | |
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| 10.16 | | |
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| 10.17 | | |
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| 10.18 | | |
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| 10.19 | | |
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| 10.20 | | |
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| 10.21 | | |
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| 10.22 | | |
| 10.23 | | |
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| 10.24 | | |
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| 10.25 | | |
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| 10.26 | | |
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| 10.27 | | |
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| 10.28 | | |
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| 10.29 | | |
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| 10.30 | | |
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| 10.31 | | |
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| 10.32 | | |
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| 10.33 | | |
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| 10.34 | | |
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| 10.35 | | |
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| 10.36 | | |
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| 10.37 | | |
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| 10.38 | | |
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| 10.39 | | |
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| 10.40 | | |
| 10.41 | | |
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| 10.42 | | |
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| 10.43 | | |
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| 10.44 | | |
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| 10.45 | | |
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| 10.46 | | |
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| 10.47 | | Consent and Amendment No. 1 dated as of December 20, 2021, to Credit Agreement dated as of April 26, 2021, by and among Farmer Bros. Co., a Delaware corporation, the other loan parties named therein, the lenders named therein and Wells Fargo Bank, N.A., as administrative agent and lender (filed as Exhibit 10.47 to the Company’s Annual Report on Form 10-K filed with the SEC on September 2, 2022). |
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| 10.48 | | Consent and Amendment No. 2 dated as of August 8, 2022, to Credit Agreement dated as of April 26, 2021, by and among Farmer Bros. Co., a Delaware corporation, the other loan parties named therein, the lenders named therein and Wells Fargo Bank, N.A., as administrative agent and lender (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on August 9, 2022 and incorporated herein by reference). |
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| 10.49 | | Amendment No. 3 to Credit Agreement, dated August 31, 2022, by and among the Company, Boyd Assets Co., FBC Finance Company, Coffee Bean Holding Co., Inc., Coffee Bean International, Inc. and China Mist Brands, Inc., as borrowers, the lenders party thereto, and Wells Fargo Bank, N.A., as administrative agent (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on August 31, 2022 and incorporated herein by reference). |
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| 14.1 | | |
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| 16.1 | | |
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| 21.1 | | |
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| 23.1 | | |
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| 23.2 | | |
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| 31.1 | | |
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| 31.2 | | |
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| 32.1 | | |
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| 32.2 | | |
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| 101.INS | | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document (furnished herewith). |
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| 101.SCH | | Inline XBRL Taxonomy Extension Schema Document (furnished herewith). |
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| 101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document (furnished herewith). |
| 101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document (furnished herewith). |
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| 101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document (furnished herewith). |
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| 101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document (furnished herewith). |
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| 104 | | Cover Page Interactive Data File - the cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document (furnished herewith). |
| ** | Management contract or compensatory plan or arrangement. |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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| FARMER BROS. CO.
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| | | |
| | By: | /s/ Deverl Maserang |
| | /S/ MICHAEL H. KEOWN
| Deverl Maserang |
| | President and Chief Executive Officer |
| | | | Michael H. Keown
President and Chief Executive Officer
(chief executive officer)
Date: September 7, 2012 |
| | |
| By: | | /S/ JEFFREY A. WAHBA |
| | | Jeffrey A. Wahba
Treasurer and Chief Financial Officer
(principal financial and accounting officer)
Date: September 7, 2012 |
| | |
| By: | | /S/ HORTENSIA R. GÓMEZ
|
| | | Hortensia R. Gómez
Vice President and Controller
(controller)
Date: September 7, 2012October 27, 2022 |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
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| /s/ Deverl Maserang | | President, Chief Executive Officer and Director (principal executive officer) | | October 27, 2022 |
| Deverl Maserang | | |
/S/ GUENTER W. BERGER
Guenter W. Berger
| | Chairman of the Board and Director | | September 7, 2012 |
| | |
/S/ HAMIDEH ASSADI
Hamideh Assadi
| | Director | | September 7, 2012 |
| | | | |
Jeanne Farmer Grossman
| | Director | | |
| | | | | |
/S/ MARTIN A. LYNCH Martin A. Lynch
s/ Scott R. Drake | | DirectorChief Financial Officer (principal financial officer) | | September 7, 2012October 27, 2022 |
| Scott R. Drake | | | | |
| | | | | |
/S/ JAMES J. MCGARRY James J. McGarry
s/ Matthew Coffman | | DirectorVice President and Controller (principal accounting officer) | | September 7, 2012October 27, 2022 |
| Matthew Coffman | | | | |
| | | | | |
/S/ JOHN H. MERRELL John H. Merrell
s/ Christopher P. Mottern | | Chairman of the Board and Director | | September 7, 2012October 27, 2022 |
| Christopher P. Mottern | | | | |
| | | | | |
/S/ MICHAEL H. KEOWN Michael H. Keown
s/ Allison M. Boersma | | Director | | September 7, 2012 |
EXHIBIT INDEX
| October 27, 2022 |
| Allison M. Boersma | | |
| | |
3.1 | | Certificate of Incorporation (filed as Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2009 filed with the SEC on May 11, 2009 and incorporated herein by reference). |
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3.2 | | Amended and Restated Bylaws (filed as Exhibit 3.2 to the Company’s Current Report on Form 8-K filed with the SEC on April 25, 2011 and incorporated herein by reference). |
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4.1 | | Certificate of Designation, Preferences and Rights of Series A Junior Participating Preferred Stock (filed as Exhibit 4.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2010 filed with the SEC on May 10, 2010 and incorporated herein by reference). |
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4.2 | | Rights Agreement, dated March 17, 2005, by and between Farmer Bros. Co. and Wells Fargo Bank, N.A., as Rights Agent (filed as Exhibit 4.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2010 filed with the SEC on May 10, 2010 and incorporated herein by reference). |
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4.3 | | Specimen Stock Certificate (filed as Exhibit 4.1 to the Company’s Form 8-A/A filed with the SEC on February 6, 2009 and incorporated herein by reference). |
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10.1 | | Amended and Restated Loan and Security Agreement, dated September 12, 2011, by and among Farmer Bros. Co. and Coffee Bean International, Inc., as Borrowers, Coffee Bean Holding Co., Inc. and FBC Finance Company, as Guarantors, the Lenders party thereto, and Wells Fargo Bank, National Association, as Agent (filed as Exhibit 10.12 to the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2011 filed with the SEC on September 12, 2011 and incorporated herein by reference). |
| |
10.2 | | Amendment No. 1 to Amended and Restated Loan and Security Agreement, effective January 9, 2012, by and among Farmer Bros. Co. and Coffee Bean International, Inc., as Borrowers, Coffee Bean Holding Co., Inc. and FBC Finance Company, as Guarantors, the Lenders party thereto, and Wells Fargo Bank, National Association, as Agent (filed as Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2011 filed with the SEC on February 8, 2012 and incorporated herein by reference). |
| |
10.3 | | Farmer Bros. Co. Pension Plan for Salaried Employees (filed as Exhibit 10.1 to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2007 filed with the SEC on September 13, 2007 and incorporated herein by reference).* |
| | | |
10.4 | | Amendment No. 1 to Farmer Bros. Co. Retirement Plan effective June 30, 2011 (filed as Exhibit 10.14 to the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2011 filed with the SEC on September 12, 2011 and incorporated herein by reference).* |
| | |
10.5/s/ Stacy Loretz-Congdon | | Farmer Bros. Co. 2005 Incentive Compensation Plan (Amended and Restated as of December 31, 2008) (filed as Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2008 filed with the SEC on February 10, 2009 and incorporated herein by reference).*Director | | October 27, 2022 |
| Stacy Loretz-Congdon | | |
10.6 | | Farmer Bros. Co. Amended and Restated Employee Stock Ownership Plan, as adopted by the Board of Directors on December 9, 2010 and effective as of January 1, 2010 (filed as Exhibit 10.12 to the Company’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2010 filed with the SEC on February 9, 2011 and incorporated herein by reference).* |
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10.7 | | Action of the Administrative Committee of the Farmer Bros. Co. qualified Employee Retirement Plans amending the Farmer Bros. Co. Amended and Restated Employee Stock Ownership Plan, effective as of January 1, 2012 (filed herewith). |
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10.8 | | ESOP Loan Agreement including ESOP Pledge Agreement and Promissory Note, dated March 28, 2000, between Farmer Bros. Co. and Wells Fargo Bank, N.A., Trustee for the Farmer Bros Co. Employee Stock Ownership Plan (filed as Exhibit 10.13 to the Company’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2010 filed with the SEC on February 9, 2011 and incorporated herein by reference). |
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10.9/s/ Charles F. Marcy | | Amendment No. 1 to ESOP Loan Agreement, dated June 30, 2003, between Farmer Bros. Co. and Wells Fargo Bank, N.A., Trustee for the Farmer Bros Co. Employee Stock Ownership Plan (filed as Exhibit 10.14 to the Company’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2010 filed with the SEC on February 9, 2011 and incorporated herein by reference).Director | | October 27, 2022 |
| Charles F. Marcy | | |
10.10 | | ESOP Loan Agreement No. 2 including ESOP Pledge Agreement and Promissory Note, dated July 21, 2003 between Farmer Bros. Co. and Wells Fargo Bank, N.A., Trustee for the Farmer Bros Co. Employee Stock Ownership Plan (filed as Exhibit 10.15 to the Company’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2010 filed with the SEC on February 9, 2011 and incorporated herein by reference). |
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10.11 | | Separation Agreement, dated as of April 1, 2011, by and between Farmer Bros. Co. and Roger M. Laverty III (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on April 6, 2011 and incorporated herein by reference).* |
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10.12 | | Employment Agreement, dated March 9, 2012, by and between Farmer Bros. Co. and Michael H. Keown (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on March 13, 2012 and incorporated herein by reference).* |
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10.13 | | Amended and Restated Employment Agreement, effective as of April 19, 2011, by and between Farmer Bros. Co. and Jeffrey A. Wahba (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on May 23, 2011 and incorporated herein by reference).* |
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10.14/s/ Alfred Poe | | Amendment No. 1 to Amended and Restated Employment Agreement, dated as of August 30, 2011, by and between Farmer Bros. Co. and Jeffrey A. Wahba (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on September 2, 2011 and incorporated herein by reference).*Director | | October 27, 2022 |
| Alfred Poe | | |
10.15 | | Second Amended and Restated Employment Agreement, effective as of February 13, 2012, by and between
Farmer Bros. Co. and Jeffrey A. Wahba (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K
filed with the SEC on February 17, 2012 and incorporated herein by reference).*
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10.16/s/ John D. Robinson | | Letter Agreement, effective as of April 19, 2011, by and between Farmer Bros. Co. and Mark A. Harding (filed
as Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the SEC on May 23, 2011 and
incorporated herein by reference).*
Director | | October 27, 2022 |
| John D. Robinson | | | | |
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10.17 | | Employment Agreement, dated as of April 4, 2012, by and between Farmer Bros. Co. and Thomas W.
Mortensen (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K/A filed with the SEC on April
10, 2012 and incorporated herein by reference).*
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10.18/s/ Waheed Zaman | | Employment Agreement, effective as of April 19, 2011, by and between Farmer Bros. Co. and Patrick G. Criteser (filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the SEC on May 23, 2011 and incorporated herein by reference).* |
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10.19Director | | Amended and Restated Employment Agreement, effective as of February 13, 2012, by and between Farmer
Bros. Co. and Patrick G. Criteser (filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed
with the SEC on February 17, 2012 and incorporated herein by reference).*
October 27, 2022 |
| Waheed Zaman | |
10.20 | | Employment Agreement, dated as of December 1, 2010, by and between Farmer Bros. Co. and Larry B. Garrett (filed as Exhibit 10.29 to the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2011 filed with the SEC on September 12, 2011 and incorporated herein by reference).* |
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10.21 | | Resignation Agreement, dated as of July 20, 2012, by and between Farmer Bros. Co. and Larry B. Garrett (filed as Exhibit 10.1 to the Company's Current Report on Form 8-K/A filed with the SEC on July 24, 2012 and incorporated herein by reference).* |
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10.22 | | 2007 Omnibus Plan (filed herewith).* |
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10.23 | | Form of 2007 Omnibus Plan Stock Option Grant Notice and Stock Option Agreement (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on February 26, 2008 and incorporated herein by reference).* |
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10.24 | | Form of 2007 Omnibus Plan Restricted Stock Award Grant Notice and Restricted Stock Award Agreement (filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the SEC on February 26, 2008 and incorporated herein by reference).* |
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10.25 | | Stock Ownership Guidelines for Directors and Executive Officers (filed as Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the SEC on February 26, 2008 and incorporated herein by reference).* |
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10.26 | | Form of Target Award Notification Letter (Fiscal 2012) under Farmer Bros. Co. 2005 Incentive Compensation Plan (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on September 21, 2011 and incorporated herein by reference).* |
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10.27 | | Form of Target Award Notification Letter (Fiscal 2011) under Farmer Bros. Co. 2005 Incentive Compensation Plan (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on September 30, 2010 and incorporated herein by reference).* |
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10.28 | | Form of Change in Control Severance Agreement for Executive Officers of the Company (with schedule of executive officers attached) (filed as Exhibit 10.3 to the Company’s Current Report on Form 8-K/A filed with the SEC on April 10, 2012 and incorporated herein by reference).* |
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10.29 | | Form of Indemnification Agreement for Directors and Officers of the Company, as adopted on May 18, 2006 and as amended on December 31, 2008 (with schedule of indemnitees attached) (filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K/A filed with the SEC on April 10, 2012 and incorporated herein by reference).* |
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14.1 | | Farmer Bros. Co. Code of Conduct and Ethics adopted on August 26, 2010 (filed as Exhibit 14.1 to the Company’s Current Report on Form 8-K filed with the SEC on September 1, 2010 and incorporated herein by reference). |
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21.1 | | List of all Subsidiaries of Farmer Bros. Co. (filed herewith). |
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23.1 | | Consent of Independent Registered Accounting Firm (filed herewith). |
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31.1 | | Principal Executive Officer Certification Pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith). |
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31.2 | | Principal Financial and Accounting Officer Certification Pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith). |
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32.1 | | Principal Executive Officer Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith). |
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32.2 | | Principal Financial and Accounting Officer Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith). |
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99.1 | | Properties List (filed herewith). |
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99.2 | | Amended and Restated Audit Committee Charter (filed herewith). |
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99.3 | | Amended and Restated Compensation Committee Charter (filed herewith). |
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101 | | The following financial statements from the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2012, formatted in eXtensible Business Reporting Language: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Comprehensive Income (Loss), (iv) Consolidated Statements of Cash Flows, (v) Consolidated Statements of Stockholders' Equity, and (vi) Notes to Consolidated Financial Statements (furnished herewith). |
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* | Management contract or compensatory plan or arrangement. |
